Earnings Call Transcript
RENAISSANCERE HOLDINGS LTD (RNR)
Earnings Call Transcript - RNR Q4 2023
Operator, Operator
Good morning. My name is Angela, and I will be your conference operator today. I would like to welcome everyone to the RenaissanceRe Fourth Quarter and Full-Year 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. 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, Angela. Good morning, and welcome to RenaissanceRe's Fourth Quarter and Year-End 2023 Earnings Conference Call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; Bob Qutub, Executive Vice President and Chief Financial Officer; and David Marra, Executive Vice President and Group Chief Underwriting 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 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 O'Donnell, President and Chief Executive Officer
Thanks, Keith. Good morning, everybody, and thank you for joining today's call. In 2023, RenaissanceRe achieved several strategic milestones. We began the year with two overarching goals: first, to achieve a step change in property catastrophe reinsurance pricing, and second, to grow into one of the best underwriting markets in a generation. I can now say we successfully achieved both of these goals and exceeded even our own high expectations. As a result, we delivered excellent financial returns for the year and positioned the business to create enduring shareholder value moving forward. This was evident in robust contributions from each of our three drivers of profit, underwriting fees, and investment income during both the fourth quarter and the year. For the quarter, we reported $623 million of operating income and a 33% operating return on common equity. For the year, we reported $1.8 billion of operating income and a 29% operating return on common equity. Also for the year, we grew our principal metric, change in tangible book value plus accumulated dividends, by 48%. Before I turn the call over to Bob to discuss these results in more detail, I'd like to take a few minutes to share a bit more context on our strategic achievements in 2023. Starting with the step change in property catastrophe reinsurance. To achieve this step change, we needed to fundamentally realign the protections we provided to our customers against large catastrophic events. We did this by significantly increasing rates and retentions and improving terms and conditions. We also rationalized structures to reduce overly broad exposure to relatively small events. Ultimately, we provided an additional margin of safety against volatility, protecting our equity and our returns. We accomplished these objectives at January 1 last year and sustained the step change momentum throughout the year. As a result, in 2023, we constructed what was the largest and most profitable underwriting portfolio in our history. As I will discuss later, the momentum behind this portfolio is persisting into 2024. Turning to our second strategic goal. We recognize the importance of growth in this stable favorable underwriting environment, and we substantially accelerated our growth by acquiring one of the best reinsurance assets in the market, Validus Re. Leading up to our acquisition of Validus, reinsurance and property catastrophe were disfavored. But we had conviction in our vision of being the best underwriter. We recognized the competitive advantage that the large, well-diversified Validus Re portfolio could bring to us. This is in part because there is substantial value and incumbency in the reinsurance industry. This is especially true in strong markets. A critical component of RenaissanceRe's value proposition to customers and brokers is our provision of consistent capacity across market cycles. This consistency, coupled with increased incumbency, was our formula for strategic success in 2023. In addition to a substantial amount of attractive premium, the Validus acquisition brought us several additional benefits. This included the addition of the Validus team which has quickly become a valuable part of the RenaissanceRe team. We continue to be impressed by their professionalism, strong work ethic, and deep industry knowledge. Our industry-leading risk expertise has been enhanced by their contributions. In addition, we now have a deeper and broader relationship with AIG, a long-time and valuable client. In summary, these two strategic achievements—delivering the step change in locking in profitable growth by delivering the Validus portfolio—are great examples of our ability to execute decisively when market conditions are favorable. We have built the industry's leading platform to accept reinsurance risk efficiently and effectively. Looking ahead to 2024, this platform positions us to continue delivering strong financial performance and creating enduring value for our shareholders. Consequently, at the recent January 1 renewal, our overriding objective was to retain RenaissanceRe's legacy lines while renewing the Validus business we choose to keep. Critically, we sought to do so without disrupting the favorable market conditions brought about by the step change in reinsurance. I am pleased to report that we were overwhelmingly successful in this endeavor. Clients and brokers broadly supported our efforts to become a larger and more relevant partner, a role that we are proud to serve. The result was beneficial to all of our stakeholders. Our customers benefited from increased access to our highly rated, well-capitalized balance sheets. Brokers benefited from access to an expanded and more influential market known for providing certainty of execution and a market-leading view of risk. Our capital partners benefited from increased access to desirable risk, and our shareholders, of course, benefited from improvements in each of our three drivers of profit. The underwriting environment remains robust. And our success retaining the Validus portfolio provides a significant tailwind. As Bob will discuss in a minute, our investment portfolio should meaningfully add to our bottom line. And growth in our fee-generating business Capital Partners should persist. That concludes my initial comments. I'll provide a more detailed update on the renewal and our segments at the end of the call. But first, Bob will discuss our financial performance for the quarter.
Bob Qutub, Executive Vice President and Chief Financial Officer
Thanks, Kevin, and good morning, everyone. We finished 2023 with an exceptional fourth quarter with a return on average common equity of 84% and operating return on average common equity of 33%. This quarter was the capstone to one of RenaissanceRe's historically strongest years, where we earned operating income of $1.8 billion and delivered an operating return on average common equity of 29%. In 2023, we outperformed across all 3 drivers of profit with underwriting income of $1.6 billion, fees of $237 million, and retained investment income of $831 million. We also grew our principal metric, tangible book value per share plus change in accumulated dividends by 48% and book value per share by 58%. This growth was primarily driven by our strong earnings and the acquisition of Validus as well as mark-to-market gains and a one-time deferred tax benefit related to Bermuda's adoption of a 15% corporate tax rate incepting in 2025, which I'll discuss in more detail shortly. Importantly, we have positioned ourselves to continue delivering strong shareholder returns, driven by several factors. First, the acquisition of Validus Re will be a material contributor to our financial results. The integration is proceeding smoothly. Teams are working well together. And as Kevin said, we had a very successful January 1 renewal. Second, we have built a solid foundation across all three drivers of profit and expect them to continue contributing meaningfully to our results. And finally, we are in an excellent capital and liquidity position, which will provide us with opportunities to deploy and manage our capital to the benefit of our shareholders. I'll dive deeper into our financial results in a moment. However, let me discuss some new disclosures related to the purchase accounting adjustments from the Validus transaction and a one-time deferred tax benefit that we recorded to the Bermuda corporate income tax legislation. Starting with accounting for balances. As we discussed with you last quarter, our calculation of operating income now includes an additional adjustment to exclude the impact of purchase accounting. These purchase accounting adjustments include the impact of amortization of net value of business acquired, other purchase intangibles, and fair value adjustments. By removing the impact of purchase accounting from operating income, we will better reflect the performance of our business, provide a more comparable metric to that of our peers, and ultimately offer greater transparency to our core results for shareholders. We've included additional disclosures on these purchase accounting adjustments in our financial supplement. Specifically, on Page 32, you can see that at the end of 2023, the purchase accounting adjustments are $917 million. This included $90 million of goodwill with the remaining $827 million in amortizing intangibles. Other than goodwill, we expect these assets to amortize over 10 years with about 40% of amortizing by the end of 2024. As these assets are amortized, they will increase acquisition costs and net claims and claim expenses, which will increase our reported combined ratio to provide clarity on these adjustments. We have included a schedule on Page 33 of the financial supplement that shows an adjusted combined ratio that excludes the impact of purchase accounting adjustments. Throughout my comments, I will refer to this combined ratio as the adjusted combined ratio. Moving now to an update on Bermuda's corporate income tax and the deferred tax benefit we booked in the quarter. In December, the Bermuda government adopted a 15% corporate income tax incepting in 2025 in response to the OECD global minimum tax rules. As a result, all things equal, we expect our effective tax rate will increase starting in '25. It is important to remember that our non-Bermuda balance sheets are already in tax-paying jurisdictions, so the incremental impact will be less than 15%. As part of this, we have recorded a net deferred tax asset (DTA) of $594 million. This includes an amount related to an economic transition adjustment provided for in the Bermuda legislation, which is intended to provide a fair and equitable transition into the tax regime. The DTA increased our book value and tangible book value in the quarter by $11.27 per share, and it was not included in operating income. This DTA will be utilized predominantly over a 10-year period starting in 2025. It will reduce, but not eliminate, our Bermuda cash tax payments in those years. This provision is independent from any credit or expense offsets that the Bermuda government may adopt in the future. Throughout this process, the Bermuda government has consulted extensively with stakeholders, including the international business community with a strong focus on maintaining Bermuda's attractive business environment and robust regulatory framework. Over the course of 2024, our focus will be on working together with our trade groups and other international businesses to engage with the government as it implements this new tax regime. Moving now to our results and starting with our first driver of profit, underwriting, where we reported consistently strong underwriting results in 2023. We delivered a 77% adjusted combined ratio for the year and a 74% adjusted combined ratio for the quarter with 7 percentage points of favorable development across both segments in the quarter. Estimated industry catastrophe losses approached $120 billion this year. Our strong underwriting results reflect the actions we took at the beginning of 2023 to increase reinsurance rates and attachment points and tightened terms and conditions. As I've discussed with you, our 2023 focus was to grow inorganically through Validus' diversified book as well as organically in classes of business where we have been seeing the best returns such as property and excess of loss and specialty. We accomplished this. The January 1 renewal was again tremendously successful, and we renewed the combined RenaissanceRe and Validus portfolio according to plan. In addition, throughout 2023, we proactively shaped the portfolio to favor attractive lines. 2023 net premiums written were $7.5 billion, up 4%, but there was significantly more growth in our target areas. Property catastrophe net premiums written were up 23% or 42% without reinstatement premium, and specialty was up 47%. While gross premiums written were $8.9 billion, down $351 million, they were roughly flat when you exclude the impact of $235 million of reinstatement premiums. Within gross premiums, we had growth in property catastrophe, specialty, and general casualty of $914 million when you exclude the impact of reinstatement premiums. This was offset by reductions in other property, professional liability, and mortgage. Collectively, the actions we took through 2023 should serve as a tailwind to both our top and bottom lines in '24. Moving now to our Casualty and Specialty segment, where gross premiums and net premiums written were up 20% and 26%, respectively, in the quarter as we brought Validus business onto our platform. Net earned premiums were $1.4 billion, up 46%, also driven by Validus. In the first quarter, we're expecting net earned premiums to be about $1.5 billion. For the year, Casualty and Specialty net premiums written were up 3.5%. This year, we continued to manage the cycle, growing in specialty and general casualty while reducing in professional liability and mortgage. Our Casualty and Specialty adjusted combined ratio was 94% for the quarter and the year. This was consistent with our expectations, and we continue to expect mid-90s adjusted combined ratio as we integrate the Validus portfolio in 2024. Additionally, the casualty acquisition cost ratio of 31% was elevated in the fourth quarter due to the impact of purchase accounting adjustments. This contributed 2.3 percentage points to the ratio. There's been a lot of focus across the industry on the robustness of casualty reserves given social and economic inflation trends. As we've discussed in the past, we have a prudent reserving process and are confident in our reserves. Turning now to our Property segment, starting with property catastrophe, where the fourth quarter is a quiet period for property catastrophe renewals and gross premium written were $55 million, roughly half of which were reinstatement premiums. Net premiums earned were up 78% in the quarter, driven by organic growth through the year and additional premium earned from Validus. We reported excellent results in property catastrophe for the quarter and for the year, with an adjusted combined ratio of 16% and 29%, respectively. While there are a few large catastrophes in the quarter, including Hurricane Otis and European windstorms, these largely did not make it into reinsurance towers or lead to significant catastrophe losses. Within catastrophe, we reported 26% favorable development in the quarter. This positive development was across the 2017 to '22 underwriting years with a significant amount related to Hurricane Ian. Moving now to other property, where we reported strong results through 2023. This reported a 79% adjusted quarterly combined ratio in Q4 and an 82% adjusted combined ratio for the year. The other property Q4 current accident year loss ratio of 53% included a 4 percentage point impact from large class, including Hurricane Otis and increased losses from previous events. All things equal, we expect an attritional loss ratio in the low 50s going forward. We reported favorable development of 4 percentage points in the quarter and 6 percentage points for the year, almost all of which related to attritional losses. We have continued to reduce our other property class of business, primarily in the pro-rata and retro quota share lines with both gross and net premiums written down in the quarter. Net premiums earned also declined to $359 million. We're bringing premium from Validus into the book and in Q1, expect net premiums earned in another property of about $325 million. While net earned premiums will be down, we have built a much more profitable goal. Moving now to fee income and our capital partners business, where fee income continued to increase with fourth quarter fees of $71 million, up 133% from the comparable quarter. For the year, these were $237 million, up 100%. In 2023, we consistently grew both management and performance fees quarter-on-quarter. Growth in fees was almost entirely driven by our joint venture vehicles and follows successful capital raising to support premium growth and continued strong underwriting performance. Starting in the first quarter of 2024, we expect management fees of around $50 million and performance fees to stay relatively stable, absent large losses. Once again, we effectively deployed capital in our partners business, in our capital partners business to match attractive risk with capital. This enabled us to bring on more property catastrophe premium onto our platform, including additional risk from the Validus portfolio. In 2023, we raised $1.2 billion in third-party capital across our joint venture vehicles with an additional $495 million effective January 1, 2024. We continue to be good stewards of capital, returning $1.3 billion of our third-party capital investors, with two-thirds of this relating to the release of trapped capital in our Upsilon vehicle. As expected, AIG invested $350 million in our Capital Partners business effective January 1, with $300 million in DaVinci and $50 million in Fontana. We facilitated most of this investment by reducing our ownership stake in DaVinci from 28% to 24%. Moving now to investments, where retained net investment income was $256 million for the quarter, up 18% from Q3 and $831 million for the year, more than double that of 2022. In the fourth quarter, we saw a sharp rally in treasury, leading to $490 million of retained mark-to-market gain and effectively eliminating retained unrealized loss that we have been carrying in our fixed maturity portfolio. Our retained yield to maturity came down by 0.6 percentage points to 5.4% and this is roughly on par with our net investment income return. As we go forward, we expect to maintain our net investment income at a similar level. For Q1, we anticipate that retained net investment income will come in around $260 million. After funding and closing Validus, our retained investment portfolio has grown by about $3 billion to $21 billion. Duration has increased from 2.6 years in Q3 to 3.2 at the year-end. Now finally, turning to expenses, where our operating expense ratio increased in the quarter by about 1.6 percentage points to 6%. This was driven by performance-related compensation expense and increased headcount. These factors also drove a slightly higher annual operating expense ratio of 5%, up 0.6 percentage points from 2022. Going forward, we expect the operating expense ratio to stay relatively flat in 2024. Corporate expenses were also elevated by about $60 million in the quarter as a result of the Validus acquisition. These transaction-related expenses are excluded from operating income, with about two-thirds of these expenses being one-time charges and the remaining one-third related to ongoing integration costs. These ongoing costs should carry over into 2024 before tapering off later in the year. In conclusion, we finished an excellent year with an exceptional quarter. All three drivers of profit made strong contributions to our results. Both segments performed very well due in part to the underwriting actions we have taken this year across both segments. Management and performance fees increased through the year as our Capital Partners team substantially grew our joint venture vehicles and a strong underwriting market. And finally, net investment income doubled over the year as we grew our investment portfolio at attractive yields. As we look forward, we believe that the Validus acquisition will benefit all three drivers of profit, generating significant value for our shareholders. And with that, I'll now turn the call back to Kevin.
Kevin O'Donnell, President and Chief Executive Officer
Thanks, Bob. As you can see, financially, we had a great year, and our expectations are high for what we expect to accomplish in 2024. In my opening comments, I explained to you how we first led the change in property cat reinsurance pricing and second, locked in profitable growth through the acquisition of Validus. At this point, I'd like to provide more information on how the January 1 renewal preceded and the underwriting decisions that we made. Our strong underwriting performance was the result of our disciplined repricing and restructuring of our portfolio. We proactively made improvements to have better pricing and better structures further from loss. In many ways, 2023 was a robust test of the profitability of property reinsurance portfolio and the effectiveness of the step change. We passed this test. It was a very active year for natural catastrophes with estimates of industry loss approaching $120 billion. In this environment, we delivered a property catastrophe combined ratio of 30% while growing net premiums written 42%, excluding the impact of reinstatement premiums. Overall, our property combined ratio was 53% for the year. This demonstrated our ability to generate attractive returns for shareholders against the ongoing backdrop of significant natural catastrophe activity. At the recent January 1 renewal, we improved this already strong underwriting portfolio. Due to our overwhelming success in renewing the Validus business, we grew substantially into a market that remains highly favorable. Roughly half of our combined premium renewed at January 1, and our retention rate exceeded our already high expectations. More critically, we overwhelmingly tapped our combined cat lines. Rates in the property cat market remain strong, and markets remain disciplined. Market rates were flat to up a few percentage points, programs that needed rate got rate, improving the overall portfolio. Terms and conditions were largely consistent, and retentions held steady. In other property, the market continues to experience rate increases, particularly in the U.S. and parts of Europe. We held our exposures relatively flat while achieving higher rates. In 2024, we will continue to monitor other property. If risk-adjusted returns approach similar levels to what we are obtaining in property cat, I expect there will be opportunities to grow exposure to this business. Similar to property, January 1 was a successful renewal for our casualty book. Our ability to participate broadly across our customers' portfolios once again served us well, helping us renew the business we targeted and had terms and conditions that made sense. This includes the Validus portfolio. Looking forward to 2024, we expect strong performance from a considerably larger book benefiting from the Validus lines. This is because we are observing increased discipline in the market. General liability is benefiting from a combination of improving underlying rates, reductions in ceding commissions, and improvements in terms and conditions. In specialty lines, the market continues to be attractive and we grew our net premiums written almost 50% in 2023. Validus brings a significant amount of specialty business and provides us an even more influential position in this market. We were successful in renewing this book at January 1 and are excited about future potential here. Overall, across our segments, our January 1, 2024 underwriting portfolio is larger and more efficient than 2023, and we believe we will continue to benefit over the year. Based on our success at January 1, we are likely to have significant upside against the $2.7 billion of the Validus portfolio we initially expected to retain. We are expecting to renew at least $3 billion of Validus premium and probably more, including most of the property and specialty lines. We achieved this favorable outcome at January 1 by consistently communicating our risk appetite to brokers and customers after we announced the Validus deal. We are now the leading participant on many placements. This prominent position allowed us to engage early with brokers and customers and work to secure our lines before many others in the market were even approached. Across property and casualty markets, we have been a consistent long-term reinsurance partner, supporting our customers when they needed us most. Our approach gave our customers certainty with our lines and allowed us to successfully combine the Validus and RenaissanceRe REIT portfolio. I would now like to touch on what we refer to as our gross-to-net strategy and how it contributes to our financial performance. It is difficult to overstate the capital efficiencies that we can bring to the large profitable underwriting portfolio we now have. This is because we have a broader array of capital management tools than any other reinsurer. To begin with, the book of business we assume from our customers is already very diversified. We then increased the efficiency of our portfolios and bring substantial additional capital to our customers through a combination of our highly-rated wholly-owned balance sheets and our capital partners business. All our risk is underwritten by the same teams of underwriters on our REMS system. And we have substantial skin in the game for any risk we write. Given such strong alignment of interest between RenaissanceRe and our partner capital investors, we view this capital as a permanent franchise. This provides our investors with the confidence to remain committed to us over the long term. At January 1, we renewed the Validus portfolio onto RenaissanceRe managed balance sheets. We also deployed our capital partner vehicles and began incorporating the larger portfolio into our ceded reinsurance programs. This year, retro capacity was more available at acceptable terms, which when deployed in combination with capital partners vehicles, improves our overall portfolio and enhances the shareholder return. As a result, after bringing on Validus, we have kept risk relatively flat on a percentage of equity basis. It is rare to find an acquisition with this combination of capital efficiency and very little top line waste. In closing, our performance in 2023, both strategically and financially, was outstanding. We delivered exceptional profitability to our shareholders through each of our three drivers of profit. At the same time, we bolstered the future of our company with the addition of one of the best reinsurers in the market, Validus Re. As a result, we expect to deliver material shareholder value over the course of 2024. And with that, we'll open it up to questions.
Operator, Operator
We'll take our first question from Elyse Greenspan with Wells Fargo.
Elyse Greenspan, Analyst
Kevin, my first question is about your expectation to retain at least $3 billion, which is an increase from the previous estimate of $2.7 billion from Validus. Is the additional $300 million expected to have occurred on January 1, and if you are more successful than anticipated during other renewal seasons this year, could that additional success contribute to the $3 billion?
Kevin O'Donnell, President and Chief Executive Officer
Yes. I think the success we had at 1/1 certainly inspired us to increase from $2.7 billion to $3 billion. We have tremendous confidence in the underwriting team and their ability to execute against that $3 billion, and we believe we have upside. About half of the Validus book renewed at 1/1 and we had enormous success, specifically targeting the property cat lines and the specialty lines. A few of the casualty classes, we exercised the same discipline we've been exercising in our own book of business, and we're a little bit more selective on some of the more challenged casualty classes. But as I look forward to what's coming for the remainder of the year, I feel very confident about $3 billion with upside for both the casualty, specialty, and property portfolios.
Elyse Greenspan, Analyst
You mentioned that there was a slight increase in pricing for property cat starting January 1, and we did not revert any of the gains that reinsurers experienced in 2023. How do you view the anticipated return on the property cat portfolio that you'll write as of January 1, 2024? I was thinking that last year's return was over 20 percent, and I assume it will be similar, if not slightly higher, at the beginning of 2024.
Kevin O'Donnell, President and Chief Executive Officer
Yes. I would say it was relatively consistent with what we experienced with the step change we achieved in '23. So when I look at the portfolio, we benefit from it being larger, more diversified. We have a little bit more flexibility on how we're structuring the portfolios between third-party vehicles, our own balance sheets, and a little bit more ceded. So I think the overall portfolio's efficiency has improved. But when I think about terms, conditions, and pricing, I think it is largely consistent on a risk-adjusted basis with last year. One could argue it's up a little bit, but I think being conservative and saying it's flat is reasonable.
Operator, Operator
The next comes from Josh Shanker with Bank of America.
Joshua Shanker, Analyst
Kevin, that was a great summary of your one-on-one. You provided a lot of numbers, and I appreciate it. Looking at your book, if I'm calculating correctly, excluding Validus, you now have approximately $1.2 billion more in equity capital, $750 million more in debt, $1.6 billion more in legacy third-party money, and an additional $350 million contribution to third-party money from AIG. This results in about 30% more capital than you had a year ago. Is it feasible to write 30% more catastrophe exposure at the current pricing under your model? I understand that the key to this is how you deploy that capital, but is it reasonable to consider that you could take on 30% more risk compared to last year?
Kevin O'Donnell, President and Chief Executive Officer
Yes. I think one of the comments that I tried to bring out on the portfolio is that on a percent of equity basis, we're holding our risk relatively flat. So knowing that, that the equity base is up, we are increasing our risk to make sure we remain equivalently exposed in the tail against peak exposures. The one thing that that comment doesn't highlight sufficiently is the portfolio that we brought on Validus is well diversified. So when I make those comments, I'm focused on property cat, but that risk capital that we brought on and exposed to property cat is very well exposed on a diversified basis with specialty classes and with casualty. So the efficiency of bringing that portfolio on is far greater than going into writing strictly into the property cat tower.
Joshua Shanker, Analyst
Okay. And then a question for Bob. When we think about the tax going forward, you said that the DTA is not going to eliminate your tax obligations on a cash basis. Should we expect that your tax obligation on a cash basis will be materially different over the next decade? Or you will still pay a similar type of cash tax rate and then you'll also have the benefit of the DTA managing the overage?
Robert Qutub, Executive Vice President and Chief Financial Officer
It's a short answer. Thanks for the question, Josh. The short answer to that question is DTA at $600 million is going to give us a $60 million a year and is capped at 10% a year for 10 years. So we're going to get a benefit of reduced cash tax flows of up to $60 million a year for the next 10 years.
Joshua Shanker, Analyst
And if you experience a large catastrophe event in that decade that causes you to have a negative tax rate, would that add the DTA such that you could utilize in longer than 10 years?
Robert Qutub, Executive Vice President and Chief Financial Officer
Yes, the details regarding the losses will carry forward. There will be other factors that emerge as we progress through the year before it becomes effective in 2025. So, to answer your question briefly, yes.
Operator, Operator
The next question comes from Mike Zaremski with BMO.
Mike Zaremski, Analyst
So I guess, you gave a lot of great guidance and I think a lot of us need a handholding a bit on the Validus acquisition details, so I appreciate that. But if I think back to kind of in May when the deal was struck, I believe your guidance was double-digit accretion on a run rate basis. And if I look at consensus estimates, the deal's close, if I look at consensus estimates on a forward-looking basis, estimates are up consensus about 9%, if I'm looking at '24 to '25 on average. And so I'm just curious, it's a long-winded question, but you've given a lot of details that point to the deal being actually a bit more accretive than what your initial guidance was in May of last year. And so just curious if you think I'm interpreting this correctly that the deal is more accretive, and obviously, this is just a deal in isolation, because it doesn't feel like the Street is clearly not moving to where, I guess, believing our guidance in isolation. Am I thinking about that correctly?
Robert Qutub, Executive Vice President and Chief Financial Officer
Mike, to answer your question, thank you for raising it. It's a great question, and we feel more optimistic than we did in May when we first announced the deal. As we've gone through the due diligence and integration process, our confidence has grown, as evidenced by the increase from $2.7 billion to $3 billion in premium, with further potential for growth. This benefit affects all three drivers of our profit. The message I shared in May remains the same: we are achieving better underwriting and greater efficiency in both casualty and specialty, and we'll maintain our position in the mid-90s. This alone contributes to our profitability. Additionally, both the DB and Fontana will gain from the extra premium and business we have coming in for fee income. As you observed, I've raised our guidance on management fees while holding at 50. We also expect an additional $3 billion in the portfolio due to the current rate environment. Therefore, we feel more confident than we did previously as we learn more, particularly regarding the quality of the people who joined us, as Kevin mentioned in his comments. We have a strong team and strong results, and looking into 2023, I see favorable conditions ahead.
Mike Zaremski, Analyst
Okay. That's helpful. And my follow-up on the Casualty and Specialty segment, and I appreciate there's a lot of different types of business in there. The combined ratio for that segment has been improving, whereas some of the primary insurers haven't seen much improvement in their casualty segments, although I know business mix is different. You mentioned in your prepared remarks about the strength of your casualty, I think, reserves. Then also, I think there were some remarks about some troubled casualty portfolios in the marketplace, which isn't a surprise. But any more color you want to offer on kind of why you feel really good about your casualty portfolio?
Kevin O'Donnell, President and Chief Executive Officer
Dave, why don't you take this one? Thanks.
David Marra, Executive Vice President and Group Chief Underwriting Officer
Sure. This is David. I'll start by saying that our casualty and specialty portfolio includes more than just casualty. A significant part of it is specialty and credit, and we always aim to allocate the portfolio towards the most attractive opportunities. You saw us rapidly grow in casualty after 2020, whereas our book was quite small before that. During that time, we also steered clear of many lines that were more susceptible to social inflation, such as commercial auto. Therefore, part of the ongoing strength in this segment is due to our active positioning across different classes. Looking ahead to 2024 with the Validus portfolio, we have a larger presence in specialty classes, which experienced a significant change in terms and conditions last year, and that trend has continued. All these factors contribute to the overall strength of the segment. Thank you.
Operator, Operator
The next question comes from Ryan Tunis with Autonomous Research.
Ryan Tunis, Analyst
First question, it's regarding the attritional large losses. We have our spreadsheet that outlines typical losses, like European windstorms and Japanese typhoons. We have a good understanding of what to anticipate in terms of REMS market share. I'm curious if there's anything you noticed about the Validus portfolio that suggests market share might be higher than usual compared to the past. I'm referring to the regular quarter-to-quarter attritional large losses, not the 15100.
Kevin O'Donnell, President and Chief Executive Officer
Yes, let me begin. I believe their portfolio is similar to ours and has gained from the recent changes. Overall, the property catastrophe portfolio is less exposed to secondary risks than it was in 2022. However, with the merger of RenRe and Validus, we have become larger, so I anticipate that we will take on a greater percentage of larger losses. It's also important to note that we are expanding in several specialty classes, both within RenRe's portfolio and with Validus's addition. Some of these may be exposed to catastrophic events. Therefore, we might be slightly more vulnerable to the smaller losses you mentioned due to our involvement in several specialty classes. I don’t see this as a significant change in exposure to new losses, but our share might increase simply because we are larger. When considering the portfolio’s exposure before and after Validus, it remains largely the same. I would say that for larger losses, especially the peak losses, our share will likely be higher due to our scale. We may also participate more widely in areas and risks that are not peak-related through some of the specialty classes we underwrite.
Ryan Tunis, Analyst
Got it. And specialty, I should be thinking more like a man-made type loss?
Kevin O'Donnell, President and Chief Executive Officer
In Marine energy per risk, there is an aviation that kind of stuff.
Ryan Tunis, Analyst
For Bob, following up on Ian, you mentioned there are some reserve releases. You set a significant initial number, so I wanted to check if there is still a substantial amount of incurred but not reported reserves or reserves linked to that event, or if that is mostly resolved now.
Robert Qutub, Executive Vice President and Chief Financial Officer
This is simply the annual review we conduct. In the last week of the third quarter, it aligned with our fourth quarter evaluation, allowing us to gather additional information and benefit from another year of data. These are our best estimates. It was by far the largest component of the review. However, we examine all the accident years and will consistently continue to analyze it in more depth on an annual basis.
Operator, Operator
The next question is from Meyer Shields with KBW.
Meyer Shields, Analyst
Sticking on reserves briefly, if I can. Can we get a sense as to the accident years that were relevant for the Casualty and Specialty segments reserve development?
Robert Qutub, Executive Vice President and Chief Financial Officer
Sorry, let me confirm I understand your question. You're interested in the relevant years, particularly regarding what David mentioned about the years before 2018 and how they relate to 2020 and 2021. In those years, we didn't have the stronger presence that David alluded to. Although we grew through acquisitions, we established terms and conditions that provided protection. Additionally, we implemented some protective measures ourselves before 2018, where growth occurred in the years we discussed, especially when the market improved in 2021. We also adjusted our portfolio to focus on areas where we had success. This year, we observed a significant decrease in professional lines and a substantial increase in specialty.
Operator, Operator
Okay. No, that's perfect. Second modeling question. So we have the impact from purchase accounting on the various segments combined ratios. Can we assume that for the near term, if we tweak that up for the fact that there are only two months of Validus ownership, that's a good run rate in the near term for the purchase accounting adjustments?
Robert Qutub, Executive Vice President and Chief Financial Officer
That's fair. It's going to taper off. Like I tried to say 40% of this is going to be gone by the end of this year. So it will start to taper towards the end of the year.
Operator, Operator
The next question comes from Alex Scott with Goldman Sachs.
Alex Scott, Analyst
I wanted to dig a little bit more into the net versus gross or gross-to-net strategy, I guess, you're referencing. And on one hand, it's sort of the way you're bringing on this Validus book and how much the third-party capital providers are being used? And then also just interested in as you're going through year-end renewals. In the view that we get to your financials, I guess includes the capital providers, I mean, will there be any noticeable differences on sort of the net to gross retention that we should think about going into 2024 as part of your strategy at year-end?
Kevin O'Donnell, President and Chief Executive Officer
Yes. I think Bob had mentioned some shifts in the percent participation we have in DaVinci and Fontana. I think it's reasonable to think we split our book and retain about half of our property cat. So half of it will be with third-party vehicles will be on our owned balance sheets. And ballpark, we keep about 85% of our casualty. That moves around each year. It's not materially different from what we had last year. But those are good estimates to think about how we're constructing the portfolio. The other piece is more of a trading account retro, where we did see more opportunities to provide more additional excess of loss protection on some peak exposures. I think that's very consistent with the way we've normally traded the portfolio, and there's nothing specific to report there.
Alex Scott, Analyst
Okay. Next question is about the investment portfolio. With the addition of Validus, it seems like it has increased the duration. Is the portfolio currently aligned with your expectations regarding investments? Are there any plans to adjust the duration or overall allocation?
Robert Qutub, Executive Vice President and Chief Financial Officer
It came in actually shorter in duration over the course of the due diligence and integration process. We've matched it with our portfolio. So this is a reflection of our decision to take it and extend it out a little bit longer than it was at the end of the third quarter.
Operator, Operator
Next question comes from Jimmy Bhullar with J.P. Morgan.
Jimmy Bhullar, Analyst
So first, just a question on the competitive environment. It seems like your comments on pricing terms and commissions are fairly positive. Have you seen any of your peers sort of start to come down in terms of offering coverage in lower layers? And have you seen any move in attachment points at all versus 2023 for '24 renewals?
Kevin O'Donnell, President and Chief Executive Officer
Dave, why don't you take that?
David Marra, Executive Vice President and Group Chief Underwriting Officer
We didn't encounter much competition affecting retention rates, which remained stable compared to 2023. The new demand from increased capacity is mainly for higher-end programs, and we observed a rise in demand for these top layers.
Jimmy Bhullar, Analyst
Okay. If we consider your returns in 2023, it's clear they have been strong for both you and your competitors. To what degree is that due to the types of events we experienced, many of which were relatively small, compared to real changes in terms and conditions? Had we encountered more typical larger events, would your returns have been similar, or would they have been significantly lower?
Kevin O'Donnell, President and Chief Executive Officer
So when I look at '23, every cat year is different. And you're correct in that there were more small events than having the $120 billion driven by one large event. When I think about what's driving our performance in '23, those positive factors are persisting in '24. So we're in a rate environment that is very robust across most lines of business, terms and conditions largely held, retentions largely held. We have a fee business that continues to grow, and we expect greater capital partners participation, not only in our own portfolio, but on Validus's portfolio, and the investment returns look robust for the rest of the year on a larger portfolio. Your question is if the cat loss profile is different, will we have different results. The answer is yes. In the way the book is constructed, we are purposefully more exposed to peak territory large losses. And as mentioned in my previous comments, we would probably have a bigger percentage share of those. That said, the robustness and the diversification in the portfolio gives me great confidence in having constructed the portfolio that we have, knowing it's resilient to even large losses that can come in.
Jimmy Bhullar, Analyst
Okay. And then just lastly, can you comment on any reserve development you might have seen related to the Tokyo Millennium ADC? Has that been exhausted? Or is there some left there?
Kevin O'Donnell, President and Chief Executive Officer
That there's still limit available on the cover. The reserves are paying down as expected. So I have nothing to report other than the coverage is still there and there's limits still available.
Operator, Operator
The next question comes from Bob Wang with Morgan Stanley.
Robert Wang, Analyst
Most of my questions are answered. I just have one. Regarding the Validus acquisition, obviously, everything sounds fairly positive from this perspective. Just curious how we should think about expenses synergies going forward? Is it more going to come from scale and operations? Or is it more of a people's related synergy? Maybe can you just help us on the expense side of things a little bit?
Robert Qutub, Executive Vice President and Chief Financial Officer
Yes, that's a good question. I mentioned it in my prepared comments, and I'll reiterate some of it now. You'll notice that many of the costs related to Validus will be reflected in our operating expenses, where we have retained a considerable number of employees. We expected significant synergies from this acquisition. However, as I’ve pointed out, we have a lot of skilled individuals who joined us from Validus, and we will be reducing the targeted synergies, although not significantly. We are optimistic about this. The integration costs will be recorded under corporate expenses, which I previously stated would be around $20 million going into the first quarter and will carry through. The synergies are expected to taper off toward the end of the year.
Kevin O'Donnell, President and Chief Executive Officer
Those costs will decrease, reflecting the realization of those synergies.
Operator, Operator
The next question comes from Brian Meredith with UBS.
Brian Meredith, Analyst
Kevin, just curious. When you put your portfolio together with Validus, are there any areas geographically that you would say right now, you're underweight and there's potential opportunity to kind of really increase your presence if market conditions so warranted?
Kevin O'Donnell, President and Chief Executive Officer
We have the ability to grow everywhere in every line of business should we choose to, and it will be return dependent. Obviously, we'll demand more profitability for each dollar we put out in peak territories. The portfolio that we picked up from Validus, largely had a similar profile to peak risk that our existing portfolio. They were slightly higher in Europe than us. What I would say is against the Southeast, we can continue to grow very efficiently in every other cat peril and every other cat region. And then we have opportunities to grow specialty and casualty as well. I think the one that we're focused on and thinking about what our next steps are going to be is the other property market, specifically the E&S cat exposed. Just as rates continue to change there, that might be a further opportunity for us as well.
Brian Meredith, Analyst
Makes sense. And then just quickly on market conditions. A little early right now, but 4/1 renewals, particularly looking at APAC, kind of thoughts on opportunities there?
Kevin O'Donnell, President and Chief Executive Officer
I think we're just getting into the Japanese renewals. It looks like the earthquake that happened earlier in January will have limited effect on the reinsurance. I think Japan is a very stable market. I'm optimistic that the solid rate that we achieved last year will be at least achieved this year in the renewals that we target.
Operator, Operator
The next question comes from Charlie Lederer with Citi.
Charlie Lederer, Analyst
Thank you. Question, is there a PGAAP impact in the loss ratio? And is that material?
Robert Qutub, Executive Vice President and Chief Financial Officer
Thank you for that question. What you're observing right now is primarily related to the acquisition ratio. As I mentioned in my prepared comments, this is especially noticeable in casualty, approximately 2.3 points. The effect of the reserves will be modest and will extend over a longer period, likely around 5, 6, or 7 years, but it won't be as significant as what you're noticing with the acquisition ratio.
Charlie Lederer, Analyst
Got it. And I think you mentioned it a little bit, but is it your sense that the DTA created this quarter for the corporate income tax are going to be enough? Or do you expect offsets to the P&L tax rates from things like payroll taxes or other things by the time '25 rolls around?
Robert Qutub, Executive Vice President and Chief Financial Officer
It's early right now in this whole process. The legislation was just passed, and what we calculated was the deferred tax benefit to reduce cash payments going forward. How the legislation adapts in 2024, we'll be paying close attention to what those changes are. I referred to some of them maybe, but we just don't know. So it's too early to tell.
Operator, Operator
The next question comes from Andrew Kligerman with TD Cowen.
Andrew Kligerman, Analyst
Could you discuss your growth in casualty and specialty? It seems significant, especially with contributions from Validus. Additionally, can you elaborate on the professional liability segment, which is down approximately $109 million year-over-year? Specifically, which specialty lines are you most optimistic about for future growth, and in casualty lines? Also, in terms of professional liability, what areas are you moving away from? Is it limited to public D&O and access D&O, or are there other sectors within professional liability that you're reassessing?
David Marra, Executive Vice President and Group Chief Underwriting Officer
Andrew, this is David. I'll start with that one. Starting with your comment on casualty and professional lines and D&O. It definitely is the public D&O in the excess in particular, which is under the most pressure. Most D&O books have a variety of different D&O exposures. So that's one opportunity we have is to shave our underwriting away from public D&O towards the other classes. Giving this happening in D&O, as we're getting a reduction in ceding commissions to compensate for the pressure on insurance rates that we're seeing. On the specialty classes, Validus had a very significant specialty footprint. We also had a significant specialty footprint. So we put those together. We're really excited about the opportunities there. Marine and energy and the associated lines like terrorism that is underwritten as part of Marine and Energy are big areas of focus there. We also are growing in the aviation space, which is experiencing some positive rate in the excess of loss. So it lines like that.
Operator, Operator
This concludes the RenaissanceRe Fourth Quarter and Full Year 2023 Earnings Call and Webcast. Please disconnect your lines at this time, and have a wonderful day.