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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Chelsy and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Second Quarter 2022 Earnings Conference Call and Webcast. After the prepared remark, we will open the call for your questions. Instruction will be given at that time. [Operator Instructions] Thank you.
And I will now turn the call over to Keith McCue, Senior Vice President of Finance and Investor Relations. Please go ahead.
Thank you. Good morning. Thank you for joining our second 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 will make sure to provide you with one. There will be an audio replay of the call available from about 1:00 PM Eastern Time today through midnight on August 2nd. The replay can be accessed by dialing 800-938-2806 in the U.S. or 1-402-220-9034 internationally.
Today's call is also available through the Investor Information section of www.renre.com. Before we begin, I am obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With us to discuss today's results are Kevin O’Donnell, President and Chief Executive Officer, and Bob Qutub, Executive Vice President and Chief Financial Officer.
I'd now like to turn the call over to Kevin. Kevin?
Thanks, Keith. Good morning, everyone. And thank you for joining today's call. We are pleased to report that RenRe generated strong second quarter results that combined consistent bottom line profitability with continued top line growth. For the quarter, we delivered an annualized operating return on average common equity of 18%, our third sequential quarter of double-digit ROEs. Importantly, we also increased our net premiums by 23%.
On a year-to-date basis, we have a reported operating ROE of 14.4% and growth in net written premium of 21%. Overall, our strong financial performance this quarter reflects the resilience of our business model across macroeconomic environments. It demonstrates that our strategy can consistently deliver profitable growth with improved performance across all three of RenRe's drivers of profit, underwriting fees and investments.
From an underwriting perspective, we are especially pleased by the growing contribution of our Casualty and Specialty segment to our operating results. Increasing fee and investment income also serve as a stable platform to support our more volatile property cat portfolio.
Turning now to the operating environment. We are confident in our ability to continue creating near and long-term value for shareholders, notwithstanding challenges in the global macro economy. As we all are well aware, most broad economic indicators continue to decay during the quarter, driving concerns over inflation and increasing fears of recession. I would like to take a minute to discuss economic conditions and how they might impact our strategic approach and business results.
Inflation in various forms, social, economic and event driven is a factor we have always taken into consideration in running our business. Given the resurgence of economic inflation, we have implemented a robust framework across our underwriting portfolio to estimate and price for its impact. As a result, we are requiring materially increased rate to compensate for the loss cost impact of inflation. As such, even given our increased view of risk, we are still receiving rate ahead of trend.
We have applied a similar framework to our reserving process, which we continue to assess and review based on our increased inflation assumptions. That said, we remain comfortable with our reserves, even after stress testing for inflation. On the asset side of the balance sheet, inflation-driven interest rate increases are materially improving our investment returns. This should significantly offset the impact of inflation on our business as the increase in interest rates is likely to persist longer than elevated inflation.
In summary, we have adopted a proactive approach to inflation and expect that once we have balanced the trade-off between inflation and increased yield, the net impact on our operating results will be positive. The risk of recession is a more recent, but growing concern. Our business model has historically proven to be less sensitive to this risk. There are several reasons for this. First, across the insurance value chain, there is limited discretion in purchasing decisions. Most policyholders must purchase coverage as is the case with homeowners insurance and many commercial coverages. By extension, most insurance carriers require reinsurance to maintain their portfolios.
Second, inflationary pressures and recessions can raise demand for reinsurance. Inflation increases the cost of goods and services. Consequently raising total insured values and by extension demand for additional reinsurance limits. Recession also decreases tolerance for risk so demand for volatility protection goes up. Third, recession and inflation reduce the supply of capital, while increasing its costs. Consequently, reinsurance rates typically rise while simultaneously becoming more competitive versus other forms of risk capital.
As a result of these supply and demand dynamics over the course of the next year, we expect increasing demand for our products across both property and casualty and specialty. In addition, rates should continue to face upward pressure in some cases, materially. We saw this at the midyear renewals with property cat demand increasing by about $5 billion against constrained supply, leading to substantially higher rates.
The constrained supply of reinsurance is being driven by investor concerns over reinsurance, generally as a class and property cats specifically. As you know, we have deep roots as a writer of property catastrophe reinsurance, and remain committed to this risk as a core component of our underwriting strategy. This is due to our competitive advantage in understanding property cat risk and our conviction that we will be paid for the volatility over time.
RenRe's strategic commitment to reinsurance enhances our value proposition to customers along three critical dimensions. First, our participation is consistent. We manage risk on behalf of the biggest and best themes and provide consistent exposure driven pricing, regardless of short-term weather predictions or deteriorating macroeconomic conditions.
Second, our participation is broad. Our customers value the scale and breadth of our offerings and our ability to meet all their reinsurance needs. And third, we do not compete with our customers. Our strategic focus on reinsurance minimizes potential channel conflict. This strategy is clear, consistent, and increasingly differentiating. We believe that it provides us outsized participations on the best reinsurance programs and ensures we are a first grower market for new or increased reinsurance demand.
Before I hand over to Bob, I wanted to address one of the major factors behind the market's perception of property cat risk. And that is the poor historic performance of cat models. In no small part, this is due to an over reliance on vendor models that inadequately capture the growing influence of climate change.
Our scientists – excuse me, our scientists and engineers at RenRe and Risk Sciences believe that the commercially available models do not properly reflect climate change as an evolving phenomenon. For some perils, while vendors may have adjusted their views to reflect recent experience, we believe that they have not robustly captured the physics of climate change. From a risk management perspective, this means that the vendor model outputs are likely to underestimate the risk that insurers and reinsurers are managing. This could cause companies to expose more capital than intended and their returns for managing cat risk will be lower than expected.
Consequently, investors may question whether the entire insurance industry truly understands the potential impact of climate risk, whether it being correctly incorporated in the industry's evaluation of risk and most critically, whether it is appropriately reflected in rates.
Now let me explain why we are confident in our management pricing and portfolio construction of this risk. We have invested considerable resources in modeling and understanding climate change. Our team at RenRe and Risk Sciences ensures our models always reflect the most up to date data informed science. This enables us to steadily increase our current view of risk to reflect the present day impact of climate change. As a result, we believe our models are better predictors of the impact of climate change on loss costs.
In addition, our REMS underwriting system provides us an additional competitive advantage in underwriting property, catastrophe risk. All our risks must be underwritten and modeled through REMS, which is continuously updated to fully reflect the best understanding of the physical parameters of shifting weather patterns. This ensures that our underwriting decisions are based on an elevated view of risk that fully reflects climate change. It gives us confidence that we are being paid appropriately for the risk we are assuming.
That concludes my opening comments. I’ll provide more detailed update on our segment performance at the end of the call. But first, I’ll turn it over to Bob to discuss our financial performance for the quarter.
Thanks, Kevin and good morning, everyone. Q2 was a strong quarter for RenRe as we reported operating income of $238 million and an annualized operating return on average common equity of 18.4%. These are excellent results that demonstrate strong underwriting performance, the capabilities of our platform and our continued focus on executing our strategy to consistently deliver profitable growth.
As I said last quarter, we believe that there is further upside to our earnings across each of our three drivers of profit. We progress each of these drivers in the second quarter. First, our casualty and specialty business is on track to consistently deliver a mid 90s combined ratio on a growing premium base. This quarter casualty and specialty reported a 94% combined ratio and generated $52 million of underwriting income.
Second, our net investment income is benefiting from rising interest rates and increased investment leverage. This quarter, our managed net investment income was $107 million, up almost 30% from the first quarter and we anticipate continued improvement as our new money yield is nearly double our current net investment income yield.
And finally, fee income increased to $34 million and we remain on target to earn fee income in the range of $45 million per quarter, by the end of the year, absent any large losses. All of these factors should reinforce a stable earnings foundation that we believe will benefit our shareholder returns.
Now moving on to capital management. And as you know, our first priority is to deploy capital into the business, which we view as our highest return potential and then return excess capital to shareholders over time at attractive levels.
In the second quarter, we chose to return a modest amount of capital to shareholders through share repurchases at attractive levels. We also continued to make modest share repurchases at the beginning of the third quarter. We remain in a strong capital position despite significant mark to market losses in the first half of 2022. Our investment portfolio remains high quality and we expect to earn back the losses in coming quarters.
As we head into the wind season, we are not planning additional share repurchases in the third quarter. As Kevin said, we believe that we are in a position of strength in the current macroeconomic environment and will benefit from supply and demand imbalances in both property and casualty and specialty. We have a strong balance sheet and are keeping our powder dry to capitalize on potential underwriting opportunities as we believe this is the best way to maximize long-term value creation for our shareholders.
I’ll now shift to our three drivers of profit, starting with underwriting income, which shared $316 million. This reflects strong performance across both segments, a normal level of expenses and favorable development that is mostly shared with our joint venture partners. In short, there were no significant one-off items driving these favorable results. We grew overall gross premiums written by 18% and net premiums written by 23%. Growth was driven by the Casualty and Specialty segment, but property also grew on both a gross and net basis.
The overall combined ratio was 78%, which increased by 6 percentage points compared to the second quarter of 2021. A little more of half of this increase relates to mix shift in our underwriting portfolio. Casualty and specialty and other property now make up a larger portion of our portfolio. This business is less volatile than our property catastrophe class of business, but it also carries higher attritional loss ratios and expense ratios, which are more visible in low CAT quarters. The remainder of the variance relates to a higher level of CAT activity this quarter, combined with lower favorable development. CAT activity in Q2 2022 was above the second quarter’s 10 year average, while Q2 2021 was close to average.
Moving to our Property segment where we reported a combined ratio of 58% and favorable development of 6 percentage points. We only retained about a third of this favorable development, as a remainder was shared with our joint venture partners. As a result, it was not a material contributor to our bottom line results. Property gross premiums written increased by $35 million or 3% and net premiums written increased by $85 million or 11%. The growth in the quarter was driven by property catastrophe and as an excellent example of our ability to employ our gross to net strategy, as we found attractive opportunities to grow at the midyear, we were able to share more risk with our joint venture partners, particularly DaVinci, Upsilon, and Vermeer.
We continue to retain about one-third of property catastrophe gross premiums written with the balance being seated through traditional retro and our joint ventures. The other property book continued to perform well and within our expectations. We reported an 83% combined ratio and current accident year loss ratio of 52%. This included about $9 million or 3 percentage points from floods in South Africa. Other property attritional losses have generally been running below 50%, which is consistent with our expectations for this business.
Other property gross and net premiums written were roughly flat to the second quarter of last year. We continue to find CAT exposed E&S business attractive and are growing premium through rate increases. Consistent with last quarter, this growth is being offset by non-renewals of certain attritional quota share deals that do not meet our return hurdles. Net premium earned for other property has been running around $340 million per quarter for the first half of the year. And we anticipate a similar amount per quarter on average for the remainder of the year. The other property acquisition cost ratio of 29% was slightly higher than expected due to a few one-off items. Generally, we expect this ratio to be around 28%.
Moving on to casualty and specialty where we reported strong results. Gross premiums written were up 37% and net premiums written were up 38% with notable growth in professional liability and financial lines. The growth in financial lines relates predominantly to mortgage deals that can take up to seven years to be fully reflected in our net premiums earned. Year-to-date net premiums earned are about $1.7 billion, up 44%. For the second half of the year we are also projecting approximately $1.7 billion in net premiums earned for a total of about $3.4 billion for the year. Our combined ratio of 94% improved by 4 percentage points from the second quarter of 2021, driven by improvements in the current accident year loss ratio and acquisition expense ratio.
Now moving on to our second driver of profit fee income, which was $34 million in total for the second quarter. Management fees were relatively stable to the comparative quarter, driven by an overall reduction in Upsilon and structured reinsurance products, mostly offset by an increase in the size of DaVinci, Vermeer, Medici and Fontana. This is the first quarter where we have started to accrue management fees on Fontana, our new casualty and specialty joint venture vehicle. Fontana’s management fees are based on net earned premium and will take several quarters to fully ramp up.
In the second quarter, performance fees continue to be impacted by a deficit related to 2021 CAT events. We have now largely earned out of this deficit and expect performance fees to pick up in the third quarter, as long as there are no significant CAT events. Overall, we shared $49 million of our net income, which includes $120 million of our operating income with partners and our joint ventures as reflected in our redeemable non-controlling interest.
The difference between those two numbers is the operating figure does not include $75 million in mark to market and foreign exchange losses attributable to our joint ventures. The mark to market losses primarily relate to DaVinci and Fontana, while the foreign exchange losses relate to Medici.
Turning now to our third driver of profit, investment income, where we are starting to see the benefits of interest rate increases in our net investment income. It was up 33% on a managed basis and 19% on a retained basis compared to the second quarter of 2021. We anticipate continued growth in our net investment income, while a retained net investment income yield is 2.2% the current yield to maturity is almost double at 4.1%, and we expect to realize much of this benefit relatively quickly as the Fed increases interest rates and we turn over the portfolio.
The significant increases in U.S. interest rates drove $654 million in mark-to-market losses in our investment portfolio, principally in our fixed maturity portfolio. $576 million of those losses were retained and drove the difference between our net and operating income, as well as the decline in our tangible book value per common share.
Turning to our expenses and foreign exchange. Our direct expense ratio, which is the sum of our operational and corporate expenses divided by net premiums earned with 6%, which is flat to the comparable quarter. While operational expenses were up in the quarter. The operational expense ratio also stayed flat at 5%. It was a volatile quarter for foreign exchange. We reported a $51 million foreign exchange loss, which was driven by large movements of the Euro, pound, and yen against the dollar and is not included in operating income.
The loss had three components. First, $21 million relates to hedges on behalf of Medici investors. This is completely offset in non-controlling interest and has no bottom-line impact on us. Second, $24 million relates to a one time adjustment regarding treatment of certain foreign exchange exposures. And finally $6 million relates to basis risk inherent in our overall hedging strategy.
Finally, I’d like to call your attention to the enhancements we’ve made to our financial supplement. Our goal was to provide our investors with additional disclosure to help better understand our business and three drivers of profit. Among other changes, we have provided more granularity on premiums, including the impact of reinstatements have highlighted the operational component of NCI and have provided significant detail on our retained investment portfolio. We hope you find the enhancements helpful, and if you have any questions, please give Keith a call.
In conclusion, we have reported excellent results with an 18% operating return on equity and solid underwriting performance across both segments. We are in a strong capital position with plenty of dry powder to take advantage of opportunities. And finally, we continue to see positive momentum across each of our three drivers of profit, which we believe will make our financial results increasingly attractive and resilient to natural catastrophe volatility.
And with that, I’ll turn it back to Kevin.
Thanks, Bob. As usual, I’ll divide my comments between our Casualty and Specialty and Property segments. The second quarter was an active renewal cycle with a busy period in Casualty and Specialty and the June one and July one renewals in property. Beginning with our Casualty and Specialty segment. We are pleased to report that it was a solid quarter across the board with robust top line growth and accident year loss ratio running as expected and favorable prior year development. This resulted in a combined ratio of just under 94% and 52 million of underwriting profit. This is a good result in line with our current expectations and one we believe we can continue to build upon.
In our traditional casualty book, we are seeing reduced over capacity on the best deals as well as reduced pressure on seeding commissions. These trends are in response to underlying rate moderation and general inflationary fears, and we expect them to persist and drive bottom-line profitability. Market conditions in the specialty book continue to improve driven by uncertainty from the Russia-Ukraine war and concerns related to cyber risk.
Cyber has presented an ongoing opportunity with demand consistently exceeding supply and rates up significantly. We have been underwriters of cyber risk for many years and are focused on prudently growing with partners that we think are the best underwriters. Our financial lines business is also facing and improving market. And over the last few quarters, we have found multiple attractive opportunities to grow predominantly in the U.S. mortgage space.
Fannie Mae and Freddie Mac have placed around 11 billion in limit into the reinsurance market so far this year. This is about the same volume as for all of 2021, which was a record issuance at the time. We were also finding opportunities in the U.S. PMI space where our role as a lead market helps us drive structure and pricing. We think the mortgage business is attractively priced given the economic backdrop. We assumed this portfolio at a particularly attractive moment due to the embedded low mortgage rates and significant increases in home equity.
We are given further confidence by the fact that over 95% of our mortgage portfolio is fixed rate and 95% is owner occupied. Overall, we have written almost 0.5 billion of gross premiums in our financial lines business so far this year, double what we wrote during the same time frame last year.
Shifting now to property. As anticipated, the June one renewals in Florida were dislocated with continued upward rate momentum driven by reduced reinsure and third-party appetite. Limited retro capacity and severe financial distress at many domestic Florida insurers. At an industry level, rate increases in Florida average 10% to 30% with pricing particularly challenged in the lower layers. We have been reducing our exposure to Florida over the last five years, and currently only provide material support to six domestic insurers. That said, decreased exposure to Florida domestics is not the same thing as decreased exposure to Florida Hurricanes. Southeast wind remains the peak risk in our portfolio.
What has changed is that we have moved away from Florida domestic companies to more regional and nationwide programs and have increasingly taken Southeast wind risk through our other property book. Overall, at the mid-year renewals, we decided to hold our PMLs flat while taking the benefit of increased rate. More broadly across the U.S., we saw a significant increase in demand mid-year with about 5 billion of new limit purchased. This was a mixture of mid-year renewals and some January one clients coming back to buy additional limit.
As a result, favorable pricing continued into July one with non-loss impacted business rates up roughly 10% to 20% risk adjusted. Loss impacted programs were up more in some cases greater than 50% risk adjusted.
Internationally, renewals in Australia were dislocated because of losses over the last year. European business also experienced rate increases, although at a more moderate pace. In other property, we also achieved strong rate increases consistent with last quarter, we continue to optimize the other property portfolio and chose to non-renew a few large deals. We are closely monitoring meteorological conditions as we head into the third and fourth quarters.
As always RenaissanceRe Risk Sciences has provided valuable information to help us understand the climate dynamics likely to influence the remainder of the year. We are expecting another active Hurricane season and our Wildfire outlook is elevated due to a drought in the Western U.S.
Closing now with our capital partners business. As you recall, last quarter, we launched our Casualty, Specialty joint venture Fontana Re. It is performing well so far, and we expect it will bring material capacity to our customers, diversifying risk to our capital partners and attractive fee income to our shareholders. Across all our joint ventures this quarter underlying performance was strong. The cap on market continues to be an attractive market. And as a result, Medici’s assets under manager up 25% so far this year.
So in conclusion, we delivered a strong quarter with robust premium growth and up [ph] 18% operating return on equity. Looking forward, market volatility and anticipated improvements in underwriting conditions should provide us with ample opportunities to grow profitably and continue to build the foundations for long-term shareholder value.
Thanks. And with that, we’ll open it up for questions.
[Operator Instructions] We’ll now take our first question from Elyse Greenspan with Wells Fargo.
Hi, thanks. Good morning. My first question on the capital side of things, you guys mentioned that you wanted to have some dry powder to capitalize and opportunities as they emerge. Does that imply that you guys are going to be on the sidelines with buyback until there’s more clarity on the January one renewals or how should we think about the timing and when you guys might consider returning to buying back your shares?
Yes. Thanks for the question, Elyse. It’s Bob. Hope you’re doing well today. Yes. In my comments, I did indicate we’re not going to buy any more shares back in the third quarter and we’ll keep a careful eye on the fourth quarter and how we see the opportunities developing for the one-one renewal. So in short, dry powder, it’s better deployed into the business than returned highest return value.
Okay, thanks. And then my second question, Kevin, you guys – you said, right, that you guys pulled back in Florida, but Southeast wind remains the peak portfolio. How is the net exposure to Florida this year compared to last year? And then of the reinsurance treaties that you have with the Florida domestics, are there termination provisions in the event as seed [ph] and is downgraded below A by Demotech and were you guys also successful in efforts to obtain upfront payments?
So let me break it down. With regard to the PMLs across property and other property, we kept the Southeast wind PML roughly flat from a dollar amount from where we were last year. So with that, we’re getting a lot more rate and a lot more margin in the business, even adjusting for inflation and climate change. So we feel really good about the portfolio, but we decided to hold risk levels relatively consistent to where they were last year.
The – a few accounts that we have, I think I mentioned we had six major relationships with Florida domestics. These are companies we think are better positioned than most in the Florida market and it’s ones in which we’ve had longstanding relationships. There are provisions for cancellation, not each of them are the same. And we did not get upfront payment on the premium. We’ve known these guys for a long time. We’re pretty comfortable with the portfolio we’ve built down there.
Thank you. We’ll take our next question from Jimmy Bhullar with JPMorgan.
Hey, good morning. So first just a question on the pricing environment. Your comments are obviously pretty positive. I just wondering if you’re seeing any of your competitors or the market as a whole soften up on rates a little bit, just given the fact that interest rates are higher and that’s benefiting investment income?
No. If anything, we’re seeing continued discipline from competitors, not only with price, but with terms and conditions. So I think we’ve seen some contraction, particularly on the cat related capacity side, where there’s increasing reluctance for competitors to put cat capacity out which is helping support pricing. And then generally across, as I mentioned, within Casualty and Specialty programs are less oversubscribed than they were last year. So that’s again, pushing more power to the reinsurance market.
Okay. And then on the non-cat side, have you seen any changes in session rates by any of your clients?
Not meaningfully, but they’re not increasing. So we’re seeing on well performing accounts, we’re seeing session rates be relatively flat on accounts that need some remediation work. There is increasing pressure on session rates.
Thank you. Our next question comes from Meyer Shields with KBW.
Thanks. Good morning. A couple of quick ones. One Kevin, Bob, can you give us a sense in terms of with the one third of the cap premium you’re retaining where the significant geographic exposures are?
It’s the peak risk around the world. The number one peak risk that we manage is Atlantic Hurricane and within Atlantic Hurricane is specifically Southeast Hurricane. So when we think about that, that’s where our capital decisions and that’s what’s dominating the tail of the distribution, even with the larger Casualty and Specialty portfolio. It’s the mix has been pretty consistent with what it’s been for several years the major exposure regions around the world, California earthquake, North Europe then followed by Japan.
Okay, perfect. Second, in Casualty and Specialty, I guess the year-over-year loss ratio improvement slowed a little bit. Is that connectivity in that segment or something else?
No, that’s when you’re talking about just the current action and your loss rate that we have in there. It’s a blended rate between our Casualty Specialty, specialty credit moved around a little bit, but we did take an adjustment for Surfside this quarter. Once the settlement was announced, that was going to be paid small management less than a point.
[Indiscernible] understood. And I think this is mostly an accounting question, but if I look at the operational expenses in the cat segment, they’re up in the mid 30% range on a year-over-year basis. And it’s something you could talk us through that?
It’s mainly the fees that come through the offset expenses that are reflected in our underwriting expenses. That’s a lion share of it. There’s also been some investments that we’ve made in the property cat modeling that Kevin has talked about.
Okay, perfect. Thank you.
Thank you. Our next question comes from Ryan Tunis with Autonomous Research.
Hey, thanks. Good morning. First question for Kevin, could you give us some sense of how much better would pricing have had to have been at midyear for you to wanted to increase your Florida PMLs?
With the book that was renewing and some of the issues in Florida, the reason I'm hesitating, I'm not sure what rate would have enticed us to put more capacity out. I think had there been more nationwide programs and with the rates that we were seeing, we were pretty close to wanting to put out more within the whole organization on balance. We did put out more limit, but more of it was shared with our partners than kept on our retained balance sheets. So I would say, we're pretty close to where rates should be for us to want to begin to think about adding to PML. Florida, specifically being a different story because of the issues within the low – to the domestic market there but for Southeast wind, I would say we're pretty close.
Understood. Thanks. And then just a follow up, from a loss ratio perspective, the mortgage business you're having in Casualty and Specialty, is that it sounds like that's a decent mix shift. I'm assuming the loss ratios are quite a bit lower than the casualty business. Is that the right way to think about it?
Yes. The credit business generally – specialty is generally outperforming casualty currently from an expected ultimate developed loss ratio. And within that, the mortgage portfolio is kind of leading the pack.
Thank you.
Thank you. Our next question comes from Josh Shanker with Bank of America.
Thank you. Question on, you did mention a little bit, but obviously one of your whole profile competitors said they don't want to be in the property reinsurance market anymore. And property reinsurance has increasingly come in negative word for a lot of your competitors. To what extent, do you measure the amount of capacity available in the market has declined over the past 12 months?
So we definitely measure the amount of limit purchased and we can measure that quite precisely. It is a little bit more difficult to manage how much supply is uncommitted to the market. So, we look to see and from the demand side, how many deals are repriced? How many deals are we getting? How many deals are we getting preferred private terms on because that's an indication that the capacity is at pretty close to equilibrium with the demand. I would say right now, the sense that we have is that supply is decreased, but it's pretty closely matched to where the market is buying. I think with increased demand at one-one, we're going to see further rate pressure come into the market and reinsurance led pricing, which we haven't seen for a long time, or at least that's what I'm optimistic for.
And when I look at the premium ceded in your P&L, and then I also look at the fee income you're generating on third-party vehicles, it seems like there's been a lot less third-party retro purchase and a lot more first-party retro. To what extent is that the pricing has changed to the point where you want to be buying it from your own book. And to what extent is it that there's the third-party capacity, just out there in the market.
And so I answer your question, third-party mean outward ceded and first part mean…
Meaning ceded to one of your own sponsored vehicles, as opposed to ceded to a non-RenRe related party.
Okay. Yeah. Ceded reinsurance has become more expensive. And with that, we are looking carefully, we've got some long-term partnership deals that continue to support the portfolio that we have more straight excess of loss. We've been very successful buying a similar program to support the London business. Some of the other portfolios we have reduced the amount of third-party outward ceded that we purchased just from a capacity and from a pricing standpoint. With that, the flexibility of our platform, we have added more capital to some of our joint ventures and allowed them to participate on the risk that otherwise would have been written and protected and limited. Excuse me, render limited. So the answer to your question is, we are buying less third-party and we are sharing more with partners.
Okay. Thank you.
Yes.
Thank you. [Operator Instructions] And our next question will come from Michael Phillips with Morgan Stanley.
Thanks. Good morning. Quick numbers question first, I think, property expense ratio, you talked about some of the reasons why that was elevated, mix shift, and then some other nuances there. Any way you can quantify the magnitude of that second piece of nuances specifically the lower amount of managed capital that impacted the expense ratio?
In fact in your question, you were talking about the performance and management fees coming through as an offset to it, less of it coming through management fees also enables management fees have remain relatively stable. The performance fees come off against that. It's you can do the math on it. I don't have the number exactly on what the reduction here is in front of me, but that would be less of an offset this year than there was last year. We've also made, like I said, some investments in the property cat space and also in the other property space to understand the risk better.
And Bob because of the mix shift component of that some of – with more other property versus property cat. But comments about kind of opportunities and property cat should that mean that maybe we could see a little bit more of a benefit to the expense ratio going forward than otherwise we might.
Yes, it's fair to say.
Okay.
A lot of the other property portfolio is written on a proportional basis. So with that, there's much higher acquisition costs. If our property cat is a pretty consistent portfolio with much, much lower acquisition costs. So if we weight more towards property cat, the overall property segment expense ratio should decline.
Okay, good. Thank you. And then the second question relates to the reserving process. Kevin, you talked about a little more due diligence because of inflation. I guess another angle on the reserving pieces, I'm curious if you've seen any kind of backlog or on claims payment or slower payment pattern at all, maybe your segments that it leads to kind of a bigger body of claims that are out there than otherwise is the case that could also impacted by inflation. Have you seen any kind of slowdown in payment patterns is the question?
Yes, that’s a great question. And it’s very hard to quantify. We believe that some of the good news we’re observing in looking at our reserves warrant, additional conservatism because of the COVID-related slowdown in the courts and potentially in processing. So we are – we believe that there’s a slowdown again, very difficult to measure it, but with that we are being even more cautious and recognizing good news in our reserves.
Do you think that’s more pronounced that slowdown? It’s hard to recognize. Is it more pronounced in one of the segments than the other?
You’ve cut out for the last thing?
Sorry. Yes. Do you think that the slowdown, that’s hard to quantify. Is that more pronounced in one of your segments than the other?
I think that’s difficult. I think it – No. No, I would say the longer tail lines is where we’re most worried about it. So it’s something we’re probably more concerned in casualty and specialty than in property. But within the casualty and specialty classes, I would say we’re equally concerned among most of the classes certainly in casualty.
Okay, cool. Thank you very much.
Thank you. Our last question will come from Yaron Kinar with Jefferies.
Good morning. Thanks for taking my questions. First question is one that I actually asked last quarter and I apologize that I’m still a little confused over it. And that’s with regards to the buybacks. I think you’ve said in the past, you’re tying the buybacks to net earnings, that said, there is a little bit of a transitory component there mainly you had some marks on interest rates that I guess you’re expecting will reverse and therefore you can continue with buybacks. I just want to make sure that I’m thinking about the moving parts correctly. Is it tied to net earnings? Is it tied to temporary net earnings? Is it tied to operating earnings? How should I think about buybacks?
There’s two parts to that one, Yaron. One is we had tied it to income. We declared it as net income. We did have temporary differences, but we see it as an opportunity too. It’s not an absolute test, but we did buy shares back when we did have a mark to market loss. We tried to clarify that on the call. But more importantly, what we’re looking at is deploying it into the best opportunity. And right now we’re looking in the macroeconomic environment. We see that opportunity as deploying it into the business. So in the absence of doubt, we will not be buying any more shares back in the third quarter, which I outlined here earlier.
And we’ll be looking cautiously at the fourth quarter to see if those opportunities continue to develop at the 1/1 renewal process that Kevin feels optimistic about. So I hope that’s clear in terms of our guidance. There is no single metric that we have out there. It’s where it is the best opportunity for us to deploy it and create long-term shareholder value.
Okay.
We’re excited about what we’re seeing in the markets and preserving capital to be able to deploy it as we approach year end and we think this is the smartest thing to do right now.
Got it. And then in terms of the opportunities you’re seeing in the market, maybe tying this back to one of your competitors’ decisions to pull out of the property reinsurance. Do you see that as offering you additional opportunities in the casualty and specialty book as well?
Yes, I’m generally pretty optimistic right now where the market’s going. The way I think about it is I look at what is the drivers of our results through the lens of kind of the three areas of profit Bob highlighted. So if we take our underwriting, we’re still seeing very strong casualty rates. We have great access to the best business and rate is continuing to be above trend. Looking into what’s happened to the yield curve and the new money rates we’re seeing on the investment portfolio, lots of opportunity for us to continue to grow investment income and have that be a major contributor to earnings.
Our fee business is continuing to grow and doing great. I think there is a little bit of reticence among third-party capital investors, but there’s been a flight to quality and we’re certainly the winner of that. And then from the property perspective, we’re continuing to see new demand come to the market. We’re seeing increased reluctance from competitors to put out capacity with that we’re seeing strong rate change, which we think will persist. So when I break down the things that are currently embedded in the things that drive our earnings, there’s no reason for me to think that they’re going – they’re going to do anything but persist and probably get even more beneficial to our strategy.
I appreciate that. I guess what I’m trying to get to though is ultimately, I guess there is a view in the market that says that you have to be able to compete in both property and casualty and reinsurance in order to compete effectively. Do you think that is – that’s a dynamic that could play in your favor considering the pullback from some of your competitors?
So we definitely benefit from providing coverage across all lines at scale to our seasons. I think a lot of times a buyer looks to how much property CAT they’re going to purchase and starts thinking about their sessions first from a property CAT lens that should additionally put us in the most preferred position going into year-end as well.
Thank you.
Thank you. I would now like to turn the floor back over to Kevin O’Donnell for any additional or closing remarks.
Thank you for joining today’s call. We’re pleased to deliver the strong quarter that we did and hopefully our comments reflect the optimism we’re seeing in the quality of the current portfolio and for what’s to come. Thanks again.
Ladies and gentlemen, this does conclude the RenaissanceRe second quarter 2022 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.