RenaissanceRe Holdings Ltd (RNR) Q3 2021 Earnings Call Transcript

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RenaissanceRe Holdings Ltd (RNR -0.09%)
Q3 2021 Earnings Call
Oct 26, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Sia, and I will be the conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe's Third Quarter Earnings Conference Call. [Operator Instructions]

Thank you. At this time, I would like to turn the conference over to Keith McCue, Senior Vice President, Finance and Investor Relations. Please go ahead, sir..

Keith McCue -- Senior Vice President, Finance and Investor Relations

Thank you. Good morning. Thank you for joining our third quarter financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't receive a copy, please call me at (441) 239-4830, and we'll make sure to provide you with one. There will be an audio replay of the call available from about 1:00 p.m. Eastern time today through midnight on November 26. The replay can be accessed by dialing (855) 859-2056 U.S. toll-free or one (404) 537-3406 internationally. The pass code you will need for both numbers is 7440669.

Today's call is also available through the Investor Information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on November 26, 2021. Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer.

I'd now like to turn the call over to Kevin. Kevin?

Kevin O'Donnell -- President and Chief Executive Officer

Thanks, Keith. Good morning, everyone, and thank you for joining today's call. Regarding our financial results, this was a difficult quarter, and a continuation of what we have been experiencing in the P&C industry over the last five years. That said, we believe that the market will continue to experience significant rate increases, which will accrue to the benefit of our shareholders.

Let's start by discussing the third quarter. Given the large catastrophe losses, I will focus my comments primarily on our property business, where climate change, social inflation and other loss drivers have caused elevated losses, as you would expect, reinsurers have absorbed a significant share of this volatility. Absorbing volatility is an important component of our value proposition to our customers. Over the past five years, we have delivered on this province. Ultimately, however, we need to be paid adequately for the risk that we assume and the returns for our shareholders over the recent five-year period were not sufficient for capital they have deployed.

Our industry that has experienced more change recently than at any time since our founding in 1993, in response, we set out to build the capabilities and scale needed to generate superior returns in this marketplace. We began this journey by forming our Lloyd's syndicate, continued with the acquisitions of Platinum and TMR and accelerated with the expansion of our capital partners business and culminated with last year's capital raise, which afforded us the ability to lean into one of the best reinsurance markets we've experienced in a long time.

We are now at an inflection point in our evolution. We have built an organization that will succeed in an industry impacted by low interest rates, abundant third-party capital, social inflation and climate change. It is now time to monetize what we have built. Our fortress balance sheet will help us achieve this goal as it easily absorbed this quarter's losses. Our shares have been trading at attractive levels which provides us more options to deploy excess capital than probably at any other time in recent history. As you saw, we continue to repurchase our shares in the fourth quarter. And thanks to our strong excess capital position, expect to continue to do so in 2022.

The attractiveness of our shares versus other opportunities places an increasingly higher hurdle against deploying excess capital into our business. We have achieved competitive scale and will only pursue future growth to the extent new business is expected to clear stringent profitability hurdle rates. This will allow our underwriters to focus on building efficient portfolios through pricing discipline and strong underwriting. We will continue to engage with our clients discussing our developing view of risk and the pricing and structures that are needed to provide fair returns to absorb the volatility.

At times, these discussions may prove difficult or challenging. I'm comfortable reducing on any business that we do not believe will create superior returns for our shareholders. This results in additional excess capital, we have more tools than ever to manage it effectively. That said, I expect that we will write a larger and more profitable portfolio in 2022. To begin with, the property market has enjoyed material rate increases over the last five years, which we'll continue to earn through. Rate increases have been similar, if not steeper in the casualty market over the last three years.

Going forward, we believe rates will continue to rise across the industry for several reasons. First, due to continuing volatility, realized results have lagged expected returns in the industry at large for several years. As a result, substantial proportions of the reinsurance industry in particular, third-party capital have failed to earn their cost of capital. Investor patience is wearing thin, and they are requiring increased return profiles to accept volatility. We expect retro capacity will shrink due to poor performance and substantial trapped capital.

Any retro that is available will likely move up an attachment level so we'll shift protection from earnings to capital. There is less retro at lower attachment points, reinsurers will be more exposed to income statement volatility. Since the cost of accepting volatility has risen, the supply of reinsurance will decrease, and further push rate. Third, social inflation will continue plaguing the industry and price inflation will increasingly push up loss costs. And fourth, persistent losses and the fear of climate change will likely raise primary carriers demand for hedges against their own volatility.

We expect these various dynamics will reduce the supply of and increase the demand for the products that we sell. This will result in further rate increases and improved profitability. I should also note that our Casualty business is now beginning to reflect the substantial rate improvements of the last three years. As a result, this quarter, we reduced our initial expected loss ratio by three points. We absorbed the Casualty segment's share of cat losses and still made an underwriting profit. I will discuss this further in the second half of my comments. But suffice it to say that we anticipate casualty will increasingly contribute to our bottom line in the future.

So when I look forward to 2022, I'm very excited about our prospects. Our fortress balance sheet allows us to maintain our current underwriting portfolio or even grow it, if desirable. Increasing rates across our business will add to the portfolio's profitability. And finally, prudent capital management will leverage our potential to generate bottom line profitability on a percentage of equity basis. That concludes my opening comments. I'll provide more detailed update on our segment performance at the end of the call.

But first, I'll turn it over to Bob to discuss the financial performance for the quarter.

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

Thanks, Kevin, and good morning, everyone. As Kevin pointed out, this was an active season for catastrophes, which is reflected in our results for the quarter. I'll discuss our performance in detail, but there are two main points that I want to take away. First, we have maintained a fortress balance sheet that gives us tremendous flexibility to create value for shareholders by actively managing how we deploy our capital. We will grow if underwriting opportunities are sufficiently profitable. But equally, we can continue to repurchase our shares at attractive multiples.

Second, the business that we have invested in and grown this year, casualty and other property continue to trend in a positive direction, and we're starting to recognize these results in our financials. This quarter, we had the confidence to lower our initial expected loss ratio in casualty by three percentage points. Additionally, the attritional loss ratio for other property has been steadily improving as a result of the portfolio management activities we discussed with you at the beginning of last year. With this in mind, I'll start my comments with a discussion of our capital position how we are thinking about managing this capital going into the January renewals. I will then move to our consolidated results and three drivers of profit.

So starting with capital management. This is an active quarter and material share repurchases, our capital position remains strong. The weather-related large losses were within expectations and we have sufficient capital and liquidity to absorb them. We generally like to hold an excess capital buffer of up to $1 billion, which gives us the flexibility to take advantage of future opportunities. As we look ahead to 2022, we're very comfortable with our excess capital position. As you know, our first preference is to always to deploy capital into profitable business opportunities; and second, to return the excess to shareholders, which we have been doing this year.

As Kevin explained, this framework is still valid. But because our stock valuation is so attractive, our hurdle rate for an attractive underwriting opportunity is higher than it has been in the past. Ultimately, our goal is to grow tangible book value per share. Going into January one renewals, our fortress balance sheet provides multiple levers to do just that. We have sufficient capital to support our existing risk, and we will continue to grow if price increases in 2022 prove sufficient. But similarly, we anticipate returning capital to our shareholders at a pace roughly equal to net earnings.

Moving now from our capital management framework to the capital management activities we undertook in the third quarter. As I mentioned in the last call, we issued $500 million of our Series G perpetual preference shares in the third quarter. The Series G has a fixed-for-life dividend 4.20%, and we used $275 million of the proceeds to refinance our five 3/8 Series E preference shares. As a result, we increased our outstanding preference equity by $225 million. We also purchased 1.5 million common shares for about $224 million in the third quarter.

This works out to an average price per share of about $151 and an average price to book value of less than 1.2 times our current book value. Subsequent to quarter end, we continue to repurchase shares. And as of October 21, had repurchased an additional 518,000 shares for $75 million at an average price of just over $145 per share. In total, this year, we have repurchased five million shares for $780 million at an average price of $155 per share, reducing our share count by about 10% of the year-end 2020 total.

Even after weather-related large losses and our active share repurchases, our total common and preferred equity position was $6.75 billion at the end of the quarter, this is roughly flat compared to our equity position immediately following last year's equity raise and provides us with scale and flexibility to effectively execute our strategy with improved capital efficiency. Moving now to our consolidated results. We reported a net loss of $450 million and operating loss of $415 million for the quarter.

These results were driven by a net negative impact of $727 million from the weather-related large losses, primarily from Hurricane Ida, record flooding in the Northwestern Europe and losses from aggregate contracts. As a result, we reported an annualized return on average common equity of negative 28% and annualized operating return on average common equity of negative 26%. I will now shift to our three drivers of profit, starting with underwriting income, where we grew gross premiums written by $631 million or 55% with the Property segment growing $346 million and the Casualty segment growing $285 million.

This quarter, we reported $255 million of reinstatement premiums from the weather-related large losses. This compares to $54 million of reinstatement premiums related to the Q3 2020 large loss events. Excluding these reinstatement premiums, gross premiums written were up 39%. Year-to-date, net premiums written were up 44% to $4.8 billion, and we remain on track to comfortably surpass $1 billion in growth for the year, even when excluding reinstatement premiums.

Most of this growth has come from casualty and specialty and other property where we have seen strong rate increases this year. We reported underwriting losses of $679 million in the quarter and a combined ratio of 145%, 74 percentage points of which are from the weather-related large losses. Specifically, 43 points are from Hurricane Ida and 19 points are from European floods. Our Property segment, where gross premiums written increased by $346 million or 81%. Reinstatement premiums from large loss events in the third quarter increased by $202 million year-over-year, with the vast majority impacting the property catastrophe class of business.

Excluding this growth, growth in property -- excluding these, growth in property premiums was $144 million or 38%, with other property up $182 million or 73% and property catastrophe down $38 million or 30%. This is not a major renewal period for property catastrophe and the decline, excluding reinstatements, is partially driven by a few bespoke nonrecurring deals that we wrote in the third quarter of 2020. We reported a current accident year loss ratio of 180% and a combined ratio of 184% in the Property segment, driven by the weather-related large losses, which added 141 percentage points to the combined ratio.

As a reminder, our other property book contains both attritional and catastrophe risk. The current accident year loss ratio of 112% included 66 percentage points from the weather-related large losses. The attritional portion of other property business has been steadily improving since last year and has been consistently below 50% in 2021. There were also 18 points of favorable development in property this quarter, primarily related to the 2017 to 2019 large catastrophe events in the property catastrophe class of business. Now moving on to our casualty results, where we reported gross premiums written of $1 billion, growing $285 million or 40% versus the comparable quarter.

As we have received more information, we're starting to reflect some of the positive rate trends we have seen in casualty over the last few years. As Kevin noted, this quarter, we reduced our initial expected loss ratio by three percentage points which should have a favorable effect on the current accident year loss ratio going forward. This is one factor of many, and we expect the current accident year loss ratio to fluctuate based on loss events, business mix and other items in the quarter. The combined ratio for casualty was 99.6%, and current accident year loss ratio was 69%.

The weather-related large losses added 3.5 percentage points to these ratios. Excluding the impact of weather-related large catastrophe events and COVID, the current accident year loss ratio for casualty has improved modestly compared to the last several quarters and full year 2020. These improved margins both in casualty and other property are on an increased earned premium base, up 43% and 73%, respectively, from the third quarter, while our capital base remains flat. This demonstrates the enhanced premium leverage we are starting to achieve following our growth initiatives in these segments over the last 12 to 18 months.

Now moving on to our second driver of profit, fee income. Total fee income in the quarter was $28 million, which reflects the impact of the weather-related large losses in 2021. Starting with management fees, which were down compared to recent quarters, this decline is primarily driven by year-to-date losses in DaVinci, which triggered a deferral of management fees. We expect to recapture these fees in future quarters at the point that DaVinci returns to a net profit position. In general, management fees are related to the growth in our joint venture vehicles, and they should steadily increase over time.

Now moving to performance fees, which were up compared to the third quarter of 2020. This difference primarily relates to performance fee reversals. In the third quarter of 2020, we reversed previously booked performance fees, which led to a negative result. This year, however, performance fees have been low year-to-date due to losses from Winter Storm Uri removing the need to reverse them this quarter. Overall, we shared $198 million of underwriting losses with partners in our joint ventures as reflected in our redeemable noncontrolling interest, driven by weather-related large losses.

Turning now to our third driver of profit, investment income. Net investment income was $78 million, which is consistent with the second quarter of 2021. This was partially offset by $42 million in realized and unrealized losses, resulting in total investment returns of $36 million. $31 million of these realized and unrealized losses came from our fixed maturity portfolio and were primarily related to increased interest rates on medium and some longer duration treasuries and a modest widening in credit spreads in some sectors.

The yield on our retained fixed maturity portfolio stayed constant at 1.3% and the duration on our retained portfolio decreased slightly to 3.7 years. We remain very comfortable with the composition of our investment portfolio and believe that it provides the liquidity that we need to support our underwriting business.

Now at this point, I'll turn to our expenses. Starting with the acquisition expense ratio, which remained flat at 22%. The casualty expense ratio increased by four percentage points to 28%, which is consistent with our expectation. As a reminder, the acquisition expense ratio in the third quarter of 2020 was low due to reduced profit commissions associated with losses in our mortgage book. The property acquisition expense ratio decreased by three percentage points to 16%, primarily related to the increase in reinstatement premiums. Excluding the impact of reinstatement premiums, the property acquisition expense ratio increased from the comparable quarter.

As a reminder, the other property business typically carries a higher acquisition cost ratio than property catastrophe. So we would expect the acquisition cost ratio to increase as other property becomes a more meaningful part of our property portfolio. Our direct expense ratio, which is the sum of our operational and corporate expenses divided by net premiums earned was 5%. This is broadly flat with last year after excluding the impact of loss on sale of the RenRe U.K. Limited and some other onetime items from the third quarter of 2020. On an absolute basis, operational expenses were up in the quarter, but the operational expense ratio declined by one percentage point to 4%.

Now before I turn it back to Kevin, I'd like to spend a moment on global tax developments. As I mentioned on the last call, we've been closely following recent announcements on setting a global minimum corporate tax. The OECDs work on Pillar one and Pillar two and President Biden's proposals for U.S. tax changes. In October, the OECD announced a framework between many countries to institute a 15% global minimum tax.

However, most of the practical details about how this would be implemented are not yet clear. We are monitoring this issue closely and believe that our global operating platform will continue to provide us with a competitive advantage. To that conclusion, while our results for the quarter were impacted by natural catastrophes, we are seeing positive momentum across both segments. We have taken a very active approach to capital management and going into the important January one renewals have built a fortress balance sheet that provides many levers to build value for our shareholders.

And with that, I'll turn it back over to Kevin.

Kevin O'Donnell -- President and Chief Executive Officer

Thanks, Bob. As usual, I'll divide my comments between our Property and Casualty segments. Starting with Property. I thought it would be helpful to spend a few minutes discussing the loss drivers for natural catastrophes, including the evolving impact of climate change and the increasing costs due to inflation. For almost two decades, we have invested heavily to understand the influence of climate change on weather and its impact on the risks that we take. RenaissanceRe Risk Sciences is a large part of this investment. It provides us with significant competitive advantage in assessing the impact of climate change it also aids us in continually updating our models to reflect the latest science, such as the recent IPCC six assessment report.

Having this ability is critical. As an example, our many decades of research on the climate influence on Atlantic hurricanes helps inform our belief that the recent active Epoch since 1995 appropriately constitutes a new baseline from which to further refine the assumptions that underlie our hurricane wind risk models. In other words, due to climate change, we believe that the elevated average of the last 25 years to depicts a more representative view of hurricane risk for the present and that the long-term historic record, which serves as the baseline for the vendor hurricane models is a poor guide for the future.

Our proprietary models reflect this elevated view of frequency and severity and our view of Atlantic hurricane wind risk in the context of hazard frequency and severity as well as expected modeled industry losses is significantly above the vendor long-term view of the risk. This supports our view that we are successfully incorporating the impact of climate change into our models. It's important to note that while storms are increasing in both frequency and severity, some of those changes are cyclical in nature and not tied to climate change. So while it's important to understand and price for climate change. It is not the only factor increasing losses in the P&C industry.

In all likelihood, the recent clustering of weather events is more attributable to statistical fluctuation in arrival rates than the influence of climate change. In the same way that the 10-year period prior to Hurricane Irma was a statistical outlier due to the absence of U.S. landfalling hurricanes. The five-year period since then is a similar outlier for tightened activity. Unlike climate change, this is not a systemic issue and should average out over time. And then there's inflation. Even though Ida is tied to the fifth strongest landfilling hurricane in U.S. history, a storm of Hurricane Ida's characteristics simply does not generate enough energy to result in the industry losses that are being projected.

The truth is that as much as storms are getting stronger and more frequent, which we can model for, social inflation and outright fraud are increasing loss costs in ways that are more difficult to quantify. Price inflation also plays a role in the elevated cost of catastrophes, in part due to labor shortages, supply chain disruptions and rising commodity prices affecting building costs. So while we actively adjust our view of natural catastrophe frequency and severity for the influence of climate change, we also know that these other factors represent a substantial accelerator of loss costs.

Consequently, we are focused on appropriately waiting all of these factors in our modeling, so we can be confident that we are being paid adequately for the risk we assume. We believe that we are successfully doing this One indication is that actual hurricane losses in the United States have averaged about $18.4 billion over the last five years, which is below the average that our models predict. This strongly suggests that we are accurately capturing recent changes. We had an opportunity to test our models again this year with Hurricane Ida and believe that losses will be within modeled expectations.

For example, PCS is currently estimating that Hurricane Ida industry loss is at $29 billion. Our models indicate that the Ida industry loss is about a one in five-year event for the U.S. and about a one in 30-year event for the Gulf. In other words, a large event, but not an extreme outlier. The third quarter also experienced a large European flood from burns, which is further evidence of the expanding influence of climate change, burned is likely to be about the $12 billion to $15 billion industry event, which, in our view, is a 50- to 100-year return period for the barrel of flood in the U.K. and Europe taken together.

Moving on from this discussion of loss drivers. This is the time of year we shift our underwriting focus to the January one renewal. We are optimistic that we will find ample opportunities to construct an improved portfolio of risks. Given the substantial losses in the quarter, our under is expect to obtain increased rate and better terms and conditions across our property book at the January one renewal. This effort will be particularly focused on the Property cat-business, which has experienced larger losses and smaller rate increases over the last five years relative to other lines. Shifting to other property.

Our other property business, which was also impacted by weather-related large losses of the quarter. Prior to Q3, this market was already dislocated and experiencing substantial rate increases. Given the active quarter, we expect this favorable trend to continue. I am delighted with our ability to construct a high-quality other property portfolio. This portfolio has been built from largely cat-exposed excess and surplus insurance lines that we write on a proportional basis. This is the most impacted and dislocated segment of the property market and our underwriters have definitely leveraged into this space, driving more than $1.3 billion in gross premium so far in 2021.

Cats aside, the other property portfolio is enjoying low attritional loss emergence, as Bob discussed in his comments, in general, this business is performing at or above our initial expectations, and we continue to realize material rate increases. Let's now shift to the retro protection that we purchased for ourselves. Given the weather-related large losses, it is likely that this protection will be less available and more expensive in 2022. Consequently, we may purchase less retro protection and take more risk net. With the expectation of improved rates, we are comfortable with this potential outcome.

Moving now to our Casualty and Specialty segment. Heading into the January one renewals, we continue to enjoy the benefit of accelerating underlying rate increases across multiple lines of business and geographies. As previously discussed, this quarter, we reduced our initial expected loss ratios in some casualty classes. If pricing and trends continue as they are, I expect that our casualty book will continue to show lower combined ratios over the course of 2022. As should be the case, our reserving team is moving cautiously to reflect new information until recent year season, and we see more evidence of favorable loss of merchants.

We have discussed our casualty book being rate adequate over a rolling 10-year period. While we continue to see rate change above loss trend, we believe more rate is required in the casualty market to produce adequate returns after an extended period of rate reductions up until about 2018. Finally, putting aside the ongoing organic growth we have planned for 2022 by simply earning through the casualty portfolio that we have already written, we expect to grow net earned premiums by over $400 million. This demonstrates the enhanced premium leverage we are beginning to achieve, which is good news in an improving market.

Our Capital Partners business continues to be core and a growing part of our platform. Over the past five years, we have grown our partner capital by approximately $5.2 billion, which represents a compounded annual growth rate of about 30%. This allows us to bring more capital to the market and generate fees. Our fee schedules have remained constant, and we are turning away more capital than we are accepting. We are not an asset accumulator, but rather see ourselves as managing these funds to solve customer problems by sourcing and matching the most desirable risk and with the most efficient capital.

This is a business that continues to mature. Investors are demanding more accountability for managers with respect to strong governance structures, robust internal audit capabilities and a clear understanding of the importance of building ESG transparency, responsibility and accountability. Given our long-term track record, robust enterprise risk management framework, we believe we maintained a considerable competitive advantage in this space. This was a difficult quarter marked by material net and operating losses.

That said, we head to the January one renewals with ample liquidity and a fortress balance sheet. Our fundamentals are strong, our prospects are bright, and I believe that we will have the opportunity to underwrite an increasingly profitable portfolio of business at the January one renewal that will generate superior returns for our shareholders.

Thank you. And with that, I'll turn it over for questions.

Questions and Answers:

Operator

[Operator Instructions] And the first question will come from Elyse Greenspan with Wells Fargo. Please go ahead.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks. Good morning. My first question is just on capital. I'm trying to piece together some of the comments throughout the call. Just are you guys willing to put let us know exactly how much excess capital you have today? I know your equity levels are below where they were after the equity raise. But I think you said they were in line, right, because that was in the middle of the second quarter of last year. But -- and you said you'd like to hold up to $1 billion buffer. But where does that actually sit today just in terms of excess capital?

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

Yes. Thanks, Elyse. Hope you're doing well. Yes, I did say 6.75. Now remember, we started our journey in building out our capital raise in the second quarter. So we raised it in the second quarter. And my comments were really based off the referencing to the end of the first quarter. We did print an unrealized gain in the portfolio in the second quarter. I think that's your comparative out there. But as I talked about last quarter, I did the reconciliation in terms of earnings based on share buybacks and what we've returned back to investors.

And your other second question on excess capital, I mean, I think it is -- we're not capital constrained. I just want to make sure that's clear. And as we look to 2022, we're going through the building of our book and is what Kevin talked about, some pretty desirable growth that's out there that we've seen. We're looking at probably going in with excess capital on the higher side of that, that we can reserve for future opportunities that we may see come at us in 2022. But in the same vein, my comments also said that I think given the earnings that we'll be able to generate off of that portfolio, we'll continue to return capital next year as well based on earnings.

Elyse Greenspan -- Wells Fargo -- Analyst

So when you say higher side of that, it's within range of that $1 million buffer?

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

Yes, will be closer to $1 billion. We'll keep it higher. And as we go through the year, we'll see -- we'll continue to manage that.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. Thanks. And then my follow-up question, you guys highlighted, right, it's been high cat loss here for the industry. Over -- if you go back over the past few years, we've heard that every year just coming across in different ways. Kevin, you said that you're optimistic for the January 1 renewals. So what's the best outcome? I know we're still ways away if things change as we get closer. But just based on what the industry has dealt with this year with losses in the U.S. and in Europe, what do you think happens to the cat market and what do you guys need to happen for you to incrementally write more property cat business and return less capital to shareholders?

Kevin O'Donnell -- President and Chief Executive Officer

Yes. I think it's a great question. And we're in a period where we don't really have a lot of price discovery that we can point to. So what I tried to highlight is what I think will be the drivers that will be resident in the market for us to increase the rate that we get on the property cat that we take. I think the way that I would think about it is we're going to have, I believe, a demand and supply imbalance.

We've already seen a few large buyers, say, they would like to increase the amount of protection that they're purchasing. I think the effect of the reduction in retro will have a material impact on reinsurers and their ability to continue to service the portfolios that they have. And pricing is always done at the margin. So I feel optimistic that there'll be a strong sense and a willingness to reduce risk should rates not be at a significantly improved level.

And when I think -- and I use the term rate, I should probably say economics because I think we'll also see a shift in attachment points, particularly in Europe, will go up, and we'll see improved terms and conditions, and we'll see -- we'll achieve more rates on a rate adjusted basis. I have significant hope certainly in the double digits as to what sort of rate change I expect.

Elyse Greenspan -- Wells Fargo -- Analyst

And the double-digits in both the U.S. and in Europe?

Kevin O'Donnell -- President and Chief Executive Officer

Europe is less important to us, but it certainly deserves double digits, and we're prepared to reduce if we don't get it. I think more important than Europe is probably the attachment point. So if we get the same rate on a risk adjusted -- but on a risk-adjusted basis, have double-digit improvement in economics will be satisfied.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. Thanks for the color.

Kevin O'Donnell -- President and Chief Executive Officer

Sure.

Operator

The next question will come from Meyer Shields with KBW. Please go ahead.

Meyer Shields -- KBW -- Analyst

Great. Thank you. I guess a key question is Casualty and Specialty segment. I -- you've been very sort of descriptive in terms of the loss ratio improvement. Have you seen any components of losses there -- or I'm sorry, loss trend that's getting worse rather than better?

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

It's always a bit of a mixed bag on a quarterly basis when you do your actuarial views to close the books. I would say, in general, '19 and forward looks pretty good, '18 and prior is where there's more challenge in the book. The good news for us is our book was growing, and we knew at the time we were investing into a market that we expected to improve. So the biggest portfolios that we have are really 2021 -- and expect to be '22. So the balance of our portfolio, I think, is in significantly better shape than others. What we're seeing in our portfolio will be pretty consistent with what others are seeing because we're writing a proportional book.

Meyer Shields -- KBW -- Analyst

Okay. That's helpful. And I just wanted to get your perspective on development in Florida. I know you've been fairly pessimistic about what's been accomplished so far. And I'm just hoping for an update.

Kevin O'Donnell -- President and Chief Executive Officer

Yes. Florida is honestly not on our radar screen just yet just because as you know, it's a midyear renewal. What we've done in building our performance is to hold our PML in Florida flat for 2022. That's easily adjustable as we begin to learn more at the 1/1 renewal and transfer that into what's likely to happen at 61 and 71.

Florida is dislocating one of the markers I generally look at to see the health of the market is to see the growth in Citizens. Citizens continues to grow, which often is a sign of stress in the market. So the fact that the market stressed, there might be an opportunity for there to be real legislative change that is beneficial and reinsurers are probably going to continue to look for rate. So we've got great relationships down there. We have pulled back over the last several years, but I don't feel impeded should we decide to grow.

Meyer Shields -- KBW -- Analyst

Okay. Perfect. Thank you so much.

Kevin O'Donnell -- President and Chief Executive Officer

Sure.

Operator

The next question will come from Brian Meredith with UBS. Please go ahead.

Brian Meredith -- UBS -- Analyst

Yes, thanks. Kevin, a couple of questions here. First, just curious, you gave us the $29 billion PCS loss event, what's your view of what the Ida losses for the industry? And how do you factor in demand surge to that given the inflationary environment?

Kevin O'Donnell -- President and Chief Executive Officer

So the $29 billion is probably a reasonable estimate, not including NFIP. So I think from that standpoint, our loss numbers are always a little bit different than where PCS is. I think the important thing to note is we did include inflation, social inflation and demand search in the number that we put up for Ida and for burn. So our numbers reflect our best estimate based on the energy of the Ida loss and the environment in which it incurred, which is with inflation, social inflation and, of course, demand surge.

Brian Meredith -- UBS -- Analyst

Got you. So your number would be probably higher than PCS given that inflation?

Kevin O'Donnell -- President and Chief Executive Officer

Yes. I would say that's probably a reasonable estimate. We don't disclose the industry number on that. We, more importantly, wanted to get the number that affected us.

Brian Meredith -- UBS -- Analyst

Makes sense. And then my second question, just curious, you made the comment that you're likely to kind of repurchase shares or capital management in line with your net income that you're generating, but you haven't generated any income over the past 12 months. Does that basically imply if fourth quarters, zero for some reason the cat comes through, you wouldn't be buying back any stock?

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

I think we're going to take it each quarter as it comes, Brian. The question is really presented, where Kevin said, we've reached a competitive scale. We feel good about the portfolio that we've built. And as we look at 2022, we're going to go in with some excess to buffer that, probably at the high side, I said. So it does give us capacity to continue to pull all the levers in our capital management portfolio.

Kevin O'Donnell -- President and Chief Executive Officer

I think, Bob is absolutely right. The most important thing for us is to maintain a fortress balance sheet and liquidity to pay our losses and have capital available, should there be opportunities to grow. We will maintain all of that in 2022 and still have room to purchase shares back should we have normal cat activity.

Brian Meredith -- UBS -- Analyst

Makes sense. Thank you.

Operator

The next question will come from Ryan Tunis with Autonomous Research. Please go ahead.

Ryan Tunis -- Autonomous Research -- Analyst

Hey. Thanks. First question, following up on some of the capital questions. I'm just trying to understand, I guess, where the excess is coming from, because if we go back to the capital raise last year, you raised the bill. So it didn't seem like you had that much excess then. You said you deployed all of it earlier this year.

And now there's less equity, there's less capital than there was before the capital raise. So I don't know the right way to ask the question. I mean what was your view of excess maybe after the capital raise last year? I'm just trying to understand where the excess is coming from.

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

No, that's a good question for clarity. We entered COVID with surplus capital. We talked about that. So as we looked at the capital base, we were looking at that in the context of the uncertainty that we face with COVID, and we still have that uncertainty out there. So in the second quarter, we also saw enormous opportunities to continue to grow into the business.

At that point in time, at the end of Q1 is when we were starting to think about raising capital, that's my reference point of the $6.75 billion that I'm talking about on a comparable basis. Subsequent to that, we generated significant earnings on the portfolio that came through an unrealized gains and losses.

In this case, they were mostly gains that came through that I talked about last quarter. That's straight common equity that comes into the capital from a capital standpoint perspective. And as over time and that crystallizes, we're able to return that and still maintain the adequacy of capital that we needed as we look into 2022.

So we feel comfortable about it. We feel comfortable for the reasons that we cited about. But that's kind of the reconciliation in terms of earnings, if you're looking back where it came from. What it's also provided us with is, you also notice our premiums have gone up by $1 billion and our capital is the same. So it's also reflecting the premium leverage that we have now embedded in our portfolio going forward in the areas that we talked about.

Ryan Tunis -- Autonomous Research -- Analyst

Got it. And then, I guess, for Kevin, I guess that was interesting that you said that the vendor models for hurricanes are actually below your internal view for the past five years, which would seem to indicate that you -- perhaps you've been over-earning relative to expectations.

How do we reconcile that, I guess, the property cat loss ratio has been, I think, about 80% since 2017, seem to indicate is a lot more rate need than, I think you said, for economic needed a lot more than just double digits for this business to be attractive to, right?

Kevin O'Donnell -- President and Chief Executive Officer

So our view of risk being higher, I think, is a demonstration of kind of our commitment to being good stewards of capital and being kind of superior in risk selection. We effectively, what that would mean is, we are holding the same deal at a higher loss ratio and a lower expected return than someone using a different model. That, to us, is the right way for us to look at the business because it appropriately states our profit rather than overstating our profit.

And more importantly, it allows us to build much more detailed EP groups to understand the use of capital and our capital management there benefits from having a view of risk that we feel reflects climate change and that we have confidence in. So when I think about where the model is, it's where someone should be in thinking about this risk and not have rose-colored glasses about the return that they hope to achieve but reflect to reserve that they're likely to achieve due to the effects of climate change.

The other thing that I tried to highlight in my comments is there's also against the model that we have, statistically, we are above the arrival rate for large storms compared to what our model would predict, which we believe is a normal statistical anomaly just like we saw prior to Irma. We're still within a confidence range about the 75th percentile on expected returns for our portfolio against the heightened average.

So, I still feel good about where we are. But we are in a period of climate change adjustment that's required, but also a statistical increase in arrival rate, which should revert back to its norm. So I feel like we've done a good job on thinking about the models and reflecting it, and we've tried to demonstrate that with the transparency on the call today.

Ryan Tunis -- Autonomous Research -- Analyst

Got it. And then just one more just kind of an information question, two parts. First, I guess, for Bob, on the DaVinci management fees, it sounds like there's a high watermark, do you have an expectation of how much management fees should be depressed over the next few quarters? How far are you from getting that back to a positive P&L?

And then the one other one I had for Kevin separately is for something like Ida, what is your level of certainty around what your loss is like at this point? It happened month and a half ago. I'm just curious how much do you -- when we think about your loss estimate, how much is that pinned down month and a half after the event?

Kevin O'Donnell -- President and Chief Executive Officer

Do you want to start with DV?

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

Yes. DV, the management fees will restart next year. It's a quick turnaround. I mean they get suspended for the year when they go negative and then they'll restart next year, and that will reset the market as they go forward.

Kevin O'Donnell -- President and Chief Executive Officer

Separately, I anticipate that DaVinci will be a little bit larger next year, which should benefit where we're -- the fees that will generate out of that. With regard to Ida and certainty, Well, I think we have a really strong process in thinking about -- we talked about before the bottom-up and top-down approach to loss estimation. It is early days. I think COVID and some of the supply chain and inflation uncertainty and labor shortages adds a high degree of uncertainty to any loss estimate in this environment.

I believe that, that will be particularly visible in some needing to increase their European flood loss. I think we've done a better job than others in reflecting these variables. But perfectly candid. I think there is uncertainty in the general macroeconomic environment that could affect this loss. We've done our best. I think it's the right estimate, and I feel confident in it.

Ryan Tunis -- Autonomous Research -- Analyst

Thank you.

Operator

The next question will come from Josh Shanker with Bank of America. Please go ahead.

Josh Shanker -- Bank of America -- Analyst

Yes, good morning everybody. I'm just a little worried about Lucy in the football a little bit. It feels like we've had a year like 2017, yes, property pricing was up, but interest rates were down, and the ILS money in the pensions were really happy to participate I felt it was coming in 2021 as well. Can you talk about your confidence in some ways that one of the stop gaps is the wide participation of ILS money isn't going to be as enthusiastic about participating in this coming year?

Kevin O'Donnell -- President and Chief Executive Officer

Yes, I think you raised a good point where there has been more persistence in some of the ILS money than we originally expected. We enjoy great relationships and we have a different platform than others. I think if you look back, there's been several large ILS managers that are not going forward compared to 2020. I think that plays a role. I think the role of retro, I think retro funds, if appropriately managed, we'll have 70% to 80% drafter lost. That's another very difficult year to explain to investors. So frankly, I believe we will shrink our Upsilon portfolio. The good news for us is we tend to restructure those deals so that they more comfortably fit within RenRe Limited and DV so that we can still manage them on our platform.

So I feel as if it's just -- it's another body blow to the ILS market with the enhanced volatility to this year and also the fact that a lot of it will shift to the retro market. Burn is even higher. I think about -- 75% of the burn loss will come to reinsurance, and that will make its way into retros as well. So I don't feel impaired or encumbered in our ability to access capital. And I think it's because of our track record and our unique structures.

So what I'm saying is an industry phenomenon, not a RenRe phenomenon. But we could be wrong and capital could come flooding in but we haven't seen that as of yet. There are some capital raises going on in the industry, which gives some transparency. And it's our expectation that we'll probably increase our capital managed under the DaVinci platform, at least for sure.

Josh Shanker -- Bank of America -- Analyst

Okay. And then just a housekeeping item. At the beginning, Kevin, you said that the loss ratio improved 300 basis points in the casualty business. I was just trying to find out what time frames are you measuring that to me? And when did the -- you go through the gate, I guess that told you it was the right time to take the lower loss pick?

Kevin O'Donnell -- President and Chief Executive Officer

So that will be on an earned basis, and it's the current year accident expected ultimate that I'm talking about. We have...

Josh Shanker -- Bank of America -- Analyst

For full year '21?

Kevin O'Donnell -- President and Chief Executive Officer

No, from this quarter forward.

Josh Shanker -- Bank of America -- Analyst

This quarter forward, OK.

Kevin O'Donnell -- President and Chief Executive Officer

So it was more of a '22 issue earned partially in '22 and '23.

Josh Shanker -- Bank of America -- Analyst

Okay. Yes. And what was the event that transpired that said now is the time in 3Q '21 that we feel we have enough information that we can take that down a little bit?

Kevin O'Donnell -- President and Chief Executive Officer

It's actually not an event. It was our normal process to go through the curves. And it's the fact that we're beginning to have enough maturity in certain years to begin to reflect the trend that we are already observing but haven't reacted to. So I've talked in previous calls that there's been a gap in what our underwriters believe the profitability of the portfolio is and the conservative nature of the actuarial process to reflect positive trends more slowly. That's all it is. It's a -- it's the normal delay in recognition of casualty profitability in an improving market.

Josh Shanker -- Bank of America -- Analyst

Okay. That's perfectly complete. Thank you.

Kevin O'Donnell -- President and Chief Executive Officer

Yeah.

Operator

The final question is from Jimmy Bhullar with JPMorgan. Please go ahead.

Jimmy Bhullar -- JPMorgan -- Analyst

Hi, good morning. So first just had a question on buybacks. And you've been fairly active, and I think you started a little bit after you raised equity, but you've been fairly active with buybacks. To what extent is it just that you have extra capital and you have an inability to deploy it at the returns that you'd want versus maybe the stock price being depressed and trying to take advantage of that.

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

I think we started buyback in the first quarter, slowly about $175 million, I think $172 million actually. And that was after we saw the accumulation of some mark-to-market gains that actually fortified our capital base. And in my comments I was talking about -- I think Kevin was too, we see the opportunities in 2022, and that's what we're focused on.

In the context of 2022 and the growth that we're seeing there, we will have excess capital going into it, that we keep for pump potential deployment into profitable business opportunities that we'll see come over the course of the year. but we will have excess capital, and we will be generating earnings in the fourth quarter and carrying it into the first quarter, and that will be the baseline that we've been looking at returning if those opportunities present.

Kevin O'Donnell -- President and Chief Executive Officer

So Bob is absolutely right. And I think you presented it as an either or. We've actually done both. We've grown our portfolio, increase the efficiency of the portfolios that we're managing and have continued to buy shares back. So I feel great about that.

Jimmy Bhullar -- JPMorgan -- Analyst

Okay. And then on inflation, to what extent are you assuming sort of continuation of the uptick inflation we've seen in your pricing versus maybe viewing it as somewhat transitory?

Kevin O'Donnell -- President and Chief Executive Officer

We've always had inflation. I think in other times, we called a demand surge that after an event, we see that there will be increased competition for labor and resources. We have increased that. And the good thing is when an event happens, we can kind of adjust it in the moment. Our belief going into 2022 is we're going to continue to see demand surge, of course, we are continuing to see the effects of social inflation.

One of the tricks is to determine whether 2020 was a pause or a change in behavior. We believe it's probably more of a pause because of the slowdown in the courts. And we believe inflation will play a role and, more importantly, the competition for labor. So we're going in with less than a rosy picture to the economic backdrop to which losses will be settled and that will be included in our modeling and thinking about how to price transactions in 2022.

Jimmy Bhullar -- JPMorgan -- Analyst

Okay. And then just lastly, you mentioned a few of the reasons you're optimistic about pricing in your opening remarks. I think some of those reasons existed last year or this year as well, yet. It seems like while prices were up, they weren't up as much as before expecting going into the year. So what gives you more confidence? Or are there things that are different as you see them in the market now versus maybe a year ago?

Kevin O'Donnell -- President and Chief Executive Officer

It's a good point. I think it's just a persistence. It's another difficult year for ILS capital for retro I think there's a total change in how primary companies are seeing volatility, how they're thinking about the impacts of the increased price of their housing stock and the TSI values that they're insuring. I just think it's not a single thing. It's just, in some ways, just the straw that broke the camel's back, where I think there's finally going to be resolved to raise prices.

We've seen good rate change in every line other than property cat, and we've talked about it being an insurance-led pricing hardening. I believe that we're coming in where reinsurers are going to have some price -- pricing power and some control of terms and conditions that will be different than what we've seen in the last couple of years. It's difficult for me to put a confidence level on it, but I feel that through the conversations we have with brokers and clients that there is an expectation that they're going to pay more.

Jimmy Bhullar -- JPMorgan -- Analyst

Okay. Thank you.

Kevin O'Donnell -- President and Chief Executive Officer

Sure.

Operator

And at this time, there are no further questions. I would like to turn the conference back over to Kevin for any closing comments.

Kevin O'Donnell -- President and Chief Executive Officer

Thank you, everybody, for your time. Our focus, as I mentioned, is squarely looking forward. I am enormously optimistic about what our prospects are at January one and 2022 overall. I've got confidence in our model, confidence in our team. We've got great relationships. And I think that the wind is at our back and our sales are out full, and we're looking forward to executing for you in 2022. Thank you. [Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Keith McCue -- Senior Vice President, Finance and Investor Relations

Kevin O'Donnell -- President and Chief Executive Officer

Robert "Bob" Qutub -- Executive Vice President and Chief Financial Officer

Elyse Greenspan -- Wells Fargo -- Analyst

Meyer Shields -- KBW -- Analyst

Brian Meredith -- UBS -- Analyst

Ryan Tunis -- Autonomous Research -- Analyst

Josh Shanker -- Bank of America -- Analyst

Jimmy Bhullar -- JPMorgan -- Analyst

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