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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the Reinsurance Group of America First Quarter 2018 Results Conference Call. Today's call is being recorded.
At this time, I would like to introduce Mr. Todd Larson, Senior Executive Vice President and Chief Financial Officer; and Ms. Anna Manning, President and Chief Executive Officer. Please go ahead, Mr. Larson.
Thank you. Good morning everyone and welcome to RGA's first quarter 2018 conference call. Joining me in St. Louis this morning is Anna Manning, RGA's President and Chief Executive Officer. Anna and I will discuss the first quarter results after a quick reminder about forward-looking information and non-GAAP financial measures. Following our prepared remarks, we will be happy to take your questions.
To help you better understand RGA's business, we will make certain statements and discuss certain subjects during this call, that will contain forward-looking information, including, among other things, investment performance, statements relating to projections of revenue, premiums or earnings and future financial performance and growth potential of RGA and our subsidiaries. Keep in mind that actual results could differ materially from expected results. A list of important factors that could cause actual results to differ materially from expected results is included in the earnings release we issued yesterday.
In addition, during the course of this call, we will also comment on pre-tax and after-tax adjusted operating income, which is considered a non-GAAP financial measure under SEC regulations. We believe this measure better reflects the ongoing profitability and underlying trends of our business. Please refer to the tables in the press release and quarterly financial supplement for more information on this measure and reconciliations of net income to adjusted operating income for our various business segments. These documents and additional information may be found on our Investor Relations web site at rgare.com.
With that, I'll turn the call over to Anna for her comments.
Thank you, Todd, and good morning. As indicated in the earnings release last night, we reported adjusted operating EPS of $1.61 compared to $1.86 a year ago. These results were below our expectations, primarily reflecting normal variability of claims that is an inherent part of our business.
As we have pointed out in the past, the nature of our business is such, that we do see some quarterly volatility of claims in both directions, which can be exacerbated by seasonal trends. Our global platform and diversified product lines have reduced overall relative volatility considerably. But this was a quarter, where more of the variance went against us.
In this quarter, the biggest source of volatility was in our U.S. individual mortality business, where we had elevated claims beyond our seasonally adjusted expectations. As you are aware, the flu season and the winter weather was especially severe this year, and thus we were not entirely surprised that we saw higher claims.
We also experienced some volatility in Asia Pacific, attributable to modest swings in underwriting results in a few different countries. Todd will have some additional details on the results, but we see no issues of concern in the underlying fundamentals of our business.
There were also a number of bright spots in the quarter. EMEA and Canada performed well, and we continue to see good top line momentum in Asia and EMEA. We were also fairly active in the quarter, deploying approximately $90 into in-force and other transactions, including mortality, asset-intensive and longevity blocks. The pipeline for our transactions business is active, and we remain optimistic that we can execute on our share of transactions over time.
In summary, this quarter was a soft quarter for us, but not entirely a surprise, given the severe flu season and the tough winter in the U.S. Although our first quarter earnings were below our expectations, our view of the underlying business fundamentals and intermediate term financial outlook remain unchanged.
Looking forward, we are excited about our ability to serve clients, execute on our strategies, and deliver attractive financial results.
And with that, let me turn it back over to Todd.
Thanks Anna. I will provide some more details on the quarter's financial results. Our adjusted operating return on equity for the trailing 12 months was 10.3%, within our range of 10% to 12%. While our book value per share, excluding AOCI, increased by 26% on a total return basis over the year ago period. With a solid quarter of deployment into transactions and supporting organic growth, excess capital is down slightly to $1.3 billion.
Moving on to investments; the average investment yield, excluding our spread business, was 4.46%, up 5 basis points compared to the first quarter of 2017, reflecting higher variable investment income and up 8 basis points versus the fourth quarter of 2017.
Our new money rate was 3.8%, up from 3.43% in the fourth quarter, so we are getting some benefit from higher interest rates, and our core investment yield before variable investment income, was basically flat with the fourth quarter of last year.
The effective tax rate on pre-tax adjusted operating income of 26.7% was higher than our expected rate of 21% to 24%, primarily due to the fact that our earnings mix in the quarter was less from the U.S. and more toward foreign jurisdictions that have higher effective tax rates, as well as the negative impact from the global intangible low tax income or GILTI provision of the tax reform bill.
Related to our overall effective tax rate, there are some timing issues involved, and we continue to work through various aspects of tax reform. We do expect the full year rate to be within the expected range, but perhaps, towards the higher end.
Turning to our segment results; the U.S. and Latin America traditional business reported pre-tax adjusted operating income of $1.2 million versus $28 million a year ago. This comparison reflects the fairly adverse quarter this year, in terms of mortality experience. We would quantify the effect in terms of adverse mortality at roughly $40 million for the quarter. In this quarter, the experience reflects the higher frequency of non-large claims.
In any given winter, the general population tends to exhibit excess mortality from almost all causes of death, other than cancer. And unfortunately, this winter was especially harsh in many parts of the U.S. Flu, pneumonia and other respiratory diseases provided an additional source of excess mortality in the winter time, and as the CDC data demonstrates, this was an especially tough flu season. Given all this, we were not surprised by the elevated claims. Also, our Group results were modestly below our expectations this quarter, down from a very strong performance this quarter of last year.
Premiums decreased in the quarter, due to the effects of the modification of the existing health treaty that we mentioned in the fourth quarter last year, as well as negative comparison in individual health, as the long term care market has seen weak new business volumes.
Our asset-intensive business reported pre-tax adjusted operating income of $49.7 million this quarter, down from $51.6 million in the year ago period, and slightly below an expected range of $50 million to $55 million, hurt by lower level of prepayment income and lower equity markets.
Our financial reinsurance line reported pre-tax adjusted operating income of $20.2 million this period, an increase versus $17.8 million a year ago, due to the strong new business activity in the second half of last year.
Our Canada traditional segment reported pre-tax adjusted operating income of $25.6 million, up from $16.8 million in the year ago period. This quarter, we had mortality experience that was basically in line with our expectations, and had $1.5 million of positive foreign currency impact compared to a modestly unfavorable mortality experience in the first quarter of last year.
Premiums were up 17%, reflecting the execution of an in-force transaction in the first quarter, and with the positive influence of foreign currency. Premiums were up 4% in constant currencies, when adjusted for the in-force transaction.
Canada's financial solutions business, which includes longevity and fee based transactions, reported pre-tax adjusted operating income of $3.2 million, that was flat versus a year ago, as both periods had favorable longevity experience.
Switching to Europe, Middle East and Africa; our traditional business reported pre-tax adjusted operating income of $15.4 million, up from $14 million last year. Overall underwriting experience was in line, as unfavorable experience in the U.K. was offset by favorable experience in continental Europe and the Middle East region. The effect of foreign currency exchange rates was a positive $1.8 million. Reported premium growth as 23%, but if you adjust for stronger currencies, on a constant currency basis, the increase was 10%.
EMEA's financial solutions business, which includes asset intensive, longevity, and fee based transactions, reported pre-tax adjusted operating income of $35.9 million, compared to last year's $27.5 million. Longevity experience was favorable in both periods, with the quarter benefitting from underlying business growth and favorable foreign currency translation of $4 million.
Turning to our Asia Pacific traditional business; pre-tax adjusted operating income totaled $22.9 million compared to $41.7 million in the prior year period. Our results this quarter in Asia, which excludes Australia, were below expectations, while the year ago quarter was particularly strong. The weaker results this year reflect normal volatility and modestly adverse experience, and Australia reported a small loss this quarter, versus a small profit in the year ago period. In the current quarter, there was modestly negative experience in both the Group and individual business in Australia, but we consider this normal volatility.
Reported Asia Pacific traditional premiums were up 22%, reflecting continued growth in Asia, where premiums were up 41%, offset by a 15% reduction in Australia, primarily due to the treaty recaptures in the fourth quarter of last year. The very strong premium growth in Asia, reflected some client reporting catch-ups, while normalized organic growth for the quarter, is more in the range of 20% to 25%.
Our Asia Pacific Financial Solutions business reported pre-tax adjusted operating income of $1.3 million versus a pre-tax adjusted operating loss of $0.5 million in the year ago period. The quarter reflected better than expected experience from the treaty and run-off that we have mentioned in the past.
The corporate segment reported pre-tax adjusted operating loss of $30.9 million compared to $26.6 million a year ago. Results for the current quarter reflect a combination of higher project costs, annual incentive compensation that exceeded accruals, and onetime costs related to the launch of Langhorne. I will also note that the segments higher level of revenues and expenses include the LOGiQ3 acquisition. On average, we still generally expect the corporate loss to be in the range of $20 million to $25 million on a quarterly basis.
In conclusion, this quarter reflected some negative volatility that is inherent in our business. Our global platform and diversified earning sources continue to be an important component to our success. And the RGA team continues to execute on priorities and opportunities before us.
Given our strong balance sheet improvement strategy, we are confident that we can continue to achieve our financial goals and objectives.
Before we open up the call for questions, I would like to remind you of our upcoming Investor Day on June 7 in New York. We hope to see everyone there.
With that, we thank you and appreciate your support and interest in RGA, and we will open the call for questions.
[Operator Instructions]. And we will take our first question today from Kenneth Lee with RBC Capital Markets.
Hi. Thanks for taking my question. Just want to -- in terms of the mortality experience within the U.S.-LATAM business. I mean, it sounded though, if it's mainly due to frequency, wondering whether there's any other severity that you'd like to call out, and whether there was any kind of pattern between the facultative and non-facultative sides of the business, and finally, just whether you expect income spillover into the second quarter, either due to timing or other factors? Thanks.
Let me start with the performance. The key contributor, as Todd mentioned, to this quarter was frequency, elevated frequency. We saw both, an elevation in the number of non-large claims, as well as a higher average size to those claims. And as we have indicated, that's consistent with the bad flu season, and this season we have had more virulent strain of the virus, and a vaccine that was less effective against that strain.
We also saw a particularly bad winter. So outside the flu, we would expect to see additional seasonal volatility, and that would impact almost all causes of claims, other than chapters generally. There is a lot of research around this phenomenon, and it's observable in most countries. In fact, the fact that this volatility exists, even though we expect it to even out over the longer term, is part of the reason why reinsurance is valuable to our clients. It helps them manage this, and that's why we get paid for it.
So having said all that, we are disappointed in the claim results, we wish it were better. But given the quarter's circumstances, we are not worried about it.
Now with respect to your question about the April results; what I can say is that, according to the CDC data, the worse is behind us. But obviously, there is a time lag for us in claims, and at this point, it's really too early to say much else, and then with respect to your question on automatic versus facultative, the performance was pretty much consistent across our blocks of business, our areas [ph] of business and also focused at the older ages.
Okay, great. And just one follow-up, on that $90 million of excess capital deployment, any way you can just break out the proportion between the mortality, the annuity and any longevity transactions? Thanks.
We don't typically provide that level of information.
Okay. Thanks.
And next we move to Jimmy Bhullar with JPMorgan.
Hi, good morning. I think you mentioned this briefly, but just wanted to see if you had any comments on. If you think about the winter season, it sort of carried on longer than in difficult years. So is there a possibility that the flu related claims continue into 2Q as well?
It's possible, and we don't have any information, other than the CDC data that I have indicated to earlier. So as I said, it's too early for us to tell.
And then the driver of the loss in Australia, can you discuss that, and whether that has changed your expectations for that business, it had been generating a modest profit the last few quarters; I think you had a loss this quarter?
Yeah. We will probably still see some level of volatility in Australia. We are quite pleased that we have reduced the amount of overall risk in Australia with the recaptures at the end of last year. But the underperformance in the first quarter, I was really split between the individual DI business and some of the Group business. But as we look at it, there was nothing that caused us any concern, and you know, nothing of any particular treaty or client or anything like that. So we would view it as normal volatility, and we would still expect Australia to show a profit for the year.
Okay. And then just lastly, if you can comment on the competitive environment in the market, and I think you have mentioned that with tax reform, it will improve your competitive position versus some of the peers that actually were in lower taxed jurisdictions in the past, if you feel -- and whether you feel that's still the case?
All else being equal, I would say, that the tax changes should make us somewhat more competitive, and that's, by reducing the disadvantage we'd had against many of our competitors like the offshore reinsurers. But things are still moving around and how the competitors react and what they ultimately do, will affect our position. So it's hard to isolate what actions competitors are taking at this stage. What we can see is, how we line up on a deal-by-deal basis, and that means that it will take us some time to see emerging trends and where our relative position ends up.
Okay. Thank you.
And next, we will move on to Erik Bass with Autonomous Research.
Hi. Thank you. Just a bigger picture, just wondering if you could talk about the level of seasonality in your business, particularly in U.S. tradition, and if you see that increasing over time, just as your block ages, it is maybe more susceptible for sort of the winter weather and flu events?
So let me start with seasonality, and it's not just in the U.S. There are lots of studies and reports that show seasonality in many countries. And what we mean by seasonality is that, we would expect, all else being equal, that we would have higher debts in the first quarter compared to the fourth quarter, second and third somewhere in between.
Now variability; our variance has increased on an absolute basis, and that's because our business is getting older and its aging. But it isn't increasing. We don't see it increasing on a relative basis. So the analogy I would offer to you, is -- if you look at share price volatility on an equity, the dollar variance may increase, as the share price increases. But the relative volatility may not, and that's the point or that's the answer that I would provide to you. Yes, dollar volatility, because the scale of our business and the aging of our business is increasing. But we don't see it increasing on a relative basis.
Got it. That's helpful. And can you provide some additional color --
And I am sorry, I beg your pardon. You also had the question about seasonality. And yes, we would expect seasonality to increase as people age, because hard winters, flues, tend to have a disproportionate impact on the older ages.
Got it. Thank you. And then other questions, if you could provide some additional color on the transactions executed this quarter, the types of business and maybe the geographies that those fell into?
Sure. Well, we were fairly active in the quarter, I would start with, and on the margin, I'd say, we actually saw pickup in overall activity compared to 2017. We felt that it was likely due to increases in interest rates, and those continuation of the balance sheet, restructuring of non-core blocks. The three deals we executed on, they varied, as indicated in our prepared remarks, we had an asset intensive deal, a longevity deal and a mortality deal. We had them in three different countries, one in Canada, one in the U.S. and one in the U.K. We also completed a few FinRe transactions in the quarter. So we consider this a very nice quarter for us on deals.
Now, I would further suggest or further add that competition continues to be strong. However, we are pursuing the approach that we have talked about in the past, about looking for things that fit our sweet spot and where we have an edge. So what I'd like to share with you about these three transactions in particular, is that two of the three transactions, we were either exclusive, or with limited competition, because we had taken a new idea, a new structure or a new approach to the client. And then on the third transaction, that was a repeating transaction from a client, where we had done other transactions in the past, and our work and their experience with us on those prior transactions translated into a last look benefit.
So these deals highlight, that we are pursuing them actively. We are bringing new ideas. We are looking for repeat transactions, and our approach to the market is working.
All right. Thank you. That's helpful color.
And next, we move to Humphrey Lee with Dowling and Partners.
Good morning and thank you for taking that question. I just want to follow on Erik's question earlier and Anna's response regarding to the volatility in the first quarter results. I get the point that, as you grow the business, the dollar amount fluctuation will increase, as your block gets bigger. I think that's what you are trying to convey. But at the same time, if I were to look back historically, like a -- the first quarter typically kind of ranges kind of at the 20% range -- like 20% to 25% range of the quarter. And when you have a bad quarter, it may mean kind of maybe, low to mid teens or the earnings on a full year basis. But if we look back kind of 2015, it was like 8% of the full year earnings, same thing for 2017 and the $1.2 million in this quarter is definitely a lot worse than what people were expecting.
So I guess, what I was trying to ask is, given the wider range of the volatility, is that all explained by the aging of the block or was there something -- some other things going on as well?
There are a couple of factors. I think one of the larger factors is, that the volume is limited in a quarter. We think of mortality, and we believe, mortality is relatively stable and predictable over the long term, but the long term, when we look at our mortality, we are talking multiple years. One quarter really can't give you any sense of changes in trends, even a few quarters, and I think that's what you are suggesting, and I think that's very difficult, given the nature of our business.
I guess, so in Todd's remarks, so the unfavorable mortality in the quarter was roughly around the $40 million range. So that would put you, maybe in $41 million for the first quarter. That seems to be low compared to where you historically would be, like first quarter tend to be on a $60 million to $70 million range, and then in a bad quarter, maybe $40 million to $50 million. So I was just kind of wondering, what is driving that shift in terms of earnings pattern?
Our earnings pattern are not leveled quarter-by-quarter. So we expect and we have seen that typically, our earnings are lighter in the first quarter and stronger in the fourth quarter. I am really struggling to understand your question, and I am afraid that I am not answering it.
Maybe I will follow-up offline. Just as a second question, related to the tax impact in the quarter; so you mentioned, there is the geographic mix, kind of income from higher tax jurisdictions, as well as the GILTI impact. Can you talk about the -- I guess the components of the higher tax rate in the quarter, and how should we think about the GILTI portion kind of going forward?
Yeah Humphrey. So on the first item, the mix of business, it's really just because the -- I think the U.S. was up a little bit, we just had a -- given that we are talking about the effective rate here. So given that the other sort of non-U.S. businesses performed a little bit better and had more of the profits, it just rode the rate up a little bit.
On the GILTI, under U.S. tax reform, as you know, I think we tried to move to more of a territorial system, under U.S. tax system. And unfortunately, they didn't want companies moving -- still moving their U.S. business off to the lower tax jurisdictions that might be below 21%. So they will tend to the tax reform as GILTI tax, and it's only on, what's called intangible income, but that ended up being a pretty broad definition and unfortunately, a lot of the income that's produced by financial service type companies like insurance companies, the income on things like fixed income, securities and bonds and our insurance income are considered intangible income, so you have to go through this GILTI tax calculation.
And so, that's something that we will need to look at. I would say that, the details are still emerging in terms of the IRS regulations, and so we were fairly conservative in our first quarter calculation on this. We do believe that, at this point, it should be very manageable over time, because it all relates to what our income looks like under this GILTI calculation, and then what our position is, as far as -- on a local basis, what our taxes look like for various operating companies. And all that being said, we think it will be manageable over time, and we still feel that the effective tax range that we provided of that 21% to 24%, is still a good range, although maybe early going, we might be towards the higher end of that range.
So, essentially kind of the impacts of the GILTI was probably the reason why it's pushing you to the upper end of your guided range?
That's part of it early on here. But again, I think over time, as it all sorts out, hopefully, we will be able to manage it over time.
Okay. Thank you.
And next, we move on to Ryan Krueger with KBW.
Hi. Good morning. Can you -- just on the U.S. mortality claims, just give some perspective, as you went through the quarter did it -- as we got to, kind of towards the end of the quarter and March, as the food season had calmed down. Did it normalize or was it elevated throughout the entire quarter?
Ryan, we typically don't provide that detail of detail. And for a specific reason, some of our clients don't report on a uniform basis throughout the quarter, and so, mortality information on our business, can be noisy for that and other reasons.
Okay. Understood. Just maybe on Asia, can you give us a sense of how much underwriting experience differed from your typical expectation?
Yeah. So for the Asia offices, and this is excluding Australia; overall, the underwriting experience was a negative, about $10 million or $11 million across the various offices. And then, as I mentioned, Australia had a small loss than compared to our expectation, it was -- for the quarter, it was off -- let's call it $9 million or $10 million.
Okay. About $20 million in total between the two?
Yeah.
Got it. And then just last one on Langhorne, can you remind us, what's the threshold of size of a transaction that would move it into Langhorne versus RGA's own balance sheet?
Well Langhorne is clearly focused on the larger deals, and so these would be deals that typically RGA or -- these would be deals that RGA would not do on its balance sheet. Other than that, I can't give you specific hard starts and stops.
Okay. Got it. All right. Thank you.
And next, we move to Dan Bergman with Citi.
Thanks. Good morning. So to start the U.S. group underwriting seemed like it was modestly adverse again. So I just wanted to see if you had any updated thoughts on this business, what you are seeing and potentially any repricing actions you are taking?
So this group business, so it is -- does come up, as you mentioned, for repricing on an annual basis. So we do have opportunity to adjust, as we go on that. But the first quarter this year was a little bit negative for the business. But if you look at last year's first quarter, we were significantly positive at this point, so that's why the comparison is pretty difficult year-over-year.
Now overall in the business, it was still -- we continue to like the business, it adds nicely to our overall U.S. traditional business.
Got it. That's helpful. Thanks. And maybe just moving the premiums, there is clearly some noise in the 9% reported growth between FX, U.S. health treaty modification, Australia recaptures, and I think the new deal in Canada. So any sense, if you were to exclude those items, what a more normalized organic premium growth rate was in the quarter, and maybe what your outlook is going forward?
It's sort of tough; because you also have to think about the fluctuations we have in the treaty reporting and everything. But yeah, you are right, the total growth -- just the reported premium growth was 9%, if you adjust for the currency, you get down to about 6%. I would say that, the pure organic growth is probably slightly below that 6% -- call it 5%.
Got it. Thank you.
And next, we move to John Nadel with UBS.
Hey, good morning everybody. I guess you know, there has been times in the past, when you had a difficult quarter like this, volatility in claims or just elevated number of claims. And there have been times in the quarter, where you have come in well shy of your own expectations and census expectations, and you'd actually preannounce, the earnings shortfall. And then I guess, there has also times, where you haven't done that. I guess, I am curious, what your philosophy is, or tactical sort of decision making is around that. How we should expect you to handle this going forward, when you have got this kind of volatility?
Yeah. So the way we look at it is, as we have been explaining for some time now, the claims volatility in our business, that's sort of a normal part of our business, we are going to have negative volatility, we are going to have positive volatility. So that's just part of the nature of our business, albeit, this quarter was a little bit higher, due to the reasons we talked about before. I think the last time we preannounced was probably back when we had the Australia charge, and we view that as a -- call it an unusual event, where we had significant reserve strengthening versus just a normal volatility around the claims.
Okay. Okay. So that's how we ought to think about it, more of a discrete event as opposed to just normal fluctuation in your business?
Yes. That's the way we look at it.
Okay. That's helpful. And I wanted to follow-up a little bit on Langhorne as well. I guess, a couple of questions; first has Langhorne written any business yet? And I say written, I understand it's not issuing -- writing new business. Has it entered into a transaction yet? Is that something that when it happens, you would issue a press release or maybe Langhorne would issue a press release, how would we know about that?
So we launched Langhorne last quarter, and it's effectively up and running, and there are opportunities in the deal pipeline that fit the Langhorne remit. And recall, the Langhorne remit is bigger deals on risks that we are doing. Risks like asset intensive, mortality and longevity. So I would say, it's fair to assume that Langhorne is actively engaged in these opportunities, and depending on the client, we would expect to announce, when the deal is executed.
But remember, these deals take quite a while. We stood up Langhorne last quarter. It's very unusual, specially with the larger deals for a deal to be sourced and assessed and structured and negotiated and executed all in one quarter.
No, I appreciate that. But at the same time, I mean the entire market knows it's RGA, correct? So it's not like there is a brand new company to deal with. Do you see where I am coming from on that?
I do. I do. And as I said, we would expect to announce on execution, subject to any specific client considerations.
Okay. Understood. And geographically, does it sort of go anywhere or are there very specific targeted markets currently?
Yeah. It is targeted to the U.S. and Europe.
U.S. and Europe. Okay. And I understand your comments about longevity, things that RGA does, can we think about perhaps sort of a retroceded opportunity around pension risk transfer or bulk annuity deals out of the U.K., that sort of things too?
Yeah. I think those are all fair assumptions.
But just to clarify, since you mentioned the retroceded concept; the idea currently is that, the transactions for Langhorne would go directly to Langhorne. They will not flow through the RGA company.
Yeah no, I am sorry. I probably wasn't very clear there. I thought, maybe Prudential is the issuer of a group annuity, and then maybe offloading some of that, from a capital management perspective or otherwise to Langhorne. That's retroceding it all.
Okay, thanks.
And that's exactly right.
Okay. And the last question I had is just, if we think about -- and I understand it's an intermediate term guide, so not necessarily applicable with single year. But if we thought about the rest of this year, the last three quarters of 2018, being even in line with your own internal expectations, it's fair for us at this point to assume that the full year does not reach 5% to 8% adjustment for tax reform, correct?
I wouldn't go that far. I think -- look we have had years in the past, where we had high Q1 claims, followed by very favorable subsequent quarter claims. I would suggest you look at last year. Now that doesn't always happen, right? Again, if we look back at 2015, that didn't happen in 2015. So I guess I would suggest, it's possible, but there is no certainty that it will happen again this year.
And maybe --
I am saying, ex-favorable, sort of in, more of underwriting results in line with your own internal expectations, that's all?
Yeah. And maybe I would add, as we had mentioned, the first quarter results do not change our view of the underlying business itself. So there is nothing that [indiscernible] the results in the first quarter that would change our view of the remaining three quarters of the year. And hopefully, we can outperform.
Absolutely. Thank you.
And next, we move to Alex Scott with Goldman Sachs.
Good morning. First question was just a bit of a housekeeping item. The $40 million pre-tax, I just want to clarify -- sorry, the $40 million unfavorable mortality, was that a pre-tax number or an after-tax number, and is that representative of the unfavorable, relative to a normal seasonal 1Q report?
That's pre-tax.
And yes, it's relative to our seasonally adjusted expectation for 1Q.
Got it. Okay. That's helpful. And then, just in light of, if I guess some of the reinsurance transactions in the U.S. being repriced over the last few years, have you done any repricing recently, do you have any planned, and I guess, does this quarter change anything about repricing action that you may need to do?
Yeah. So we are obviously aware that some reinsurers have raised rates, and that has caused clients to recapture their business, and obviously, at a cost of the reinsurer in most cases. We haven't taken this approach. I'd also point out, that the difficulty, the performance difficulty that they are looking at, we had identified that back eight years, on our U.S. mortality business. Recall, we had isolated the 9904 business. And then, two years ago, we updated our assumptions. Since that time, so for the four quarters in 2016 and the four quarters in 2017, on a cumulative basis, that era has performed slightly better.
Now when you add this quarter, it's slightly behind, but there is nothing that causes us concern, and we are not seeing any underlying change and I think that for us, it just continued to monitor.
Okay. And maybe one more if I can, just the decision to not repurchase shares this quarter, is that more reflective of the pipeline that you see or is that more a function of where your share price has been, any kind of color you can provide there?
Yes. So as you know, we do manage the capital over longer term, not on a quarter-to-quarter basis. And certainly, our preference is to redeploy it back into the business to support the transactions on the types of deals that we like, where we can get the returns that we like. And also, the share price is certainly a factor that we consider, but as well as, we will be looking at the dividend level as we always do in the second quarter here, which we will announce any changes in July. And we still view share repurchase as a very viable good part of our way to deploy capital. So certainly, it's something that we will keep on the radar screen here.
Okay, thanks very much.
And next, we move to Sean Dargan with Wells Fargo.
Thank you. Good morning. I have a question about the primary carriers and universal life secondary guarantees. I know you grew up as a reinsurer of mortality risk, primarily through yearly renewable term, but do you have any solutions that would help primary carriers, that have issues with the secondary guarantee universal life, that they may wish to find a solution for?
We have participated in the universal life secondary guarantee market, as you said, through our YRT mortality. But we have also done it through solutions in our financial reinsurance area. So we do support financial reinsurance deals on the AXXX reserves. If you are asking about any other, the fundamental underlying risks, is that your question around maybe the lapse guarantees to your underlying consumer behavior risks?
Yes.
No. We haven't participated to-date. We are always looking at new ideas to see if we can find a solution that fits our risk appetites and provides the type of support clients are looking for. To-date, that hasn't -- we haven't come up with that idea.
Okay. Thanks. And then if I can just switch to Australia, I think, you said a couple of years ago that you and other reinsurers were basically trying to, I guess, dictate new terms and conditions of the primary carriers, where terms and conditions have gotten very loose. And since that time, the handful of life insurance entities in Australia, a lot of them switched hands from bank ownership to insurance ownership. I am just wondering, if you can give us an update on the -- how that market spans today on new business, in terms of terms and conditions and what you think -- if you can give us an idea, if you think anything has really changed there?
I would say, relative to five years ago, 2013, we have seen improvements in the group part of that market. And so we are selectively writing new deals that are targeted on having somewhat stronger or stronger provisions and protections.
We haven't seen that similar movement in the underlying individual market, individual disability, and in that instance, we have not been writing new business for a number of years. We think that market still has room to move.
Now, what's interesting to me, is that there is a lot of new capacity that is in that market from new reinsurers, and so that may have resulted in a slower movement or a slower change in, at least, the individual market.
Okay. Thank you.
And next, we move to Andrew Kligerman with Credit Suisse.
Hey, good morning. I'd like to talk a little bit about some top line trends in U.S. and Latin America. Maybe first, starting with the net premiums being flattish, and I know you had a long term care treaty that came off. But do you think you can still kind of grow in that 2% to 4% zone, and then the second part of the question, more broadly throughout U.S. and Latin America, I think you are guiding for 3% to 6% operating revenue growth. You are down about 1% in the quarter overall. So maybe give a little color on whether you can kind of stay the course in that 3% to 6% zone, or maybe there are some other issues?
Hey Andrew, I will start. It was actually a health treaty that got restructured at the end of last year. That could have a negative impact on the premiums in the first quarter here. I think if you adjust for that, we do have some positive growth in the premiums for the first quarter here.
And Andrew, I would add; there are some encouraging signs. We just received preliminary information on the size of the 2017 reinsurance market for organic business, that's that U.S. individual mortality business. This is from the Society Of Actuaries Munich survey. The information is fresh, so we are still analyzing it. But it looks like 2017 will be the second straight year with an increase in the reinsurance market. And so that's nice to see. We hope it's the beginning of a new pattern, with some good signs for business, for additional top line business.
Got it. And just sort of -- so you think traditional could see some decent top line? I think last year, it was up about 2%, so that doesn't seem out of the realm? And then just kind of back to your overall guidance for revenue across the board in U.S. and Latin America, do you still feel good about that 3% to 6%?
Perhaps on the lower end of that range, and the factor that's causing that, is the long term care business. It's not that we lost the treaty, it's that the underlying market itself, the direct market, has been shrinking for many years. Very little new business is available to the reinsurers, the insurance companies, because of that contraction or keeping more and more of the risk. And this is -- I want to be clear, this is the standalone LTC market that has been contracting for a long period of time. We are not active in the combo market. So our LTC business is not growing. We have very little -- I believe it was down 2% this quarter, and again, it's not loss of treaties, it's actually, we are not seeing much in the way of new business.
Interesting. Interesting. Thanks a lot.
[Operator Instructions]. Next, we move to Tom Gallagher with Evercore.
Good morning. Just on this GILTI tax situation, can you comment on when you do expect to get clarity on that?
I think as we go throughout the year, we will get more and more clarity. It's something that we continue to talk with our tax folks, and they talk with others as well. And we are working through it, and like I said, it's something that we have to calculate and work with. But again, we think it will be manageable as we go forward.
Okay. And just as it relates to organic growth that you are seeing? I know you mentioned that the Munich Re survey statistics are showing the reinsurance market is growing. When you look at your underlying book of business and you look at flow reinsurance amount, that primary companies are ceding, are you actually seeing organic growth or when you look at your U.S. mortality business, do you really need to do in-force treaties, in order to grow organically? I don't know if you can split those two things apart.
I think I can. So when we look at our organic business in the U.S., it has increased, it has been increasing, consistent with the 2016 market, and the 2017. As I said, early indications. So yes, that has been growing. But given the scale of our business, you can appreciate that, that isn't always enough to compensate for the loss of premium on debts and other causes.
I am sorry, I forgot what the second part -- on the in-force blocks. Yes, we are always looking for and are pursuing small, medium and larger mortality blocks. That wouldn't be additive to the growth from the organic business.
So should I take that to mean, is that low single digit growth in flow reinsurance, and then you could get to something higher than that, when you add in-force deals. Is that about right, or is there any way to --
No, no. That's about right.
Okay. And then, just final question is, I know -- I think it was just a small loss you had in Australia, but just quick question on that, I know there has been some issues with that in the past, so just making sure, you are not seeing any warning signs there, that might get worse. Do you feel like that's under control, fairly stable with current loss trends you are seeing there?
Yes, we have seen a lot of times, over the past few years, de-risking and getting the Australia business in good shape, and we haven't been pushing for growth there. So the results in the first quarter, as we looked at them and we continue to evaluate it, it really does look like normal volatility, and we still expect for the year, for the Australia operation to be profitable.
And sorry, just a final follow-up on that, any consideration, just given the history there of pulling out of that market, or are you really committed to it?
We are committed to that market. It's a very important market in a global context, and it's an important market for RGA.
Okay, thanks.
And next, we move to John Nadel with UBS.
Thank you for the follow-up question. Anna, we have heard recently from a couple of different companies, that maybe there is an increase in the potential interest in long term care blocks and reinsuring or outright purchasing, transferring risk, from an in-force run-off block to somebody else. I guess I have two questions for you, first is, is that something that you would concur, that based on what you see in the market, that there is maybe some increased appetite potentially for that particular business? And then secondly, is that a business that RGA has an appetite in or appetite for?
I will answer your second question first and then circle back to your first question. Over the last number of years, we have looked at a number of legacy LTC blocks. And we have not been successful at finding a structure or finding a block, where our evaluation of the risks line up with the client's expectations, and we get to a doable deal. So we scale back our efforts -- occasionally, if a block comes to market or if we are approached with a block, where the risk characteristics might be interesting, we will look at it. But I would say, our interest in legacy LTC blocks is quite-quite low.
Now with respect to your -- sorry, go ahead?
Sorry go ahead. I just had one quick follow-up, but go ahead.
Okay. And with respect to your question about, did we see any evidence that there is interest; there are a number of new competitors, maybe a few, a number is probably too hard. A few competitors, new competitors that I would not be surprised, that were looking at some of these opportunities.
Got you. That's helpful. And then -- this maybe more difficult and I understand if you want to punt on this one, but in the past, when you have taken a very close look, done real-real work and you couldn't come to an agreement with the client. Can you give us a sense for how far apart -- how wide is the bid-ask, and frankly, I guess I am going to assume that a client is willing to pay the counterparty X to take it on, and the counterparty needs a payment of some multiple of X. I can't imagine that there's a case where there's somebody who would be willing to pay the client.
I really can't answer that question. I would just offer up to you, that it was whited off, that even with structuring out some of the risks, we were contemplating removing some of the risks. It still wasn't an attractive enough opportunity for the client. Now, we are a conservative organization. That doesn't mean new competitors would have a similar view, and so, I wouldn't read much into that or too much into that.
That's very helpful. Thank you, Anna.
And next, we move to Ryan Krueger with KBW.
Thanks. I actually didn't have a follow-up question, just wanted to clarify for the transcript record, that wasn't me with the hot mike earlier. Thanks.
All right.
Okay. Well thank you everyone for participating on our call this morning. We very much appreciate it. And again, we look forward to seeing some of you on June 7 in New York for our annual Investor Day. With that, we will conclude the call.
And that will conclude today's call. We thank you for your participation.