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AXA Equitable Holdings, Inc. (EQH 0.53%)
Q1Â 2019 Earnings Call
May. 10, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, my name is Carol, and I will be your operator today. At this time, I would like to welcome everyone to the AXA Equitable Holdings First Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question-and-answer session. (Operator Instructions) At this time, I would like to turn the call over to Kevin Molloy, Head of Investor Relations. Mr. Molloy, you may begin.
Kevin Molloy -- Head of Investor Relations
Thank you. Good morning and welcome to AXA Equitable Holdings First Quarter 2019 Earnings Call. Materials for today's call can be found in our website at ir.axaequitableholdings.com.
Before we begin, I would like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may materially differ from those expressed in or indicated by such forward-looking statements. I'd like to point out the Safe Harbor language on Slide 2 of our presentation. You can also find our Safe Harbor language in our 10-Q.
Joining me on today's call is Mark Pearson, President and Chief Executive Officer of AXA Equitable Holdings; and Anders Malmstrom, our Chief Financial Officer. Also on the line is John Weisenseel, AllianceBernstein's Chief Financial Officer.
During this call, we will be discussing certain financial measures that are not based on Generally Accepted Accounting Principles, also known as non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations portion of our website, in our earnings release, slide presentation and our financial supplement. I would now like to turn the call over to Mark and Anders for their prepared remarks.
Mark Pearson -- President and Chief Executive Officer
Thank you, Kevin, and good morning everyone. Thank you for joining our call today. We are pleased to present our results for the first quarter of 2019.
I'd like to begin by providing some key highlights from our performance for the period. Next, I'll share an update on our progress against these strategic priorities and financial goals, we've previously articulated to you. Before we turn to the numbers, I thought it'd be helpful to provide some context around current capital market conditions, as well as some recent developments in the unique story of our company. During the first quarter of 2019, we saw a mixed picture in the macroeconomic environment. While the equity markets recovered from the correction during the fourth quarter with the S&P 500 rising 13%, treasury yields turned weaker with the 10-year declining by approximately 30 basis points while higher rates in equities are good for our business, our hedge program ensures we are protected through volatile periods. With this as a backdrop, our hedge program continued to perform as expected protecting our balance sheet and supporting our strong capitalization levels in excess of CTE98 for our VA business.
We further enhanced our long-term financial flexibility to an offering that raised $1 billion in contingent capital to provide a committed alternative source of capital and diversify our funding sources. The favorable rates at which we obtained this facility speaks to market recognition for our capital strength and stability. We also continue to deliver on the shareholder commitments we made more than a year ago. Actions, which are in line with a target payout ratio we revised upwards to 50% to 60% of non-GAAP operating earnings. In fact in the first quarter of 2019, we returned $818 million in the form of share repurchases and dividends for the benefit of shareholders, which reflects continued confidence in our expectations for operating cash flows and financial flexibility. And as we have previously communicated, we intend to increase our quarterly dividend by 15% from $0.13 per share to $0.15 per share payable in this current second quarter. It's remarkable that it's already been a year since AXA Equitable Holdings became a publicly listed company.
In fact, it was exactly a year ago this morning that we rang the opening bell of the New York Stock Exchange, culminating a tremendous achievement by our people and signifying the next chapter in our storied 160-year heritage of providing financial security and protection for our clients and their families. The first quarter of 2019 was an especially significant moment in our history. As the subsequent secondary offering and share buyback reduced AXA S.A.'s ownership stake to below 50%. Commensurate with the sale, our nearly 3-decade successful relationship with AXA as our controlling shareholder concluded. And we are once again one of the largest independent financial services companies in the US.
Accordingly, we established independent governance at the end of March, implementing a new board structure and then announcing the appointment of new members, including an Independent Board Chair. We're delighted at the expertise and diversity of our board and we're sure that they will bring much to achieving our strategic objectives and creating shareholder value.
Turning now to Slide 4 and a summary of our performance in the first quarter of 2019. We delivered solid growth with positive momentum across all of our segments, resulting in strong operating earnings and further progress toward our financial targets, including 5% to 7% annual non-GAAP operating through 2020. The strong earnings momentum we generated in 2018 carried on into this year, as we increased first quarter 2019 non-GAAP operating earnings by 5% to $509 million, reflecting solid operating performance and continued effective execution against our long-term strategic targets. We delivered $0.98 per share in non-GAAP operating earnings in quarter one, a 14% increase over the comparable quarter from last year.
This overall momentum is further evident in the contributions from each of our business segments to our reported results. Beginning with individual retirement, strong sales fueled by a leading distribution platform helped drive a 16% increase in first year premiums to $1.9 billion. In addition to improving net flows, we also had the highest ever quarter for sales of our structured Capital Strategies product, which is enabling individuals to better manage market uncertainties. In Group Retirement, operating earnings increased by 7% to $81 million, as continued net inflows and market growth moved account values higher. Top line growth remained solid as renewal contributions and strong flows were supported by our leading advice centered engagement model in the 403(b) market. Increased contributions were the outcome of innovative advisor and digital campaigns to help participants recognize the value of planning for retirement.
AllianceBernstein continues to deliver differentiated returns for clients through its diverse product set. The first quarter marked the third consecutive quarter of positive net flows with $1.1 billion in firmwide net inflows driven by $2.2 billion of active net inflows, translating to a 2% active annualized organic growth rate. With strong momentum in active equities and in diverse regions, AB continues to scale and commercialize its offering while remaining expense disciplined and executing on its relocation to Nashville.
For our Protection Solutions segment, we reported a strong quarter with $49 million in operating earnings, representing growth of 40% from the prior year quarter, in line with expectations. From a top line perspective, we grew annualized premiums 14% driven by sales growth in capital-light VUL products and continued traction in our employee benefits business, where we recently crossed the $100 million sold premium threshold demonstrating the value of our platform and what it can deliver for SMEs. For the total enterprise on a pro forma basis, we generated an operating ROE of 15.2% for the quarter, an attractive result in line with our target. And for the total company assets under management stood at $664 billion as of March 31, 2019. The quarter represented a strong start for the year for AXA Equitable Holdings with solid momentum across our businesses, continued value creation for our clients and the fulfillment of our commitments to shareholders.
Turning to Slide 5 and our strategic priorities, we have made meaningful progress against the strategic priorities that we set out to achieve at the time of our IPO. And our first quarter results keep us firmly on track to deliver on these targets through 2020. For our general account optimization, we have completed over 2/3 of the rebalance from treasuries to longer duration corporate and have achieved $108 million toward the $160 million goal. We expect to complete the rebalance by year-end 2019 and we remain on track to realize the $160 million uplift by year-end 2020. From a productivity standpoint, we continue to make progress in reducing net costs in our insurance business, achieving $21 million of run rate savings as of the end of the first quarter. We expect this run rate to accelerate through 2019 and into 2020 and we remain on track to deliver on our $75 million pre-tax target net of reinvestment. From a growth standpoint, the momentum and strength in each of our four business segments give us confidence in our ability to achieve our broader targets and continue generating sustainable organic earnings growth over time.
Now I'd like to turn the call over to Anders to go through our results from the first quarter in more detail. Andres?
Anders Malmstrom -- Chief Financial Officer
Thank you, Mark, and good morning everyone. On Slide 6, I will review our consolidated results for the first quarter before providing more detail on segment results and our capital management program. As Mark noted, we reported solid first quarter results with non-GAAP operating earnings of $509 million, up 5% from the prior year quarter or 14% on a per share basis, as the impact from our share repurchase program has reduced outstanding shares by over 12% since the IPO. This growth was primarily attributable to higher net investment income, which had a positive impact of higher asset balances and yields. And from our general account portfolio optimization, partially offset by lower income from alternative investments due to the reporting lag for private equity. Also contributing to the growth was lower DAC amortization and lower operating expenses. The GAAP net loss for the quarter was $775 million. As with prior quarters, driving this figure are non-economic items related to VA product features. This includes nonperformance risk and the impact of our hedging program, which together generated a negative GAAP impact as expected, driven by double-digit equity market growth and the tightening of our own credit spread in the quarter. Overall, this result was in line with expectations and our previously communicated guidance.
As a result of AXA's ownership falling below 50%, we now commence our separation from AXA and we expect to incur additional one-time expenses of $300 million to $350 million over the next three years. We anticipate the cumulative amount of separation costs to be between $650 million and $700 million, of which $330 million has been incurred since 2017, including $24 million in the first quarter of 2019. Total company assets under management ended the quarter at $664 billion, rebounding 7% sequentially following the equity market decline in the fourth quarter of 2018 and returning to previous year levels. And finally, pro forma non-GAAP operating ROE increased 160 basis to 15.2%, driven by strong operating earnings growth over the past 12 months. This level of ROE remains in line with our mid-teens objective.
Moving on to business segment performance, I will begin with Individual Retirement on Slide 7. Operating earnings of $370 million were up slightly versus the prior year quarter as higher investment income reflecting growth in general account assets and improved GMxB results were partially offset by higher DAC amortization and lower fee type revenue on lower average separate account values. As we have pointed out in prior quarters, the assets backing our SCS product are held as trading securities and mark-to-market each quarter. We are in the process of transitioning these assets to an available for sale classification, which will not require quarterly marks. The mark-to-market is below the line, while the associated DAC amortization with the mark-to-market has been occurring above the line and causing volatility in our non-GAAP operating earnings.
For 2019, we have elected to move the volatile DAC amortization associated with this mark-to-market below the line, to match the location of the mark on the assets. We believe this change will help provide better insight into our fundamental business drivers within our non-GAAP operating earnings. You can find the impact of these changes to previous quarters in our financial supplement and 10-Q. In addition, when we have completed the transition of our trading securities to AFS over the next 12 months to 18 months, we expect that this below the line volatility will largely diminish.
In the quarter, we maintained positive sales momentum in our de-risked variable annuity product, with first year premiums up for the fourth straight quarter, and 16% year-over-year. Products without living benefits again represented over 70% of sales, led by the sales of our structured Capital Strategies product, which increased 43% year-over-year to its highest level ever. Enabled by the breadth and depth of our distribution, we continue to have success driving disciplined growth of capital-light product, while emphasizing value over volume.
Account values increased by approximately $700 million year-over-year, primarily driven by equity market depreciation. Net flows improved both sequentially and year-over-year, as outflows from the mature fixed rate block were partially offset by $841 million of net inflows on newer less capital-intensive products, which increased by $262 million versus the prior year quarter. This trend continues to de-risk our portfolio toward less capital-intensive products, which along with segment earnings growth over the trailing 12 months contributed to 240 basis point increase in segment return on capital.
Turning to our Group Retirement segment on Slide 8, we reported operating earnings of $81 million, up 7% from the prior year quarter, primarily due to higher fee type revenue and net investment income and higher average account values. Account values increased $1.2 billion year-over-year due to market depreciation and continued net inflows. Net inflows, which are traditionally strongest in the first two quarters of the year, improved 6% over the prior year quarter, driven by strong gross premiums and lower surrenders. Gross premiums also improved on a year-over-year basis to $840 million, driven by growth in renewal contributions enabled by our ongoing efforts to deepen penetration in the plans that we serve and increased contributions through our client engagement programs. Finally, segment operating return on capital improved from 25.8% to 31.3%, driven by strong earnings growth over the trailing 12 months. Normalizing for the impact of assumption update in the third quarter of 2018, this figure would have been approximately 28%.
Now turning to Investment Management and Research, which is AllianceBernstein on Slide 9. Operating earnings decreased to $77 million from $81 million in the prior year quarter, primarily driven by lower revenue due to higher performance fees in the prior year quarter following adoption of the new revenue recognition standard and the decline in Bernstein Research revenue. The decrease was partially offset by our increased ownership of AB from 46.5% in the first quarter of 2018 to 65.6% as of March 31, 2019. Net inflows of $1.1 billion were positive for the third straight quarter and were driven by $2.2 billion of active net inflows translating to a 2% active annualized organic growth rate. First quarter results reflect underlying momentum in many areas of AB's business. 85% of retail rated assets were rated 4 or 5 stars by Morningstar at quarter end and we continue to see a diverse array of AB funds attracting assets with seven fixed income and six equity funds each attracting more than $100 million of net inflows during the quarter. In addition, AB continues to diversify and grow its institutional pipeline, which was $11.4 billion at quarter end, up from $9.7 billion at the end of the year. In its private wealth business, flows returned to positive territory with $500 million, driven by improved sales and redemptions versus the fourth quarter.
Finally, AB's adjusted operating margin declined to 24.1% from 30.1% in the prior year quarter, primarily due to the impact previously noted. Excluding the impact of the real estate performance fees in the first quarter of 2018, transition expenses related to the Nashville relocation and proxy solicitation fees incurred in the first quarter of 2019 in connection with the AXA change of control, the operating margin declined approximately 250 basis points versus the prior year's first quarter.
Moving to Protection Solutions on Slide 10, where we reported operating earnings of $49 million for the quarter. This result represents a 40% increase from the prior year quarter in line with our previously communicated run rate guidance following the exit from loss recognition in the third quarter of 2018. Driving earnings was higher net investment income from our GA optimization initiative, lower DAC amortization and stable operating expenses. Partially offsetting this growth was an increase in large case mortality claims compared to the first quarter of 2018. In addition, claims frequency for the quarter was in line with expectation. Concluding with sales, we continue to see solid momentum in this segment with annualized premiums up 14% year-over-year, led by growth in VUL sales and the ongoing ramp-up of our employee benefits business. Now with over $100 million in sold premiums, we are encouraged by the growth of the business and it is further validating the need for a technology centered solution for SMEs.
Before turning the call back to Mark for his closing comments. I would like to highlight our capital management program outlined on Slide 11. During the quarter, we returned $818 million to shareholders through three methods. First, we completed $150 million of share repurchases as part of an accelerated share repurchase agreement entered in January, at an average price of $18.51 per share. This amount effectively completed the company's previous share repurchase authorization. Second, we returned $68 million to shareholders in the form of quarterly cash dividends, reflecting $0.13 per share. Looking ahead, we announced our intention to increase the dividend by 15% to $0.15 per share beginning in the second quarter of this year.
And finally, we completed a $600 million share repurchase from AXA in conjunction with the successful March secondary offering, which was a significant step toward delivering on our 50% to 60% capital return objective. Following this transaction, the company has $200 million remaining on its current repurchase authorization.
Also during the quarter, we strengthened our financial preparedness through the issuance of $1 billion of contingent capital funding arrangements, split between 10-year and 30-year tranches. This offering complements our existing capital tool kit and enhances our financial flexibility by providing an additional source of committed long-term capital, regardless of capital market and economic conditions. These transactions have no current impact on the company's debt and cash positions and ongoing financing costs of approximately $24 million per annum pre-tax will be reflected in our corporate and other results going forward.
Overall, we believe that our financial strength continues to be one of the cornerstones of our company's differentiated story with capital returns supported by our solid recurring operating earnings and our robust capital position.
With that, I will turn the call back to Mark for closing remarks.
Mark Pearson -- President and Chief Executive Officer
Thanks, Anders. Before we turn to taking your questions, I'd like to close by reiterating our solid results and some highlights as we step into 2019. The first quarter was a strong start to the year for our company as we continue to perform well across various market environments and delivered growth in earnings with contributions from across our business segments. We continue to make significant progress against our strategic initiatives and remain confident we will achieve our 2020 targets, including annual non-GAAP operating earnings growth of 5% to 7%.
We are delivering on our commitments to shareholders with $818 million in dividends and share repurchases in the first quarter of 2019, in line with our increased payout target ratio of 50% to 60% of earnings. Our long-term financial flexibility is further enhanced, thanks to the successful launch of a $1 billion contingent capital facility, which provides increased liquidity and diversification of funding sources. And following the March secondary offer, we are one of the largest independent publicly traded financial services companies in the country, with independent governance and a commitment to deliver for our clients and maximize shareholder value over the long term.
With that, we'll open it up for questions and answers.
Questions and Answers:
Operator
(Operator Instructions) Our first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
Elyse Greenspan -- Wells Fargo -- Analyst
Hi, good morning. My first question on the investment portfolio optimization. You guys seem to be running a little bit ahead. You guys had said about $120 million to $140 million will come through this year. And you're at $108 million after the first quarter. Is there any sense could we maybe see some of the earnings that are expected for 2020, come into 2019?
Anders Malmstrom -- Chief Financial Officer
Yeah. Good morning this is Anders speaking. Look, I think as you said, I mean, the general account rebalancing is moving well toward the target of $160 million. As we stated, it's $108 million. I think from my perspective, it's really running on track, so that we should get the full amount reflected in 2020. And then the program will be basically finished by Q3, Q4 this year.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay, great. And then on capital return. You guys have $200 million left on your authorization. You know, as you think about -- and you now have some contingent capital that you could raise some debt. As we potentially think about additional offerings by AXA, would you guys potentially be willing to go above the target level this year? There is more stock coming to the market and can you just give us some comments and thoughts about maybe going to the higher end and maybe front-loading some 2020 buyback.
Anders Malmstrom -- Chief Financial Officer
Yeah, look, I think it's -- as we said, we have the 50% to 60% payout ratio, which is already higher than what we said a year ago. I think we really want to stick to the 50% to 60%. And I think the authorization we have right now is $800 million, we already front-loaded that in order to participate with the buyback. So I don't anticipate any other front-loading, because I think we really want to maintain the range, and later in the year we are going to use the extra $200 million that we still have authorization from.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay, and then one last quick question. In terms of -- it seems like there was one -- some one-off benefit to investment income within corporate, but there was no kind of one-off number that went through the investment income line within any of the segments, correct?
Anders Malmstrom -- Chief Financial Officer
So what we saw in Q1 is really because of the market rebound. And we have some seed money that we invest into our business and generate funds and then this is allocated to the corporate and other and that's where we saw a one-time benefit that came through in Q1 after the very strong rebound of the market.
Elyse Greenspan -- Wells Fargo -- Analyst
Okay, thank you very much.
Operator
Our next question comes from Ryan Krueger from KBW. Please go ahead.
Ryan Krueger -- KBW -- Analyst
Hi, thanks. Good morning. SCS have remained pretty strong as new competitors have been entering that market. Can you talk a little bit about the competitive dynamics there and I guess, why it doesn't seem like some of the new competition is having much of an impact on your sales?
Mark Pearson -- President and Chief Executive Officer
Good morning, Ryan. It's Mark Pearson, yes, we had a very, very good quarter on the individual retirement side, particularly as you say through SCS. Yes, we do see more competition in the market. A number of players have followed our product design and are out there competing. But I think one of the things that really sets us apart is the depth and breadth of our distribution. It can be not too difficult to copy a product but it's quite hard to copy a distribution footprint like ours. So we are benefiting from good product design, but also very good reach through AXA advisors affiliated sales force into the traditional banks and warehouses, where we've always played but also into new channels like general insurance players, where we've been particularly successful. That's what's really fueling our superior growth.
Ryan Krueger -- KBW -- Analyst
Thanks. And then in Group Retirement, we've seen a lot of fee pressure in the 401(k) industry, doesn't seem like there's been that much in tax exempt. So just hoping you could talk a little bit about what you're seeing there and the differences between tax-exempt markets versus 401(k) markets at this point?
Mark Pearson -- President and Chief Executive Officer
I think the key in the Texas markets is the business model we have, where principally we are advising teachers, it's an advice model, it's a work-site model, if you like, where our advisors are with teachers helping them through what is quite a complex situation, they tend to have a defined benefit scheme. And we are advising them on their supplementary retirement needs and because it's advice we're giving rather than just a pure platform, the margin pressure is less there.
Ryan Krueger -- KBW -- Analyst
Okay. Thank you.
Operator
Our next question comes from Suneet Kamat from Citi. Please go ahead.
Suneet Kamat -- Citi -- Analyst
Thanks. Wanted to start with AB and the margin outlook there, I think in the past you talked about 30% plus by 2020. Obviously, lower than that in the quarter. So can you just give us an update in terms of how you're thinking about that target?
John Weisenseel -- Chief Financial Officer
Sure. This is John from AB. We still believe that a 30% margin target is achievable. We believe this is a 30% margin business that we run. It's, obviously, dependent upon the markets. And so the function of when we actually hit that target will depend upon the markets. But it's definitely our target and we think it's definitely achievable.
Suneet Kamat -- Citi -- Analyst
Okay. But with the market kind of coming back now to where it was in September, is there any reason why we shouldn't think the 30% plus by 2020 is -- is there any reason why you're not citing that specific date in terms of the target anymore?
John Weisenseel -- Chief Financial Officer
I think when you look at the composition of our AUM, where over 50% is fixed assets -- fixed income and about 38%, 39% is equities. You can run your models and I think there's definitely scenarios under which you look at increases in markets, where we get to the 30% by 2020. And there is other scenarios that you may run where we do not get there. So it really depends upon, I think, the probability that you attach to each one of those market assumptions, as far as when we actually get to the 30% margin target.
Suneet Kamat -- Citi -- Analyst
Okay. And then on the individual retirement, Mark, you talked about the strength of the distribution, can you give us a sense in terms of your sales, how much of your individual retirement sales are third-party versus AXA advisors?
Mark Pearson -- President and Chief Executive Officer
It's 60%/40%, Suneet.
Anders Malmstrom -- Chief Financial Officer
It's 60% third-party, Suneet, and 40% AXA advisors.
Suneet Kamat -- Citi -- Analyst
Okay. Thanks.
Operator
Our next question comes from the line of Tom Gallagher from Evercore. Please go ahead.
Tom Gallagher -- Evercore -- Analyst
Good morning. John, just a follow-up on AB. I know there was a sharp drop in Bernstein Research revenues and earnings in 1Q. Should we assume that's a new run rate or is there an expectation that's going to recover in 2Q. And also last year 2Q was a higher performance fee quarter, is that a -- should we have a similar expectation for this year?
John Weisenseel -- Chief Financial Officer
Sure. Let's take the first question first. With regards to the -- I'm sorry. let's go with the Bernstein question first. It really was -- the drop was global and it really is a function of less trading volume globally, whether we're talking about Europe, Asia or the US. And it's really we've looked at our peers and our peers are down similar percentage drops in terms of revenue. So it really was more of an industry dynamic as far as anything specific to us. So the lower volatility hurt us as well. So we just have to keep an eye on in terms of how that proceeds through the rest of the year, but if volumes pick up, the volatility picks up in the market. We'd expect the Bernstein business to do better as well. In terms of the performance fees, last year we had a total of $195 million in performance fees for the full year; $130 million of that was due to two portfolios that were in liquidation.
So the Real-Estate Equity Fund 1 portfolio, which impacted us in the first quarter comparison period and then there was also the Financial Services Opportunity Fund 1 portfolio. So we actually had some significant performance fees in the Financial Services Opportunity Fund I portfolio in the second quarter of last year. In fact, I think it probably accounted for somewhere roughly about maybe half the performance fees that we have recorded in the second quarter of last year. So I think when you think about the second quarter, you have to realize that you won't see those Financial Services Opportunity Fund 1 performance fees this year.
Tom Gallagher -- Evercore -- Analyst
Understood, thanks. And the $200 million remaining share repurchase authorization, should we expect that to be used ratably over the next three quarters or how should we think about that?
Mark Pearson -- President and Chief Executive Officer
Yes, so I think, look, Tom, I think it's a good question. You know -- I mean, we have this authorization of $800 million, usually basically spread over the year. We front-loaded $600 million in order to participate them with the offering. I think you can expect that the remaining $200 million would be spread over the -- basically the rest of the year. But don't expect us to front load because when it comes to the cash actually that we have at the holding company, now we have the surplus note that we repaid in March, which helped us then to pay the $600 million for the repurchase. But the dividend we expect from the operating entity will come later in the year, usually around June/July framework, and after that we can then use it for the remaining $200 million tons. Don't expect it to front load even more, we're already very much front loaded.
Tom Gallagher -- Evercore -- Analyst
Got you. And then just one final one, the contingent capital facility. So if I am hearing you correctly, this is really for (ph) downside scenario planning over a long period of time. From a contingency standpoint, it doesn't sound like you have any intention of using this over the next year or so, is that a fair way to characterize it?
Mark Pearson -- President and Chief Executive Officer
Yeah, absolutely, I mean, it's really coming from capital, it's a good time to basically set it up now because you fix the terms. And then you have access to that capital whenever you need it. And particularly, you know, if there is a crisis, it's usually very difficult, very expensive to get this facility, that's why we set it up now. But there is no, really no intention to use that in the near term.
Tom Gallagher -- Evercore -- Analyst
Okay. Thanks.
Operator
Our next question comes from Andrew Kligerman from Credit Suisse. Please go ahead.
Andrew Kligerman -- Credit Suisse -- Analyst
Okay. Good morning. Maybe some numbers to start. So in the fourth quarter, the swing in statutory capital -- statutory plus, you gained $1.4 billion in that down market probably largely in unassigned surplus. So I'm wondering what that swing was in 1Q '19 and then where you ended at total adjusted capital in the quarter?
Anders Malmstrom -- Chief Financial Officer
You know, Andrew, good morning. We don't give the detailed stat numbers on a quarterly basis. But what I can tell you, we were at the year-end, we had a target capitalization -- an RBC of 670%, that was the RBC we had at year-end. And you know our target capitalization is CTE98 for VAs and 350% to 400% for non-VAs. And that brings you to 550% to 600%, that's the target RBC. So you saw we were significantly above that. Since then, we, obviously, paid back the surplus note out of the operating company, but we generated new earnings. And what I can tell you, we are still meaningfully above our target capitalization, which is our goal, our stated goal. But I don't give you usually on a quarterly basis all the statutory numbers. But we are well capitalized.
Andrew Kligerman -- Credit Suisse -- Analyst
Okay. So maybe I'll ask another one that I might not get an answer too, but I want to get a sense of your dividend capacity from the insurance entities. If you were to desire some capital to be dividended up on a one-time basis, could you give a sense of how much that number might be?
Anders Malmstrom -- Chief Financial Officer
Yeah. So look, I think the overall dividend capacity is about $1.6 billion we have and this is dividend like. Because we already paid $600 billion (ph) or concretely $572 billion back in the form of a surplus note in March. And we have another billion left as capacity out of the operating entity, which we intend to distribute later in the year.
Andrew Kligerman -- Credit Suisse -- Analyst
Got it. Perfect. And then just lastly, just maybe, I think the question was asked on the portfolio optimization going $108 million to $160 million, how about on the cost saves you mentioned, $21 million on track for $75 million. Is that kind of a gradual trajectory or maybe a little sense on that timing?
Anders Malmstrom -- Chief Financial Officer
Yes. I think on the expenses it's usually not gradual because you make all the investments in order to get the save, so you can see it more as a hockey stick and I think '21, I think that's where we are and we are pretty happy that we are there. But I mean still a way to go and we expect that to -- that we get the saves related to this year and then in particular next year, when all the investments actually pay off.
Andrew Kligerman -- Credit Suisse -- Analyst
Thanks much.
Operator
Our next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.
Jimmy Bhullar -- JPMorgan -- Analyst
Hi, good morning. Some of my questions were answered, but first on the AllianceBernstein business, your fees were down sequentially and I just want to understand if you could -- what drove that? Because average assets -- at least equity assets were up, not a lot, but up a little bit and so if you could just give us some idea on how much of the weakness was caused just by Bernstein on the research side versus maybe some of the international business and maybe fixed income?
John Weisenseel -- Chief Financial Officer
When you say sequentially, are you saying, fourth quarter to first quarter or are you --?
Jimmy Bhullar -- JPMorgan -- Analyst
Yeah, just looking at fee income, specifically?
John Weisenseel -- Chief Financial Officer
So fee income, the average AUM was down just slightly, what happened ? If you think about all the declines in the fourth quarter in the market, we had lost over 6% off of our own AUM from the end of the third quarter to the end of the fourth quarter. We basically got that back in the first quarter, but it's really just the timing and when you look at the average AUM, so the average AUM for the first quarter was slightly below where it was in the fourth quarter.
Jimmy Bhullar -- JPMorgan -- Analyst
Although your revenues were actually -- or fees were down more than 5% I think. So it seems like a bigger decline than the change in assets, and that's what I was trying to get to.
John Weisenseel -- Chief Financial Officer
No, I think the base fees were only down about $5 million which was going from fourth quarter of '18 to the first quarter '19, so that's only about 1% drop.
Jimmy Bhullar -- JPMorgan -- Analyst
Okay. And so what's the rest of the drop, is it all Bernstein or what is it $696 million (ph) to $657 million or $658 million (ph) ?
John Weisenseel -- Chief Financial Officer
So let's confirm. So when we talk about the base fees, we're referring to the investment fees on the portfolio.
Jimmy Bhullar -- JPMorgan -- Analyst
Okay.
John Weisenseel -- Chief Financial Officer
They were only down 1% is entirely due to a lower average AUM. If you're looking at our adjusted net revenues, they were down 5% and there are two changes there. One is the performance fees. So they were $35 million in the fourth quarter and they are typically larger in the fourth quarter than the first quarter of the year. So there's really no surprise there, because many of our strategies that -- our ongoing performance fee-based strategies with funds have annual calculation periods and the majority of those end in the fourth quarter. So again the performance fee is $35 million in the fourth quarter last year, down to $4 million in the first quarter. And then the third -- the other part was the Bernstein Research Services that you did mention, they were down -- their revenues were down 22% sequentially and 21% year-over-year. And again, it was really due primarily to the drop in the trading volume and the volatility and it's global.
Jimmy Bhullar -- JPMorgan -- Analyst
Okay. And then on annuity flows, they got a lot less negative from 4Q to this Q. And typically, I think 2Q ends up being a seasonally strong quarter for the industry and you guys as well. Do you envision positive flows in annuities for the year or for the second quarter?
Anders Malmstrom -- Chief Financial Officer
Momentum is good, Jimmy. We don't like to be -- to give a forecast such for momentum, particularly on the gross flows, remains very good from our view.
Jimmy Bhullar -- JPMorgan -- Analyst
And then just lastly on retirement. You had a good quarter on flows there, but probably not a good run rate for the year, right? Because you typically have weakness, and I think you mentioned in your comments as well. But we shouldn't assume this level of flows recurring through the rest of the year?
Anders Malmstrom -- Chief Financial Officer
Yeah, I think we were very clear. You know, it's -- we have very strong flows in the first quarter, quarter one and quarter two. Usually it's weak at quarter three and then kind of mixed quarter four, that's kind of the annual mix of flows. But we are very happy with the Q1.
Jimmy Bhullar -- JPMorgan -- Analyst
Thank you.
Operator
Our next question comes from the line of Josh Shanker from Deutsche Bank. Please go ahead.
Josh Shanker -- Deutsche Bank -- Analyst
Yeah, Jimmy in the flows question I guess. Given that we had a huge sell-off in 4Q and a big recovery, has that changed consumer appetite in individual retirement? Does that cause any change in your producer education? And are there capital-intensive products that you'd like to sell more, because they're attractive but the appetite is not there on the market?
Mark Pearson -- President and Chief Executive Officer
I think from a consumer point of view, one of the best -- well, the best selling product we have now is SCS and it works very well with consumers. Because it gives some downside protection, plus an upside kept into an index of choice either over 5 years, 10 years or 15 years. So it's a really good product to volatile times. Because you can get the upside and is there's any newnessness about the markets and volatility, you got some protection on the way down. So I don't believe we've seen any significant change in the mix across those quarters. But it's because of the design of the product.
Anders Malmstrom -- Chief Financial Officer
Yeah. But I think maybe just one thing to add, I think the product portfolio we have is really an all weather portfolio. I think that's and what Mark mentioned, It's really good to have an SCS type, and then we also have Retirement Cornerstone, which is more income-oriented and SCS is actually very attractive when you have a high volatility in the market, that's when the caps become kind of cheap. And I think we really saw that but there is times where volatility is lower and that's where basically then we see more sales in the other product. But overall, I think it's pretty stable. You would expect more volatility from the mix because of that, but I think it's more macro trended. People like the downside protection of SCS but people also like the income of the other product and it really depends on the market environment, is also their need.
Josh Shanker -- Deutsche Bank -- Analyst
And producer education, is there any ramp ups or it's just steady?
Mark Pearson -- President and Chief Executive Officer
This is very steady. And I think our producers they know that we have this all weather portfolio, they know that different products suit different end purposes and I think we have a high education and our advisors, they have to go through a lot of training in order to be prepared for this and for their doing their job.
Josh Shanker -- Deutsche Bank -- Analyst
Thank you very much.
Operator
Our next question comes from the line of Mark Hughes from SunTrust. Please go ahead.
Mark Hughes -- SunTrust Robinson Humphrey. -- Analyst
Yeah. Thank you very much. Good morning. On the protection solutions front, I wonder if you could just talk about the -- refresh us where you're seeing more success in employee benefits business and overall there, any strategies for expanding distribution both for the VUL and employee benefits?
Mark Pearson -- President and Chief Executive Officer
Hi, it's Mark. Let me deal with the EB one and then I'll pass to Anders on the VUL. Look we are very pleased with the momentum inside the EB. If you remember, three, four years ago, this was when we started as one of our big bets, if you like, for the future. So in terms of employees we are covering now, people we are covering now, it's over 300,000. So that's a really nice number. I think in the quarter we kicked over $100 million of premiums collected totally. So certainly the model is working out there, it's still a couple of years before we can see meaningful profits coming out of the unit. But we really are where we hope to be and we feel very confident about it. On the VUL side, Anders?
Anders Malmstrom -- Chief Financial Officer
Yeah, look, I think, in particular, on the individual life side, we are very selective where we operate and where we -- and what kind of products we sell, it's really VUL and IUL, these are the products, we think we can add value. As a stock company, we don't go into whole life and also term life is not a key product for us. We have it but that's something where we don't focus on, it's really on the IUL and VUL. I think we have strong performance there and then sales (ph) has a strong momentum there. So I think that's moving in the right direction.
Mark Hughes -- SunTrust Robinson Humphrey. -- Analyst
Then on the benefit ratio was up this quarter, I think you talked about the higher large case mortality, what's a good run rate on that benefit ratio? Do you think that'll calm down in Q2?
Anders Malmstrom -- Chief Financial Officer
Yeah, look, I think, we mentioned that on the call. I think overall the mortality was in line with expectation. In particular, when it comes to frequency, we had an uptick in high claim and cases. But I think overall, you can expect somewhere in the high 60s. I think that's a good run rate.
Mark Hughes -- SunTrust Robinson Humphrey. -- Analyst
Thank you.
Operator
Our next question comes from the line of Ian Ryave from Bank of America. Please go ahead.
Ian Ryave -- Bank of America -- Analyst
Good morning. Thanks for taking the question. So just revisiting a few questions that other analysts have asked about your ability to participate in further offerings. I mean, AXA is essentially, their intention is to continue to sell down. There's no material lock ups and the markets are near highs, you had talked about getting about $1 billion or so in subsidiary dividends in the June or July period. So should we take it out, there's nothing really stopping you from being able to materially participate in any further offerings?
Mark Pearson -- President and Chief Executive Officer
Yeah, look, I think, I mean, I want to reiterate what I said before, I think our target and payout ratio is 50% to 60% of operating earnings. I think that's really key for us. I think we have an authorization of $800 million and $200 million left. This together with the dividends and that we pay out, I think brings us in the middle of that range and right now -- so the $200 million that are left, I think as we said before, I think we want to use a majority of that, particularly of the total one, but also of the $200 million together with AXA. But we also opportunistically looking at open market repurchases. But I think don't expect that this is going to materially increase.
Ian Ryave -- Bank of America -- Analyst
Okay, Thank you.
Mark Pearson -- President and Chief Executive Officer
Thank you.
Operator
Now I'll turn the call back over to Mr. Pearson for closing remarks.
Kevin Molloy -- Head of Investor Relations
Great, thanks. This is Kevin Molloy, the Head of Investor Relations. Thanks for your participation today. And if you have any follow-up questions, please don't hesitate to give us a call or send us an email. Thank you.
Operator
This concludes today's conference. You may now disconnect.
Duration: 53 minutes
Call participants:
Kevin Molloy -- Head of Investor Relations
Mark Pearson -- President and Chief Executive Officer
Anders Malmstrom -- Chief Financial Officer
Anders Malmstrom -- Chief Financial Officer
John Weisenseel -- Chief Financial Officer
Elyse Greenspan -- Wells Fargo -- Analyst
Ryan Krueger -- KBW -- Analyst
Suneet Kamat -- Citi -- Analyst
Tom Gallagher -- Evercore -- Analyst
Andrew Kligerman -- Credit Suisse -- Analyst
Jimmy Bhullar -- JPMorgan -- Analyst
Josh Shanker -- Deutsche Bank -- Analyst
Mark Hughes -- SunTrust Robinson Humphrey. -- Analyst
Ian Ryave -- Bank of America -- Analyst
