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 Second Quarter 2023 Earnings Conference Call and Webcast. After the prepared remarks, we will open the call for your questions. Instructions will be given at that time. Lastly, if you should need operator assistance, please press star 0. Thank you, and I will now turn the call over to Keith McCue, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Chelsea. Good morning, and welcome to RenaissanceRe's Second 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. 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?

Thanks, Keith. Good morning, everybody, and thank you for joining today's call. We are pleased to report that RenRe delivered strong second quarter results that combine consistent bottom line profitability with continued top line growth. This growth was particularly robust in our property catastrophe business, where we continue to observe significant rate momentum. For the quarter, we reported an annualized operating return on average common equity of 28.8%, even with the dilution from the quarter's equity issuance. On a quarter -- excuse me, on a year-to-date basis, our operating ROE is running at almost 30%. Of course, our most prominent strategic milestone this quarter was the announcement that we are acquiring AIG's treaty reinsurance platform, Validus Re. I will highlight some of the key business reasons we are excited about this transaction. Bob will then cover the financial details, including our recent equity and debt issuances to help finance the transaction. Beginning with Validus Re, we are very excited to partner with AIG on this win-win transaction. For RenaissanceRe, this advances our strategy as a leading P&C reinsurer. We are gaining access to a large, diversified business in a favorable reinsurance market. Validus Re has a great team and their underwriting portfolio consists of high-quality mix of property casualty, specialty and credit lines that closely mirrors our own. We expect the Validus acquisition to be highly accretive across our financial metrics. For a premium over book value of $885 million, we anticipate receiving a gross written premium base of $3.1 billion in 2022, of which we are targeting at least $2.7 billion of premium, $4.5 billion of investable assets and a $250 million equity investment by AIG and our common shares as well as up to $500 million in our capital partner business. At close, we anticipate receiving $2.1 billion…

Thanks, Kevin, and good morning, everyone. Once again, we had a very strong quarter with net income of $191 million and operating income of $407 million. This is the third quarter in a row where we have reported annualized operating return on average common equity of over 28%. These excellent results reflect the momentum behind each of our 3 drivers of profit, with underwriting, fees and investments, all contributing significant income for our shareholders this quarter. Today, I'd like to start by highlighting a few key takeaways from the quarter, provide an update on the integration progress for Validus, and then discuss our results in more detail. Starting with some highlights. And first, we leaned into a very attractive property catastrophe market in the midyear renewals, growing property catastrophe net premiums written by almost 55%, even at an above-average quarter for cats, our Property segment performed well, reporting a combined ratio of 63% with other property having a particularly strong quarter. Second, Casualty and Specialty had another solid quarter, reporting a combined ratio of 93%. We are pleased with the positioning of the portfolio, and we continue to expect mid-90s combined ratio in 2023. And third, fee income rose 65% to a record $57 million. This reflects increased partner capital under management as we grow into an attractive market and a steady increase in performance fees from strong underwriting results. And finally, retained net investment income for the quarter was $189 million. This is more than double a year ago and up 13% from Q1 2023, reflecting our continued rotation into higher coupon securities. As Kevin mentioned, we are also advancing our strategy through the acquisition of Validus Re, which we announced in May. I am pleased to say that integration planning is progressing well and that we are on…

Thanks, Bob. As usual, I'll divide my comments between our Property and Casualty, Specialty segments. The second quarter was an active renewal cycle with the midyear renewals and property and a busy period for Casualty and Specialty. Beginning with our Property segment. As anticipated, the midyear property renewals benefited from continued upward rate momentum and improved terms and conditions. This brought the market in line with the step change in reinsurance we realized at January 1. Rate increases in the U.S. averaged 30% to 50% with pricing particularly challenged on more risk exposed layers. It is worth noting that the midyear renewals in 2022 experienced about a 10% to 30% rate increase. So rate increases this year were on top of a higher bids. Our strategy for the renewal was to offer private deals on nonconcurrent terms with core customers early in the process. This allowed us to achieve higher risk-adjusted rate increases on most programs relative to what was available in the open market. Overall, we lean heavily into the property cat market in the second quarter and recorded property catastrophe net written premium growth exceeding 50%. We believe these higher rates will persist. Prior hard markets were driven by losses intended to be geographically concentrated. The current market is being driven by equity and ILS investor sentiment and is geographically broad. In particular, investors are concerned that they had not been adequately compensated for the volatility they experienced and in response are demanding substantially higher returns to continue taking risk. This is especially true now as other asset classes provide attractive yields with less volatility and greater familiarity. From our perspective, we are focused on rate adequacy in our property catastrophe business. Rate adequacy means that we expect business to have rate sufficient to provide investors with a…

[Operator Instructions]. Our first question will come from Elyse Greenspan with Wells Fargo.

Kevin, my first question is on the Validus Re deal, right? So you guys reaffirmed, right, all the targets you had laid out when you announced the deal. And so the premium base that you guys expect to take on, right, that $2.7 billion, that's off of 2022. And I know AIG themselves, right, they pointed to growing Validus Re by over 40% at January 1. So when you think it through that lens of the growth that they saw at 1/1, perhaps some during midyear, does that put you guys in position to perhaps bring on more premium than that base and have the deal potentially be more accretive than your -- the expectations you've laid out to the Street?

Yes. We're trying to be consistent in the information that was available at the time of the acquisition. Your commentary about their growth absolutely provides us with significant upside as to the amount of desirable businesses at Validus. So when we talk about the $2.7 million, we're saying $2.7 million with potential upside, I think everything that Validus achieved since the end of the year provides us with substantial upside.

And then my second question, Bob, when you were discussing Casualty and Specialty, I think your comment was that you guys have not taken releases from recent accident years. So can you just provide -- and it sounded like that could be favorable, like what lines of business and accident years are you assessing? And what loss trends are you seeing? And what are you paying attention to before you might take some positive action there?

First, we feel very good about our reserves and Casualty and Specialty. And my reference was to the earlier years that we've been keeping a careful eye on it, limited favorable development. That's just an outcome of a process that we have. In my comments, I was referring to the favorable rate that we saw starting in '19 carrying on through this year in some -- in many of the classes of business and that rate did exceed the trend, and that's what I was referring to.

Yes, I think -- actually, one thing I'd add to Bob's comments is much of our growth in Casualty and Specialty is from '19 forward, which are obviously younger years and also years that have had COVID. We generally do not recognize good news in our reserves until the curve is approximately 30% developed. So I like the balance of the reserve profile within our casualty having had substantial growth since '19. And with that, we're being cautious about the recognition of good news embedded in those portfolios.

Our next question comes from Ryan Tunis with Autonomous Research.

First question on Validus. On that net written premium that you guys are getting, how should we think about what percentage of that you probably are sharing with Capital Partners?

Yes. So I think it's going to be largely similar split to what we have now. I think what we've talked about is we share roughly 50% of our property cat premium. And the new portfolio will also go into Fontana. The Fontana percentage is just under 20%. At this point, I think that's -- we still have some modeling to do, but I think that's a likely reasonable target as to how much we'll go in from the Casualty Specialty perspective as well.

Got it. And then in terms of fee income, if I go back to 2016, 2014 to '16 when they were capped, it was closer like -- performance fees were like close to 50% of the total fee income. This quarter, it was only like 20%. Is that the right way to think about -- How should we think about the potential for what performance fees could be?

Yes. We've grown. I mean the part of our capital we have has grown significantly over that period of time. And that just in of itself is going to support a strong basis for the management fees coming. And our fee schedules are unchanged. They haven't changed. We brought in a new vehicle, Vermeer, over that period of time. But by and large, nothing has changed. So it just reflects the growth in our platform and the stability that we have and the relationship that we have with our third-party capital providers. And you can see that reflected in the management fees and the confidence that we have in being able to give the guidance on just the management fee side of $45 million. The performance fees are on top of that based on performance and they can and have been volatile with activity. As I said, it's about $15 million is kind of what we're looking right now, absent any large losses that may come through the book.

Got it. And then I guess last one for Kevin. You talked a little bit about demand. And yes, I kind of get how in theory primary should be buying more but that hasn't really been a theme thus far. So just curious like from your perspective, if you want to make a prediction like what needs to happen for the demand to come through? From your experience, what needs to end that -- what needs to happen to end that lag?

Yes. It's a good observation. That demand -- we didn't really -- Florida and a midyear set up kind of as we expected. I think we expected a little bit more demand to be realized at 1/1. The demand was there by buyers. They just didn't have the wallet to be able to purchase what they needed. I think in order for that to change, they need rate. So if you think about what's happened is reinsurance programs have shifted up. So for insurance companies, and we're starting to see that with the second quarter cat losses, more volatility is residing on the income statement of primary companies. They need rate to cover that and an excess rate to continue to build capacity on their balance sheet through reinsurance. So we're watching what's going on with primary market, particularly admitted market rate change as that becomes more fulsome, I think the appetite -- or they'll be able to realize the budget to be able to purchase the limit that they desire. So they are getting rate. It obviously takes a while to run through the books there. But I believe that the appetite has not gone away. It's simply a matter of managing the limited wallet they have for reinsurance right now.

Our next question will come from Yaron Kinar with Jefferies.

Kevin, when you say that property cap rates are largely adequate now, does that mean that when you say that you expect higher rates to persist that you essentially expect them to hold where they are plus loss trends going forward? Or is there room for additional rate increases beyond that here?

So what we're focused on is -- and the reason we talk about a step change is really getting to a level of rate adequacy. So investors are -- both ILS investors and equity investors are adequately compensated for the volatility and for the risk that they're taking. In general, as a market, I believe we're there. So certain deals are better rated than other deals. So I think there are opportunities for rate increase. But if we were -- if the market went and renewed as expiring, adjusting for unique idiosyncratic risk within certain companies, I think the market would largely be adequate for 2024. Investor sentiment other things will continue to be a factor as to what adequate means and whether they are relatively associated with the returns that they're achieving. But looking at it from a more academic perspective, I believe rates are compensating at adequate levels for the volatility we're observing in our portfolio. Our portfolio is a bit unique in that we do capture alpha above what we consider to be the market. And then this distribution across our owned and rated balance sheets provide us additional ability to achieve better than market returns. So although we talk about rate adequacy of the market, we believe that we are achieving returns that are above rate adequacy and hence, the interest we continue to have in our equity and our third-party capital vehicles.

Got it. And can find on what loss trends are like in property cat today, the best estimates for those?

I'm not sure I understand your question.

I guess. What do you see as the rate of increase of costs and property catastrophe?

I think there's kind of known things to think about and then more difficult things to think about. I think from a known, obviously, inflation, so that's something that we continue to capture. I think the more difficult things and one that obviously gets a lot of attention is climate and the effects of climate change on covered perils. When we think about that, we spend a lot of energy determining the rate of change. And I believe we talked about this in other calls that we think nature has outpaced science. So we have spent a lot of time trying to think about what the climate ramp looks like from today's regime to what we think a hotter world looks like in the future and then trying to stay ahead of the rate of change between the current state and the future state. I think we've done that well. I think our -- the shape of our curves reflect what I think is an above nature perspective as to the rate of change, so I feel good about that, but it is a little harder to assess. So I think there are quite a few things that are affecting trend in the industry. Social inflation, another one that's difficult to monitor. But I think we've done a good job staying ahead of what is likely the future state.

Our next question will come from Josh Shanker with Bank of America.

Yes. Kevin, I don't mean to catch you and Bob in a conflict, but hear me out. At the beginning of the call, you said that you've leaned into improving property catastrophe market. But you also said later in the call that your capital utilization or your risk exposure, however you want to measure it, is lower than it was last year. Is there a disconnect there? And how do you guys think about those 2 things, if I'm putting it correctly?

Well, firstly, Bob and I are completely in sync on that. We may have used different words. You're absolutely right that those are 2 things we said. So leaning into the property cat market was you have to adjust for rate. So when we look at our percent of equity exposures, including rate and reinstatement premium and watching the effect of that, it's also against a bigger equity base. So we've shifted the shape of our overall portfolio so that we have reduced the amount of frequency risk we're taking in Southeast and as a percent of equity basis, have held our net negative impact from large wind storms or catastrophes in the Southeast, relatively flat. So I think on a risk basis, absent the effective rate, there might be a way to say that those are inconsistent. But when including the effective rate, I think it reflects the change in the market and is a better way to think about the risk that we're taking. The other thing is included in my comments is the reduction in other property. So our other property contribution to a Southeast wind storm would be lower, which allows us to further lean into the property cat market.

When you think about doing this over a 30-year period, what kind of market needs to occur for you to meaningfully increase the risk-adjusted exposure of the portfolio?

That's a good question. I like this market. And I think strategically, what we did is we wanted to focus on rewarding our existing investors with the highest probability of good to great returns that we could get for a relatively consistent level of risk. I think that's the right strategy. It's also why we bought Validus. So by buying Validus, we can take our existing portfolio and fully expose it with effectively what is a 30% quota share of our book on the day of close. If we were to try to leverage into a better cat market, which is what we're seeing right now, our portfolio would become unbalanced, and the tail would be more singularly exposed to windstorm, then we would have -- then we think would have been optimal. By buying Validus, we continue to expose the tail with diversified risks, and it's a better trade for investors than trying to grow solely into the better property market that's being offered.

[Operator Instructions]. Our next question will come from Meyer Shields with KBW.

Just a couple of brief questions, if I can. First, Kevin, you mentioned expectations of an average hurricane later this year. So that expectation actually impact underwriting decisions that you made at midyear or even in January?

We don't believe that we can underwrite on a forecast because we don't think it's fair to our clients who look for us to provide consistent capacity. We do use our understanding of what is the market like or what is likely to occur to help shape the portfolio on the margin. But formations and landfall are very different, I think. So thinking about what an average year means and then what a landfall means is difficult to use that as the basis to create a portfolio. So I think it helps on the margin, but we believe that is our risk to manage, not our risk to, on an annual basis, leave with our customers or take from our customers.

Okay. Understood. That's helpful. And a question on Casualty and Specialty reserves. But I am having a little bit of a challenge for relating this question. But if the process is unchanged and the last couple of quarters, that process invested $20 million of favorable development, give or take. What was it in the process that led to a different outcome this time?

The process remains unchanged. We take a look on an annual basis -- it's a good question. We will look at on an annual basis, we'll take a look at the curves that we have on development. We'll look at where we are in the development along that curve. You can get some rebalancing that may look at it differently. So nothing's really changed at the core. This is part of an annual process we go through. The outcome of that process this quarter was that we had just very, very modest favorable development as opposed to what we saw last quarter.

One thing I'd add to that is in different quarters, there are different deep dives down and different elements of the portfolio that are looked at. And so it's not as if formulas run against the portfolio and it spits out an answer. There's different emphasis within different books of business at different times. So I would say there's nothing -- I wouldn't read anything into reserves at this point. I think our reserve -- I feel equally good this quarter as last quarter is the quarter before with the reserve profile that we have and how things are developing on an actual versus expected basis.

Okay. And then one final question, if I can. And this is, I think, for Kevin, you talked about second quarter cash losses approaching $30 billion. So far, all the losses that we've seen from public companies looks manageable, even if they're painful. Is that a fair representation for the broader market? Or could just the second quarter losses or use date losses impact cat reinsurance purchasing programs?

So some of these covers are -- some of the deals that have happened are geographically small, but rather large in the geography that was affected. So I would expect with some regional covers, reinsurance is going to be impacted. I think that's less likely for the nationwide. There's also much less aggregate cover that's been purchased by primary companies. Aggregate covers, I think, would be heavily exposed going into wind season this year due to the activity in the first quarter. So I think that's another reason that there's going to be more retained at the primary level. So I think everything that we're seeing is kind of consistent with our expectations. It's been a more active first half of the year, in particular, than one would have normally expected. But the fact that more of it's residing with primary companies is not surprising and the fact that some regional companies are benefiting from recoverables because of the concentrated nature of some of the events.

Our next question comes from Mike Zaremski with BMO.

Couple ones on Validus. So can you talk about the addressable cost base that you -- now that you've had a more comprehensive integration planning taking place? I know you're not giving the exact synergies on that cost base. But what is the addressable cost base? And then also on Validus, in the prepared remarks, did you change the amortization schedule that you had previously given guidance on in May or maybe I just heard incorrectly?

Let me take that a couple of them. Look, synergies are going to be an outcome of a process of bringing 2 great companies together. We think that the combined platform will be a powerful acceleration of our strategy for our investors. We haven't given any guidance on synergies. We're going through the addressable cost base of about $150 million to $160 million. The purpose on addressing the amortization was we talked about in the call originally that the distribution or the allocation between that $900 million of excess purchase price, most of that 80%, 90% is going to be hard -- was going to be amortizable over time. A lot of that's long-winded 10 years. But what I was trying to emphasize that the bulk of that, Mike, will go -- be amortized 40% over the first 2 years. So what you're going to see is massive noncash dilution to our earnings, and we're going to show you that separately in the disclosures once we get through to the 10-K. So that will be fairly transparent. But what we like to show is how fast that's going to erode really quick. That was the point of that comment. Nothing's changed.

Understood it. Okay. I guess lastly, if we were privy to kind of, I guess, ECS U.S. cat losses in the first half of the year, would you say RenRe's market share of U.S. losses have kind of been in line with your internal expectations?

Yes, broadly. So the way I would think about answering your question is we have not changed the overall balance of our portfolio in a material way. I think we've done a better job in picking up a little bit more diversity away from Southeast wind in this portfolio than we had even last year. But I don't necessarily think about it as a U.S. market share perspective because there's different perils in different regions. And I think about it as when I look across the -- particularly in the tail of the distribution and the capital utilization, it is marginally better this year than last year. And the driver of the tail risk remains Southeast wind and as I already mentioned, that's relatively flat. So a little bit better balance in your terminology in our market share, but a relatively consistent portfolio compared to last year with a little bit better diversification balance in the tail.

Our last question will come from Brian Meredith with UBS.

Kevin, a couple here for you. First, I'm just curious, what size hurricane industry loss in Florida, do you think it would take for the reinsurance industry to take a meaningful loss? And then on that, how big would it need to be for you to actually see rate actually rise at 1/1/24 renewals?

I think the -- I think any storm of reasonable size is going to unsettle the market. I believe the market is up bit, is enjoying the benefits of the hard work of that we've achieved to bring rate adequacy. I think there's still a sense of -- or an expectation that results need to be achieved for the market to fully believe that this is adequate. So I think even just a loss of premium for some place like Florida will have a material impact on capital need for additional rate to continue to service the reinsurance market. The size of that is hard to predict. And I think -- but I think it's one which -- if there's another Ian type storm, I would expect that the market reaction to be at least as strong as what it was last year. Perhaps, we can't achieve the same percent rate increase, but I think rate increase would be required for capital to remain committed.

Got you. And then, Kevin, just my second question. I'm just curious, what's your thoughts -- and I know you talked a little bit about the capital markets players, but what's your thoughts on additional capital coming into the market to take advantage of the property cat, company formation, those types of things. Are we seeing that yet? And do you anticipate any potentially happening here between now and the beginning of the year?

From a company formation, I think it's pretty late for a company to think that they're going to be able to come to market and execute in a way that's going to meaningfully impact the market. From an ILS perspective, I think there are alternatives. So what's going on with some of the more noteworthy allocators into ILS is their alternative allocation still probably at the high end of where they'd like it ILS fits into that so that there's a reticence to commit more. I think areas in which they have greater familiarity are producing good returns. So the competition against ILS remains robust. I think the issues with collateral and fronting, COVID and other things, trapped collateral are still very much in the minds of where investors are. It's one of the reasons we've been successful, to be honest, is our platform is different than traditional ILS and that we bring rated balance sheets to clients. So it's a form that they're used to. And we bring our expertise and our entire platform and governance to capital so that they have the comfort of knowing that it's the RenRe franchise that's supporting their investment. So I don't believe we will be in a state where we're impacted with the limited appetite for ILS, but I think the appetite for ILS will remain challenged going into year-end.

And at this time, there are no further questions. So I'd like to turn the floor back over to Kevin O'Donnell for any additional or closing remarks.

Thanks, everybody, for joining the call. We reported a strong quarter in which we significantly advanced both our financial and strategic objectives. Each of our 3 drivers of profit met or exceeded expectations. And going forward, we're excited about the Validus acquisition and its ability to drive shareholder value. So thank you. Appreciate the attention on the call and look forward to speaking to you next quarter.

Thank you, ladies and gentlemen. This concludes the RenaissanceRe Second Quarter 2023 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.