Earnings Call Transcript - RNR Q2 2023

Operator, Operator

Good morning. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Second Quarter 2023 Earnings Conference Call and Webcast. After the prepared remarks, we will open the call for your questions. Instructions will be given at that time. Lastly, if you should need operator assistance, please press star 0. Thank you, and I will now turn the call over to Keith McCue, Senior Vice President of Finance and Investor Relations. Please go ahead.

Keith McCue, Senior Vice President of Finance and Investor Relations

Thank you, Chelsea. Good morning, and welcome to RenaissanceRe's Second Quarter 2023 Earnings Conference Call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer. First, some housekeeping matters. Our discussion today will include forward-looking statements. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now I'd like to turn the call over to Kevin. Kevin?

Kevin O'Donnell, President and CEO

Thanks, Keith. Good morning, everybody, and thank you for joining today's call. We are pleased to report that RenaissanceRe delivered strong second quarter results that combine consistent bottom line profitability with continued top line growth. This growth was particularly robust in our property catastrophe business, where we continue to observe significant rate momentum. For the quarter, we reported an annualized operating return on average common equity of 28.8%, even with the dilution from the quarter's equity issuance. On a year-to-date basis, our operating ROE is running at almost 30%. Of course, our most prominent strategic milestone this quarter was the announcement that we are acquiring AIG's treaty reinsurance platform, Validus Re. I will highlight some of the key business reasons we are excited about this transaction. Bob will then cover the financial details, including our recent equity and debt issuances to help finance the transaction. Beginning with Validus Re, we are very excited to partner with AIG on this win-win transaction. For RenaissanceRe, this advances our strategy as a leading P&C reinsurer. We are gaining access to a large, diversified business in a favorable reinsurance market. Validus Re has a great team and their underwriting portfolio consists of a high-quality mix of property casualty, specialty, and credit lines that closely mirrors our own. We expect the Validus acquisition to be highly accretive across our financial metrics. For a premium over book value of $885 million, we anticipate receiving a gross written premium base of $3.1 billion in 2022, of which we are targeting at least $2.7 billion of premium, $4.5 billion of investable assets, and a $250 million equity investment by AIG in our common shares, as well as up to $500 million in our capital partner business. At close, we anticipate receiving $2.1 billion of unlevered shareholders' equity, which is $1.2 billion lower than Validus Re's year-end 2022 equity. This reduction is due to the capital efficiency we expect to bring to this business and is part of the reason why this transaction is a win-win for both us and AIG. As a result, and as Bob will explain, we believe this transaction will be immediately accretive to each of our three drivers of profit, as well as book value per share, earnings per share, and return on equity, excluding peak GAAP adjustments and integration costs. Of course, there are always risks in any transaction, but we believe we can manage them effectively. To begin with, we are a proven acquirer and have substantial institutional knowledge in managing execution and integration risk. The fact that Validus Re's underwriting portfolio is similar to our existing book also reduces our execution risk. We have deep familiarity with the lines of business that they write and have the tools necessary to support the business. As a result, we expect that we can fully deploy Validus Re into our portfolio on day one and fully integrate it into our risk management system soon afterward, diminishing execution risk. The Validus Re portfolio will also benefit from a reserve development agreement. Validus Re is a strong underwriting platform and AIG should continue to profit from the attractive risks that they have underwritten. As such, AIG will retain 95% of any reserve development, whether favorable or adverse. We expect the Validus Re acquisition to close in Q4 and have already begun comprehensive integration planning. Of course, the closing is subject to regulatory approval, among other customary closing conditions. I am pleased to report that since the announcement of the Validus Re acquisition and the completion of our debt and equity raises, the rating agencies have affirmed our A+ financial strength ratings. This is a good result as it is typical for potential acquirers to be placed on negative watch due to execution and integration risk. In conclusion, the acquisition of Validus Re advances our strategy on financial terms that should be immediately accretive. In addition, it extends our relationship with AIG, a key partner. For these reasons, I couldn't be more excited about our future or more convinced that this transaction will drive shareholder value. That concludes my opening comments. I'll provide more details on our segment performance at the end of the call, but first, Bob will discuss our financial performance for the quarter.

Robert Qutub, Executive Vice President and CFO

Thanks, Kevin, and good morning, everyone. Once again, we had a very strong quarter with net income of $191 million and operating income of $407 million. This is the third quarter in a row where we have reported an annualized operating return on average common equity of over 28%. These excellent results reflect the momentum behind each of our three drivers of profit, with underwriting, fees, and investments, all contributing significant income for our shareholders this quarter. Today, I'd like to start by highlighting a few key takeaways from the quarter, provide an update on the integration progress for Validus, and then discuss our results in more detail. Starting with some highlights. First, we leaned into a very attractive property catastrophe market in the midyear renewals, growing property catastrophe net premiums written by almost 55%. Even at an above-average quarter for catastrophes, our Property segment performed well, reporting a combined ratio of 63%, with other property having a particularly strong quarter. Second, Casualty and Specialty had another solid quarter, reporting a combined ratio of 93%. We are pleased with the positioning of the portfolio, and we continue to expect mid-90s combined ratio in 2023. Third, fee income rose 65% to a record $57 million. This reflects increased partner capital under management as we grow into an attractive market and a steady increase in performance fees from strong underwriting results. Finally, retained net investment income for the quarter was $189 million. This is more than double the amount from a year ago and up 13% from Q1 2023, reflecting our continued rotation into higher coupon securities. As Kevin mentioned, we are also advancing our strategy through the acquisition of Validus Re, which we announced in May. I am pleased to say that integration planning is progressing well and that we are on track to close in the fourth quarter. We have established a dedicated integration team that is reviewing Validus' operating model, processes, and systems so that we can bring together our two great companies. Our work to date supports our initial acquisition thesis, and we are very excited about the transaction. Validus is a great business with great people, and this deal will accelerate our strategy. As we discussed when we announced the deal, we are paying just under $3 billion for $2.1 billion of unlevered shareholders' equity at close. We believe this transaction will be immediately accretive to each of our three drivers of profit as well as book value per share, earnings per share, and return on equity when excluding GAAP adjustments and integration costs. We're paying a premium of $885 million over shareholders' equity for Validus. The majority of this premium, approximately 85%, will be amortized over 10 years, with about 40% amortizing in the first two years. In anticipation of the Validus transaction this quarter, we also successfully raised approximately $2.1 billion through public equity and debt issuances. This included almost $1.4 billion of net proceeds from the issuance of 7.2 million common shares at $192 per share and about $740 million of net proceeds from the issuance of 5.75% senior notes due in 2033. This additional funding was on top of our already strong capital position. Additionally, we will issue $250 million of our common shares to AIG at closing and intend to fund the balance of the cost of the transaction with excess cash on hand. Until we close, the additional capital we raised for the deal will have a dilutive effect on our returns. In the second quarter, this capital diluted our operating return on average common equity by about 2 percentage points on an annualized basis. Our Q2 28.8% operating return on equity is particularly impressive due to this. In Q3, we expect the impact of the excess capital on our operating returns to be about 5 percentage points on an annualized basis. Moving now to our second quarter results and our first driver of profit underwriting, where our total combined ratio was 80%, with both segments delivering strong results. We achieved these returns against a backdrop of above-average catastrophe activity and modest favorable development. Overall, gross premiums written were up 8%, and net premiums written were up 18%. This quarter, we continued to manage the cycle and allocated our capital to the businesses that we believe will generate the best relative returns. We grew property catastrophe and other specialty lines considerably while continuing to reduce our exposure in other property and professional liability lines. Moving now to our Property segment. As disciplined underwriters with differentiated cat modeling capabilities, we have continued to focus on property catastrophe and saw very attractive opportunities to grow this class of business at the midyear renewals at improved rates, which Kevin will speak more to in a few more minutes. Overall, net premiums written for the Property segment were up 29%, with property catastrophe net premiums written up 55%. Due to the U.S. storm activity this quarter, we recorded $30 million of reinstatement premiums in property catastrophe compared to almost none in Q2 2022. Without reinstatement premiums, property catastrophe net premiums were up 49%. Our other property book also continues to benefit from significant rate increases. Although net premiums written were down 4%, we have cut the risk in this book significantly, with much of the reduction in cat-exposed business. We expect other property net premiums earned to continue to decline modestly in the third quarter. For the Property segment overall, we reported a combined ratio of 63%, with a current accident year loss ratio of 41%. So far this year, catastrophe activity has been well above average. In the second quarter, large loss events had an overall net negative impact of $45 million on our consolidated results. About $25 million of this net negative impact came from a series of severe weather events in the second quarter. The remaining $20 million of net negative impact related to Q1 large loss events, including the Turkish earthquake, reported a 33% current accident year loss ratio in our Property catastrophe class of business. This is up from last year but a good result given the increased catastrophe activity in the quarter. Other property performed well in the quarter, delivering a combined ratio of 79%. As I previously explained, we have been reducing exposure to catastrophes in our other property business while benefiting from additional rate. Large losses contributed 4 percentage points to the other property combined ratio. We continue to expect an attritional loss ratio for the other property book to be in the low 50s. The property acquisition cost ratio improved by 4 percentage points from last year, primarily driven by a mix shift within the Property segment. Property catastrophe has a lower acquisition cost ratio than other property and now makes up 56% of property net premiums earned compared to 45% last year. Moving now to our casualty and specialty portfolio, where we had another solid quarter, reporting a 93% combined ratio. Net premiums written were up by about 8%, similar to last quarter. There was a lot of movement within classes of business as we grew in attractive areas while coming off of deals that did not meet our return hurdles. Specifically, other specialty was up significantly, while we reduced on both professional liability and credit. Net earned premiums for the segment were about $1 billion, and we continue to expect a similar quarterly amount for the remainder of 2023. This quarter, reserve development in the Casualty and Specialty segment was essentially flat. We have been closely scrutinizing trends in earlier years in adjusting our reserves as appropriate. Conversely, we have not yet recognized much of the favorable trends from the more recent years, as we'll wait for the book to season. Moving now to fee income in our Capital Partners business, where fee income reached a record $57 million, driven by strong management and performance fees. Management fees were up 41% to $43 million as we grow our joint ventures to underwrite into this attractive market. We continue to expect management fees to run at about $45 million per quarter for the remainder of the year. Performance fees have largely recovered from prior year deficits, reaching $13 million this quarter. Absent large losses, these fees may tick up slightly in the second half of the year to about $15 million per quarter. Overall, we shared $175 million of our net income with partners in our joint ventures as reflected in our redeemable noncontrolling interests. $234 million of this amount was operating income, which was partially offset by mark-to-market losses. In the quarter, the Capital Partners team also raised about $350 million of third-party capital focused on catastrophe bond strategies. Moving now to investments. We also reported record net investment income in the quarter. Retained net investment income was up $114 million to $189 million, and our retained net investment income return was up 2.7 percentage points to 4.9%. We have remained very defensive in the positioning of our investment portfolio. Most of the growth in net investment income relates to our proactive rotation into higher coupon securities over the last year. We did generate about $10 million in net investment income from increased invested assets related to the public equity and debt raised associated with the Validus acquisition. This quarter, rising interest rates led to retained mark-to-market losses of about $210 million. These higher coupons, coupled with additional capital from our equity and debt raises, should be a tailwind for net investment income. We expect retained net investment income will tick up to about $220 million in the third quarter. Retained unrealized losses in our fixed-maturity investments are now $442 million or about $8.64 per share. We expect this to accrete to par over time. Now turning briefly to expenses, where operating expenses were up 11% in the quarter, with the operating expense ratio remaining relatively flat. The increase reflects investments in people in our business to support our growth. As you would expect, operating expenses will increase with the Validus acquisition. However, in the near term, we will anticipate holding the operating expense ratio relatively flat. It should then tick down over time as we realize synergies from the transaction. Corporate expenses were elevated in the quarter with about $11 million related to the Validus transaction. After we close, corporate expenses will be temporarily elevated for a period as we integrate Validus. In conclusion, we performed very well this quarter, with continued strong contributions from each of our three drivers of profit. Integration planning for Validus is well underway, and we have successfully executed our financing plan for the transaction. Over the last few quarters, we have demonstrated the power of our platform to deliver superior returns. As we look forward, we couldn't be more excited about the incremental benefits that we believe Validus will provide to our shareholders across all three drivers of profit.

Kevin O'Donnell, President and CEO

Thanks, Bob. As usual, I'll divide my comments between our Property and Casualty, Specialty segments. The second quarter was an active renewal cycle with the midyear renewals and property and a busy period for Casualty and Specialty. Beginning with our Property segment. As anticipated, the midyear property renewals benefited from continued upward rate momentum and improved terms and conditions. This brought the market in line with the step change in reinsurance we realized at January 1. Rate increases in the U.S. averaged 30% to 50%, with pricing particularly challenged on more risk-exposed layers. It's worth noting that the midyear renewals in 2022 experienced about a 10% to 30% rate increase. So rate increases this year were on top of higher bids. Our strategy for the renewal was to offer private deals on nonconcurrent terms with core customers early in the process. This allowed us to achieve higher risk-adjusted rate increases on most programs relative to what was available in the open market. Overall, we leaned heavily into the property catastrophe market in the second quarter and recorded property catastrophe net written premium growth exceeding 50%. We believe these higher rates will persist. Prior hard markets were driven by losses intended to be geographically concentrated. The current market is being driven by equity and ILS investor sentiment and is geographically broad. In particular, investors are concerned that they have not been adequately compensated for the volatility they experienced and in response are demanding substantially higher returns to continue taking risk. This is especially true now as other asset classes provide attractive yields with less volatility and greater familiarity. From our perspective, we are focused on rate adequacy in our property catastrophe business. Rate adequacy means that we expect business to have rates sufficient to provide investors with a return commensurate with the volatility they assume. We believe the property cat business is now broadly rate adequate. That said, inflation and climate change will continue to increase risk, which will require ongoing monitoring and careful underwriting. We are watching other property closely as substantial rate increases continue to flow through this business, especially in property E&S. Over time, this should increase the number of other property businesses that are rate adequate, which should provide us fertile ground for future growth. Another source of future growth could be substantial unmet demand for reinsurance. In part, this is because overall demand for traditional reinsurance at the midyear renewal was down, particularly in Florida. There are several reasons for this. First, Florida homeowners insurers reduced their exposure or stopped driving business altogether. Many of these policies went to Citizens, which purchases proportionately less reinsurance. Second, many larger companies obtained coverage from the reinsurance to assist policyholders or wrap layer, which is approximately $2 billion of free property catastrophe reinsurance below the cat bond provided by the state of Florida on a one-off basis. Third, cat bonds were increasingly used in more risk-remote layers. Fourth, companies did not have adequate budgets to purchase additional cover that they desired. The first two factors should be temporary drags on demand, meaning it is only a function of time before demand returns to the traditional market. The third factor, the growth in cat bonds, plays to one of our unique strengths: our industry-leading capital partners business. As Bob discussed, these market opportunities allowed us to grow our cat bond strategy substantially, which will benefit our fee income. The risk-remote layers covered by cat bonds typically do not fit well on our wholly owned balance sheets due to their capital consumptive nature. Consequently, this shift in demand to cat bonds should positively benefit our bottom line. Looking forward, we are seeing some signs of increased demand coming to the market. Companies may seek additional limit if they believe capacity is available and they achieve rate increases to provide adequate funds for the purchase. Our other property business had a strong quarter overall, and you're seeing the benefit of much of the work we have done over the past year to reduce exposure, which will benefit from increased rates. This business continues to experience double-digit rate increases that show little sign of abating. At the same time, we have been shifting cat exposure away from other property, which has freed considerable capital that we deployed for growth in property cat. Even with the premium growth in property catastrophe, on a percentage of equity basis, our risk is flat versus last year and down at more frequent return periods for Southeast wind. We based this calculation on our pre-capital raised equity base. As such, it does not include the almost $1.4 billion in capital we raised in May, as that capital is earmarked to support the Validus Re acquisition later this year. We are closely monitoring meteorological conditions this storm season. As usual, RenaissanceRe Risk Sciences has provided full information to help us understand the climate dynamics likely to influence the remainder of the year. We are expecting an average hurricane season, which reflects the dampening effect of the El Nino cycle, offset by above-average sea surface temperatures. Due to the prevalence of severe convective storms, the U.S. experienced its most active second quarter of catastrophe losses since 2011. Public reports of these losses are already exceeding $20 billion, and we expect once the quarter is fully developed, this number could approach $30 billion. These events were localized, and at least three are likely to exceed $4 billion in industry loss. Taken together, it is not surprising that at least some of this loss would impact reinsurance. In addition, we updated our estimates on several of the events that occurred late in the first quarter based on additional information we received this quarter, and that contributed to the catastrophe losses. Against this backdrop, we are happy with the Property segment's performance this quarter. Property catastrophe reported $211 million of underwriting income, which is up from the same quarter last year. Other property results were particularly strong with minimal impacts from catastrophes, demonstrating the benefit of our underwriting discipline. Moving now to the Casualty segment. We are pleased to report that it was a solid quarter across the board with good top line growth, occurring at accident year loss ratio running a little better than expected and reserves remaining consistent. This resulted in a combined ratio of 93% and $70 million in underwriting profit. In traditional casualty, we saw a continuation of the trends at January 1. Rates have been moderating relative to increases achieved over the last several years. Consequently, we have continued our process of managing the cycle with a focus on optimizing the portfolio through selectively reducing our share on less attractive deals and reducing acquisition costs to offset lower rates. For example, underlying rates in public D&O programs continue to deteriorate, albeit after several years of substantial increases. In response, we have come off business or reduced seating commissions in some instances by 2 to 3 points. This quarter, you could see these actions reflected in a 25% decrease in net premiums written in professional liability. This decrease has been very selective and has resulted in an improved overall risk profile. In our specialty business, market conditions remain broadly favorable, and we continue to grow into a dislocated market characterized by limited supply. Specialty lines have greater exposure to volatility than more traditional casualty business and often require specialized knowledge and skills to successfully underwrite. This makes RenaissanceRe an ideal home for this business as we have the people, tools, and platforms necessary to price and manage volatile risks. When pockets of opportunity arise, such as we are currently experiencing in lines such as aviation, marine, and energy, we can move quickly to grow this business. In our credit portfolio, we are monitoring economic conditions and the potential for a U.S. recession. Mortgage rates are again around 7%, and continued supply-demand imbalances have left many housing markets in a state of low-volume equilibrium. Currently, we continue to reduce market share in mortgage, move up the capital stack, and target seasoned business. Demand exceeds readily available supply in mortgage reinsurance, and rates continue to rise. We continue to believe that our mortgage portfolio is attractive and resilient in the event of a recession and another example of appropriate cycle management as we grew significantly in this business last year. Closing now with Capital Partners. Our fee-generating activities performed well this quarter with strong management fees and profit commissions, reflecting both growth in partner capital and rebounding profitability. One highlight is the continued success of Medici, our cat bond fund. Medici continued to see strong capital inflows from both new and existing investors. As a result, we exceeded $1.7 billion in assets under management. In aggregate, we have capital commitments of over $700 million so far this year for deployment into cat bond strategies, either through the segregated accounts. Another highlight for the quarter, as I've already discussed, is the intent by AIG to invest up to $500 million in our Capital Partners business. Overall, we were pleased with the performance of the Capital Partners, and this is a growing and substantial part of our business that increasingly generates low volatility management fee income. This differentiates it from most of the ILS management industry, where investor appetite has diminished due to performance, draft capital, and collateralization issues. Our long-term track record and ability to bring rated balance sheets to ILS investors distinguishes our capital partners business and explains our continued success in raising capital and growing fees in an otherwise difficult environment. Finally, I want to recognize the extraordinary contribution Ian Branagan has made over the past approximately 25 years. He has developed a world-class risk oversight framework and advanced our strategy. He's made us a better company and a better manager and a better person. He's leaving RenaissanceRe but will always be part of us. So thank you; we'd like to thank Ian for your service. With that, we'll turn it over to questions.

Operator, Operator

Our first question will come from Elyse Greenspan with Wells Fargo.

Elyse Greenspan, Analyst

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

Kevin O'Donnell, President and CEO

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

Elyse Greenspan, Analyst

My second question is regarding Casualty and Specialty. I understand that you haven't taken releases from recent accident years. Could you explain what lines of business and accident years you are evaluating? What loss trends are you observing, and what factors are you considering before potentially making any positive changes?

Robert Qutub, Executive Vice President and CFO

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

Kevin O'Donnell, President and CEO

I would like to add to Bob's comments that a significant portion of our growth in Casualty and Specialty has occurred since 2019, which includes both younger years and those affected by COVID. We typically do not acknowledge positive developments in our reserves until they are about 30% established. Therefore, I appreciate the strong balance of the reserve profile in our casualty segment, especially given the considerable growth since 2019. However, we remain cautious about recognizing the positive developments that may be present in those portfolios.

Operator, Operator

Our next question comes from Ryan Tunis with Autonomous Research.

Ryan Tunis, Analyst

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

Kevin O'Donnell, President and CEO

I believe the distribution will remain largely the same as it is now. We currently share around 50% of our property catastrophe premium. The new portfolio will also be included in Fontana, which has a share of just under 20%. At this moment, we still have some modeling to complete, but I view that as a reasonable expectation for how much we will include from the Casualty Specialty perspective as well.

Ryan Tunis, Analyst

Got it. In terms of fee income, if I look back at 2016, during the period from 2014 to 2016 when they were capped, performance fees accounted for around 50% of the total fee income. This quarter, however, it was only about 20%. Is that a correct way to consider the potential for performance fees moving forward?

Robert Qutub, Executive Vice President and CFO

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

Ryan Tunis, Analyst

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

Kevin O'Donnell, President and CEO

Yes, that's a good point. We didn't see the expected demand in Florida and midyear setup. We thought there would be more demand realized at the beginning of the year, but while buyers were present, they didn't have the funds to make the necessary purchases. For this situation to improve, they require better rates. The recent shifts in reinsurance programs have affected insurance companies, leading to increased volatility in their income statements due to second-quarter cat losses. They need adequate rates to cover these losses and additional rates to build capacity on their balance sheets through reinsurance. We're observing changes in the primary market, especially regarding rate adjustments in the admitted market, as those changes become more pronounced. I believe that once those rates adjust, the appetite for purchasing desired coverage will reemerge. They are seeing increased rates, but it takes time for these adjustments to reflect in their financials. The demand hasn't diminished; it's just about managing the limited funds available for reinsurance at this moment.

Operator, Operator

Our next question will come from Yaron Kinar with Jefferies.

Yaron Kinar, Analyst

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

Kevin O'Donnell, President and CEO

What we're concentrating on is achieving a significant improvement in rate adequacy, ensuring that both ILS investors and equity investors receive appropriate compensation for the risks and volatility they face. Generally, I believe the market has reached this point. Some deals stand out with better ratings than others, indicating potential for rate increases. However, if the market were to renew at the existing levels, adjusted for specific risks of certain companies, I think it would generally be sufficient for 2024. Investor sentiment and other considerations will play a role in defining what adequate means and how it relates to the returns they are experiencing. From a more academic standpoint, I feel that rates are providing adequate compensation for the volatility we see in our portfolio. Our portfolio is somewhat unique because it captures higher returns than what we consider the market average. The diversity in our owned and rated balance sheets gives us an advantage in achieving returns exceeding market rates. Therefore, while we discuss rate adequacy in the market, we are confident that we are generating returns above what is deemed adequate, which is why we remain interested in our equity and third-party capital initiatives.

Yaron Kinar, Analyst

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

Kevin O'Donnell, President and CEO

I'm not sure I understand your question.

Yaron Kinar, Analyst

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

Kevin O'Donnell, President and CEO

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

Operator, Operator

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

Joshua Shanker, Analyst

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

Kevin O'Donnell, President and CEO

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

Joshua Shanker, Analyst

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

Kevin O'Donnell, President and CEO

That's a good question. I like this market. Strategically, our focus is on rewarding our existing investors with the highest likelihood of achieving good to great returns for a relatively consistent level of risk. I believe that is the right strategy. This is also why we acquired Validus. By purchasing Validus, we can take our existing portfolio and fully leverage a 30% quota share of our book at the time of closing. If we aimed to improve our position in the current favorable catastrophe market, our portfolio could become unbalanced, exposing it more to windstorms than would be optimal. Acquiring Validus allows us to continue diversifying our risk profile while protecting our investors, rather than solely pursuing growth in the improving property market.

Operator, Operator

Our next question will come from Meyer Shields with KBW.

Meyer Shields, Analyst

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

Kevin O'Donnell, President and CEO

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

Meyer Shields, Analyst

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

Robert Qutub, Executive Vice President and CFO

The process remains unchanged. We review it annually, which is a valid point. We’ll assess our development curves and our progress along those curves. There could be some rebalancing that offers a different perspective. Essentially, nothing has fundamentally changed. This is part of our annual review process. The result of this quarter's review was very modest favorable development compared to what we observed last quarter.

Kevin O'Donnell, President and CEO

One thing I'd add is that in different quarters, various deep dives and elements of the portfolio are examined. It’s not simply a matter of applying formulas to the portfolio and getting an answer. Different areas of the business are emphasized at different times. So I wouldn’t read anything into reserves at this point. I feel just as positive about our reserves this quarter as I did last quarter and the quarter before, considering the reserve profile we have and how things are evolving compared to expectations.

Operator, Operator

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

Kevin O'Donnell, President and CEO

Some of the recent deals have been limited in geographic scope but significant in terms of the areas affected. I anticipate that regional coverage will see some effects from reinsurance, while nationwide coverage is less likely to be impacted. Additionally, primary companies have purchased much less aggregate coverage, which I believe could be significantly at risk going into this year's wind season due to the activity observed in the first quarter. This suggests that more risk will likely remain with primary companies. Overall, we are seeing trends that align with our expectations, with the first half of the year being more active than usual. It's not surprising that more risk is being retained by primary companies and that some regional firms are benefiting from recoverables due to the concentration of certain events.

Operator, Operator

Our next question will come from Mike Zaremski with BMO.

Michael Zaremski, Analyst

Can you discuss the addressable cost base for Validus now that you have completed more comprehensive integration planning? While I understand you are not disclosing the exact synergies related to that cost base, what is the addressable cost base? Additionally, in your prepared remarks regarding Validus, did you alter the amortization schedule that you had previously guided on in May, or did I possibly misinterpret that?

Robert Qutub, Executive Vice President and CFO

Let me address a couple of points. Synergies will emerge from the integration of two strong companies. We believe that the combined platform will significantly advance our strategy for our investors. We haven't provided specific guidance on synergies yet, but we're examining an addressable cost base of about $150 million to $160 million. We previously mentioned the allocation of approximately $900 million in excess purchase price, with 80% to 90% expected to be amortizable over time, primarily over a period of a decade. However, I want to highlight that the majority of this will be amortized at a rate of 40% in the first two years. As a result, we expect significant non-cash dilution to our earnings, which we will outline in our disclosures once we finalize the 10-K. We aim to make this information clear and show how quickly the impact will occur. That was the essence of my earlier comment. Nothing has changed.

Michael Zaremski, Analyst

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

Kevin O'Donnell, President and CEO

Yes, generally. To address your question, we haven't significantly altered the overall balance of our portfolio. We have improved our diversity away from Southeast wind compared to last year. However, I don't view it purely from a U.S. market share standpoint since various risks exist in different areas. When I analyze the distribution and capital utilization, it is slightly better this year than last. The main contributor to the tail risk remains Southeast wind, which has remained stable. So, there is a somewhat improved balance in our market share terminology, but the portfolio is largely consistent with last year, featuring slightly better diversification in the tail.

Operator, Operator

Our last question will come from Brian Meredith with UBS.

Brian Meredith, Analyst

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

Kevin O'Donnell, President and CEO

I think any moderate storm will likely disturb the market. The market appears to be up slightly, benefiting from our efforts to achieve rate adequacy. However, there is still an expectation that results need to be shown for the market to fully trust that the situation is adequate. For example, a reduction in premiums in areas like Florida could significantly affect the capital needed to maintain rates in the reinsurance market. It's difficult to predict the exact impact. If a storm similar to Ian occurs, I would anticipate that the market's reaction would be at least as pronounced as last year's. While we may not achieve the same percentage of rate increase, I believe rate hikes will be necessary for capital to stay engaged. From a company formation, I think it's pretty late for a company to think that they're going to be able to come to the market and execute in a way that's going to meaningfully impact the market. From an ILS perspective, I think there are alternatives. So what's going on with some of the more noteworthy allocators into ILS is their alternative allocation is still probably at the high end of where they'd like it. ILS fits into that, so there's a reticence to commit more. I think areas in which they have greater familiarity are producing good returns. So the competition against ILS remains robust. I think the issues with collateral and fronting, COVID, and other things, trapped collateral, are still very much in the minds of where investors are. It's one of the reasons we've been successful, to be honest, is our platform is different from traditional ILS in that we bring rated balance sheets to clients. So it's a form that they're used to. We bring our expertise and our entire platform and governance to capital so that they have the comfort of knowing that it's the RenaissanceRe franchise that's supporting their investment. So I don't believe we will be in a state where we're impacted with the limited appetite for ILS, but I think the appetite for ILS will remain challenged going into year-end.

Operator, Operator

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

Kevin O'Donnell, President and CEO

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

Operator, Operator

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