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spk08: Good day and thank you for standing by. Welcome to the Renaissance Re's Q1 Earnings Results Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Keith McHugh, SVP, Finance Investor Relations. Thank you. Please go ahead.
spk04: Good morning. Thank you for joining our first quarter financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't receive a copy, please call me at 441-239-4830, and we'll make sure to provide you with one. There will be an audio replay of the call available from about 2 p.m. Eastern time today through midnight on June 4th. The replay can be accessed by dialing 855-859-2056, U.S. toll-free, or 1-404-537-3406 internationally. The passcode you will need for both numbers is 754-9718. Today's call is also available through the Investor Information section of www.investor.com. and will be archived on Renaissance Re's website through midnight on June 4, 2022. 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 Renaissance Re'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 Qutub, Executive Vice President and Chief Financial Officer. I'd now like to turn the call over to Kevin. Kevin?
spk00: Thanks, Keith. Good morning, everyone, and thank you for joining today's call. Last night, we reported solid top-line growth and an annualized operating return on average common equity of 11%. This is a good start to the year and the second quarter in a row of reporting double-digit operating ROE during active CAT quarters. As I've discussed with you, over the last 10 years, we have made key strategic decisions to build the capabilities and scale that we think are needed to generate superior returns in an evolving marketplace. This has included carefully growing our casualty and specialty business, developing leadership and other property underwriting, maintaining our leadership in PropertyCat, and continuing to be trusted partners for capital while growing our fee-generating businesses. As a result, we have built one of the world's largest reinsurance businesses to where we now manage about $8 billion in gross written premium with about 650 employees. This has allowed us to build considerable asset, premium, and operational leverage, and we continue to invest in internal initiatives to make us more effective and efficient as we scale. We are now seeing the benefit of these strategic decisions across each of our three drivers of profit and believe our financial results should continue to improve over the course of the year. I would like to begin my comments by explaining why our prospects are increasingly bright. Across the PMC industry, we are seeing reinsurers increasingly step back from risk. We, on the other hand, have never been more confident in positioning as a lead reinsurer, both in casualty and specialty, as well as in property. We believe that the pullback by competitors in the reinsurance market, particularly in property cat risk, will inure to our benefit. Starting with our casualty and specialty business, which constitutes about 60% of our net premiums written for the quarter, we intentionally but carefully began building this segment during a more challenging phase of the market. constructing a portfolio with embedded options for growth. For the last three years, we have accelerated this growth into an improving market. In the first quarter of 2022, net premiums were up nearly three and a half times from the same quarter in 2019. As a consequence, we believe our casualty business will be a significant tailwind to our earnings. Profitability on this book continues to improve, and the leverage it provides our investment portfolio will be increasingly valuable in a rising interest rate environment. This quarter, we also introduced a new strategic dimension to the casualty business, our most recent joint venture, Fontana Re. Fontana is the first fund that is 100 percent dedicated to writing casualty and specialty risks, including long tail lines. It continues our track record of innovation and reflects robust external validation of both the market leadership we have built in casualty specialty, as well as our recognition as a leading manager of partner capital across multiple risk classes. We are unique among our peers, as we are the only reinsurer that is both owned and managed, rated and fronted at scale vehicles for every class of risk that we write. In our casualty business, we are now employing the same strategy that for 20 years we successfully deployed in our property business. Fontana delivers significant benefits to our stakeholders. For customers, it helps us to be broader and a deeper partner by providing long-term capital that allows us further flexibility to grow our casualty and specialty business and bring additional capacity to dislocated markets. For our capital partners, it gives investors direct access to market-leading underwriting and claims management through a whole-account quota share of our casualty and specialty businesses. And for our shareholders, it reduces volatility and furthers our strategic aim of monetizing our competitive advantage in underwriting by trading underwriting risk for fee income. I believe the strategic choices we have made in the last decade make us uniquely capable of bringing a solution such as Fontana to market. For example, We built the underwriting infrastructure necessary to source attractive casualty and specialty risk and underwrite it profitably. We have 40 underwriters in this segment, many with decades of experience, as well as strong relationships with the largest and most prominent insurance companies. Equally important, we have built a robust casualty specialty claims infrastructure, which is vital to managing the life cycle of the casualty business. Our underwriting focus also distinguishes Fontana from other investment-centered vehicles, as its return primarily derives from underwriting profit, not investment return. None of the competitive advantages we bring to Fontana can be quickly or cheaply replicated by third-party capital, providing investors the confidence they need to invest in long-tail lines and the liquidity they will ultimately desire to efficiently exit. which creates a deep and sustainable mode around this business. Moving now to property. While we have evolved as a broadly diversified writer of property and casualty business, we have remained steadfast in our commitment to underwriting catastrophe risk. Our deep institutional knowledge in this area is a critical component of who we are as Renry and the value that we bring our shareholders. both directly through underwriting income and through the fees that we earn managing risk in our capital partners' business. In contrast, the overall trend in the PNC reinsurance market has been an increasing reticence to accept catastrophe volatility at any price. For example, third-party capital in this space continues to contract. Previously independent reinsurers have been absorbed into larger, more risk-averse organizations. carriers are cutting back on their reinsurance business, and few recent startups are focusing on writing reinsurance. Our willingness to accept volatility is increasingly valuable as the level of catastrophe risk in the world continues to grow. Climate change and its amplification of the frequency and severity of natural disasters is a well-known phenomenon. European windstorms, Australian floods, and Midwest tornadoes once again reminded our customers of the threat of climate change and the value of the protection we offer to them and to society more broadly. So while volatility is increasing, there are a smaller number of reinsurers willing to help students manage it. We distinguish ourselves in continuing to support our customers, maintaining a strong appetite for property cat risk and the ability to profitably underwrite business that clears our hurdle rates. Our decades of experience and industry-leading understanding of volatility places us in a preferred position to price the risk of loss from climate change and remain comfortable accepting cat risk. This is due to our strength in modeling, which has been a core component of our strategy since we formed almost 30 years ago. We frequently update our models as part of a regular, incremental process to which we have committed considerable resources. This provides several competitive advantages. First, we are not dependent on vendor models, where changes tend to be less frequent and more acute. Second, we are better able to anticipate and understand trends, giving us greater comfort in rapidly changing environment and making us less inclined to pull back from this risk class. Climate change has long been part of our view of risk. This quarter, with the expertise of Renrui risk sciences, we further updated our North Atlantic hurricane model to reflect our view of increased risk from the impacts of climate change, as well as rising social and economic inflation. Closely related to our long-term strategic decision to be a leader in catastrophe reinsurance is our commitment to addressing climate change as part of this strategy. As I wrote in my most recent letter to shareholders, Anthropogenic climate change is both an existential threat to the planet and an imminent risk to our industry, and we believe that Renry bears the responsibility of being part of this solution. As part of this, we need to recognize the potential threats of climate change to our underwriting results and our investment performance, as well as the opportunities we have to provide protection in an increasingly risky world. In furtherance of these objectives, this quarter we took several steps to advance our response to climate change. First, I was delighted to accept the role of chair of ClimateWise. This is an organization that brings together insurers, reinsurers, brokers, and industry service providers to promote a systematic response to climate change across the financial sector in cooperation with the University of Cambridge Institute for Sustainability Leadership. In this role, I will be working closely leaders across our industry to further our response to climate change. In addition, we appointed one of our most experienced property underwriters as global head of climate and sustainability strategy. We believe that while climate change is a risk that needs to be managed, it also brings opportunities across our business. This role will be focused on designing, executing, and coordinating our climate and sustainability underwriting strategy across both property and casualty. which includes new product development to respond to emerging underwriting opportunities. I would now like to take a minute to address inflation specifically, which has become more significant as of late. For us, inflation is both a headwind and a tailwind and cannot be viewed exclusively as good or bad. Rather, it needs to be anticipated and adjusted for. The obvious downside to inflation is the impact it has on our loss costs, more accurately in property where the confluence of social inflation, commodity inflation, and economic inflation can intersect to materially amplify industry loss. Frankly, this is not new as there is always inflation after a large event, which means we have deep experience modeling inflation of all types and are regularly updating our models to reflect anticipated conditions. Inflation can also impact casualty and specialty, which has been experienced lost cost inflation for several years due to elevated court verdicts. As a result, we are familiar with inflation's impacts and have the ability to capture and price for it. On the opportunity side, inflation is often correlated with both higher interest rates and insurance rates. We are enjoying significant amounts of both, which will benefit our results this year despite experiencing some mark-to-market losses this quarter. So, inflationary environments are both an opportunity and a threat, but we have deep expertise in managing the threat and anticipate material benefits from the opportunity. In summary, due to growing volatility, I believe that the reinsurance market has greater relevance now than at any time in our recent history. Climate change and other large recent losses have increased awareness of systemic risk. At the same time, many reinsurers have reduced their appetites for volatility. Consequently, we are in an excellent position to execute our strategy into a strong market. I anticipate that we will continue to grow our top line, albeit at a slower pace than the last several years, and more importantly, improving underwriting profitability. That concludes my opening comments. I'll provide a more detailed update on our segment performance at the end of the call. But first, Bob will discuss our financial performance for the quarter.
spk02: Bob? Thanks, Kevin, and good morning, everyone. This quarter, we continue to demonstrate the power of our platform, reporting operating income of $152 million and an annualized operating return on average common equity of 10.8%. We had underwriting income of $200 million, generating profits across both segments and a very attractive quarter. Looking forward to the end of 2022, we expect improvements in each of our three drivers of profit, which should increasingly benefit our financial results as the year progresses, making them more resilient to natural catastrophe volatility. First, we expect our net investment income to benefit from rising interest rates and increased investment leverage. Our retained investment leverage, defined as the ratio of our retained fixed maturity and short-term investments portfolio to common equity is about 2.3 times. This means that a 100 basis point increase in our retained yield will generate about 230 basis points of incremental operating return on equity over time. As long as rates continue to rise, we anticipate that investment earnings will be a greater contributor to operating ROEs. The casualty and specialty business continues to improve, and we believe that it can produce a mid-90s combined ratio on a growing premium base. Finally, we expect the income to improve over the course of the year and anticipate we should be earning in the range of $45 million per quarter by year-end, absent any large losses. This improvement reflects capital growth and normalization of performance fees in DaVinci and the launch of our new vehicle, Fontana. With these tailwinds, you can understand why I'm so confident about the strategic decisions that we have made and the earnings power of our business. Today, I'll cover these points in more detail in addition to our capital management activities and expenses. I'll also provide an update on our engagement with S&P and their proposed model changes. Starting with capital management, we remain in a strong capital position with excess capital in the upper end of our targeted range. As I have discussed in the past, we target an excess capital buffer that supports our ability to execute our strategy, allowing us to take advantage of underwriting and investment opportunities. In supporting of this, during the quarter, we purchased 577,000 shares for $93 million at an average share price of $162. We have a long history of being good stewards of capital and will remain consistent in our approach to capital management. Our first priority is to deploy capital into the business and second, to return the excess to shareholders. We anticipate having the ability to do both in the second quarter. I'll now shift to our three drivers of profit, starting with underwriting income, where this quarter we grew gross premiums written by 11% and net written premiums by 19%. This growth was driven by the casualty segment as property reduced on both a gross and a net basis. Our combined ratio of 87% included 7 percentage points from the weather-related large losses and 2 percentage points from the Russia-Ukraine war. For our property segment specifically, we reported a combined ratio of 70%, which included 17 percentage points from weather-related large losses. Gross premiums written declined by $273 million, or 17%, while net premiums written declined by $118 million, or 12%. As Kevin mentioned last quarter, we reduced Upsilon, our aggregate retro vehicle, significantly at January 1st. Decreasing the size of Upsilon drove almost two-thirds of the decline in overall property gross premiums written, with the remainder related to lower reinstatement premiums and a reduction in other property. This reduction to Upsilon and lower reinstatement premiums mostly impacted property cap, with a cumulative decrease of $255 million in gross premiums written. Absent these two items, Property Cat gross written premiums increased by about $10 million. As a reminder, we only retained about 15% of Upsilon's premiums, so the reduction in Upsilon did not have a significant impact on net premiums written. Property Catastrophe net premiums written were down $58 million, but this included $69 million decline in net reinstatement premiums and a decrease of $21 million for a portion of Upsilon Adjusting for these items, net premiums written were up. Both gross and net premiums written for other property were down this quarter. As Kevin discussed two years ago, we have been re-underwriting the nutritional part of the other property book. The decline in the quarter came from the non-renewal of quota share deals that were below our return hurdles. Last quarter, most of our growth in other property came from CAD-exposed E&S. We find this business attractive. and are continuing to see double-digit rate increases on our existing book. The other property current accident year loss ratio of 51% included losses of $15 million, or four percentage points, from the weather-related large losses. The attritional portion of this book continues to improve due to our underwriting actions. Attritional losses have been running below 50% for the last five quarters, which is consistent with our expectations for this business. While other property did have three points of adverse development, it was primarily driven by late reported losses on the severe convective storms that occurred in December 2021. Finally, the overall property acquisition expense ratio increased by two percentage points to 20.5%, primarily related to a decrease in reinstatement premiums. Excluding the impact of reinstatement premiums, the property acquisition expense ratio was flat to the comparable quarter. Now moving on to our casualty results where we had another great quarter. Both gross and net premiums written were up over 50%. Of the $564 million in growth in gross premiums written, about 40% came from new deals and 34% came from growth in existing deals from expanded share or better than expected premiums. As I discussed last quarter, going forward, we believe the casualty books should produce a mid-90s combined ratio absent significant loss events. While the combined ratio for casualty was 98% this quarter, this included 3.1 percentage points, or $27 million, related to the war. We undertook a robust process to assess the potential direct and indirect impact of the war on our business. Kevin will discuss more about this from an underwriting perspective in his comments. On the investment side, we have no direct exposure to Russia or Ukraine, with only minimal exposure to Eastern Europe. Now moving on to our second driver of profit, the income. As Kevin mentioned, we launched the new casualty and specialty joint venture Fontana in April. Fontana assumed a whole account quota share of our global casualty and specialty business. It is a long-term strategic vehicle for us, providing another flexible form of capital to enhance our gross to net strategy while extending the suite of offerings available to our third-party capital partners. We launched Fontana with $475 million of capital committed, including $150 million from Renaissance III, with the opportunity to raise additional capital and increase in scale over time. Fontana will be reported in our Q2 results and will be fully consolidated. It has both a management fee based on net premiums earned and a performance fee based on the underwriting performance of our casualty and specialty business, both of which will be recognized through non-controlling interest. Now moving on to our fee income for the quarter, which was $28 million, and performance fees continued to be negatively impacted by CAT events in 2021. Absent large loss events, we expect that it will take another quarter or two to recover the losses in DaVinci, and if that occurs, anticipate performance fees will normalize by the fourth quarter. Our more stable management fees were slightly lower than the comparative quarter, driven by a reduction in Epsilon and structured reinsurance products, partially offset by an increase in the size of DaVinci. Overall this quarter, we shared $12 million of losses with partners in our joint ventures, as reflected in our redeemable, non-controlling interest. This result was primarily driven by $92 million of mark-to-market and foreign exchange losses, which was mostly offset by strong operating income in our joint ventures. Turning now to our third driver of profit, investment income. This quarter, financial markets experienced historic increases in U.S. interest rates, which resulted in $673 million in mark-to-market losses in our investment portfolio, 585 million of which were retained and impacted our net income. These losses stem from our fixed maturity portfolio and drove the difference between our net and operating income, as well as the decline in our tangible book value per common share. While these increasing interest rates had a short-term negative impact on our results, as I mentioned in the beginning of my comments, we believe that we will benefit meaningfully from increased yield and net investment income due to our relatively low-duration portfolio. In March, we added some investment-grade corporate credit and public equity exposure to our portfolio and reduced duration slightly. We remain very comfortable with the composition of our investment portfolio and believe that it provides the liquidity that we need to support our underwriting business. Turning briefly now to our expenses, where our direct expense ratio, which is the sum of our operational and corporate expenses, divided by net premiums earned was 5.4%, which is slightly better than the comparable quarter. On an absolute basis, operational expenses were up in the quarter. but the operational expense ratio stayed largely flat at 4.6%. Now turning to an update on the S&P proposed model changes. Our teams have been working closely, evaluating the proposed criteria since it was first announced back in December. We have been engaging with our peers, industry trade groups, and S&P directly to understand the new model changes and also to provide constructive feedback as part of the comment process. Without a detailed model, it's difficult to quantify the impact of the proposed changes as certain aspects of the current proposal could benefit us and others could have a negative effect. Regardless of the final model, I'm comfortable with our position because we have a very strong balance sheet with low leverage. We also do not consider debt as underwriting capital and have many flexible forms of capital to managing our own balance sheet. Additionally, model changes in the past have actually created opportunities to sell more reinsurance, cat cover in particular, So we continue to monitor this as well. So in conclusion, I want to close with we are in a strong capital position with excess capital at the upper end of our target range. We generated profits in both our underwriting segments and a cat exposed quarter. And looking forward, all three drivers of profit are poised to benefit from improving conditions. We expect net investment income to increase due to rising interest rates. Our casualty business should generally produce a combined ratio of mid 90s on average. And our fee business continues to expand with Fontana and growth in DaVinci. In short, we believe our financial results should be increasingly attractive and resilient to natural catastrophe volatility. With that, I'll turn the call back over to Kevin.
spk00: Thanks, Bob. As usual, I'll divide my comments between our property and casualties segments. And starting with property, after January 1, the first quarter of the year tends to be quiet for our property portfolio. marked by the 4-1 renewals, which were orderly, as well as preparation for mid-year renewals. In the U.S., our other property business continues to do well. Underlying rate momentum persists as insurers continue to withdraw capacity from the property E&S market. We have multiple competitive advantages in this space, including deep long-term relationships and advanced pricing system and rated paper. At the January renewal, we continue to our focus on the insurance component of the other property portfolio. If you recall, two years ago, I spoke about our strategic shift to increasingly focusing this book on property cat risk from insurance E&S markets. This quarter, that ongoing shift resulted in a reduction of gross premiums written as we non-renewed less profitable attritional business. In property cat, we continue to see double-digit rate increases in advance of the mid-year renewals. With respect to Florida, even with these rate increases, we are unlikely to increase offered limits at the June 1st renewal. Florida has a social inflation problem that can't be solved by rate because it is ultimately impossible to know how much to charge to cover fraud. It now also has a capacity problem due to reduced third-party capital appetite, limited retroavailability, and severe financial distress at many domestic Florida insurers. We know this market well and could be substantially more interested in taking additional risk if Florida's long-term structural problems were addressed. That said, over the last several years, we have steadily reduced our exposure to the Florida domestic homeowners market, and it now represents about 2.5 percent of our gross written premium. Consequently, the ultimate outcome of the Florida renewal is of diminishing consequence to us relative to several years ago. Moving now to a quick summary of the quarter's events. In Europe, windstorm units brought major hurricane force wind gusts. Initial industry loss estimates are in the 2.2 to 3.3 billion range, likely making it one of the top five costliest European windstorms. In Australia, a series of slow-moving low-pressure systems produced long, intense rainfall and significant flooding in both Brisbane and Sydney. Initial industry loss estimates are around 2.5 to 3.3 billion, which is the largest flood loss on record in Australia. The quarter also saw events in Japan and the U.S. While neither of these events materially impacted our financial results, they contributed to the overall growing perception of natural catastrophe risk that continues to drive reinsurance pricing. Moving now to casualty and specialty, overall this segment continues to demonstrate healthy underlying profitability. We expect this profitability to continue to grow in part due to ongoing rate increases driven by concerns over inflation. Our casualty and specialty strategy and where we take risk is constantly adapting to anticipated future conditions. Our underwriting tools give us the ability to determine where the best opportunities lie and grow individual lines or whole segments accordingly. Over the past few years, aided by the TMR acquisition, we grew general casualty and professional lines significantly as rate outpaced trend. As of 2021 progressed, our focus increasingly shifted towards other specialty as market conditions began to improve considerably in these lines. This year, we expect specialty will continue to experience an increased rate in part due to the Russia-Ukraine war. We also believe that we will find many opportunities to grow in financial lines. With respect to the Russia-Ukraine war, as Bob discussed, we booked about $27 million in IBNR for the quarter as the result of a robust process to assess the potential impact on our underwriting results. Our initial conclusion is that we have relatively minimal exposure to the war. To begin with, we do not expect material exposure in our property segment, in part due to widespread applicability of war exclusions. Additionally, exposure in traditional casualty business also is likely not material. The most likely sources of exposure would be in our specialty and credit portfolios. Of course, this is an ongoing event and our reserve is subject to change. continue to work with our customers and brokers to monitor the impact. Thanks, and with that, I'll open it up for questions.
spk08: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Elise Greenspan with Wells Fargo.
spk09: Hi, thanks. Good morning. My first question was just on the level of buyback. So last quarter, you guys had said that buyback would be driven by net income. So did the negative mark to market from the higher interest rates impact the slowdown in the quarter? And then tying into that, I guess I was also a little surprised with the slowdown, given that you said excess capital remains at the top end of your range. So I would have think that would have supported perhaps more buyback activity in the quarter.
spk02: Thanks, Elise. Good question. First, I'll start with we still are at the high end of our excess capital. We did reflect the mark-to-market that came through on the portfolio. We look at that as more timing as opposed to absolute. And the future, what I was talking about, the rise in interest rates, our model is on a pro forma basis. And so that's going to have the ability to look forward and actually look at the increasing rates that we'll get on the portfolio and bring that back into our capital. So that's the support of our capital. Look, there was a lot of activity this quarter between inflation, between the war and rising interest rates. We did start off the quarter and bought about $93 million back, but we just took a pause. We look at this on a quarterly basis. So as we look forward into the second quarter, you know, we're looking at a number of things where we can deploy capital. And actually we already have in Fontana. We've got the ability to put $150 million to work there. We also have the ability to do both, and we have the intent to look at both options that we have to deploy both into the business and also return.
spk09: Thanks. And then my follow-up, last quarter you guys had said within property that gross premiums are going to be down and net was expected to be about flat after accounting for excluding reinstatement. So It does seem like you guys found better growth within, you know, casualty, but then perhaps not as, you know, much growth within property as when you made those statements. So how should we be thinking about the growth within both gross and net within your property book this year? Has anything changed relative to that guide?
spk02: No, there's been really no change. What I tried to point out was there's a lot of times we get focused on the gross, and that's what I was trying to walk it down in my comments about Upsilon and reinstatements and get into the net. And that's really when I look at the net premiums written in property, I broke it down between catastrophe, which actually showed modest growth that we had in there, reflective of the rate and the positioning of the portfolio. Other property, over the last couple of years, we've seen significant growth in what you saw in the decline in other property on a net basis, which was down about 17 points. It was really just refining the profitability that Kevin's been talking about. And so we now have renewed on some proportional lines on the quota share.
spk00: Yeah, that's accurate, Bob. And one thing you mentioned is, has anything changed in our view of property? If anything, we are increasingly seeing green shoots in further dislocation in pricing. So if I think about how to underwrite a property portfolio, firstly, from a growth perspective, Bob explained where we are. Over a couple of years, the growth has been strong, and we've had the pendulum kind of swung over to the risk accumulation As an underwriter, you need to think about when you want to focus on margin expansion and risk accumulation. We are swinging the pendulum towards margin expansion. So on a like-for-like basis, all of our property is now producing more expected profit for the premium that we're bringing in. We think that's the right focus. Coming into what is coming up for renewal is largely going to be wind-exposed business. We like the construct of the portfolio, but we're going to press rate. So I still have optimism that we're going to see opportunities for growth from rate and largely within expectations of where pricing is likely to be will hold the risk curves relatively flat to where we were last year.
spk09: Okay. Thanks for the color.
spk00: Yep.
spk08: Your next question comes from the line of Yaron Kenner with Jefferies.
spk07: Thank you. Good morning, everybody. I need to follow up on Elise's question because I'm not sure I fully understand the response with regard to the buyback capacity for this year. So if buybacks were going to be tied to net income and net income was actually a loss this quarter given the marks, do you still expect them to do buybacks over the course of the year? Do you expect a slower buyback as a result of that? Or is it that you're looking at the pro forma operating income benefits from higher interest rates that would still drive buybacks.
spk02: The point I was trying to make, and thanks for the follow-up on that for clarification, the point I was trying to make on the mark-to-market, yes, indeed, we had absolute net income loss, but the point I was trying to make on the mark-to-market is we view a lot of that as more timing as opposed to absolute. We'll realize very small amounts of it, so we're still looking at a positive base. We have the ability to buy back shares. We have the ability to deploy capital. and we look at each quarter on a discrete basis.
spk07: So conceptually, wouldn't it make sense to tie the buybacks to operating income then?
spk02: I don't want to get too disconnected because it's the net income that accretes to capital, and we have to look at what our available capital is, and that was the point I was making when I said we did take a hit on the capital through the mark-to-market, but we have to look forward to the investment earnings going forward. It's kind of a balance in a situation like this. This was a lot of activity this quarter. And we took a breath. That doesn't mean we didn't stop.
spk00: We're not formulaic on our buybacks. We are looking at lots of different things. One thing Bob had mentioned is buying back is a way for us to manage excess capital. Our first priority is to deploy capital into the business. And we invested significantly in Fontana. We think Fontana provides long-term strategic advantages to us in managing our casualty business. So again, beyond the share buybacks, we did invest more in building out the platform.
spk07: Okay, got it. And then my second question, a higher level. Kevin, in your comments, sounds like you're still confident in being in the property CAD business more so than many of your peers. That said, you are also scaling back a little bit in property, just not to the extent we're seeing others. And I guess my question would be, Does that essentially mean that you're comfortable with having higher volatility over the long run, even with higher ROE, and even with recognition that maybe the investment community seems to be a bit more negative on such volatility and underwriting results, even with the higher ROE?
spk00: Yeah. I think you're thinking about it through the right lens, and then it's two degrees. I believe there's more rate coming in property. I also believe we have more skills, more access, and more vehicles to think about how to construct property portfolios and specifically property cat portfolios to extract more alpha from the market. So I think it's rational for others to take a different view on how to think about property cat. But I look at what we're building and the portfolios that we're able to create in each of our vehicles. And we're getting paid more for the risks that we're taking. And, you know, I think the volatility is a trade that investors make for the amount of return we're producing. But I see more return on the horizon for every dollar of premium we're taking in, in PropertyCat, other property, and E&S exposed PropertyCat.
spk07: Thank you.
spk08: Your next question comes from the line of Mayor Shields with KBW.
spk06: Thanks. I guess, Kevin, I'm trying to... Sure. reconcile your, I think, optimistic tone about market opportunities now with comments you've made on previous calls about rethinking your overall risk expectations. I'm sure I'm getting the phrasing wrong. Are you seeing current opportunities now or is it that you think that the pullback of competitors means that at some point in time, even with a higher level of anticipated risk, that you come out ahead?
spk00: Yeah. I'm not exactly sure what commentary you're adjusting to, so let me just talk about what we're actually doing in property and see if that answers your question. So from the property perspective, other property, we're seeing excess return in catapults, other properties. So that has been the focus. What you've seen this quarter is a shift, one, to our updated, you know, our normal process of updating our view of risk requires some changes to the portfolio, but also the opportunity to for us to press for margin. So you're seeing some change just to the construct of the other property portfolio, but no shift in strategy. From a property cap perspective, a lot of focus right now is on Florida. We're not that interested in the Florida market, but we do have a lot of Southeast Atlantic hurricane risk, which comes in through different ways. We think we're going to hold that relatively flat, but harvest more margin for the risk that we're taking there. So when I think about the overall construct of the portfolio, I'm delighted with the size. I'm delighted with the pricing prospects that we see on the construct of the portfolio and the efficiency that we're continuing to enhance in the overall returns in each of our vehicles. So I am very optimistic about where we are and the opportunities. I think there'll be, in addition to that, from a demand side, we said that after the January 1st renewal, we had an expectation that companies would sit back and realize that they were retaining perhaps more risk than they might be comfortable with. We're seeing that affect the supply through reinsurers reassessing their desire to write PropertyCat, and they're seeing substantial new demand come to the market for increased purchasing. So all of those dynamics set up for what I think is a really accretive market for us to be bullish on, and we're working into that market right now by enhancing margin.
spk06: Okay, that's helpful. Second question, not to be terribly cute, but according to a lot of media reports, there are some reinsurance businesses for sale, and I'm wondering how you think about that, additional acquisitions and reinsurance.
spk00: I think I probably should read fewer tabloids for the insurance industry, but I think from our perspective, I feel strategically complete. We have a great portfolio. We fully absorbed the last acquisitions, which you know, Platinum and TMR. I think the lens we have hasn't changed, which would be if it advances our strategy and is financially creative, we'd take a look. But right now, I think the opportunity cost from distracting our underwriters from the pursuit of organic opportunities in the market is significant. And I think that's the lens in which any opportunity needs to be viewed from. So I think the barrier for us to enter into an engagement is where acquisition is higher than perhaps it was with TMR, but if the right opportunity is there, it's impossible to say you'd never look at anything.
spk06: Okay, perfect. Thank you very much. Sure.
spk08: As a reminder, if you would like to ask a question at this time, simply press star, then the number one on your telephone keypad. Your next question comes from the line of Josh Shanker with Bank of America.
spk05: Yeah, thank you for taking my question. You know, I see obviously you're pulling back and remixing for the best opportunities available. Does that mean last year that the property cap business you wrote was probably underpriced given what your model is saying right now? You're not the only ones who are pulling back. Maybe there's better opportunities everywhere. But if you could do over 2021 again, is the model different enough that it's giving a different – output for the risks that you took a year ago?
spk00: That's a great question and one we obviously spent a lot of time on. So first, we're not pulling back. What we're doing is we're looking at ways to expand the profit in the portfolio. I think our risk levels will be ballpark the same as last year. With regard to underpricing last year and adequately pricing this year, I think that's a Let me break it down to some of the things that we looked at in the change. Firstly, our models are always updated. And what we try to do is get ahead of the moment and build into where the markets are headed. From an inflation perspective, inflation is higher this year than last year. So we want more money for the same risk just because its lost costs are going to be higher. Social inflation trends are continuing. I'd say we learn more about that so there's more precision in our social inflation application in the model. I wouldn't say that's making a judgment as to prices higher or lower. And then climate's a mix. Climate is going to change and the benefit we have with building our own model is we've long reflected climate change. A component of reflecting climate change is incrementally changing your model as the environment changes. I'd say that's very consistent with the best science out there. So I would say that that is a very big part of our change, and you'll hear for the next 20 years us talking in context of changes to reflect where the pace of change for climate change is going. And then when there's an event, we learn more. So I don't know if we're getting excess margin compared to what we should have gotten last year or if we're just catching up to where we are. What I can tell you is we do measure changes On a like-for-like basis, we're being paid more for the risk, and our objective now is under an elevated view of risk to get no less margin than we had last year, and we're achieving that as well. So it's an imprecise answer to something that is kind of unknowable, but I think if you take the rationale as to how we're addressing it. We're trying to get ahead of the curve and incrementally always stay there. And I think our pricing and the opportunities we have to expand margin are allowing us to do that in a way that under any measure is we're building a better, more profitable portfolio now than last year.
spk05: Okay, thank you. And the other question, which probably I could figure this out if I were a forensic accountant, but it's really a question for Bob, I think. So the new money yields you guys are earning right now are far higher than where the yield of your portfolio is but also you have a lot of ventures and whatnot where the investments are in short-term rates, cash, and stuff that doesn't really have any duration or credit risk to it at all. When I think about the portfolio, how much of the portfolio is subject to those new money yields, and how long should we expect it for that portfolio to turn over, or I guess what percentage of that portion turns over in a 12-month period?
spk02: That's a good question for clarity, and we're not going to rack your brain. I'm going to give you the answer. Page 14 in the supplemental tells you exactly what we consider the retained fixed maturity and short-term investment portfolio, about $12.1 billion. That's all our fixed maturity that comes out of the investment portfolio and some of the short-term investments. The lion's share of the shorter-term investments that you're talking about is really what we're managing on behalf of the third-party capital. The new money yield, that's what the new money yield of 2.7% represents, and that's up from 1.6. We expect that to accrete into earnings rather quick. We'll expect to see some of that benefit come in in the second quarter and increasingly in the third and fourth quarter.
spk05: Okay, thank you.
spk08: Your next question comes from the line of Ryan Tennis with Autonomous Research.
spk01: Hey, thanks. Good afternoon. First question, I apologize if this has been covered. If it has, just ignore. But on the other property segment with the non-renewals, an indication of, you know, how much more that's on the come in subsequent quarters this year?
spk00: A lot of that book's renewed already. And, you know, I think what we're doing is a fair amount of it's quota share, so it's going to depend on what the underlying companies are doing. I still believe that that portfolio is going to be relatively up on a net earned basis, but there's a lot of variables moving around. If I were to guess, flat is a conservative assumption.
spk01: Gotcha. Kevin, you seem obviously more confident in the profitability of that portfolio and some of the actions you've taken. Just wondering if maybe you could kind of share observations about, I don't know the math behind that. Like last year, it looked like you did like a 44% attritional and other property excluding large losses. Have you thought about or looked at the math on, you know, if we didn't write this, it would have been X points lower. Just any, anything you could share on those lines about the type of tailwind that these non-renewals could offer you. Thanks.
spk02: I'll kick it off a little bit, Ryan. We've seen the profitability in that book. really come on pretty strong. I'm not sure about the 44%. Maybe we can go offline and talk about that. But we've been around upper 40s. We've been focused on keeping that below 50. It was 51 this quarter, but there was four points coming in from the weather-related large losses. But we see that the business that we've grown significantly over the last three and a half years, 50%, 21 over 20, we're going to see the magnitude of that accreting income over the course of the year pretty significantly.
spk01: I guess I'll just ask one more too. So I guess it's been, this has been something we've discussed over time that you guys have struggled another property with the non-cap style. You know, what is it about that business? It's obviously the history of the company goes back to property capital. Like what is it, you know, I guess, Kevin, like what's your assessment of, you know, why you weren't quite as successful at, at writing some of the non-cap stuff for other properties?
spk00: I think non-CAT is, you know, there are two skills. You're absolutely right. There's understanding the attritional element, getting that right, and then understanding the CAT. Leveraging into more CAT-exposed, we think, is an area that a lot of insurance companies have attritional expertise, but either less expertise or less desire for the CAT. We're getting a lot of excess margin there. So that we're leveraging into the strength that historically we've demonstrated. The other property, frankly, the issues that we had were the bottom decile of the portfolio and being too patient from an under-earning perspective. We're not making that mistake again. And what you're seeing in some of the changes in other property is us working aggressively on leveraging very, very narrowly into our strategic objectives on that and having less of a historic tolerance for those that aren't getting there. Thank you.
spk08: Your next question comes from the line of Brian Meredith with UBS.
spk03: Yeah, thanks. A couple of them here for you. First, Kevin, I'm just curious. The growth that you're seeing in your casualty segment, how do you think about social inflation there? Are you thinking about when you're pricing and reserving that business, kind of the current social inflation environment? or are you building in something significantly higher because as the courts reopen, there's a lot of uncertainty there?
spk00: I absolutely agree with your last comment. There's a ton of uncertainty, and some of the observations we have about the outperformance, particularly in 20 when things were shut down, we are being very, very slow to recognize because the historic lens for recognition of that may not be accurate because of the courts being slower. I think commentary broadly over the earnings season and our absolute observations on our portfolio is measuring trend and rate is kind of the art of casualty and specialty reserving and pricing, and we're still seeing rate above trend. That is discounted because we're uncertain or our confidence in trend because of the slowdown is lower. And social inflation is a component of that. So I would say everything we see under a normal environment would be even more bullish than I feel. We're tempering that bullishness because of the uncertainty of how COVID has affected the emergence of claims.
spk03: Great. That's helpful. And then, of course, I'm just curious, you know, looking at the breakdown of kind of the growth across your casualty and specialty segments, growth obviously throughout all of them. But financial lines kind of jumped out at me as kind of the big growth there. what areas within the financial lines right now are attractive?
spk00: We're seeing lots of attractive opportunities. You know, one area that we spoke about and we continue to see lots of opportunities in the mortgage. You know, we're a very large protector of the GSEs as well as the PMI market. So we still see opportunity there. I know inflation is is a known risk to the mortgage market. We're obviously watching that closely. But the portfolio continues to develop really well. We're seeing strong demand and good opportunity.
spk03: Great. And if I could sneak one more in just quickly. With respect to your Russia-Ukraine exposures, have you had any claims notifications yet? And kind of as we look forward, you know, where are the other areas that potentially you think you might see some development, if at all?
spk00: Um, we, we don't have any, everything we've done is a shift in our w we just think risk is elevated. So we we've upped our IVNR. Um, you know, the, the areas that are getting the most press short-term is the aviation market and aviation leasing specifically. We are underweight in that market. Um, is there's some war on land coverage. So a lot of it's in the Marine market and the aviation market. You know, I think there are, you know, elevated chances for the global impacts from the war for credit businesses. So, you know, this can become pretty broad in its impact. We're monitoring it all. You know, internally we have a very sophisticated reserving approach to this where every deal, every class of business that we write is categorized as to how exposed it is to potential risks emerging from the war. And when I look at that and I add up kind of what I think our exposure is, we are significantly underweight relative to where our peers are in the market. At this point, this is not a risk that is changing anything strategically or fundamental to who we are or what we're doing.
spk03: Makes sense. Thank you.
spk08: Your next question comes from the line of Yaron Kenner with Jefferies.
spk07: Thanks for taking the follow-up. Just one quick one. I know you said that you still have a very limited appetite for growth in Florida, but with the special legislative session scheduled for late May, how do you see that impacting 6-1 renewals for the industry more broadly?
spk00: I don't think I've ever successfully forecast what's going to happen in the Florida legislature. I know it's being discussed, in particular the drop on the FHCF by the drop down in attachment. That doesn't change. Actually, from Renry's perspective, that has no change in what we do or how we're looking at the market. I think there's a lot of problems in Florida. Solving it by a drop in the FHCF, I think, is difficult. is potentially relieving some short-term pain for the domestic carriers. I think the structural issues are my bigger concern, and I think it's hard to want to perform in that theater when, at the end of the day, the theater is kind of on fire because of all the issues within the market.
spk07: Appreciate it. Thank you.
spk00: Yep.
spk08: And there are no further questions in queue at this time. I would like to turn the call back over to you, Kevin, for closing remarks.
spk00: Thanks, everybody, for joining the call. All things equal, we believe our results should improve steadily over the course of the year and we'll be paid more for the risk that we take. We'll benefit from expanded capital partners business and anticipate that rising interest rates will translate materially higher investment income. So, frankly, today's volatility should translate into tomorrow's improved financial performance and reward our shareholders with superior returns. I am optimistic about where we are. I like our portfolio and look forward to speaking to you on our next call. Thanks.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
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