Renaissancere Holdings Ltd
NYSE:RNR
Earnings Call Analysis
Q3-2023 Analysis
Renaissancere Holdings Ltd
The company is intensively channeling its capital towards lucrative business prospects in a favorable market. In the third quarter, despite facing catastrophes, they managed to achieve a sturdy 78% combined ratio reflecting well-executed current accident year outcomes. This is consistent with their year-to-date performance, evidencing a reliable 79% combined ratio amidst industry losses of nearly $100 billion. Although there was a notable 27% decline in gross premiums written and a 22% decrease in net premiums, attributable mainly to lower reinstatement premiums and a strategic cycle management in their casualty segment, the company continues to redirect its resources to high-return areas such as property, excess-of-loss, and specialty lines.
The property segment didn't undergo significant renewals this quarter. Catastrophe net premiums fell, primarily because the previous year's extensive catastrophic reinstatement premiums, such as those from Hurricane Ian, did not recur. The property business is undergoing risk reduction yet enjoying sizeable rate increases. With a combined property ratio of 53% and a current accident year loss ratio at a reasonable 46%, the property segment stands firm. Despite catastrophic events like the Hawaiian wildfires and Hurricane Idalia, which resulted in a net negative impact of $78 million, the segment still exhibited a favorable combined ratio.
The casualty and specialty segments waned by $149 million or 13%, deeply influenced by non-recurring mortgage transactions from the previous year. The company is fine-tuning its portfolio to gravitate towards opportunities with adequate returns, thus affecting growth in certain specialty areas. The casualty and specialty combined ratio slightly rose to 97%, marginally affected by specialty losses. Nonetheless, favorable development was present, and the company maintains confidence in its reserve robustness despite inflationary pressures, expecting a mid-90s combined ratio following the integration with Validus.
Fee income has surged, hitting $65 million due to increased management and performance fees, echoing the company's adept stewardship and performance. Redeemable non-controlling interest saw a significant boost by $1.2 billion, mainly owing to inflows in joint ventures like DaVinci and Medici. Simultaneously, retained net investment income doubled from the prior year's quarter, with a yield to maturity of 6% reinforcing returns.
The company completed the acquisition of Validus for $3 billion, adding a reputable underwriting portfolio and investable assets valued at $4.8 billion. This strategic move is expected to fortify underwriting performance and increase fee income due to augmented capital in joint ventures. Anticipating Q4, retained net investment income is projected to be around $260 million. The company anticipates realizing synergies from the acquisition which would enhance operating leverage. However, due to integration costs, corporate expenses are foreseen to climb, although they remain excluded from operating income.
Regarding the Validus purchase, about 90% of the acquisition premium will be amortized over 10 years, with plans to exclude such adjustments from operating income to present a transparent representation of the company's business performance. The company also intends to furnish additional disclosures to mitigate the impact of these accounting adjustments on metrics such as the combined ratio. Moreover, a newly proposed corporate income tax in Bermuda may increase tax expenses from 2025, but the company views its Bermuda domicile as sustaining a competitive edge.
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Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Third Quarter 2023 Earnings Conference Call and Webcast. After the prepared remarks, we will open the call for your questions. Instructions will be given at that time. [Operator Instructions]. And I will now turn the call over to Keith McCue. Senior Vice President of Finance and Investor Relations. Please go ahead.
Thank you, Chelsea. Good morning, and welcome to RenaissanceRe's Third Quarter 2023 Earnings Conference Call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer. First, some housekeeping matters. Our discussion today will include forward-looking statements, including new and updated expectations for our business and results of operations following the Validus transaction. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning the non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now, I'd like to turn the call over to Kevin. Kevin?
Thanks, Steve. Good morning, everyone, and thank you for joining today's call. I'd like to begin today by highlighting 2 significant accomplishments, the closing of the Validus acquisition and our overall strong performance in the third quarter. Both are a direct outcome of the disciplined implementation of our strategy. This has provided us the clarity of focus and consistency and execution necessary to seize the many opportunities that have presented themselves this year. Beginning with Validus. Since announcing our planned acquisition in May, many teams have been working diligently across multiple work streams. Our collective goal has been closing the transaction as quickly as possible. It is a testament to the team's hard work that we're able to get this all done by November 1. I would like to express my gratitude to everyone at AIG, at Validus and at RenRe, who contributed to this outstanding achievement. Bob will walk me through the financial details. Before he does, however, I would like to reflect on how the Validus acquisition accelerates our strategy and provides us a competitive advantage. Adding Validus to our existing platform makes us a leading global P&C reinsurer [ and ] positions us to be the premier broker market for P&C reinsurance. [Audio Gap] adds further scale and diversification provides efficient growth in attractive lines at a highly favorable point in the market cycle and further increases our access to risk by providing new customers, lines of business and platforms to access new geographies. It enhances the economic outcomes for each of our 3 drivers of profit, deepens our relationships with AIG, one of the world's leading insurance companies through this win-win transaction. In return, they are making significant investments in our common equity as well as our capital partner businesses. And finally, it has valuable new tools, talents and capabilities by combining 2 of the best teams and portfolios in the industry. In short, acquiring Validus further extends what we have already achieved organically this year. We have now reviewed the Validus underwriting portfolio in greater depth. As a result, we are increasingly excited about this transaction for several strategic and financial reasons. First, we believe that there is upside potential to our original estimate of $2.7 billion of incremental premium. We have communicated this to our customers and brokers and their feedback has been consistently positive. Second, we believe we can support the Validus underwriting portfolio with 30% less capital. This is due to the efficiency of our integrated system as well as the support of our capital partner balance sheets. As our flexible capital structure and focus on reinsurance make us the ideal counterparty for AIG. Going forward, AIG's investment in us means we can jointly benefit from the underwriting portfolio's future performance. Third, we are obtaining a large investment portfolio supporting a pool of reserves to which we have limited exposure. This is due to a reserve development agreement with AIG. The current interest rate environment is more than 100 basis points higher than when we announced the deal. As a result, the Validus investment portfolio will serve as an even stronger tailwind to profitability. Finally, we have always been impressed by the quality of people at Validus. The talent pool ramped deeper than we even expected. Consequently, we extended authors for either full-time or transition roles to many Validus employees. Successful integration of the Validus business will be a focus over the next year. Since May, our team has been working closely with Validus Re and AIG to understand Validus Re's operating model, processes and systems. Our goal is to quickly bring our 2 companies together and to operate as one entity. I am pleased to say that we have made significant progress towards this goal specifically. By this Monday, the Validus portfolio will be represented in our underwriting system REMS. Actually, I just received an e-mail that that's done already. And all underwriters will have access to the combined portfolio with the same view of risk. We have already implemented several technology solutions to allow teams to easily collaborate across legacy systems and data, and many of our employees have already moved into shared offices so that they can sit together. All our meeting rules will be completed by the end of the week. In summary, yesterday, we delivered on our promises regarding acquisition of Validus Re. We are privileged to have had the opportunity to acquire such a high-quality asset from AIG. And I want to thank Peter Zaffino and his leadership team who are integral to the success of this transaction. We are pleased to be associated with AIG and look forward to a long and successful relationship. In short, I could not be more excited about our future. Shifting now to our strong financial performance in the third quarter. We earned over $420 million of operating income. This represents an operating return on average common equity of 25%. Year-to-date, we earned $1.2 billion in operating income and delivered a 28% return on equity. This is an impressive outcome for 2 reasons: this performance was not driven by any onetime factors or unusual circumstances. Rather, each of our 3 drivers of profit, made solid contributions to our financial performance in ways that are likely to persist. And we obtained these results even with catastrophe losses and the financial drag from prefunding the Validus acquisition. This outcome is before including the bottom line contribution Validus will bring. We have built a solid financial foundation upon which we will now overlay Validus. This will further bolster each of the 3 drivers of profit. As a result, I am very excited about our opportunities to create shareholder value next quarter, next year and into the foreseeable future. That concludes my opening comments. I'll provide more detailed update on our segment performance at the end of the call, but first Bob will discuss our financial performance for the quarter. Bob?
Thanks, Kevin, and hello, everyone. As Kevin said, this is another strong quarter, both financially and strategically. Financially, we delivered net income of $194 million, operating income of $422 million and an annualized operating return on average common equity of 25%. These operating results are strong on their own, but reflect a 5 percentage point dilution from the additional capital we raised for Validus acquisition. With the closing of the transaction yesterday, this capital has been now been set to work. Our 3 drivers of profit, underwriting, fees and investments continue to contribute significant income for our shareholders. Strategically, we were pleased to close the Validus acquisition yesterday. This transaction builds a solid foundation for the continued execution of our strategy. It is immediately accretive to each of our 3 drivers of profit as well as our book value per share, operating earnings per share and operating return on equity. Today, I would like to highlight a few key financial takeaways from the quarter before I discuss our results in more detail. I will also discuss the Validus transaction which, including how we will report it in our financials and the impact on our fourth quarter results. And finally, I'll provide an update on the recent Bermuda corporate income tax proposal. Starting with some highlights. First, we delivered a solid underwriting performance in a quarter with a significant level of cat activity, reporting a combined ratio of 78%. Well, this was a quieter third quarter than we experienced in the last 3 years, industry cat loss estimates in the U.S. are approaching $20 billion, exceeding the 10-year median. Much of the industry loss this quarter came from secondary perils, and our results are benefiting from the higher rates and attachment points that we required in 2023. Second, fee income was $65 million, more than double Q3 last year and up 14% from the second quarter of this year. This reflects increased partner capital under management compared to last year and higher performance fees from strong underwriting results. Third, retaining net investment income for the quarter was $217 million. This is almost double a year ago and up 14% from the second quarter of this year. This reflects our continued rotation into higher coupon security as well as higher invested assets related to the capital we raised with the Validus acquisition. And finally, we believe we are in a strong capital position even after paying for the Validus acquisition. As we approach the January renewals and we are focused on deploying our capital into profitable business opportunity in this attractive market. I'll now move on to a more detailed discussion of our third quarter results and starting with our first driver of profit underwriting. [ We already ] mentioned, we delivered a 78% combined ratio with solid current accident year results and in a quarter with catastrophes. Across both segments, we also had a 9 percentage points of favorable development. Year-to-date, we're running at a 79% combined ratio even with an estimated industry losses approaching $100 billion in record industry losses from severe convective storms. Overall, gross premiums written in the third quarter were down 27%, and net premiums were down 22%. I'll cover this in more detail through my comments, but the reduction primarily related to one, lower reinstatement premiums in our property book due to lower catastrophe activity, a reduction in mortgages due to the nonrecurring deals last year and active cycle management in our casualty segment. Over the last several quarters, we have told you that we have been allocating our capital lines such as property and excess of loss in specialty, where we are seeing the best returns. Year-to-date, property catastrophe net premiums written are up 18% or 40% without reinstatement premiums and specialty is up 38%. Now moving to our Property segment. In the third quarter is not a significant renewal period for our property catastrophe book, while catastrophe net premiums written declined by $229 million, $208 million of this reduction were 91% related to reinstatement premiums. Last year, Hurricane Ian resulted in significant losses and significant reinstatement premiums, which did not repeat this quarter. The balance of the reduction relates to the timing of ceded contracts. In line with the previous quarters, we have continued to reduce risk in our other property business. This line continues to benefit from significant rate increases. And although net premiums written were down 6%, risk is down substantially more. We reported an overall property combined ratio of 53% and with a current accident year loss ratio of 46%. As I mentioned previously, there was significant cat activity in the quarter. Large loss events had an overall net negative impact of $78 million on our consolidated results, $57 million of this net negative impact came from the Hawaiian wildfires and Hurricane Idalia. Despite this cat activity, other property performed well and with a combined ratio of 78%. The current accident year loss ratio was 66% with large losses contributing 12 percentage points to this ratio. Overall, for the property segment, we reported 19 percentage points of favorable development. The property acquisition ratio was elevated compared to the prior year period, driven by the impact of reinstatement premiums last year. Otherwise, the ratio would have been down. Moving now to our Casualty and Specialty portfolio. Net premiums written were down by $149 million or 13%. This included $100 million of one-off mortgage transactions from last year, which earn out over the next several years. In addition, we continued to manage the cycle to grow in attractive areas and reduce on deals that do not meet our return hurdles. As a result, growth in other specialty was offset by reductions in professional liability. Our Casualty and Specialty combined ratio was 97%, which is slightly elevated compared to recent quarters. This was driven by specialty losses, which contributed 3 percentage points to the combined ratio. This primarily relates to the marine and energy book, which we have been growing at very attractive returns. However, it is exposed to Cat [ LICA ] volatility from time to time. We reported 1.4 percentage points of favorable development in the Casualty and Specialty segment and continue to feel confident in the robustness of our reserves despite the inflationary environment. Year-to-date, the Casualty and Specialty combined ratio is 94%, and we continue to expect a mid-90s combined ratio after adding Validus. Moving now to fee income on our Capital Partners business, where fee income increased to $65 million, driven by strong management and performance fees. Management fees were $44 million, up 78% from the third quarter of 2022, reflecting the increase in capital managed in our joint ventures. Performance fees were $20 million this quarter, reflecting continued strong underwriting performance. Year-to-date, redeemable noncontrolling interest increased by $1.2 billion, more than half of this increase relates to the net capital inflows in DaVinci and Medici, which should continue to be a positive accelerator for fees. Moving now to investments. We retain net investment income is $217 million, nearly double the third quarter of last year. While retaining yield to maturity of 6% continues to drive up the net investment income return, which was 4.9% this quarter. Our investment portfolio remains defensively positioned. In our retained portfolio, we have reduced exposure to credit and equity and shortened duration to 2.6 years, which is down from 3.2 years at the end of 2022. This quarter, rising rates led to retained mark-to-market losses of $220 million. Retained unrealized losses in our fixed maturity investments have gone up to $585 million or about $11.43 per share. We expect this to accrete to par over time. Turning briefly now to expenses. The operating ratio ticked up by approximately 1 percentage point, which was the result of lower reinstatement premiums. On an absolute basis, increased expenses reflect continued investments in our platform to support our growth. Moving now to the Validus acquisition. As Kevin said yesterday, we were very pleased to close the Validus acquisition purchasing $2.1 billion of unlevered shareholders' equity of $3 billion. As a reminder, this is $1.2 billion lower than Validus' year-end 2022 equity to the capital efficiency we bring to this business by renewing onto our flexible platform. The important point here is that we're acquiring a high-quality underwriting portfolio that is supported by $4.8 billion of investable assets and with the RDA, we're only retaining 5% of the reserve risk. When I announced the Validus transaction, I discussed the benefits to each of our 3 drivers of profit, I'm pleased to say these benefits still stand and in some cases, have improved over the last few months. Let me take you through these drivers and how they will impact our fourth quarter results. Starting with underwriting. The Validus portfolio has a similar composition to our own. The market continues to be very attractive, and we believe that there is upside potential to the $2.7 billion incremental premium figure that we provided in May. For both casualty and property, we expect performance to be similar to our own as we renew the book onto our platform. And over the course of the next year or 2, we expect to merge the Validus balance sheet into existing RenaissanceRe balance sheet. Moving to fee income. These will benefit from the increased capital we're bringing to our joint ventures to support our growing underwriting portfolio. This includes a substantial expected investment by AIG into our capital partners business effective on January 1. For the fourth quarter, we continue to expect a similar level of management and performance fees as in the third quarter, absent any large losses. And finally, net investment income. We are very comfortable with the composition of the Validus investment portfolio. Since we announced the deal, yields have continued to increase, which should be a tailwind to net investment income in the future. For the fourth quarter, we expect retained net investment income of about $260 million. We expect that our results will benefit further from significant synergies related to the Validus acquisition, which should further optimize our operating leverage. These synergies will be actioned in the first year and realized over the coming years. As we continue to integrate Validus, we expect corporate expenses will be elevated due to transaction-related expenses. In the fourth quarter, these will be significant, reflecting onetime charges. Through 2024, we expect corporate expenses will be lower than Q4, but remain elevated due to ongoing integration costs. As a reminder, we do not include transaction-related expenses and operating income. Now moving on to how we plan to report the Validus transaction in our financials. As we discussed, we are paying a premium of $900 million over shareholder equity for Validus, but we're still settling in on the exact number. We expect that the majority of this premium, approximately 90% will be amortized over 10 years with nearly 40% of that amortizing by the end of 2024. We plan to exclude the impact of purchase accounting adjustments from operating income. This includes the amortization of net value of business acquired and other purchased intangibles. Our goal is to ensure that our operating income reflects the performance of our business. GAAP accounting does not distinguish between intangible amortization of true capitalized expenses and those that arise from purchase accounting adjustments. We believe that by removing the impact of purchase accounting from operating income, we will better reflect the performance of our business, providing a more comparable metric to that of our peers and ultimately offer greater transparency of our core results for shareholders. Purchase accounting will also impact other metrics such as the combined ratio, and we plan to provide additional disclosures so that you can see our performance without the impact of these adjustments. Finally, let me provide an update in terms of Bermuda corporate income tax proposal. The Bermuda government recently proposed a 15% corporate income tax effective 2025 in response to the OECD global minimum tax rules. The Bermuda government has taken a collaborative approach in seeking feedback on their proposal but we expect that we may pay more taxes. We believe that being based in Bermuda will still create a competitive advantage for us for a variety of reasons, including tax. And in conclusion, this is a very exciting day for us. As we move forward as one company after the Validus acquisition. We reported strong results in the third quarter with continued composition from all 3 drivers of profit. We continue to demonstrate the power of our platform to deliver superior returns. And as we look forward, we believe that Validus will provide additional benefits to our shareholders across all 3 drivers of profit. And with that, I'll turn it back to Kevin.
Thanks, Bob. As usual, I'll divide my comments between our Property and Casualty segments. Starting with Property. Our Property segment performed well this quarter, delivering over $350 million in underwriting profit. It also demonstrated its resilience and ability to produce attractive loss ratios in both property cat and other property. Going forward, each will benefit from the addition of the Validus portfolio. Property's strong performance this quarter is against a backdrop of continuing catastrophe activity. This cat activity has had a much smaller impact on us than it would have had in previous years. This is due to the underwriting changes we have made, namely requiring higher rates and attachment points. Catastrophes this quarter were a mix of large events in secondary perils. Beginning with Hurricane Idalia, which made landfall on the Florida Peninsula on August 29 as a strong Category 3 hurricane. The storm impacted a sparsely populated area of the state, which should limit the industry loss to low single-digit billions of dollars. Additionally, the Hawaiian town of Lahaina was impacted by severe wildfires in August. Industrial loss estimates are around mid-single digits billions still persist. And finally, there are a handful of other events in the third quarter. These included ongoing severe convective storm in the United States, a flood in Hong Kong and a tornado that hit a Pfizer plant in North Carolina. Over the course of 2023, natural catastrophe activity has persisted, although the nature of these events has differed from 2022. We have experienced increased prevalence of smaller events and secondary perils. Our scientists at RenRe -- scientists believe that weather events have been influenced by a combination of slowly evolving large-scale factors. These factors include the Pacific decadal oscillation, short-term volatility due to the transition to El Nino conditions and enhanced energy in the system due to climate change. Moving now to our Casualty and Specialty segment, which is also demonstrating resilience. This segment experienced some current year loss activity in the quarter. Year-to-date, however, it has returned an attractive underwriting profit and strong results. This is the positive impact of portfolio shaping. We have emphasized classes with the most attractive returns while managing the cycle of returns are more challenged. Breaking this down by class of business in traditional casualty, our portfolio is weighted toward the most attractive years of '20 to '22 when rates exceeded trend. More recently, rates have been moderating. Consequently, we continue to manage the cycle. We do this by working with customers to differentiate based on performance, focus on the best deals and cutting back on less attractive business. In Specialty, we continue to believe that pockets of this business remain attractive following a step change in terms and conditions in 2023. That said, we will remain disciplined as we approach these risks against the backdrop of increased geopolitical uncertainty. And in credit, we continue to see strong results while managing exposure across the portfolio. With the inclusion of the Validus Credit business, portfolio optimization will become an increasing focus. Moving now to the upcoming January 1 renewal. This year, we head into the renewals in a favorable position. In our Property business, last year, renewals was one of the most dislocated in recent memory. Over the course of 2023, we achieved a significant step change in both rates and terms and conditions. Our customers' expectations are now better aligned with the market conditions and the reinsurance budgets are likely to have increased. Looking at the market overall, inflation, climate change and geopolitical instability have been consistent drivers of exposure. The industry insurance losses in 2023 are likely to exceed $100 billion once again, this puts more pressure on demand for reinsurance. At the same time, we've seen very little new capital enter the system. There will be no reinsurance class of 2023 and minimal third-party capital. As Bob explained, we have a robust excess capital position and are prepared to meet some of the additional demand. That said, Validus affords us considerable optionality. We have substantial growth already built in, the size and strength of our combined portfolio allows us the flexibility to remain disciplined. This applies equally well to casualty. As I've said many times, we think about the Casualty business cycles over an approximate 10-year time scale. The years prior to 2020 were soft, Consequently, we were cautious taking risk in this area. The years from 2020 to 2022, -- far exceeding trend in many lines. We scaled up quickly, creating a deep reservoir of what we anticipate being favorable business. Throughout 2023, we have been exercising discipline in coming off business that does not meet our return hurdles. As in property, the Validus acquisition provides us with optionality and casualty, we're obtaining a large portfolio of well-priced risk guaranteeing growth while providing us the flexibility to be otherwise selective. Moving now to our ILS business. It was a quiet quarter in capital partners. We can continue to prepare for the Validus integration. One of the many advantages Validus will bring us is growth in our Capital Partners business. This is because as our underwriting portfolio renews next year, we will share it proportionately with capital partners. AIG remains on track to invest $500 million in aggregate into DaVinci and Fontana. This investment is expected to be facilitated through a combination of partially selling down our shares and injecting new capital to support growth. Our capital market business is performing well and the fees it generates continue to serve as a capital-light, low volatility source of earnings. In closing, we reported another strong quarter in what so far has been one of the most successful years to date, both strategically and financially. Strategically, we closed the Validus -- strategically, we closed the Validus acquisition yesterday. We now expect it to deliver value at or better than originally modeled. Financially, each of our 3 drivers of profit are positioned to continue delivering results, particularly when considering the added benefits of Validus. Consequently, I couldn't be more excited about our potential for future performance and ability to create value for our shareholders. With that, I'll turn it over to questions. Thank you.
[Operator Instructions] Our first question will come from Elyse Greenspan with Wells Fargo.
My first question was on the January 1 renewals. Kevin, just looking for more color just on how you think rate increases could trend at [indiscernible] on the cat side on a risk-adjusted basis, assuming, I guess, losses for reinsurers, given where we are right now or modest for the rest of the year?
Great. Thanks, Elyse. I'm going to divide my answer between where RenRe is and where the market is. And the reason being is because RenRe, with the closing of Validus, we're in a very different position going into this 1/1 than we were going into last year 1/1. As I said in my comments, we are already one company. We have all of the Validus risk reflected on a pro forma basis in our risk systems. And we have, by the end of the week, all of the Validus employees co-located with us. We've been talking to our clients and to our brokers. So we go into this renewal in a very, very strong position as a single company into what is a very accretive market. Last year, we had a conversation where we talked about the step change that was required and that was achieved over the course of the year. So when we go into -- let me just start with property. When we look at the property renewal, we're going into what we think will be a significantly easier renewal than what we experienced last year because of the achievements over the course of the year. I think buyers have reset expectations. One thing that didn't materialize over the course of this year is the increased demand that we anticipated. We believe that demand will come in, in 2024. So there'll be relatively steady supply because capital has not been flowing into the business at an accelerated pace. We think there's increased demand, and that should create a healthy tension for pricing. So from a relatively strong pricing environment, we have expectations of private -- of a positive rate change but rate change that's not disruptive. I would consider last year's rate change disruptive. This year, it will be positive, but more manageable. From the casualty perspective, we've talked before that we look at casualty over a 10-year rolling basis. Those lines of business right now on an underwriting year basis are providing strong returns to capital, but more rate is required because of the prior year rating cycles. So, we look at this market as very accretive, one in which rate is above trend, but parously close to trend in many classes. So what our strategy will be is we're going to reward companies that are committed to increasing rate to stay ahead of social inflation, economic inflation and overall trend. So it's really meaning that risk selection, portfolio construction and underwriting discipline will be rewarded, which really plays to our strength. So I think of the casualty market in a very strong place, but one in which underwriting will be rewarded, puts us in a preferred position, property very strong. And specialty is kind of like property where it went through a step change last year. We believe it's a strong market. We think there's good adequacy in most classes, not all classes within specialty, rates above trend. So again, underwriting discipline and underwriting expertise that will be rewarded, which should play strongly into our hand.
And then my follow-up, Kevin, you mentioned incremental demand. I know, right, we're still a couple of months out from the 1/1s, but if you had to peg it, how much incremental demand do you think we could see? And do you think it will all come at January 1? Or will that be something that we'll be talking about throughout 2024?
It's a great question. It will come throughout the course of 2024. I think it's too early for us to put a number on what's available. I think the one important point I would highlight is new demand will come at the more remote layers. People will top up their programs. I think it will be -- continue to be difficult to reduce retentions. With that, there'll be more peak exposure coming. So there'll be some -- some additional supply constraint just because of concentration, which will add to the overall positive rate environment. So I feel we are in a good position with the Validus portfolio coming on with our capital position with premier, with top layer to play into this quite specifically, and we should help the overall portfolio, but it's difficult to calibrate exactly how much of that demand will come into the market, but it will be -- our expectation sits in the billions, single-digit billions.
Our next question will come from Yaron Kinar with Jefferies.
I guess maybe a follow-up on the last question. Thinking more on the supply side. So, I'm calling on the fact we haven't seen new entrants and ILS still seems to be holding back. But at the same time, you're talking about a 25% return. That's actually depressed given the Validus capital that was waiting to be deployed into Validus . So if I look at that and think about others that are also generating 20-plus percent returns right now. That does suggest what a good $60 billion or more of generated capital by incumbent reinsurers over the course of '23. So I guess my question is, do you think that additional supply will still not exceed incremental demand over the course of '24?
It's a really good question. The demand is not proportional to the portfolios that are already built. So the demand that's likely to come to the market, which would be the pull on the additional supply that you referenced there from retained earnings is going to on balance portfolios because it's going to be peak driven because that's what primary companies need to protect. So that capacity -- that supply can temper some of the demand or need some of the demand, but it's not -- it cannot all be deployed against what is likely to come to the market, which is those top layers. If you look at what we did this year, that is exactly why we bought Validus. We raised the money over the summer. And what we said is that money will be fully deployed, which happened yesterday. Our portfolio is 100% diversified similar to what it was prior to that and fully deployed, which is not something that can be achieved in the short term by growth. So I think when I -- when we look at this, the expectation of how the market is going to change in '24 is consistent with our forecast and our strategy to buy Validus and -- against another diversified basis against the capital we raised, I think it's even more important to point out, recognizing where we are in the market.
Got it. And then maybe shifting gears to investments. So Bob, I think you had referenced $260 million of expected retained NII in the fourth quarter. Does that contemplate the reallocation of the investment portfolio? Obviously, you're holding a lot of liquidity and risk-free essentially waiting for the Validus deal to close. How quickly can you reallocate that into maybe a more in line with longer-term expectation investments? And how much of the lift do you get from that?
That's a good question. We've been working through that. As we spoke, we had an ability to reposition some of the portfolio to about $500 million. So we actually were able to direct and then just some shorter-term securities, a lot of T-bills and shorter-term notes. And I think that -- sorry, we have the ability to position the portfolio prepurchase with that $500 million allocation. The $217 million will come down when we deploy the $1.4 billion to $3 billion, a little bit because that was being invested in there. But we had pretty significant upside already. We were 2% when we look at it, probably five months ago, with the repositioning of the portfolio to shorter duration similar to ours. That list is going to take us up to $2.6 billion. So $260 billion is a better reflection of the run rate this quarter. And as we go into 2024, we should expect to see that continued lift.
And that continued lift, is that just coming from higher interest rates or also from a reallocation of the portfolio?
Or new money -- on new money, what I alluded to what I said in the call was that our new money rate is 6% right now and we're closing in on that. So we have upside at 4.9% and what we've seen this quarter, 4.7% for the year in book yield. So we'll see upside. We'll see it continue to grow as rates are kind of all around right now, but we're still benefiting from where they are at.
Our next question will come from Josh Shanker with Bank of America.
Given [ Powell ] on the Fed's comments yesterday and whatnot, maybe there's going to be a ending to the inverted yield curve and a steepening. Does this change at all how you orient the investment portfolio? Would you have a smaller allocation to short term and be willing to go out to 3 or 4 years? Or what's normal in the portfolio, in some securities that are currently maybe 3 months in duration?
That's a great question. We have a lot of agility in the portfolio that the team is looking at how do you leg into some longer duration right now. We've seen rates moving around, but it's a balancing act between what you've seen what the Fed has said, a little dovish, but the economy still seems to be on fire. So the bond market players, I think, took some capture some duration of what you're seeing right now with the 10-year and in the 5-year. But we're actively looking at it, Josh, it's a good question. Duration will not happen overnight, we'll lag into it over time.
And so Bob, when you are at the phone with us after this call here, and you have all this $4.6 billion in investments you've just received from AIG, how you shape that right now today? That obviously is currently investing in a bunch of securities of AIG is choosing. What are you going to do with that portfolio in 45 minutes?
The portfolio has -- a lot of it's been prepositioned. We got out of assets. We had a $500 million allocation that we could remove assets from that portfolio and put into T-bills. And that's what we did. We directed them to do it at the fund administrator, and they took care of that. So that got rid of think about things like single asset-backed securities that we don't want to hold. There are things in there that we don't like that are not in our portfolio. We got rid of most of that. So the portfolio is more like ours than not. And so I think that gives us a very distinct advantage and it's a pretty short-term portfolio. is around 2-point -- just under 3%. So it's getting close to our duration.
And if I can get one more in. Any guidance on having a big boost in the investment portfolio for the last 2 months of the year sequentially what that's going to do to net investment income comparing 4Q '23 to 3Q '23?
Two factors in that. The $3 billion that we put out there for Validus will come out of our existing portfolio and be refunded that in by $4.5 billion. So you're going to get a net increase of about $2 billion, and that's why you get up to about net change is up about $40 million to $260 million. That's how you get there.
Our next question will come from Meyer Shields with KBW.
Kevin, in your comments, you mentioned that you didn't really see an uptick in demand for cat cover this year, but you expect it next year. Something you could flush out why you think that will play out that way.
I think we may have even touched on this once or twice in our calls earlier is I think many buyers were surprised about the discipline for the change in rates that was required by reinsurers at the beginning of last year. With that, they ran out a wallet for demand that they already had identified that they wanted to purchase. I think as they're more prepared for this renewal, having seen the rates stick throughout the year. They'll have a budget process that is more flexible to include the wallet to pay for the new limit.
Okay. That makes sense. Second question, I guess one area where we have seen some capital come in the cat bond market. And I was wondering, does that have any implications for Premier?
I think the capital market is -- has had a good year. I think it's probably slowing a little bit for the pace of new money coming in. But it is something that we -- Premier is designed to be an efficient vehicle to compete with both cat bonds and traditional players. So the more cap bond activity tends to be at the rear internationally to top layer type level, but we continue to have great success deploying Premier in people issuing cap bumps but also alongside people who chose discount issue cap bonds as well.
[Operator Instructions] Our next question will come from Alex Scott with Goldman Sachs.
First one I had for you is just sort of high level on growth. As we looked across property and casualty. It seems like at least relative to one of your peers that recently reported, there was a little more restraint around where and how you're willing to grow. And yes, I just wanted to understand what are you seeing in the environment? What are the underlying drivers of those decisions? Is it seeing more opportunity at 1/1 or does it have to do with the Validus transaction? What are the underlying reasons for that?
Yes. Let me start off, and then Kevin may add a couple of comments. We've seen growth all year. The third quarter is a difficult quarter to look at on a year-over-year basis because most of our renewals are done by the end of the second quarter. Think about 1/1 over half our book. That's why in my prepared comments, I really wanted to point you back to a year-to-date number. Year-to-date, property cat has grown by 40% once you take out the reinstatement premium specialty, which, again, we looked at the rates with the head of trend. We saw that grew by 38%. So we saw the opportunities over the course of this year, but we also -- we've selected professional lines, we dropped by 30%. So we made choices that were out there, and we had the opportunity in the market to show that growth. And we've had a really good opportunity throughout the course of the year, and that's why we pointed it back to full year.
Actually, if I can add -- I think Bob is absolutely right. The year-to-date numbers look great. I think it's important also that we were positioning the portfolio for yesterday. And what happened yesterday is we brought in the Validus book into a portfolio that had been optimized to accept it. The way in -- from an underwriting perspective, that book is now reflected in the REMS. And the way we reflect that book is through in-force gross written premium. We have said that we believe going forward, the gross premium that we will retain is $2.7 billion with upside. The actual portfolio on an in-force basis that we brought into REMS yesterday was $3.7 billion. What in-force premium means is that's the amount of premium that underwriters have the ability to touch over the -- that's embedded in the Validus portfolio. So we have significant optionality when we talk about the $2.7 billion. And we have grown tremendously because we brought in $3.7 billion of diversified premium against our capital base yesterday. So when I think about it, we can't isolate a quarter without talking about Validus because so much of what we did was to be prepared to accept that portfolio and to be operational against it today.
Yes. That all makes a lot of sense. Second one I had for you is I guess just on new capital formation in the market, any observations around what you're seeing headed into year-end and how impactful that maybe to the supply and demand dynamic. And I guess, sort of in the same vein, any commentary around third-party vehicle is an ability to go out and get capital to take advantage where you thinking about capacity to work?
One comment I mean since I don't believe there will be a class of 2023. I think it's very late in the cycle for that capital coming in. It certainly can't be operational by 1/1. If we were raising equity, we would have done it by now because we would want to have interactive conversations with clients and brokers. So there may be equity raise that between now and year-end, but from the lens that we would put you what we would place on it, it's late. From an ILS perspective, we're a different capital partners business than others. We traditionally -- most of our vehicles are all rated. So draft collateral and other things that have been the bane of the market don't really exist on our platform. The fact that we underwrite all the risks, we are the largest investor in DaVinci. We share the risk in RenRe [indiscernible] across our platform. So there's a sense of security in the underwriting that's achieved at RenRe for investors to feel comfortable. The structures of the vehicles provide them more flexibility than traditional ILS platforms. And many of our investors for that reason, are in more than one vehicle. We are not constrained to grow ILS. We are optimizing the platform against the ILS opportunities we want to bring to that capital and the risk that we want to retain on our own balance sheet. I think the rest of the market will remain a bit challenge to increase and certainly will not be able to increase at a scale that's disruptive to our strategy.
Our next question comes from Brian Meredith with UBS.
Kevin, I'm just curious, there's been some other companies that talked about some potential significant opportunities in the cat as the reinsurance marketplace. Could you kind of talk about what you think from that perspective?
Yes. I think -- well, from a reinsurance perspective, I think we're in a strong position. I think our capacity is strongly needed coming in with the bigger portfolio with Validus, we're more important to bigger clients. We believe that there's increased recognition for the required rate on the primary level. That will [indiscernible] to the benefit through proportional and reinsurers seem to be developing discipline to press on ceding commissions. So when I look at it, I think not every line of business is equally attractive and not every client is equally skilled at leveraging into those attractive markets. I think we're in the best spot to grow with the most skilled [indiscernible] in the most preferred lines. There's been a lot of discussion about rate change in D&O and professional lines and I think all of those things are things that we are looking at carefully. But I think the platform that we've built and the scale that we have puts us in about as strong a position as one can be going into the renewal.
Great. That's helpful. And then my second question, of the $2.7 billion plus premium that's coming and I think, Bob, you kind of alluded to this, but how much of that do you believe or like a percentage will sit on your balance sheet versus going via third-party capital vehicles?
When I said we just did, that's the e-mail I got before coming into the call which I'll have to say I'm extraordinarily proud of the team to be able to turn this around that quickly. I can tell you we are shifting not only Validus, but RenRe's risk sharing to optimize DaVinci, Fontana and all of our owned balance sheets. So it's not as simple as a question of saying, we're going to take 50% of the property cat from Validus and move it. We're actually shifting what is coming from RenRe Limited as well. I would say the overall Fontana will grow. DaVinci will grow by a smaller percentage. RenRe will drop its percentage share with DaVinci and Fontana will ballpark be 50-50. So that's without reading the e-mail. So more to come on that, but that's about where we think the optimizations will lie.
Great. And do you anticipate raising some more capital in the third-party view of DaVinci to handle the Validus portfolio? I mean, obviously, you had AIG coming in but more than that.
Well, we've got retained earnings in AIG coming in. I think, again, this is a control that we -- is a lever that's in our control. And I think if you look at the capital generation at limited and then what's going to be generated at DaVinci, Fontana and or the other vehicles. I think we're going to hold relatively flat on additional raises with DaVinci, maybe a little bit more in Fontana.
Thank you. That does conclude today's Q&A portion. I would now like to turn the floor back over to Kevin O'Donnell for any additional or closing remarks.
Thank you. I would say that the last few days have probably been my proudest and most exciting days at Renaissance and we've seen the Validus portfolio come over. We are delighted to welcome the new team. Every diligence we did reaffirm the quality of the portfolio and the opportunity to bring shareholder value. We're looking at accretive markets in '24. And I think we are in a very enviable position as we think about servicing our clients and bringing shareholder return over the course of 2024. So thank you for your time, and we look forward to reporting back.
Thank you, ladies and gentlemen, this concludes the RenaissanceRe Third Quarter 2023 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.