Good day. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings, Inc. fourth quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Kevin Molloy, Head of Investor Relations, you may begin your conference.
Thank you. Good morning, and welcome to AXA Equitable Holdings full year and fourth quarter 2018 earnings call. Materials for today's call can be found on 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 two of our presentation. You can also find our safe harbor language in our 10-K. Joining me on today's call is Mark Pearson, President and Chief Executive Officer of AXA Equitable Holdings, and Anders Malmström, 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 financial supplement. I would now like to turn the call over to Mark and Anders for their prepared remarks.
Thank you, Kevin, and good morning, everyone. Today, we present our 2018 earnings and fourth quarter performance. I will also provide an update on progress against our strategic priorities and key financial targets. Before giving the numbers, I thought it would be helpful to provide a few highlights. Obviously, the fourth quarter of 2018 saw a significant correction in equity markets, with the S&P 500 falling 14%. We have a hedge program in place to protect against situations like this. This program offsets movements in the economic liability of our living benefits due to changes in the market and interest rates and protects asset levels at CTE 98 for our VA business. We have over a decade of experience running this hedge program. However, this was the first occasion since our listing in May 2018 that we have seen equity markets fall in the quarter.
With the market fall, CTE 98 requirements increased by $3 billion in the quarter. Our hedging program worked as expected and funded this increase. As a result, we end the year with VA capitalization levels in excess of CTE 98 and a combined RBC ratio of approximately 670%. Anders will go into more detail later in the presentation, but I'm pleased that we were able to demonstrate our financial strength in volatile markets. Having said that, as I fully expected, our hedge program worked in the falling market, and I'm even more encouraged that the S&P has since risen by over 10% this year. Turning to the business. We continue to see strong operating earnings and delivery against our key financial targets. We remain confident that we will deliver the three-year aspirational targets we set at the time of our IPO.
That is, non-GAAP operating earnings growing five to 7% annually through 2020. As a result of our balance sheet strength and our performance in 2018, we have more than met our capital return commitments. Since the IPO, we have returned over $1 billion in the forms of dividend and share repurchases to shareholders. Looking forward to 2019, we remain confident in our ability to generate operating cash flows and return capital to shareholders. We believe that this is a unique part of our value proposition. Yesterday, our board authorized a new $800 million share repurchase program for 2019. In addition, subject to board approval, we intend to increase our quarterly dividend by 15%, from $0.13 per share to $0.15 per share, payable in the second quarter.
Following the AB reorganization where we moved all AB units held by the AXA Equitable Life to Holdings, we have improved capital flexibility and cash flow into EQH, and we are also announcing an upward revision to our target payout range to 50 to 60% of operating earnings. A final highlight. In addition to executing against our strategic priorities, our transition continues to run smoothly and we have exited nearly 20% of the services covered under our transition service agreement with flexibility to exit the remaining services over time. Turning now to slide four and a summary of our performance in 2018. 2018 non-GAAP operating earnings increased 28% to $2 billion, excluding favorable actuarial assumption updates in both periods, reflecting higher average AUM, execution against our goals, and the benefit from tax reform.
In rounding up the year, we continued our momentum and delivered operating earnings per share of $0.93 in a volatile fourth quarter. Each of our business segments have contributed to our strong 2018 results. In individual retirement, we reported an operating earnings increase of 24% from 2017, as we increased sales and distribution reach to help even more individuals secure their financial futures. In group retirement, 2018 marked the sixth consecutive year of positive flows as we continue to deliver value to more customers and solidify our leadership position, particularly in the 403(b) K through 12 education market. For AllianceBernstein, adjusted operating margin for the full year improved by 140 basis points to 29.1%, driven by equity and alternatives inflows into our diverse set of services and disciplined expense management.
Lastly, our protection solution segment reported growth in annualized premiums of 8%, driven by strong capital-light variable universal life sales and new capabilities to better engage with current and prospective clients. All in, on a pro forma basis, we generated an attractive operating ROE of 14.9% for the year. Total assets under management, including AB third party, general account, and separate account assets, stood at $619 billion as of December 31st, 2018. In conclusion, it was a strong debut year for AXA Equitable Holdings. We continue to create value in keeping with our long history of providing advice, protection, and investment expertise backed by our financial strength to the millions of clients we serve. Turning to Slide five and our strategic priorities. We are on track to deliver our 2020 strategic objectives.
With a 5%-7% operating earnings CAGR and our share buyback program, delivery of these objectives should return double-digit earnings per share growth. In terms of our efforts to optimize our general account, our plan to move a portion of our U.S. Treasuries to high-grade corporates is already more than two-thirds complete, with an earnings uplift of $73 million delivered in 2018. Our investment portfolio remains high quality, with an average A.1 rating and less than 2% of below investment grade holdings. Our productivity initiatives remain well on track. We have achieved a savings run rate of $18 million at the end of 2018, towards our goal of $75 million by 2020. We expect to accelerate through 2019 as we implement savings initiatives across our real estate footprint and technology systems.
As highlighted in the previous slide, we remain on track for our growth target. We remain confident to achieve this goal because of the strength we have in our business segments. Our investment management and group retirement fee-based businesses are leaders in their respective markets and generate high returns on capital. Our individual retirement business has been significantly de-risked over the past decade, with just 44% of the account value carrying fixed rate GMXB living benefits, down from 77% in 2008. Strong sales of our capital-light products, such as SCS, have enabled this transition. Today over 70% of our individual retirement sales do not offer long-term living benefits. Of course, our protection solutions business has been protecting families for almost 160 years against a variety of unexpected events, yielding a steady stream of core earnings and cash.
While macro environment conditions have undoubtedly pressured the industry, we remain confident that the strength of our teams, diversified business profile, and execution against our three strategic priorities will enable us to achieve our 2020 earnings objective. I will now turn the call over to Anders to go through our results for the full year and quarter in more detail. Anders?
Thank you, Mark, and good morning, everyone. We delivered solid financial performance during our first year, particularly in light of some of the macro headwinds Mark mentioned earlier. We have good momentum in all of our businesses, and our results keep us firmly on pace to deliver on our 5%-7% growth target and maintain the highest level of capitalization in the industry. On Slide six, I will review our consolidated results for the full year before providing more detail on the fourth quarter, including our hedging program performance, segment results, and capital position. Overall, we reported strong full-year results with non-GAAP operating earnings of $2.2 billion, up 6% from 2017. Excluding significant favorable assumption updates in both periods, operating earnings increased 28% to $2 billion or $3.59 per share.
This growth was primarily attributable to an increase in fee type revenue reflecting higher average assets under management, lower income tax expenses driven by the impact of tax reform, and higher net investment income, mainly due to the general account optimization and higher asset balances. GAAP net income was $1.8 billion for the year. Contributing to this figure is the impact of our hedging program, which generated a large positive benefit to net income in the fourth quarter as a result of the decline in equity markets at year-end. This result was both in line with expectations and aligned with experience in previous quarters. As a reminder, the full variance between operating earnings and net income is a combination of primarily non-economic factors, including hedging results and non-performance risk adjustment, which I will review in a moment.
As a result of our performance and this hedging impact on net income, we saw a 13% year-over-year increase in book value excluding AOCI, slightly depressing our pro forma non-GAAP operating ROE, which finished the year at 14.9%, up 290 basis points from the prior year. Finally, total AUM declined 8% year-over-year to approximately $619 billion, driven predominantly by adverse market performance. Average AUM, however, was higher on a full year basis, which was the primary driver for our higher fee revenues. Moving to the quarterly view on Slide seven, we reported non-GAAP operating earnings of $504 million. This represents a decrease from the prior year quarter, which included a large favorable one-time impact of pre-IPO assumption updates, which increased operating earnings during the fourth quarter of 2017 in our protection solutions segment.
Also contributing to the year-over-year variance was lower fee type revenue due to adverse market performance, higher DAC amortization, which I will review in the context of our individual retirement business, partially offset by a positive impact from tax reform and higher net investment income. On a per share basis, operating earnings increased year-over-year from $0.92 to $0.93, excluding assumption updates, reflecting the benefit of share repurchases in the second half of 2018. Net income was $1.9 billion for the quarter, driven primarily by the aforementioned impact of markets on our hedging program. From a capital perspective, during the fourth quarter, we improved cash flexibility through our previously announced upstream of AB units to the holding company. Through 2018, approximately 18% of cash flows received at the holding company came from AB units held outside of our life company, and thus not subject to regulatory approval.
Accounting for the recent upstream of AB units previously held at the life company, non-regulated cash flow on a pro forma basis for 2018 would have increased to 35% of the $1.4 billion total. In addition to improving capital flexibility, we also continued to execute on our capital management program in the quarter. Concurrent with our secondary offering in November, we completed the repurchase of $592 million of shares from AXA SA, reducing common shares outstanding by over 5% in the fourth quarter and bringing AXA's ownership level to below 60% at year-end. I will discuss our capital return in greater detail shortly. Turning to slide eight, I'd like to review the work from net income to non-GAAP operating earnings. Included in the fourth quarter net income of $1.9 billion were significant non-economic items related to VA product features, driven by hedging and non-performance risks.
Specifically, these adjustments include a $1.2 billion gain related to the difference between the market-based movements in our GAAP reserve due to fourth quarter market impacts, and the larger movement in the value of our hedge assets backing our economically based hedge program. Static hedge cash option costs of $12 million during the quarter and consistent with guidance. The mark-to-market impact of $144 million on our short duration VA investments or our SCS product portfolio, which drove a timing-related acceleration of DAC in our individual retirement business, which I will touch on momentarily. A $554 million related to non-performance risk due to our own credit spreads widening 70 basis points during the quarter. For additional context, our spreads have tightened in the current quarter, if the quarter were to end today, we would expect the opposite impact.
To reiterate, this impact during the quarter helped to illustrate precisely why we believe operating earnings is the best proxy for analyzing our performance. If you recall, following strong equity markets and rising rates in the third quarter of 2018, VA product features drove a negative non-economic adjustment to net income. Conversely, as equities sharply corrected and rates fell in the fourth quarter, the adjustment turned largely positive, in line with our expectations and previously communicated guidance. Finally, other adjustments to net income include separation costs of $54 million, investment gains, non-cash pension amortization, and tax-related items. Moving to page nine, I'd like to highlight the performance of our hedge program, given the market environment in the fourth quarter.
While we would not define the fourth quarter as an extreme event, hosting a 14% decline in equity markets and a 36 basis point drop in the 10-year treasury yield, nevertheless, our proven hedging program protected our capital position at or above our CTE 98 target and performed as expected, delivering 95% hedge effectiveness. As a reminder, our hedging program is comprised of two components, the dynamic hedging strategy and the static strategy. The most significant part of our program, the dynamic strategy, is a true economic hedge where we hedge from the first dollar and forgo the upside and protect on the downside using futures and swaps to offset the market impact. The fine-tuning element of the program, the static hedge, is used to maintain our target CTE level, currently at CTE 98 and remaining at CTE 95 under extreme scenarios.
The dynamic program operates in close cooperation between the Equitable hedging team and AB's capital markets desk. We evaluate our economic exposure on a daily basis, and hedge positions are rebalanced accordingly with AB providing the execution. In addition to our dynamic program, the static hedge is used to mitigate the adverse impact of market conditions on our statutory capital. The cash cost of this options-based program was $12 million in the fourth quarter, or $76 million for the full year of 2018. We expect the cost of this program to be between $100 million and $150 million per year. The combination of these two programs performed as expected during the fourth quarter, with hedge effectiveness improving to 95%.
As a result of this strategy, the hedge program effectively funded an approximate $3 billion change in our CTE98 liability, enabling us to maintain our target asset level for VAs at CTE 98, and importantly, remain protected again further downside. I will review the fourth quarter financial performance of our segments, beginning with individual retirement on slide 10. Operating earnings decreased to $348 million from $408 million in the prior year quarter, primarily driven by higher DAC amortization and lower account values due to a decrease in interest rates and a double-digit fourth quarter equity market decline, respectively. Approximately $30 million of this DAC amortization is due to a timing-related impact from the mark-to-market asset portfolio backing our SCS product.
We expect this portfolio of trading securities to decline over the next 18 to 24 months as we classify future investments backing our SCS product as available for sale, thus eventually eliminating these DAC amortization timing differences. Sales momentum of our de-risked variable annuity products remains strong, with first-year premiums increasing for the third straight quarter and registering 15% growth since the prior year quarter. From a mix standpoint, over 70% of sales are product without living benefits, consistent with our overarching objective to drive disciplined growth in a balanced portfolio of capital-light products, emphasizing value over volume. Account values over the last 12 months declined by $8.8 billion, primarily due to adverse equity markets. Our flows dynamic remained stable, with strong net flows into our current product offering of $780 million, offset by ongoing net outflows from our mature fixed GMXB block.
This trend continues to de-risk our portfolio towards less capital-intensive products, evidenced by the fixed-rate GMXB block now representing just 44% of our total VA account values, down from 48% at year-end 2017 and from 77% a decade ago. A less capital-intensive block of business will increase our returns on capital over time. Turning to our group retirement segment on slide 11. We reported operating earnings of $102 million, up 13% from the prior year quarter, primarily due to higher net investment income from our GA optimization initiative. Account values in the segment declined year-over-year due to market performance, but were partially offset by the sixth straight calendar year of positive net flows. We are very encouraged by the steady results delivered by this business of engaging customers with our worksite advice model and continuing those relationships for many years, often through retirement.
Fourth quarter outflows of $56 million were primarily driven by a single corporate plan surrender and were partially offset by another strong quarter in the tax-exempt market where we remained the number one retirement provider for K-12 educators. Through the end of the third quarter. Gross premiums were up 7% on a year-over-year basis to $917 million, driven by a strong 15% increase in renewal contributions in our tax-exempt business, and supported by our continued efforts to deepen penetration across the 9,100 public school plans we serve, and increased contributions through our successful client engagement program in the 403(b) market. Turning to investment management and research, which is AllianceBernstein on slide 12. As a reminder, operating results reflect the company's increased economic interest in AllianceBernstein from 46.7% in fourth quarter of 2017 to 65.2% as of year-end 2018.
For the fourth quarter, operating earnings grew from $74 million to $107 million, primarily due to these higher ownership levels, while improved expense management at AB was offset by declining revenues on lower average AUM and strong performance fees in the year ago quarter. While AB's adjusted operating margin was strong at 29.3%, the market decline was experienced in the fourth quarter of 2018, as it impacted our ability to achieve the 30% target by 2020. We are not giving up on what we believe is an attainable long-term objective and are taking expense actions to partially offset this impact. Despite these volatile markets, net flows were positive at approximately $800 million for the quarter. Notably, with continued growth in equities and alternatives.
Finally, throughout the year, AB has continued to demonstrate its success in diversifying and growing its business, as illustrated by 25 retail funds across asset classes, generating net flows of $100 million or more. Gross sales in institutional active equity at multiyear highs, and flows in the private wealth channel reaching their highest levels in more than a decade. Finally, we'll turn to protection solutions on slide 13, where we reported operating earnings of $37 million for the quarter. As you know, earnings in this segment have been volatile over the past several quarters. We recorded substantial favorable assumption updates ahead of the IPO in the fourth quarter of 2017, and subsequently, earnings declined to $37 million in the current quarter.
If you recall, we exited loss recognition in the third quarter of 2018 and are starting to see a more stable earnings trend around the $50 million run rate we expect. For the current quarter, operating earnings continued to trend closer to these expectations, with increases in fee type revenue and net investment income driven by higher asset balances and the GA optimization partially offset by $10 million of non-recurring legal related expenses. Going forward, this segment should continue to benefit from the GA optimization initiative and our productivity improvements. Finally, sales growth closed out the year strong with annualized premiums up 10% year-over-year. Turning to our capital discussion on page 14. We emerged financially strong from the fourth quarter, maintaining our CTE 98 target for our VA business and 350-400 RBC for our non-VA business, resulting in an RBC ratio of approximately 670%.
Notably, the strength of our capital base allowed us to absorb the impact of the change in tax factors and retain our existing capitalization target. In addition, our debt-to-capital ratio of 24.5% was within our target mid-20s range. During the quarter, we completed the transfer of AB units from AXA Equitable Life to our holding company, which helped simplify our corporate structure and most importantly, provides increased unregulated cash flows and additional capital flexibility directly at the holding company level. This transaction also contributed to the company's decision to increase the lower end of our target payout range from 40%-50%, bringing our new payout ratio target to 50%-60% of non-GAAP operating earnings. Before turning the call back to Mark for his closing remarks, I would like to provide an update on our capital management program outlined on slide 15.
Since the IPO, we returned over $1 billion to shareholders in the form of quarterly cash dividends and share repurchases, including $150 million as part of an accelerated share repurchase agreement executed in January. This completed our previous repurchase authorization of $800 million. Yesterday, our board announced a new authorization program of $800 million, and earlier in February, we declared a $0.13 per share dividend payable in the first quarter. Looking ahead, we intend to increase the dividend by 15% to $0.15 per share, payable in the second quarter, subject to the board approval. This demonstrates the financial strength and operating earnings power of this company following one of the more volatile markets in recent memory. Our financial strength remains 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.
These components support our long-term goals and continue to give us confidence as we begin 2019. With that, I will turn the call back to Mark for closing remarks.
Thanks, Anders. Before we turn to taking your questions, I'd like to close by reiterating our strong results, our progress, and our momentum as we step into 2019. 2018 was a remarkable year for our company, with a successful IPO and a well-received secondary offering. We demonstrated our ability to deliver on our commitments, reported solid financial results, and made meaningful progress against our strategic initiatives. We have returned $1 billion since our IPO and are announcing today a new share repurchase program of $800 million. Taken together, our performance, financial strength, momentum, and positioning for growth give us confidence to announce an increased payout ratio target of 50%-60% starting in 2019. With that, we'll open it up for Q&A.
Certainly. If you'd like to ask a question at this time, please press star one on your telephone keypad. Your first question comes from the line of Elyse Greenspan with Wells Fargo. Your line is open.
Hi, good morning. My first question. You guys, the hedging program performed pretty well in the fourth quarter with obviously the sharp decline in equity markets. Could you guys give us a sense, how much would equity markets really need to drop for you guys to fall below that CTE 98 target for your VA business?
Good morning. This is Anders. Look, I think as we talked before, our hedging strategy is really to stay at the CTE 98 for almost all scenarios. I think if we have a very severe scenario, we would go down to 95. Think about a minus 40% equity shock. That's when we would basically go down to 95 CTE. In most scenarios, we actually stay at the CTE 98.
Okay, that's helpful. In terms of the portfolio optimization, as we think about 2019, can you give us a sense of what could flow through earnings in 2019 as you continue to shift your investment portfolio?
Yeah, sure. You recall the overall outcome of the full program will be $160 million additional earnings coming out of the general account. We're about two-thirds through. The impact this year was, I think, $73 million. The program itself will be finished by the end of this year. You can think about If you make it a linear approach, I think it will be, I would say, between $120 million and $140 million, somewhere there.
Okay, that's helpful. Last question, the tax rate was a little bit lower in the fourth quarter. I'm assuming that was just one time, and you would expect it to go back to your normal 18% target in 2019?
Yeah. Look, I think tax is always, you have sometimes true-ups later in the year. We had some true-ups on DRD and state taxes. I would say guidance again is, we're going to see an effective tax rate of about 18% for the insurance segment and about 27% for the AB segment.
Okay, thanks so much. I appreciate the color.
Your next question comes from the line of Thomas Gallagher with Evercore. Your line is open.
Hi, first question is the $800 million new buyback authorization. Do you have the ability to accelerate that to the earlier part of the year if you get opportunity with AXA secondary? Would you be able to participate in a meaningful way again? That's my first question.
Yeah. Good morning. Yes. I think, as we said in the call, we have the authorization for $800, and then yes, we have the ability to take a meaningful piece of that in case AXA goes out as a secondary offering. Yes.
Would that be based on existing whole co resources, or would you have to use leverage or be willing to use leverage temporarily to do it? Can you talk a little bit about the timing of when you expect to get cash flows throughout the year in terms of dividends from subs?
I think first of all, we have right now cash above our target level of $500 million at the holding company. I think we have their ability to use some of that earlier in the year. We have the availability also during the year. We will not have to wait for the second half of the year to take money out of the operating entity. We have a plan that we have continuous cash coming into the holding company. Just don't forget, with the upstream of the AB units to the holding company, we now have meaningful cash coming out of AB on a quarterly basis. We don't have to use any leverage, to your question, to participate.
Got you. My final question. Brighthouse had some new disclosure on cash flows That showed a reduction from updated policyholder behavior assumptions from the new VA standard. There was also part of their cash flow reduction was based on a drag from its hybrid product, which is similar to your SCS product. Just question for you. I know when you had put out your S-1, you had the year-end 2017 updated estimates for NPV of cash flows for variable annuities. Are you going to provide an update for 2018 on those same cash flow estimates? If so, would you expect to see a similar reduction as Brighthouse saw?
First of all, I think, remember we had these cash flows end of last year. We decided to wait for the final NAIC rule to come in, which I think we expect to be somewhere in April. Based on that, we're going to update our cash flows going forward, because I don't think in our case it makes sense to do that before the NAIC rule is finished. Based on what I've seen today, I don't think it's going to have a material impact to the cash flows we provided a year ago. In particular, you saw during the year, we were actually able to take out cash out of the operating entity up to the holding company. Also, I think we feel very confident also for this year. That's why we changed the range from 40 to 60 to 50 to 60.
I think we feel very confident with the cash flows. I think there's one point, obviously, that's the market, and we gave you sensitivities to the market, you have that. Other than that, I don't think there's a material change. One thing I want to highlight here is our hedging program is really hedging for a dollar. I don't think we should see an impact then from hedging to the cash flow, because it will really take away the impact on the rider coming from the market.
Great. That's helpful. Thanks.
Your next question comes from the line of Andrew Kligerman with Credit Suisse. Your line is open.
Hey, good morning. Question on the individual retirement segment. You report a nice non-GAAP return on capital of 22.5%. I'm curious, as the legacy business rolls off the GMXBs, what's the return on capital for that business versus your SCS products?
Yes, sir. Mark?
Yeah. I don't think we've split it down for you. What we can tell you is as the legacy book runs off, remember we gave you that figure of $4 billion a year. That will throw off capital because that's capital intensive business. We're adding business which is much lower in capital intensity. It wouldn't surprise us to see the ROC improve as a result of those two dynamics.
Pretty sharply, Mark? Several hundred basis points, you think?
No, I don't think pretty sharply. The momentum will be that way, but not sharp.
Okay. Looking over to the group business, it looks like you had a negative flow in the quarter, not the year, of course. It was a corporate account. Could you talk a bit about how your 401(k) business is performing? Are there any pressures there?
I think you rightly recall, in Q4, we had this negative outflow from a 401(k) case, which has much lower fees. I think overall, the 403(b) business is performing very well. Just keep in mind from a flow perspective, it's usually the case that first half of the year, that's where you have the strongest flows. Third quarter, you have usually negative because teachers don't get any salaries. Fourth quarter is usually mixed. This time we have this small outflow. One thing, if you go back over the last six years, we actually had a positive flow on an annual basis. This gives us confidence that we're on the right path here going forward.
Great. Just real quickly, just following up on Tom's question about the buybacks. Maybe I'm fishing a little bit, but could you give us a little color on discussions with AXA, how they're looking at timing? Importantly, are you going to kind of hold off on any material buybacks until such time that they want to offer shares in a secondary?
Yeah, it's Mark. Obviously, AXA don't talk to us too much about something like this because we would have to disclose it to you. We don't know.
Right.
I think as you know, the period at which they gave undertakings not to come back to the market, that's about to lift or has just lifted. It is in AXA's hands now as to whether they would like to make a third offering or not. That's about all we know at this stage.
You want to just take it slow until you find out if they do, I would assume, right?
Yeah. We've always said that we would use the majority of that buyback to support AXA, because obviously if we go into the market with it, we're actually increasing AXA's share, which is counter to what they want. We've always said that the majority will be to support a buy down if when one happens. I think as Anders said to answering Tom's question, the money is there so we can move without having to increase leverage.
Excellent. Thank you.
Okay.
Your next question comes from the line of Ryan Krueger with KBW. Your line is open.
Hi. Thanks. Good morning. Following the adoption of any NAIC reform, do you still anticipate talking about your VA capital target based on a CTE level, or would you potentially switch more to an RBC ratio after the new methodology, I guess, makes a bit more sense for RBC?
Yeah. Morning, Ryan. As you know, I think, one of the objectives of the VA reform is actually to harmonize also the way we can talk about the RBC. Remember the way they set it up is that the CT 98 corresponds to an RBC of 400%. Our intent is once the rule is adopted, that we actually then talk about an RBC target on a combined basis.
Okay, thanks. Got it. On Group Retirement, the last couple of quarters, excluding items, your earnings have been in the $100 million range, which is a decent step up from where it had been previously. Is there anything in the results that would suggest the $100 million type run rate isn't good to go forward with?
No. I think the run rate, I think you see here, it's a steady growth. I think the Group Retirement business is one business that will actually benefit from the GA rebalancing. I think you should see a nice uplift coming there as well. Just recall, it's about half and half of the revenues are coming from separate account and general account. The uplift should help Group Retirement nicely.
Okay, thank you.
Your next question comes from a line of Joshua Shanker with Deutsche Bank. Your line is open.
Yeah. Thank you. Two unrelated questions. The first is on the net investment income optimization. It came through nicely in the quarter, but we didn't really see it in the individual retirement segment where most of your investable assets are. Is there something different going on in that segment versus the other two segments? Did you complete that first? Why is that growth rate stagnant on the NII, but the other ones are growing quite swiftly?
Yeah. Look, I think the core general account, and that's really where the program is focusing on, is really benefiting Protection Solutions and Group Retirement. That's where we have core business in the general account, and that's where you see the benefits. It's less so, at least today, on the individual retirement, because the traditional VAs are really in the separate account, and then SCS has a separate program, completely distinctive from the general account for the other segments.
Okay. Given the new way in the transfer of the ownership stake in AB, are there any tax implications for how you're holding that possession?
Yeah. I think you recall in the update that we moved them up to the holding company. There is a small impact on the state taxes, and that's actually included in the guidance I gave you about 27% in tax rate for the AB segment.
Okay, thank you.
Your next question comes from the line of Suneet Kamath with Citi. Your line is open.
Thanks. I wanted to start with the capital return target of 50%-60%. Just to unpack that a little bit, can you give us a sense of what the free cash flow is out of each of your businesses? I'm assuming that AB is pretty high, close to maybe 90%-100%, which would imply sort of a 40%-50% for everything else. I just want to understand maybe what that is at the segment level, if you could provide it.
Yeah, look, I think it's an interesting question. We don't give the details by segment. I think what I can tell you is clearly on AB, I think they pay out 100%. As you know, they're a limited partnership. That's what they have to do. I think for the other businesses, we don't give the breakdown. You recall, when we think back, the VA cash flows, I think, gave you a good indication on how we think about the cash coming out of the segments.
Okay. Just to follow up on the VA cash flows for a second. I think at the IPO, you talked about being already at peak reserves for the VA business. Obviously, the market's been moving around a bit, just want to get a sense if that's still the case. Is there any reserve release, steady or inflection-wise, that we should think about being embedded in your cash flows over the next couple of years?
Yeah. I think one of the key points, and we mentioned at the IPO, is really the peak TAR. I can tell you we're still at peak TAR, I think, for the core business. Obviously, whenever you bring a new business, the new business in itself is not at peak TAR. For the core business that is in force, we are at peak TAR.
Got it. Just the last one related. I think when you disclose your update in the spring for your VA cash flows, have you or would you consider separating out the Group Retirement VAs from the individual retirement VAs, just so we can get a better sense of the risk profile of the individual business?
I think that's a question we get from time to time. The way I look at it is, because we manage the business together, we cannot really separate the cash flows between the segments. What we can tell you, I think we told you that the majority of the CT requirement is coming from the old accumulator business. The newer business and then the other segments have much less Contribution to the CTE, I don't think we're going to give a breakdown of that business. When it comes to the cash flow outside of the CTE, you can really go and split it by the asset base, because that's how the fees flow into this cash flow.
Thanks, Anders.
Welcome.
If you'd like to ask a question, please press star one on your telephone keypad. Your next question comes from a line of Alex Scott with Goldman Sachs. Your line is open.
Hi, good morning. The first question I have is just if you could provide any more color on what elements of VA Capital Reform are already included in the way you calculate CTE98 versus some of the elements that you may still need to implement.
Yeah. The way right now we are using the old way to calculate CTE98. Obviously, we're working on the new one, but we're still basically using what is right now the right way, or let's say the official way, to calculate CTE98. I think that's when I talk about CTE98. I think as we said before, we don't think that it's going to have a material impact on our cash capacity on a going forward basis. Otherwise we wouldn't have updated our cash projections today.
Okay. My second question is just around the expense efficiencies. It looked like there was a pretty nice step down in expenses. Just would be interested to hear any update on how you'd expect the target expense efficiencies to earn in over the next couple of years. Also, I think there were some higher costs associated with AXA SA selling down below a certain percentage that maybe were below the line. Could you just remind us about what those costs are and how they all come in?
Yes. I think first of all, as you can imagine, the biggest, let's say, the benefits will really come in in 2019 and 2020. That's when you basically earn the benefit of the efficiency initiatives we undertook already and we are undertaking. I think that's clear. As you correctly mentioned, the separation costs, they go below the line. They're really one time. I think the way we look at it's not just separation. We also want to make sure that we are actually put ourselves in the best position going forward. That's why you might see a slightly uptick there relative to the guidance we gave, but this should help in the future to actually be more efficient.
All right. Thank you.
Thank you.
There are no further questions at this time. This concludes the Equitable Holdings, Inc. fourth quarter earnings call. We thank you for your participation. You may now disconnect.