Earnings Call Transcript - RNR Q3 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 Third Quarter 2023 Earnings Conference Call and Webcast. After the prepared remarks, we will open the call for your questions. Instructions will be given at that time. 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 third-quarter 2023 earnings conference call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer. First, some housekeeping matters. Our discussion today will include forward-looking statements, including new and updated expectations for our business and results of operations following the Validus transaction. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning 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 CEO

Thanks, Keith. Good morning, everyone, and thank you for joining today's call. I'd like to begin today by highlighting two significant accomplishments. The closing of the Validus acquisition and our overall strong performance in the third quarter. Both are a direct outcome of the disciplined implementation of our strategy. This has provided us the clarity of focus and consistency in execution necessary to seize the many opportunities that have presented themselves this year. Beginning with Validus, since announcing our planned acquisition in May, many teams have been working diligently across multiple workstreams. Our collective goal has been closing the transaction as quickly as possible. It is a testament to the team's hard work that we were able to get this all done by November 1st. I would like to express my gratitude to everyone at AIG, Validus, and RenRe who contributed to this outstanding achievement. Bob will walk you through the financial details. Before he does, however, I would like to reflect on how the Validus acquisition accelerates our strategy and provides us a competitive advantage. Adding Validus to our existing platform makes us a leading global P&C reinsurer, positions us to be the premier broker market for P&C reinsurance. Adds further scale and diversification, provides efficient growth in attractive lines at a highly favorable point in the market cycle and further increases our access to risk by providing new customers, lines of business and platforms to access new geographies. It enhances the economic outcomes for each of our three drivers of profits. Deepens our relationships with AIG, one of the world's leading insurance companies through this win-win transaction. In return, they are making significant investments in our common equity as well as our capital partner businesses. And finally, it adds valuable new tools, talents, and capabilities by combining two of the best teams and portfolios in the industry. In short, acquiring Validus further extends what we have already achieved organically this year. We'll now review the Validus underwriting portfolio in greater depth. As a result, we're increasingly excited about this transaction for several strategic and financial reasons. First, we believe that there is upside potential to our original estimate of $2.7 billion of incremental premium. We have communicated this to our customers and brokers, and their feedback has been consistently positive. Second, we believe we can support the Validus underwriting portfolio with 30% less capital. This is due to the efficiency of our integrated system, as well as the support of our capital partner balance sheets. As our flexible capital structure and focus on reinsurance make us the ideal counterparty for AIG. Going forward, AIG's investment in us means we can jointly benefit from the underwriting portfolio's future performance. Third, we are obtaining a large investment portfolio supporting a pool of reserves through which we have limited exposure. This is due to a reserve development agreement with AIG. The current interest rate environment is more than 100 basis points higher than when we announced the deal. As a result, the Validus investment portfolio will serve as an even stronger tailwind to profitability. Finally, we have always been impressed by the quality of people at Validus; the talent pool runs deeper than we even expected. Consequently, we extended offers for either full-time or transition roles to many Validus employees. Successful integration of the Validus business will be a focus over the next year. Since May, our team has been working closely with Validus Re and AIG to understand Validus Re's operating model, processes, and systems. Our goal is to quickly bring our two companies together and to operate as one entity. I'm pleased to say that we have made significant progress towards this goal. Specifically, by this Monday, the Validus portfolio will be represented in our underwriting system, REMS. Actually, I just received an email that that's done already. Then all underwriters will have access to the combined portfolio with the same view of risk. We have already implemented several technology solutions to allow teams to easily collaborate across legacy systems and data, and many of our employees have already moved into shared offices so that they can sit together. All remaining moves will be completed by the end of the week. In summary, yesterday, we delivered on our promises regarding the acquisition of Validus Re. We are privileged to have had the opportunity to acquire such a high-quality asset from AIG. Now I want to thank Peter Zaffino and his leadership team who were integral to the success of this transaction. We are pleased to be associated with AIG and look forward to a long and successful relationship. In short, I could not be more excited about our future. Shifting now to our strong financial performance in the third quarter. We earned over $420 million of operating income. This represents an operating return on average common equity of 25%. Year-to-date, we earned $1.2 billion in operating income and delivered a 28% return on equity. This is an impressive outcome for two reasons. This performance was not driven by any one-time factors or unusual circumstances. Rather, each of our three drivers of profit made solid contributions to our financial performance in ways that are likely to persist. And we obtained these results even with catastrophe losses and the financial drag from pre-funding the Validus acquisition. This outcome is before including the bottom-line contribution Validus will bring. We have built a solid financial foundation upon which we will now overlay Validus. This will further bolster each of the three drivers of profit. As a result, I am excited about our opportunities to create shareholder value next quarter, next year, and into the foreseeable future. That concludes my opening comments. I'll provide a more detailed update on our segment performance at the end of the call. But first, Bob will discuss our financial performance for the quarter.

Robert Qutub, Executive Vice President and CFO

Thanks, Kevin. And hello, everyone. As Kevin said, this was another strong quarter, both financially and strategically. Financially, we delivered net income of $194 million, operating income of $422 million, and an annualized operating return on average common equity of 25%. These operating results are strong on their own but reflect a 5 percentage point dilution from the additional capital we raised for the Validus acquisition. With the closing of the transaction yesterday, this capital has now been put to work. Our three drivers of profit: underwriting, fees, and investments continue to contribute significant income for our shareholders. Strategically, we were pleased to close the Validus acquisition yesterday. This transaction builds a solid foundation for the continued execution of our strategy. It is immediately accretive to each of our three drivers of profit, as well as our book value per share, operating earnings per share, and operating return-on-equity. Today, I would like to highlight a few key financial takeaways from the quarter before I discuss our results in more detail. I will also discuss the Validus transaction, including how we'll report it in our financials, and the impact on our fourth-quarter results. And finally, I'll provide an update on the recent Bermuda corporate income tax proposal. Starting with some highlights. First, we delivered a solid underwriting performance in the quarter with a significant level of cat activity, reporting a combined ratio of 78%. While this was a quieter third quarter than we experienced in the last three years, industry cat loss estimates in the US are approaching $20 billion, exceeding the 10-year median. Much of the industry loss this quarter came from secondary perils, and our results are benefiting from the higher rates and attachment points Validus Re required in 2023. Second, fee income of $65 million more than doubled Q3 last year and is up 14% from the second quarter of this year. This reflects increased partner capital under management compared to last year, and higher performance fees from strong underwriting results. Third, retained net investment income for the quarter was $217 million. This is almost double a year ago and up 14% from the second quarter of this year. This reflects our continued rotation in the higher coupon security, as well as higher invested assets related to the capital we raised for the Validus acquisition. And finally, we believe we are in a strong capital position, even after paying for the Validus acquisition. As we approach the January renewals, we're focused on deploying our capital into profitable business opportunities in this attractive market. I'll now move on to a more detailed discussion of our third-quarter results, beginning with the first driver of profit: underwriting. As mentioned, we delivered a 78% combined ratio with solid current accident year results that incurred in a quarter with catastrophes. Across both segments, we also had 9 percentage points of favorable development. Year-to-date, we're running at a 79% combined ratio even with estimated industry losses approaching $100 billion and record industry losses from severe convective storms. Overall, gross premiums written in the third quarter were down 27% and net premiums were down 22%. I'll cover this in more detail through my comments. But the reduction primarily relates to lower reinstatement premiums in our property book due to lower catastrophe activity, the reduction in mortgages due to the nonrecurring deals last year, and active cycle management in our casualty segment. Over the last several quarters, we have told you that we have been allocating our capital to lines such as property, excess-of-loss, and specialty, where we're seeing the best returns. Year-to-date, property catastrophe net premiums written are up 18% or 40% without reinstatement premiums and specialty is up 38%. Now, moving to our property segment, in the third quarter, it's not a significant renewal period for our property catastrophe book. While catastrophe net premiums written declined by $229 million, $208 million of this reduction, or 91%, is related to reinstatement premiums. Last year, Hurricane Ian resulted in significant losses and significant reinstatement premiums, which did not repeat this quarter. The balance of the reduction relates to the timing of ceded contracts. In line with previous quarters, we have continued to reduce risk in our other property business. This line continues to benefit from significant rate increases. And although, net premiums written were down 6%, risk is down substantially more. We reported an overall property combined ratio of 53% with a current accident year loss ratio of 46%. As I mentioned previously, there was significant cat activity in the quarter. Large loss events had an overall net negative impact of $78 million on our consolidated results, $57 million of this net negative impact came from the Hawaiian wildfires and Hurricane Idalia. Despite this cat activity, other property performed well, and with a combined ratio of 78%. The current accident year loss ratio was 66%, with large losses contributing 12 percentage points to this ratio. Overall, for the property segment, we reported 19 percentage points of favorable development. The property acquisition ratio was elevated compared to the prior year period, driven by the impact of reinstatement premiums last year. Otherwise, the ratio would have been down. Moving now to our casualty and specialty portfolio. Net premiums written were down by $149 million or 13%. This included $100 million of one-off mortgage transactions from last year, which earn out over the next several years. In addition, we continue to manage the cycle to grow in attractive areas and reduce on deals that do not meet our return hurdles. As a result, growth in other specialty was offset by reductions in professional liability. Our casualty and specialty combined ratio was 97%, which is slightly elevated compared to recent quarters. This was driven by specialty losses, which contributed 3 percentage points to the combined ratio. This primarily relates to the marine and energy book, which we have been growing at very attractive returns. However, it is exposed to catastrophe-like volatilities from time to time. We reported 1.4 percentage points of favorable development in the casualty and specialty segment, and continue to feel confident in the robustness of our reserves despite the inflationary environment. Year-to-date, the casualty and specialty combined ratio is 94%, and we continue to expect a mid-90s combined ratio after adding Validus. Moving now to fee income in our Capital Partners business where fee income increased to $65 million, driven by strong management and performance fees. Management fees were $44 million, up 78% from the third quarter of 2022, reflecting the increase in capital managed in our joint ventures. Performance fees were $20 million this quarter, reflecting continued strong underwriting performance. Year-to-date, redeemable non-controlling interest increased by $1.2 billion. More than half of this increase relates to the net capital inflows in DaVinci and Medici, which should continue to be a positive accelerator for fees. Moving now to investments. While retained net investment income is $217 million, nearly double the third quarter of last year. Our retained yield to maturity of 6% continues to drive up the net investment income return, which is 4.9% this quarter. Our investment portfolio remains defensively positioned. In our retained portfolio, we have reduced exposure to credit and equity and shortened duration to 2.6 years, which is down from 3.2 years at the end of 2022. This quarter, rising rates led to retained mark-to-market losses of $220 million. Retained unrealized losses in our fixed maturity investments have gone up to $585 million or about $11.43 per share. We expect this to accrete to par over time. Turning briefly now to expenses, the operating ratio ticked up by approximately 1 percentage point, which was the result of lower reinstatement premiums. On an absolute basis, increased expenses reflect continued investments in our platform to support our growth. Moving now to the Validus acquisition, as Kevin said yesterday, we were very pleased to close the Validus acquisition, purchasing $2.1 billion of unlevered shareholders' equity for $3 billion. As a reminder, this is $1.2 billion lower than Validus' year-end 2022 equity due to the capital efficiency we bring to this business by renewing our flexible platform. The important point here is that we're acquiring a high-quality underwriting portfolio that is supported by $4.8 billion of investable assets, and with RDA, we're only retaining 5% of the reserve risk. When I announced the Validus transaction, I discussed the benefits to each of our three drivers of profit. I'm pleased to say these benefits still stand, and in some cases have improved over the last few months. Let me take you through these drivers and how they will impact our fourth-quarter results. Starting with underwriting. The Validus portfolio has a similar composition to our own. The market continues to be very attractive, and we believe that there is upside potential to the $2.7 billion incremental premium figure that we provided in May. For both casualty and property, we expect performance to be similar to our own as we renew the book onto our platform. And over the course of the next year or two, we expect to merge the Validus balance sheets into existing RenaissanceRe balance sheets. Moving to fee income. Fees will benefit from the increased capital we're bringing through our joint ventures to support our growing underwriting portfolio. This includes a substantial expected investment by AIG into our Capital Partners business, effective on January 1st. For the fourth quarter, we continue to expect a similar level of management and performance fees as in the third quarter, absent any large losses. And finally, net investment income. We are very comfortable with the composition of the Validus investment portfolio. Since we announced the deal, yields have continued to increase, which should be a tailwind to net investment income in the future. For the fourth quarter, we expect retained net investment income of about $260 million. We expect that our results will benefit further from significant synergies related to the Validus acquisition, which should further optimize our operating leverage. These synergies will be actioned in the first year and realized over the coming years. As we continue to integrate Validus, we expect corporate expenses will be elevated due to transaction-related expenses. In the fourth quarter, these will be significant, reflecting one-time charges. Through 2024, we expect corporate expenses will be lower than Q4 but remain elevated due to ongoing integration costs. And as a reminder, we do not include transaction-related expenses in operating income. Now moving on to how we plan to report the Validus transaction in our financials. As we discussed, we are paying a premium of $900 million over shareholder equity for Validus. While we are still settling in on the exact number, we expect that the majority of this premium, approximately 90%, will be amortized over 10 years, with nearly 40% of that amortizing by the end of 2024. We plan to exclude the impact of purchase accounting adjustments from operating income. This includes the amortization of the net value of business acquired and other purchase of tangibles. Our goal is to ensure that our operating income reflects the performance of our business. GAAP accounting does not distinguish between intangible amortization of true capitalized expenses and those that arise on purchase accounting adjustments. We believe that by removing the impact of purchase accounting from operating income, we will better reflect the performance of our business, provide more comparable metrics to that of our peers, and ultimately offer greater transparency of our core results for shareholders. Purchase accounting will also impact other metrics such as the combined ratio, and we plan to provide additional disclosures so that you can see our performance without the impact of these adjustments. Finally, let me provide an update on the Bermuda corporate income tax proposal. The Bermuda government recently proposed a 15% corporate income tax effective 2025 in response to the OECD global minimum tax rules. The Bermuda government has taken a collaborative approach and is seeking feedback on their proposal. While we expect that we may pay more taxes, we believe that being based in Bermuda will still create a competitive advantage for us for a variety of reasons, including tax. In conclusion, this is a very exciting day for us as we move forward as one company after the Validus acquisition. We reported strong results in the third quarter with continued contributions from all three drivers of profit. We continue to demonstrate the power of our platform to deliver superior returns. And as we look forward, we believe that Validus will provide additional benefits to our shareholders across all three drivers of profit. And with that, I'll turn it back to Kevin.

Kevin O'Donnell, President and CEO

Thanks, Bob. As usual, I'll divide my comments between our Property and Casualty segments. Starting with Property. Our Property segment performed well this quarter, delivering over $350 million in underwriting profit. It also demonstrated its resilience and ability to produce attractive loss ratios in both property cat and other property. Going forward, each will benefit from the addition of the Validus portfolio. Property's strong performance this quarter is against a backdrop of continuing catastrophe activity. This cat activity has had a much smaller impact on us than it would have had in previous years. This is due to the underwriting changes we have made, namely requiring higher rates and attachment points. Catastrophes this quarter were a mix of large events and secondary perils. Beginning with Hurricane Idalia, which made landfall on the Florida Peninsula on August 29th as a strong Category 3 hurricane. This storm impacted a sparsely populated area of the state, which should limit industry loss to low-single digit billions of dollars. Additionally, the Hawaiian town of Lahaina was impacted by severe wildfires in August. Industry loss estimates around mid-single digit billions still persist. And finally, there were a handful of other events in the third quarter. These included ongoing severe convective storms in the United States, floods in Hong Kong, and a tornado that hit a Pfizer plant in North Carolina. Over the course of 2023, natural catastrophe activity has persisted. Although the nature of these events has differed from 2022, we have experienced increased prevalence of smaller events and secondary perils. Our scientists at RenaissanceRe Risk Sciences believe that weather events have been influenced by a combination of slowly evolving large-scale factors. These factors include specific to El Niño, short-term volatility due to the transition to El Niño conditions, and enhanced energy in the system due to climate change. Moving now to our Casualty and Specialty segment, which is also demonstrating resilience. This segment experienced some current year loss activity in the quarter. Year-to-date, however, it has returned an attractive underwriting profit and strong results. This is the positive impact of portfolio shaping. We have emphasized classes with the most attractive returns while managing the cycle of returns that are more challenged. Breaking this down by class of business. In traditional casualty, our portfolio is weighted towards the most attractive years of 2020 to 2022 when rates exceeded trend. More recently, rates have been moderating. Consequently, we continue to manage the cycle. We do this by working with customers to differentiate based on performance, focused on the best deals, and cutting back on less attractive business. In Specialty, we continue to believe that pockets of this business remain attractive following a step change in terms and conditions in 2023. That said, we will remain disciplined as we approach these risks against the backdrop of increased geopolitical uncertainty. And in credit, we continue to see strong results while managing exposure across the portfolio. With the inclusion of the Validus credit business, portfolio optimization will become an increasing focus. Moving now to the upcoming January 1 renewal. This year we head into the renewals in a favorable position. In our Property business, last year renewals were one of the most dislocated in recent memory. Over the course of 2023, we achieved a significant step change in both rates and terms and conditions. Our customers' expectations are now better aligned with the market conditions and the reinsurance budgets are likely to have increased. Looking at the market overall, inflation, climate change, and geopolitical instability have been consistent drivers of exposure. Industry-insured losses in 2023 are likely to exceed $100 billion once again. This puts more pressure on demand for reinsurance. At the same time, we've seen very little new capital entering the system. There will be no reinsurance class of 2023 and minimal third-party new capital. As Bob explained, we have a robust excess capital position and are prepared to meet some of the additional demand. That said, the Validus acquisition supports us with considerable optionality. We have substantial growth already built-in; the size and strength of our combined portfolio allow us the flexibility to remain disciplined. This applies equally well to Casualty. As I've said multiple times, we think about the casualty business cycles over an approximate 10-year timescale. The years prior to 2020 resolved; consequently, we were cautious taking risks in this area. The years from 2020 to 2022 saw rates far exceeding trend in many lines. We scaled up quickly, creating a deep reservoir of what we anticipate being favorable business. Throughout 2023, we have been exercising discipline and stepping back from business that does not meet our return hurdles. As in property, the Validus acquisition provides us with optionality in casualty. We are obtaining a large portfolio of well-priced risk guaranteeing growth while providing us the flexibility to be otherwise selective. Moving now to our ILS business. It was a quiet quarter in Capital Partners. We continue to prepare for the Validus integration. One of the many advantages Validus will bring us is growth in our Capital Partners business. This is because as our underwriting portfolio renews next year, we will share proportionately with Capital Partners. AIG remains on track to invest $500 million in aggregate into DaVinci and Fontana. This investment is expected to be facilitated through a combination of selling down our shares and injecting new capital to support growth. Our Capital Partner business is performing well, and the fees it generates continue to serve as a capital-light, low-volatility source of earnings. In closing, we reported another strong quarter in what so far has been one of the most successful years to date, both strategically and financially. Strategically, we closed the Validus acquisition yesterday. We now expect it to deliver value at or better than originally modeled. Financially, each of our three drivers of profit are positioned to continue delivering results, particularly when considering the added benefits of Validus. Consequently, I couldn't be more excited about our potential for future performance and the ability to create value for our shareholders. With that, I'll turn it over to questions. Thank you.

Operator, Operator

Our first question will come from Elyse Greenspan with Wells Fargo. Your line is open.

Elyse Greenspan, Analyst

Hi, thanks. Good morning. My first question was on the January 1 renewals. Kevin, just looking for more color on how you think rate increases could trend at 1/1 really on the cat side on a risk-adjusted basis, assuming, I guess, losses for reinsurers given where we are right now are modest for the rest of the year?

Kevin O'Donnell, President and CEO

Thanks, Elyse. I will break down my answer by discussing RenRe's current position and the overall market conditions. With the closing of Validus, RenRe is in a much stronger position heading into this January 1 renewal compared to last year. As I've mentioned, we are already unified as one company, and all Validus risk has been integrated into our systems. By the end of the week, all Validus employees will be working alongside us. We have been in discussions with our clients and brokers, so we are entering this renewal as a unified entity in a favorable market. Last year, we talked about the significant changes needed and achieved during the year. Starting with the Property segment, we anticipate a much easier renewal process this year compared to last due to the progress made. Buyers have adjusted their expectations. One factor that did not come to fruition this year was the increase in demand we were expecting, but we believe that demand will emerge in 2024. Consequently, supply should remain stable since there hasn’t been a rapid influx of capital into the industry. We expect this to create a healthy competitive environment for pricing. Overall, we foresee a positive rate change that is significant but manageable, especially compared to last year's disruptive changes. Now, let's discuss the casualty perspective.

Elyse Greenspan, Analyst

No. Keep going, Kevin. Thank you.

Kevin O'Donnell, President and CEO

Yes, sure. So from the casualty perspective, we've talked before that we look at casualty over a 10-year rolling basis. Most lines of business right now on an underwriting year basis are providing strong returns to capital, but more rate is required because of the prior year rating cycles. So we look at this market as very accretive, one in which rate is above trend, but perilously close to trend in many classes. So what our strategy will be as we're going to reward companies that are committed to increasing rates to stay ahead of social inflation, economic inflation, and overall trend. So it's really meaning that risk selection, portfolio construction, and underwriting discipline will be rewarded, which really plays to our strength. So I think that the casualty market is in a very strong place, but one in which underwriting will be rewarded, which puts us in a preferred position, property very strong, and specialty is kind of like property, where we went through a step change last year. We believe it's a strong market. We think there's good adequacy in most classes. Not all classes within specialty rates are above-trend. So again, underwriting discipline and underwriting expertise will be rewarded, which should play strongly to our hand.

Elyse Greenspan, Analyst

Thanks. And then my follow-up, Kevin, you mentioned incremental demand. I know, right, we're still a couple of months out from the 1/1s. But if you had to peg it, how much incremental demand do you think we could see? And do you think that will all come at January 1 or will that be something that we'll be talking about throughout 2024?

Kevin O'Donnell, President and CEO

It's a great question. It will come throughout the course of 2024. I think it's too early for us to put a number on what's available. I think the one important point I would highlight is that new demand will come at the more remote layers. People will top-up their programs; I think it will continue to be difficult to reduce retention. With that, there will be more peak exposure coming. So there'll be some additional supply constraints just because of the concentration, which will add to the overall positive rate environment. So, I feel we are in a good position with the Validus portfolio coming on, with our capital position, with Premier, with Top Layer playing into this specifically. And it should help the overall portfolio, but it's difficult to calibrate exactly how much of that demand will come into the market, but it will be our expectations it's in the billions, single-digit billions.

Operator, Operator

Thank you. Our next question will come from Yaron Kinar with Jefferies. Your line is open.

Yaron Kinar, Analyst

Thank you. Good morning. I would like to follow up on the previous question, focusing on the supply side. I'm trying to understand why we haven't seen new entrants in the Insurance-Linked Securities market, which seems to be a constraint. At the same time, you're discussing a 25% return, which actually seems low considering the Validus capital, as it is awaiting deployment into Validus. If I consider this and look at others offering returns above 20%, it suggests that the $60 billion in additional generative capital from established reinsurers throughout 2023 is notable. So, my question is whether you believe that the additional supply will not surpass the incremental demand in 2024.

Kevin O'Donnell, President and CEO

It's a really good question. The demand is not proportional to the portfolios that have already been built. The demand likely coming to the market, which would drive the additional supply from retained earnings, will focus on balanced portfolios due to peak needs that primary companies must address. This capacity can help meet some of the demand, but it cannot fully accommodate what is anticipated in the market, particularly the top layers. If you look at our actions this year, this is precisely why we acquired Validus. We raised funds over the summer and these funds were fully deployed as of yesterday. Our portfolio is completely diversified, similar to its state before the acquisition, and fully deployed. This level of deployment cannot be quickly achieved through growth alone. Therefore, as we look ahead, our expectations for market changes in 2024 align with our forecasts and the strategy behind acquiring Validus on a diversified basis with the capital raised. It's crucial to acknowledge our current market position.

Yaron Kinar, Analyst

Got it, thank you. And then maybe shifting gears to investments. So, Bob, I think you'd referenced $260 million of expected retained NII in the fourth quarter. Does that contemplate the reallocation of the investment portfolio? Obviously, you are holding a lot of liquidity and risk-free essentially waiting for the Validus deal to close. How quickly can you reallocate that into maybe a more in-line with longer-term expectation investments and how much of a lift do you get from that?

Robert Qutub, Executive Vice President and CFO

That's a good question. We've been addressing that. As we discussed, we had the ability to reposition some of the portfolio to the $500 million. We could direct payments to some shorter-term securities, primarily T-Bills and short-term notes. We had the ability to position the portfolio before making that $500 million allocation. The $217 million will decrease when we redeploy the $1.4 billion, slightly adjusting the $3 billion that was being invested. However, we already saw significant upside. Five months ago, we were at 2% after repositioning the portfolio to align with shorter durations. This should take us up to $260 million. Therefore, $260 million better reflects the run rate for this quarter, and as we move into 2024, we can expect that to continue to rise.

Yaron Kinar, Analyst

And that continued look, is that just coming from higher interest rates or also from the reallocation of the portfolio?

Robert Qutub, Executive Vice President and CFO

Our current new money rate is 6%, and we are approaching that figure. This quarter, we have seen an upside of 4.9%, with a 4.7% yield on our book. We expect this to keep growing as interest rates fluctuate, but we are still benefiting from the current levels.

Yaron Kinar, Analyst

Thank you.

Operator, Operator

Thank you. Our next question will come from Josh Shanker with Bank of America. Your line is open.

Josh Shanker, Analyst

Yes. Thank you very much. Given the Fed's comments yesterday and whatnot, maybe either there's going to be an ending to the inverted yield curve and a steepening. Does this change at all how you orient the investment portfolio? Would you have a smaller allocation to short-term and be willing to go out to three or four years or what's normal in the portfolio income securities that are currently maybe three months in duration?

Kevin O'Donnell, President and CEO

That's a great question. We have a lot of flexibility in our portfolio, and the team is exploring the possibility of extending our duration right now. We've noticed fluctuations in rates, but it's a fine balance considering the Federal Reserve's statements and the still strong economy. For those in the bond market, it seems that some duration has been captured with the current yields on the 10-year and 5-year bonds. We're actively assessing this, Josh. It's a relevant question. Extending our duration will take time; we'll approach it gradually.

Josh Shanker, Analyst

And so, Bob, when you have a phone with us after this call here and you have all this $4.6 billion in investments, you've just received from AIG. How are you going to shape that rate now, and what's current investing in a bunch of securities that AIG is choosing? What are you going to do with that portfolio in 45 minutes?

Robert Qutub, Executive Vice President and CFO

On the portfolio, a lot of it has been pre-positioned. We removed assets from a $500 million allocation and put them into T-Bills. The fund administrator handled that for us. We decided against holding single-asset backed securities and eliminated most of the things we disliked from the portfolio. Now, the portfolio closely resembles our preferences. This gives us a distinct advantage, and it is a relatively short-term portfolio, with a duration of just under three years, which aligns with our strategy.

Josh Shanker, Analyst

And if I get one more in, any guidance. I'm having a big boost in the investment portfolio for the last two months of the year. Sequentially, what that's going to do to net investment income comparing Q4 2023 to Q3 2023.

Robert Qutub, Executive Vice President and CFO

Two factors in that. The $3 billion that we put out there for Validus will come out of our existing portfolio and be refunded back in by $4.5 billion. So you're going to get a net increase of about $2 billion. And that's why you get up to that net change is about $40 million to $260 million. That’s how we get there.

Josh Shanker, Analyst

Okay. Thank you very much.

Kevin O'Donnell, President and CEO

Thanks, Josh.

Operator, Operator

Our next question will come from Meyer Shields with KBW. Your line is open.

Meyer Shields, Analyst

Great, thanks. Kevin, in your comments, you mentioned that you didn't really see an uptick in demand for cat cover this year, but you expect it next year. Is there something you could flush out why you think that will play out that way?

Kevin O'Donnell, President and CEO

I think we may have even touched on it once or twice in our calls earlier. Many buyers were surprised about the discipline for the change in rates that was required by reinsurers at the beginning of last year. With that, they ran at a wallet for demand that they already had identified that they wanted to purchase. I think as they are more prepared for this renewal, having seen the rate stick throughout the year, they'll have a budget process that is more flexible to include the wallet to pay for the new limit.

Meyer Shields, Analyst

Okay. That makes sense. Second question, I guess one area where we have seen some capital come in is in the cat bond market. And I was wondering, does that have any implications for Vermeer?

Kevin O'Donnell, President and CEO

You know, I think the capital market has had a good year. I think it's probably slowing a little bit for the pace of new money coming in. But it's something that Vermeer is designed to be an efficient vehicle to compete with both cat bonds and traditional players. So the more activity tends to be at the Vermeer international at the top layer type level. But we continue to have great success deploying Vermeer. In lieu of people issuing cat bonds, but also alongside people who have chosen to issue cat bonds as well.

Meyer Shields, Analyst

Okay, understood. Thank you.

Kevin O'Donnell, President and CEO

Yes.

Operator, Operator

And our next question will come from Alex Scott with Goldman Sachs. Your line is open.

Alex Scott, Analyst

Hi. First one I had for you is just sort of high-level on growth as we look across property and casualty. It seems like at least relative to one of your peers who recently reported, there's a little more restraint around where and how you're willing to grow. And, yes, I just wanted to understand what you are seeing in the environment? What are the underlying drivers of those decisions? Is it seeing more opportunity at 1/1, is it sort of to do with the Validus transaction, what are the underlying reasons for that if you could?

Robert Qutub, Executive Vice President and CFO

Yes, let me start off, and then Kevin may add a couple of comments. We've seen growth all year. The third quarter is a difficult quarter when we look at it on a year-over-year basis because most of our renewals are done by the end of the second quarter. Think about 1/1 over half our growth. That's why in my prepared comments, I really wanted to point you back to the year-to-date number. Year-to-date, property cat has grown by 40% once you take out the reinstatement premiums. Specialty, which again, when we look at the rates had a trend we saw that grew by 38%. So we saw the opportunities over the course of this year, but we also were selective in professional lines; we dropped by 30%. So we made choices that were out there, and we have the opportunity in the market to show that growth. And we've had a really good opportunity throughout the course of the year. That's why we pointed it back to full-year.

Kevin O'Donnell, President and CEO

Yes, I think Bob is absolutely right. The year-to-date numbers look great. It's also important that we positioned the portfolio for yesterday. What happened yesterday is we incorporated the Validus book into a portfolio that was optimized for its acceptance. From an underwriting perspective, that book is now part of REMS, and we reflect it through in-force gross written premium. We believe that moving forward, the gross premium we will retain is $2.7 billion with potential for growth. The actual portfolio on an in-force basis that we integrated into REMS yesterday was $3.7 billion. In-force premium refers to the premium amount that underwriters can engage with, which is embedded in the Validus portfolio. Thus, we have significant flexibility when discussing the $2.7 billion. We have grown tremendously by adding $3.7 billion of diversified premium to our capital base yesterday. Therefore, we cannot consider a quarter without mentioning Validus, as a lot of our efforts were focused on being ready to accept that portfolio and to operate effectively today.

Alex Scott, Analyst

Yes, that all makes a lot of sense. Second one I had is, I guess, just on new capital formation in the market, any observations around what you're seeing headed into year-end and how impactful that may be to the supply and demand dynamic. And I guess, sort of in the same vein, any commentary around your third-party vehicles and ability to go out and get capital to take advantage of rethinking?

Kevin O'Donnell, President and CEO

Sure. One comment is that I don't believe there will be a class of 2023, as it’s quite late in the cycle for that capital to come in and certainly it won’t be operational by January 1. If we were raising equity, we would have already done it to engage in meaningful conversations with clients and brokers. There might be an equity raise before the year ends, but from our perspective, it's late. From an ILS perspective, we operate as a different capital partners business than others. Most of our vehicles are rated, so issues like collateral that impact the market don't affect our platform. We underwrite all the risk and are the largest investor in DaVinci, spreading risks across our other vehicles, which gives investors a sense of security in the underwriting at RenRe. The vehicle structures offer more flexibility than traditional ILS platforms, and many investors choose to invest in more than one vehicle for that reason. We are not limited in our growth of ILS; instead, we are optimizing our platform for ILS opportunities while retaining some risk on our balance sheets. I believe the rest of the market will struggle to grow significantly without disrupting our strategy.

Alex Scott, Analyst

Very helpful. Thank you.

Brian Meredith, Analyst

Yes, thank you. Kevin, I'm just curious. There's been some other companies have talked about some potential significant opportunities in the casualty reinsurance marketplace. Could you kind of talk about what you think from that perspective?

Kevin O'Donnell, President and CEO

Yes. I think from a reinsurance perspective, I think we're in a strong position. I think our capacity is strongly needed coming in with the bigger portfolio with Validus; we're more important to bigger clients. We believe that there is increased recognition for the required rate at the primary level that is near to the benefits proportional. And reinsurers seem to be developing disciplined press on ceding commissions. So when I look at it, I think not every line-of-business is equally attractive. Not every client is equally skilled in leveraging into those attractive markets. I think we're in the best spot to grow with the most skilled cedents in the most preferred lines. There's been a lot of discussion about rate change in D&O and professional lines. And I think all of those things are things that we are looking at carefully. But I think the platform that we've built and the scale that we have puts us in about a stronger position as one can be going into the renewal.

Robert Qutub, Executive Vice President and CFO

When I said we just did, that's the email I received before coming into the call. I must say I'm extremely proud of the team for being able to turn this around so quickly. We are shifting not only Validus but also RenRe's risk-sharing to optimize DaVinci, Fontana, and our own balances. It's not a straightforward matter of taking 50% of the property cat from Validus and moving it; we are also adjusting what is coming from RenRe Limited. I would say Fontana will grow, while DaVinci will grow by a smaller percentage. RenRe will reduce its share with DaVinci, and Fontana will roughly be 50-50. That's without reading the email, so more details will follow, but that's where we believe the optimizations will be.

Kevin O'Donnell, President and CEO

We have retained earnings in AIG coming in. This is a control that we manage, which serves as a lever in our favor. When you examine the capital generation at Limited and what will be produced at DaVinci and Fontana, we expect to maintain a relatively stable position regarding additional raises with DaVinci, possibly increasing slightly with Fontana.

Operator, Operator

Thank you. That does conclude today's Q&A portion. I would now like to turn the floor back over to Kevin O'Donnell for any additional or closing remarks.

Kevin O'Donnell, President and CEO

Well, thank you. I would say that the last few days have probably been my proudest and most exciting days at Renaissance. We've seen the Validus portfolio come over. We are delighted to welcome the new team; every diligence we did reaffirmed the quality of the portfolio and the opportunity to bring shareholder value. We're looking at accretive markets in 2024, and I think we are in a very enviable position as we think about servicing our clients and bringing shareholder return over the course of 2024. So thank you for your time, and we look forward to reporting back.

Operator, Operator

Thank you, ladies and gentlemen. This concludes the RenaissanceRe third Quarter 2023 earnings call and webcast. Please disconnect your line at this time and have a wonderful day.