Earnings Call Transcript
RENAISSANCERE HOLDINGS LTD (RNR)
Earnings Call Transcript - RNR Q4 2022
Operator, Operator
Good morning, and welcome to RenaissanceRe's Fourth Quarter and Year-End Conference Call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer. First, some housekeeping matters. Our discussion today will include forward-looking statements. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now I'd like to turn the call over to Kevin.
Kevin O'Donnell, CEO
Thanks, everyone, for being on the call. We apologize for the technical issues. I will repeat my comments to ensure everyone receives the same information. I’m pleased to report our results and appreciate your understanding in hearing them again. We finished 2022 strongly with excellent financial results in Q4, showing solid performance across segments, favorable developments, and strong growth from investments. I want to start with a follow-up on my remarks from last quarter about the changes we aimed to implement to provide an increased margin of safety for investors amid significant catastrophe losses, which topped $130 billion in 2022, along with ongoing climate change effects, inflation, and increased secondary peril occurrences. I’m happy to report that we achieved all of our ambitious goals during one of the most critical renewals we've had. A significant change was made in property reinsurance pricing, which has led to a necessary reset in how insurers and reinsurers interact. This shift promises more appropriate risk-adjusted returns for investors while ensuring reliable access to high-quality capacity for customers. The market's structural transformation has created a more stable long-term equilibrium that benefits both investors and customers. Our renewal in the casualty business was successful, with rate increases in many specialty areas and progress in reducing ceding commissions in traditional lines, which decreased by about 1 percentage point on average. I'll provide more details about the casualty segment later. Looking at our 2022 results, I like to address two key questions at the end of each year: How did we perform financially, and have we executed our strategy effectively? First, we had a strong fourth quarter from both GAAP and operating perspectives, with an operating return on equity of 30%. For the year, we reported over $300 million in operating income, representing a 6% return on common equity. I want to clarify that I view a 6% return on equity as insufficient; we need superior long-term returns to justify our volatility. However, this return is significantly better than our results from 2021, where we nearly broke even despite similar catastrophe losses. This improvement is due to various positive factors benefiting our business, including increased reinsurance rates, higher investment income, and growth in our capital partners business. We are also experiencing better operational efficiency from our investments aimed at scaling our business. Bob will elaborate further on these advantages in his comments. In this quarter, we demonstrated the benefits of increased diversification by achieving solid results despite substantial negative effects from large catastrophes. With the reset in underwriting at the start of the year, we expect to face a much smaller loss if similar events occur this year. We believe that in 2023, our financial performance will continue to improve as we get paid adequately for the risks we take, earn significantly more from our investments, and further expand our fee-generating capital partner business. Now, regarding the effectiveness of our strategy, I would say the word that defines it in 2022 is consistency. We remain committed to being a large global P&C reinsurance company and a top underwriter of property catastrophe risk. We chose this direction because it represents a critical part of the insurance value chain where we hold a competitive edge. Within the insurance landscape, we believe this path will allow us to deliver superior returns to shareholders over the long term. Over the past decade, we have focused on building sustainable platforms that support long-term profitable growth, by increasing scale and diversifying our offerings, clients, and capabilities. These moves have diversified our earnings and enhanced our leverage, ensuring a leading competitive position. This strategy has given us the confidence to continue as a key writer of property catastrophe insurance. In 2022, we pushed our underwriters to optimize our property portfolio and aimed for improved profitability. This focus resulted in a successful January 1 renewal where we effectively deployed substantial and sustainable capacity to our customers. Thus, we begin 2023 with all three of our profit drivers set to perform well. I'm excited about the current environment and our position within it and look forward to creating significant value for our shareholders. That wraps up my initial comments. I will provide a detailed update on our segments at the end of the call, and now I’ll turn it over to Bob to discuss our financial performance for the quarter.
Bob Qutub, CFO
Thanks, Kevin, and good morning again, everyone. We finished 2022 with a very strong quarter, reporting operating income of $322 million, an annualized operating return on average common equity of 30%. For the year, we generated operating income of $316 million and an operating return on average common equity of just over 6%. Our performance this year demonstrates that our three drivers of profit, underwriting, fees, and investments are increasingly benefiting our financial results and making them more resilient to volatility. I will discuss our fourth quarter results in more detail in a moment, but here are a few points from 2022 that I'd like to highlight. First, casualty and specialty performance remained strong, and the segment has been consistently profitable every quarter for the last two years. In 2022, the segment delivered a consistent mid-90s combined ratio and grew net written premiums by 42%. We have been successfully growing the Casualty and Specialty segment into a profitable market. Kevin will talk more about the renewal. But as we look forward to 2023, we feel great about the positioning of this business and continue to expect a mid-90s combined ratio in 2023. Second, our Property segment broke even in 2022 despite a very active year, including a major Florida hurricane, reflecting a 7-percentage point improvement from 2021, which had a similar magnitude of industry losses. The improved performance is a result of the increased rate and tightening terms and conditions we achieved in our property book throughout 2022. Importantly, the additional underwriting capacity we took in on January 1 should continue to benefit the property book's results. Third, our Capital Partners business continues to lead the industry in third-party capital management. In 2022, we raised a total of $1.4 billion in third-party capital, with an additional $400 million effective January 1, 2023. In 2022, management fees contributed a consistent $25 million to $30 million per quarter, and we expect this to run around $35 million per quarter in 2023, reflecting an increase in capital managed primarily in DaVinci. We also expect to see performance fees start to recover midyear, absent any significant catastrophe events. Finally, retained net investment income grew considerably in the second half of the year to $144 million in the fourth quarter. Over the past few quarters, we have rotated the book into more current yields. Subject to market changes, we expect retained net investment income to continue to increase at a milder pace. Importantly, as part of our strategic positioning as a global P&C insurer, we have scaled these diversifying income streams very efficiently. Over the last five years, common equity is up 15%, and while casualty gross premiums written have quadrupled, management fees have doubled, and net investment income was up 2.5 times. As we look toward 2023, we feel we are in an excellent position with all three drivers of profit poised for continued improvement and outperformance. In addition, we organically grew shareholder equity this quarter by $440 million and have over $600 million of unrealized losses on our fixed-maturity investments that will accrete to par over time. All of this puts us in an excellent capital position. We are in a very attractive market and are excited about the many capital deployment opportunities in 2023 and beyond that should result in strong financial performance. Moving now to our fourth quarter results and our first driver of profit: underwriting. Beginning with the Casualty and Specialty portfolio, the segment results were strong again this quarter, and we reported a combined ratio of 94% for the quarter and 95% for the year. Gross and net premiums written were up 31%, continuing to reflect the growth in underlying rate improvements from prior year renewal periods throughout the year. Net premiums earned for the Casualty and Specialty segment were $975 million, up 31%. In the first quarter of 2023, we're expecting net earned premiums to be about $975 million. Turning now to our Property segment, where we had a solid quarter. This segment reported a combined ratio of 63%. The current accident year loss ratio of 54% contained 19 percentage points from large cat events, which had a net negative impact on our financial results of $84 million, about one-half of which came from Winter Storm Elliott and Hurricane Nicole, and the remainder coming from aggregates. These events impacted both property cat and for property cat, the current accident year loss ratio was 42% and included 34 percentage points from large cat events. For other property, the current accident year loss ratio was 63% and included 8 percentage points from large cat events and an additional 5 percentage points from the gas explosion. In the quarter, there was also 19 percentage points of favorable development for the property segment, primarily driven by releases on 2017 through 2021 large cat events in the property catastrophe class of business. Net premiums earned for other property were $393 million for the quarter. Going forward, we expect premiums in our other property business to decrease as we shift our focus to property catastrophe business, where we have the most attractive opportunities. Moving now to fee income and our capital partners business, where overall fees were $30 million. Management fees were $26 million, continuing to provide a steady source of income in the quarter. Starting in the first quarter of 2023, we expect management fees to increase to around $35 million per quarter, reflecting increased capital managed on our joint venture balance sheet. Performance fees continue to be depressed due to the cumulative impact of industry losses in 2021 and 2022; we expect these fees to start recovering by the second quarter of 2023. Overall, we shared $236 million of our net income with partners in our joint ventures, as reflected in our redeemable non-controlling interest. $207 million of this amount was operating income and the remainder being mark-to-market gains. Finally, on Capital Partners, as of January 1, we reduced our ownership stake in DaVinci to enable several long-term-oriented investors. Moving now to investments, where net investment income continues to have a growing impact on our financial statements. In the fourth quarter, retained net investment income was $144 million; the higher net investment income was driven by higher coupon yields as we rotated our investment portfolio, higher yields on our floating rate exposure, as well as an increase in invested assets. Over the course of 2022, retained annualized net investment income return has increased from 1.5% to 4.1%, and our new money yield, which is reflected as retained yield to maturity, has increased from 1.8% to 5.6%. As a result, in the first quarter of 2023, we expect quarterly net investment income to be about $150 million. Overall, duration has declined on a managed basis to 2.5 years, largely driven by capital increases for our joint ventures. On a retained basis, duration remains relatively flat at 3.3 years. In the fourth quarter, rebounding equity markets, tighter credit spreads, and bond accretion led to retained mark-to-market gains of $129 million. For the year, we reported total retained mark-to-market losses of $1.5 billion, principally in our fixed maturity portfolio. As I discussed last quarter, these are high-quality assets, and we expect to earn these losses back over time in two ways. First, the securities that we hold will return to par over time. And second, through increased net investment income, where we proactively sold the securities and reinvested at higher coupons. Retained unrealized losses in our fixed maturity portfolio are about $13.93 per share. Finally, turning briefly to expenses, our operating expense ratio was up by about 1.4 percentage points in the quarter. For the year, the operating expense ratio was relatively flat. The increase in absolute operating expenses reflects investments in people and the increased costs as we return to a more normal operating environment. Going forward, we expect to hold the operating expense ratio relatively flat. In conclusion, we finished the year with a very strong fourth quarter. This demonstrated the growing strength of each of our three drivers of profit; even with significant catastrophe activity in the year, we generated a 6% operating return on equity. As we look forward to 2023, we expect continued stable underwriting income from our Casualty and Specialty business. Our Property segment to benefit from increased rate and tightening terms and conditions, stable and increasing management income with upside from performance fees, and significant retained net investment income. And with that, I'll now turn the call back to Kevin.
Kevin O'Donnell, CEO
Thanks, Bob. As usual, I will divide my comments between our Property and Casualty segments. And while I touched on the success of our January 1 renewal in my opening remarks, I will primarily focus on adding more detail given our belief this renewal marks an important inflection point for our business. Starting with Property, the Property renewal was very late, with many deals not finalized until late December or even early January. Going into the renewal, we expected significant supply and demand imbalance for property catastrophe reinsurance that would drive material rate increases in the range of 50% to 100%. As the renewal progressed, cedents understood that the market would remain disciplined on price. They responded by increasing retentions, restricting coverage, and restructuring programs in order to control budgets. These changes benefited us in particular, as our underwriting expertise and flexible capital allowed us to execute in a structurally shifted market to increase profit, reduce risk, and better diversify our portfolio. Cedents' reactions also meant that limits, particularly in the U.S., were relatively flat, albeit more remote. The increased demand we anticipated was restrained by providers who were at the time unwilling to accept the additional rate that this marginal demand would require. Over time, we expect this risk to return to the reinsurance market as macroeconomic forces, such as inflation and climate change, continue to drive overall risk in the system. We will always have the most efficient capital to assume property catastrophe risk, so it should ultimately sit with us. I am very pleased with the property risks that we underwrote at January 1. As expected, we renewed business at significantly increased rates and tightened terms and conditions. Additionally, we increased allocation to property catastrophe as it became increasingly profitable relative to other properties. Regarding top line growth, we are seeing good opportunities and expect the reset on rates to persist through 2023. The January renewals are more focused on retro and international business, while the most dislocated part of the property market, U.S. risk, will mostly renew in midyear. Consequently, we expect many opportunities to deploy additional capacity in property over the next six months. As Bob explained, in addition to the growth we've already achieved, we have ample capital to deploy into a profitable market. As we expected, the retro market was highly dislocated going into the January 1 renewal with rates up materially, terms and conditions very tight, and an ongoing shift to occurrence from aggregate structures. This allowed us to build a strong inwards book of business. Against this backdrop, we had several successes on our seeded placements as well. First, we purchased more retro protection than originally anticipated, a testament to our strong relationships and consistent track record. Second, we were able to grow with our longstanding partners on our structured reinsurance products. Finally, in early January, we issued our cat bond, albeit for a reduced limit. Given current market conditions, we believe we successfully executed our gross-to-net strategy and that it materially improved the efficiency of our portfolio. Moving now to our Casualty and Specialty business. Similar to property, the January 1 renewal was an important renewal for our casualty book. At the renewal, casualty and specialty reinsurance terms and conditions moved in a positive direction across many classes of business. Dislocated markets provided opportunity for us to quote and lead profitable business. We continue to see opportunities across casualty and specialty classes. Rate increases are starting to slow in general liability lines and reducing in directors and officers liability. This follows several significant rate increases in these lines. In most cases, ceding commissions have reduced, and we maintained attractive margins. In cases where expected margins did not meet our thresholds, we scaled back our exposure. The market was very dislocated in some specialty classes, and we were able to quote significant lead lines of unprofitable business. Lines such as marine and energy, terrorism, cyber, and aviation were particularly attractive. We demonstrated leadership and achieved increased rates and retentions as well as tightened terms and conditions in these diversifying classes of business. Our mortgage, credit, and political risk business remains profitable, critically due to the structure of our portfolio and our focus on risk selection; it is also resilient to any downturn in economic conditions that may occur this year. Overall, we are confident this casualty renewal will drive sustained profitable growth. We continue to grow this book, and we have written what is likely to be our largest and most attractive portfolio to date. More importantly, as our casualty business matures, it is becoming increasingly consistent at delivering mid-90s combined ratio performance. Shifting now to the Capital Partners business, we have always taken a differentiated approach to our capital partners business. First and foremost, this is because we are recognized leaders in underwriting property and casualty risk and always approach this business as underwriters would. This means we start with sourcing desirable risk and only then seek to match it with the most efficient capital. Second, we have a long and successful track record of managing third-party capital and are always strongly aligned with our investors. Our partners know that we always stand alongside them, sharing any loss that they may incur. This provides them with the confidence to reinvest with us after large events. Finally, we offer the broadest suite of investment vehicles with both owned and managed balance sheets for every risk that we take. This includes Fontana, the only rated third-party balance sheet dedicated to casualty and specialty risk. In addition to being innovative, our vehicles are highly flexible from a capital perspective and have features allowing us to deploy capital when it is needed and return it when it is on. This allows us to navigate difficult markets as we did in 2022 and also to facilitate the liquidity needs our institutional investors demand. This differentiated approach is highly appreciated by our partners and also explains our success in raising capital in 2022 as both new and existing investors chose to trust us with their capital. Now we continue to scale our capital partners business even under the most difficult circumstances demonstrates that it is a permanent part of our franchise. We have every intention of continuing to grow it in the future to bring reliable, sustainable capital to our customers. We fully expect our capital partners business to increasingly generate low volatility fee income for the benefit of our shareholders. In closing, this quarter brought a strong end to a year marked by elevated catastrophe losses coupled with Fed-driven mark-to-market investment losses. Consequently, the January 1 renewal was one of the strongest in our history, and investment returns should be materially higher in 2023. The ongoing growth in our capital partners business should serve as the third financial tailwind. As a result, we expect to deliver material shareholder value over the course of 2023. As usual, we will now turn the call over to questions. I apologize for those that had difficulty coming on the call at the beginning. Both Bob and I will stay available after the close of the hour to make sure we answer all your questions. Thank you.
Operator, Operator
We'll now take our first question from Elyse Greenspan from Wells Fargo.
Elyse Greenspan, Analyst
Hi, thanks. Good morning. My first question is, assuming 2023 is a normal cat year, based on the book of business that you were able to compile as of January 1, what return on equity do you expect your book of business could generate this year?
Kevin O'Donnell, CEO
Thanks, Elyse. This was one of the most profound renewals, I think RenaissanceRe has ever had. We went in with very aggressive targets for ourselves, including growing the property cat portfolio, reducing risk at the low-end of the risk distribution, holding PMLs relatively flat, increasing our footprint, particularly with the addition of third-party capital. So all of those things will benefit shareholders should there be a normal cat year. One way that might be helpful to think about it is, if we just take a couple of losses last year and think of how they could affect us. If we looked at Hurricane Ian occurring in the third quarter of this year, I would expect our loss would be significantly lower for a couple of reasons. One, primary companies will need to retain more risk at the low end of their risk distribution. Secondly, we will have more rates, so more reinstatement premium coming in should there be a loss. So I think from that perspective, we would have a smaller loss. If we were to look at Winter Storm Elliott, between the increased retentions, tighter terms and conditions, and higher rates, I would expect that loss to be almost fully retained within the primary market and not be transferred to the reinsurance market, which is different from what happened last year. So it's difficult to put an exact number on it. But between substantial rate increases, the growth we've achieved, the additional profitability in specialty, higher investment returns, I would expect returns to be substantially higher should we have a repeat of 2022 in 2023.
Elyse Greenspan, Analyst
And then my second question. So you just said your PMLs are flat, I believe, right? So your exposure is probably consistent. We've heard right about retentions going higher for primary companies, right? But there's a lot of rate increases in the system. As you put it all together, how do you see the premium growth coming together just within the property catastrophe business in 2023?
Kevin O'Donnell, CEO
Yes. So about half of our U.S. exposed property cat limit is yet to be renewed. So just to kind of put it in context, I anticipate that what we achieved at January 1 will persist through the rest of 2023. In thinking about the portfolio, it was our objective to hold the tail of the distribution relatively flat and increase the probability of high returns by reducing the level of risk at the low end of the distribution. So I feel optimistic from a property cat perspective. The other thing I would say is we allocated increasing capacity to our property cat portfolio within our overall property book by adding capacity from the other property portfolio to the property cat book. So we will achieve substantial growth in the property cat portfolio. A little bit of that growth will come from us creating capacity by reducing a bit on other property. Sure. Thanks, Elyse.
Josh Shanker, Analyst
Yes, thank you. Can we discuss the casualty and specialty ceding commissions? How quickly will they be reflected in the book? And what range of basis points might we expect to see just from the acquisition cost ratio?
Kevin O'Donnell, CEO
On average, as I mentioned, it's about 1 percentage point for the casualty portfolio. First, let me discuss casualty specialty. We experienced significant growth in several specialty lines within that segment. This growth is attributed to disruptions caused by the Ukraine War, which led to elevated losses and certain property catastrophe risks, especially in the marine and energy sectors. We typically observe increased ceding commissions flowing directly through as we earn the premium. Over the next 12 to 18 months, this will differ from our usual pricing approach, allowing it to be earned more quickly. However, I do not have the figure to convert to a GAAP number.
Josh Shanker, Analyst
And say 100 basis points, I mean, look, everybody is just a spectator. It does seem like commentary is greater than 100 basis points for the industry and more broadly, maybe not where you play. Do you think 100 basis points is typical? Or is that specific to run rate?
Kevin O'Donnell, CEO
I think it's pretty typical. And I could be optimistic and point to deals where we had much bigger changes, but there are deals that have been performing better and ceding commissions were a little stickier. So I use 1% as a good macro benchmark for how the portfolio is, and it is consistent with the way I would discuss the industry.
Josh Shanker, Analyst
And where are we in terms of the commentary in that portfolio of understanding your own loss and your own risks and whatnot and using your own data to: a, set new loss picks and b, evaluate the loss picks you said in the past.
Kevin O'Donnell, CEO
So if you go back to 2006, that was an important part of the discussion for rate changes, understanding how the models have changed. It also drove the expected loss through the property market. I'll speak about our view of risk being relatively consistent this year to last year. I would say it's the normal tweaks in our model. We did not run through substantial risk changes from inflation and from climate change or other natural phenomena. We had that reasonably well reflected. So we went through our normal process. So the rate change that we achieved this year is much more similar to the risk-adjusted rate change than we would have experienced in 2006.
Josh Shanker, Analyst
Well, I guess, maybe I'm sort of talking about the loss picks in the casualty and specialty book where you said you're holding back sort of being more aggressive and being conservative because you just don't have the data yet to be super confident about using your own ability to pick the losses? And are we at the point in time where now you have the full data set and the loss picks we're going to see are based on your experience?
Kevin O'Donnell, CEO
The vast majority of it is based on our experience at this point. We are always analyzing industry metrics to evaluate the development of our own portfolio. I understand your concern about being cautious with reserves. We typically acknowledge bad news before good news, which means we wait for a significant portion of the curve to develop before we consider any positive outlook. Although this approach may not be standard in the industry, it reflects our own analysis and when we believe it is suitable to think about making adjustments.
Josh Shanker, Analyst
Okay. Given the shorter time, please. Take some other questions. Thank you for your answers.
Kevin O'Donnell, CEO
Sure.
Ryan Tunis, Analyst
Hey, thanks, good morning. I guess just a relative question, thinking back to 2006. In the years following that, I think RenRe had net ROEs of 30% to 45%. I realize there were no cat years, but even if those were normal cat years, it would have been a 20%-plus ROE business. I guess just in comparison, Kevin, like if you think about the health of the property cat business today relative to where it was in 2006. I mean, maybe linking us back to what happened at the renewal concessions that you thought might have fallen a little short of your expectations. I guess, like what are the primary differences that would make it a different ROE business today versus post Katrina?
Kevin O'Donnell, CEO
I view the January 1 renewal as more akin to what occurred in 2001 and 2002 rather than 2006. This shift is driven by a broader geographic reach, with many attractive lines and a significant number of hardening lines in the market. I don't need to compare it to 2006 because our capabilities have strengthened since 2002. While the market fundamentals are somewhat different, our capacity to generate profits from the casualty portfolio is on the rise. Our Capital Partners business has expanded significantly and continues to add value; investment returns appear robust; and the property portfolio is currently positioned at very appealing levels.
Ryan Tunis, Analyst
Got it. And again, just on the renewal, it did seem to kind of come together at the end. Any idea of just, I guess, whether it's terms and conditions or rate, some aspects of that renewal that you wish would have potentially been a little bit more favorable than they were for the industry or for Ren?
Kevin O'Donnell, CEO
Late renewals benefit us, as they occur in situations where the market hasn't fully adjusted, allowing us to create options and provide alternatives that can lead to significant rewards. We successfully facilitated numerous private placements by assisting companies in structuring their programs. The delay we observe is related to the capacity we expected to enter the market on January 1. While we did see an increase in capacity in Europe and other regions, U.S. buyers seemed to make budget-based decisions regarding their spending. Their interest in purchasing has not decreased, and what we are witnessing is a delay in capacity entering the market, which could contribute to the ongoing price stability we are experiencing. Overall, this was somewhat unexpected for us at the beginning of the year. However, I am not worried because I believe that capacity will eventually enter the market. Once that happens, we have the necessary capital and structuring capabilities to support it.
Ryan Tunis, Analyst
Got it. And then just lastly, with capital going more toward the property catastrophic business away from other property. Other property obviously has quite a bit more premium. Any indication of I guess what top line could look like next year from another property perspective?
Kevin O'Donnell, CEO
Yes. It's a deliberate change. We're seeing good rate increases in the other property portfolio, but they're coming in more slowly than the losses in the property cat portfolio. Given that, I believe we're making a smart decision on how to deploy capital in the market. I'm not particularly concerned about one being up while the other is down. Our presence in that market is very strong, and when opportunities arise that are beneficial again, we will invest back into it. For now, property cat is our focus, and we will continue to prioritize its growth. Overall, we plan to significantly grow property cat and slightly reduce our involvement in other property, which I believe is a sound strategy.
Operator, Operator
Our next question comes from Meyer Shields from KBW.
Meyer Shields, Analyst
Thanks, I guess to begin with, it sounds like the casualty and specialty combined ratio expectation is flat on a year-over-year basis. In other words, picking in the mid-90s, am I thinking about that correctly?
Bob Qutub, CFO
Yes. In my prepared comments, I mentioned that we expect to maintain a mid-90s range with growth. This year, mid-90s represented 95.3, and we have fluctuated within that range due to events like the losses in Ukraine earlier this year. We experienced a loss on January 1, so we anticipate more fluctuations, but we are quite confident about staying in the mid-90s.
Meyer Shields, Analyst
Okay. No, that's fair enough. I guess I was expecting a little bit more improvement, but I understand what you're saying about the range. If you look back at the extended January 1 renewal season, how do you compare the actual capacity deployed to your expectations going in?
Kevin O'Donnell, CEO
We performed very well. In my view, the most relevant question is regarding the U.S. property cat limit. We still have about 50% of that to renew. There was less demand in the market, but that didn't alter our strategy on how much to deploy; it just required us to be more agile in getting the limits to our customers, which we accomplished. Overall, I feel quite positive about our market performance, although the circumstances are somewhat different from what we anticipated back in December.
Meyer Shields, Analyst
Okay. That's helpful. And I guess last question, if I can, just to continue with that. You talked about expecting that demand to come back. Is that the higher or lower layers of coverage that you expect to come back?
Kevin O'Donnell, CEO
Yes, it's a good question. It will be in the higher layers. At this point, larger companies will continue to prioritize building balance sheet protections instead of focusing on low-end income statement protections. The income statement will need support from increased primary rates. However, Florida is an exception. People often view the Florida market through the lens of weather constraints related to the FHCF. I believe there will still be some demand for purchasing limits below the FHCF, although I expect those amounts to be very low. More generally, the new limits being purchased will be at the upper end of the programs.
Meyer Shields, Analyst
Okay, fantastic. Thank you so much.
Kevin O'Donnell, CEO
Yes.
Operator, Operator
Our next question comes from Yaron Kinar from Jefferies.
Yaron Kinar, Analyst
Hi, good morning.
Kevin O'Donnell, CEO
Good morning.
Yaron Kinar, Analyst
First question, maybe going back to Elyse's question on how the ROE looks in a normal cat year, realizing you can't really prognosticate the precise ROE, but maybe you can also help us delineate how much of the improvement you see coming from net investment income versus underwriting. Would it be more weighted to underwriting, more weighted NII?
Bob Qutub, CFO
I've tried to point that. It's a good question. I'll help me try and break that down. We're seeing much more improvement; let's start with net investment income. You started to see that over the course of the year, ending with $144 million and giving you guidance that we'll probably look at $150 million in the first quarter here, give or take, subject to market moves. And we're starting to see relative performance just on the management fees coming through from our capital partners going up by basically 40% from $25 million a quarter to $35 million, which is reflective of the capital that we've raised. The Casualty and Specialty business will improve based on the net earned premium that we bring through. So those are things that we look at as very stable. And we look at that as something we continue to talk about in the core drivers of profit; property should do better. As Kevin has pointed out, property should do better, but you can't control Mother Nature. You can only structure the book to be able to adapt to it as well as you can. So that's the picture that we're trying to portray out there that there is a core stable, solid earnings stream that does support a level of return that we feel is above our cost of capital just to begin with.
Yaron Kinar, Analyst
Got it. That's helpful. Could you provide some clarification regarding the underwriting book? It seems to me that you are indicating that a larger portion of the improvement in underwriting margins may come from property catastrophe, while the growth in overall revenue might be more significant in the casualty and specialty areas in 2023. Is that an accurate summary?
Kevin O'Donnell, CEO
I didn't intend to create that impression. We are significantly expanding in property catastrophe, which will drive overall property growth. While property catastrophe is set to grow considerably, we will see a slight reduction in other property areas. This is part of our strategy for portfolio management. Additionally, we will be expanding our casualty specialty portfolio, with a notable portion of that growth coming from some dislocated specialty lines. I want to emphasize, based on my underwriting background, the importance of focusing on net-written premium, particularly given the significant changes occurring at the third-party capital and managed premium levels. To be more specific, we have reduced Upsilon's presence in the market because its products are better suited for RenaissanceRe and DaVinci, which will affect gross written premium, but the net economics for us are better captured by net written premium due to this adjustment.
Yaron Kinar, Analyst
And does this shift or the parallel growth in casualty, specialty and property catastrophe at the same time, how does that impact excess capital?
Kevin O'Donnell, CEO
From a capital standpoint, we are extremely well positioned for the upcoming opportunities we are seeing. In the realms of casualty, specialty, and outside the U.S., capital is never an issue. The peak exposure in the portfolio heading into this renewal was Southeast Hurricane, and it will continue to be Southeast Hurricane. We also have ample opportunity to expand the portfolio and invest more capital if we decide to do so.
Yaron Kinar, Analyst
Thank you.
Operator, Operator
Our next question comes from Brian Meredith from UBS.
Brian Meredith, Analyst
Great. Thank you. Hey, just a couple of ones here for you, Kevin. I think, I just want to clarify what you just said there. So you should see some pretty substantial growth in cat premium retained net written premium growth.
Kevin O'Donnell, CEO
Yes.
Brian Meredith, Analyst
I would like to clarify that it is indeed on your balance sheet. For my second question regarding Florida and the six-one renewals, I'm wondering if any legislative changes improve your interest there, or if it's solely dependent on the market's rates and pricing.
Kevin O'Donnell, CEO
I'm pleased that they're taking steps to improve the health of the Florida market. At the margin, it's beneficial. Thinking strategically as to how we're going to position the book, it will not change our appetite in Florida. Specifically, rate attachment and other opportunities will be the drivers in how we structure the portfolio.
Brian Meredith, Analyst
Got you. Great. And then I guess just last quick question. I think you kind of referred to it earlier. It sounds like Europe turned out to be better-than-expected with rate increases. Have you increased your allocation of business to Europe?
Kevin O'Donnell, CEO
Yes. Capital is still driven by the U.S., and capital is still driven by Southeast, but we saw more opportunities in Europe than we expected, and we're able to leverage into it. The Zurich office performed well, seeing the opportunity early and executing.
Operator, Operator
We have reached our allotted time for Q&A. I will now turn the call back to Kevin O'Donnell.
Kevin O'Donnell, CEO
So thanks, everybody. I appreciate you staying on for a few extra minutes. I appreciate the questions as well. For those that have trouble getting onto the call, I apologize for the difficulties. But happy to take any follow-ups. As far as the renewal, I've been doing this for a long time, I've seen a lot of different types of markets, and this was one of the most impressive renewal performances I've ever seen from the Renaissance team to be able to execute in this market, and I couldn't be prouder of the portfolio that they built. So thanks again, and look forward to speaking with you next quarter.
Operator, Operator
This concludes the RenaissanceRe fourth quarter and full-year 2022 earnings call and webcast. Please disconnect your line at this time, and have a wonderful day.