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. If you would like to ask a question at that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. At this time, I would like to turn the call over to Kevin Molloy, head of investor relations. Mr. Molloy, you may begin.
Thank you. Good morning and welcome to AXA Equitable Holdings first quarter 2019 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-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.
Thank you, Kevin, and good morning, everyone. Thank you for joining our call today. We're 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 the strategic priorities and financial goals we've previously articulated to you all. Before we turn to the numbers, I thought it would 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 and 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 CTE 98 for our VA business. We further enhanced our long-term financial flexibility through 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%-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. 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 a subsequent secondary offering and share buyback reduced AXA S.A.'s ownership stake to below 50%. Commensurate with the sale, our nearly three-decade successful relationship with AXA as our controlling shareholder concluded, we are once again one of the largest independent financial services companies in the U.S. Accordingly, we established independent governance at the end of March, implementing a new board structure and announcing the appointments of new members, including an independent board chair. We are delighted at the expertise and diversity of our board, we're sure that they will bring much to achieving our strategic objectives and creating shareholder value. Turning now to slide four 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 towards our financial targets, including 5%-7% annual non-GAAP operating earnings growth 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 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 firm-wide 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, AllianceBernstein continues to scale and commercialize its offering while remaining expense discipline 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. For the total company, assets under management stood at $664 billion as of March 31st, 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 five 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 two-thirds of the rebalance from Treasuries to longer duration corporates and have achieved $108 million towards the $160 million goal. We expect to complete the rebalance by year-end 2019 and 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. Anders?
Thank you, Mark, and good morning, everyone. On slide six, 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 due to the 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.
With prior quarters, driving this figure are noneconomic items related to VA product features. This includes non-performance 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 to $350 million over the next three years. We anticipate the cumulative amount of separation costs to be between $650 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. Finally, pro forma non-GAAP operating ROE increased 160 basis points 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 seven. 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 GMXP results were partially offset by higher DAC amortization and lower fee type revenue on lower average separate account values.
We have pointed out in prior quarters, the assets backing our SCS product are held as trading securities and marked 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.
When we have completed the transition of our trading securities to AFS over the next 12-18 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 products, 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 products while emphasizing value over volume. Account values increased by approximately $700 million year-over-year, primarily driven by equity market appreciation.
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 towards less capital-intensive products, which, along with segment earnings growth over the trailing 12 months, contributed to a 240 basis point increase in segment return on capital. Turning to our group retirement segment on slide eight, 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 on higher average account values. Account values increased $1.2 billion year-over-year due to market appreciation 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 growth premiums and lower surrenders. Growth 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 increase 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 updates in the third quarter of 2018, this figure would have been approximately 28%. Turning to investment management and research, which is AllianceBernstein on slide nine.
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 a decline in Bernstein Research revenue. The decrease was partially offset by our increased ownership of AllianceBernstein from 46.5% in the first quarter of 2018 to 65.6% as of March 31st, 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 AllianceBernstein's business.
85% of retail-rated assets were rated four or five stars by Morningstar at quarter end. We continued to see a diverse array of AllianceBernstein funds attracting assets, with seven fixed income and six equity funds each attracting more than $100 million of net inflows during the quarter. AllianceBernstein 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. AllianceBernstein'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, 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.
Claims frequency for the quarter was in line with expectations. 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. 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. 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.
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. Finally, we completed a $600 million share repurchase from AXA in conjunction with the successful March secondary offering, which was a significant step towards delivering on our 50%-60% capital return objective. Following this transaction, the company has $200 million remaining on its current repurchase authorization. During the quarter, we strengthened our financial preparedness through the issuance of $1 billion of contingent capital funding arrangements split between 10 and 30-year tranches. This offering complements our existing capital toolkit 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. 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.
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 continued 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%-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%-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. 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.
As a reminder, if you would like to ask a question, please press star followed by the number 1 on your telephone keypad. Our first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
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-$140 million would 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?
Yeah, good morning, this is Anders speaking. I think as you said, the general account rebalancing is moving well towards 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.
Okay, great. Then on capital return, you guys have $200 million left on your authorization. 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 if there is more stock coming to the market? Can you just give us some comments on thoughts about maybe going to the higher end and maybe front-loading some 2020 buyback?
Yeah, I think as we said, we have the 50%-60% payout ratio, which is already higher than what we said a year ago. I think we really want to stick to the 50%-60%. I think the authorization we have right now is $800 million. We already front-loaded that in order to participate with the buyback. I don't anticipate any other front-loading because I think we really want to maintain the range. Later in the year, we're going to use the extra $200 million that we still have authorization from.
Okay. One last quick question. In terms of, it seems like there was some one-off benefit to investment income within corporate, but there was no kind of one-off numbers that went through the investment income line within any of the segments, correct?
Yeah. What we saw in Q1 is really because the market rebound. We have some seed money that we invest into our business to generate funds. This is allocated to the corporate and other. That's where we saw a one-time benefit that came through in Q1 after the very strong rebound of the market.
Okay, thank you very much.
Our next question comes from Ryan Krueger from KBW. Please go ahead.
Hi, thanks. Good morning. SCS sales 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?
Morning, Ryan. It's Mark Pearson. Yes, we had a 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 are out there competing. 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. We are benefiting from good product design, but also very good reach through AXA Advisors' affiliated sales force into the traditional banks and wirehouses 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.
Thanks. Then in Group Retirement, we've seen a lot of fee pressure in the 401 industry. It doesn't seem like there's been that much in tax-exempt. Just hoping you could talk a little bit about what you're seeing there and the differences between tax-exempt markets versus 401 markets at this point.
I think the key in the tax-exempt 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 complex situation. They tend to have a defined benefit scheme, and we are advising them on their supplementary retirement needs. Because it's advice we're giving rather than just a pure platform, the margin pressure is less there.
Okay, thank you.
Our next question comes from Suneet Kamath from Citi. Please go ahead.
Thanks. I wanted to start with AllianceBernstein and the margin outlook there. I think in the past you talked about 30% plus by 2020. Obviously, lower than that in the quarter. Can you just give us an update in terms of how you're thinking about that target?
Sure. This is John from AB. We still believe a 30% margin target is achievable. We believe this is a 30% margin business that we run. It's obviously dependent upon the markets, the function of when we actually hit that target will depend upon the markets. It's definitely our target, and we think it's definitely achievable.
Okay. With the market coming back now to where it was in September, is there any reason why we shouldn't think the 30% plus by 2020? Is there any reason why you're not citing that specific date in terms of the target anymore?
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, I think there's definitely scenarios under which you look at increases in markets where we get to the 30% by 2020, and there's other scenarios that you may run where we do not get there. 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.
Okay. 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?
It's 60/40, Suneet.
60% third party, Suneet, and 40% them AXA Advisors.
Okay, thanks.
Our next question comes from the line of Thomas Gallagher from Evercore. Please go ahead.
Good morning. John, just to 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? Also last year, 2Q was a higher performance fee quarter. Should we have a similar expectation for this year?
Sure. Let's take the first question first. With regards to the Bernstein question first. The drop was global, it really is a function of less trading volume globally, whether we're talking about Europe, Asia, or the U.S. It's really, we've looked at our peers, and our peers are down similar % drops in terms of revenue. It really was more of an industry dynamic as far as anything specific to us. The lower volatility hurt us as well. We just have to keep an eye on in terms of how that proceeds through the rest of the year. If volumes pick up, if 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. The Real Estate Equity Fund I portfolio, which impacted us in the first quarter comparison period. There was also the Financial Services Opportunity Fund I portfolio. 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 had recorded in the second quarter of last year. I think when you think about the second quarter, you have to realize that you won't see those Financial Services Opportunity Fund I performance fees this year.
Understood. Thanks. The $200 million remaining share repurchase authorization, should we expect that to be used ratably over the next 3 quarters? Or how should we think about that?
Yes. I think, look, Tom, I think it's a good question. We have this authorization of $800 million, usually basically spread it over the year. We front-loaded $600 in order to participate them with the offering. I think you can expect that the remaining $200 will be spread over basically the rest of the year. Don't expect us to front-load because when it comes to the cash, actually, that we have at the holding company, we have the surplus note that we repaid in March, which helps us then to pay the $600 million for the repurchase. The dividend we expect from the operating entity will come later in the year, usually around June, July framework. After that, we can then use it for the remaining $200 million. Don't expect it to front-load even more. We already very much front-loaded.
Got you. just one final one. The contingent capital facility. if I'm hearing you correctly, this is really for 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?
Yeah, absolutely. It's really contingent 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. in particular, if there is a crisis, it's usually very difficult and very expensive to get these facilities. That's why we set it up now, but there's really no intention to use that in the near term.
Okay, thanks.
Our next question comes from Andrew Kligerman from Credit Suisse. Please go ahead.
Okay. Good morning. Maybe some numbers to start. In the fourth quarter, the swing in statutory capital, stat surplus, you gained $1.4 billion in that down market, probably largely in unassigned surplus. I'm wondering what that swing was in 1Q19 and then where you ended at total adjusted capital in the quarter.
Andrew, good morning. We don't give the detailed stat numbers on a quarterly basis. 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. Our target capitalization is CTE 98 for VAs and 350 to 400 for non-VAs. That brings you to 550 to 600 as a target RBC. 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. What I can tell you, we are still meaningfully above our target capitalization, which is our goal, our stated goal. I don't give you usually on a quarterly basis all the statutory numbers. We're well covered side.
Okay. Maybe I'll ask another one that I might not get an answer to, 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?
Yeah. Look, I think the overall dividend capacity is, I think it's about $1.6 billion we have, and this is dividend-like because we already paid $600 million, or concretely $572 million back in the form of a surplus note in March. We have another $1 billion left as capacity out of the operating entity, which we intend to distribute later in the year.
Got it. Perfect. Then just lastly, I think the question was asked on the portfolio optimization going 108 to 160. How about on the cost saves, you mentioned $21 million on track for $75. Is that kind of a gradual trajectory or maybe a little sense on that timing?
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. I think $21, that's where we are, and we're pretty happy that we are there, but still a way to go. We expect that we get the saves later this year in particular next year.
Got it.
When all these investments actually pay off.
Thanks much.
Our next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.
Hi. Good morning. Some of my questions were answered, but first on the AllianceBernstein business, your fees were down sequentially, and I was just trying to understand what drove that, because average assets, at least equity assets, were up, not a lot, but up a little bit. 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.
When you say sequentially, are you saying fourth quarter to first quarter?
Yeah, just looking at fee income specifically.
fee income, the average AUM was down just slightly. What happened, if you think about all of the declines in the fourth quarter in the market, we had lost over 6% off of our 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. 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.
Yeah, although your revenues were actually, or fees were down more than 5%, I think. it seems like a bigger decline than the change in assets, and that's what I was trying to get to.
No, I think the base fees were only down about $5 million, which was going from fourth quarter of 2018 to the first quarter of 2019. that's only about a 1% drop.
Okay. What's the rest of the drop? Is it all Bernstein or what is it? The $696 to $657 or $658.
I'm sorry. Let's confirm. When we talk about the base fees, we're referring to the investment fees on the portfolio.
Okay.
They were only down 1%. It's entirely due to the lower average AUM. If you're looking at our adjusted net revenues, they were down 5%. There were two changes there. One is the performance fees. They were $35 million in the fourth quarter, and they're 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 are ongoing performance fee-based strategies with funds have annual calculation periods, and the majority of those end in the fourth quarter. Again, the performance fee is $35 million in the fourth quarter last year, down to $4 million in the first quarter. The other part was the Bernstein Research services that you did mention. Their revenues were down 22% sequentially, and 21% year-over-year.
Again, it was really due primarily to the drop in the trading volume and the volatility, and it's global.
Okay. On annuity flows, they got a lot less negative from 4Q to this Q. 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?
Momentum's good, Jimmy. We don't like to give a forecast as such, but momentum, particularly on the gross flows, remains very good from our field.
Just lastly, on retirement, you had a good quarter on flows there, but probably not a good run rate for the year, right? You typically have weakness, and I think you mentioned it in your comments as well, but we shouldn't assume this level of flows recurring through the rest of the year.
Yeah. I think we were very clear. We have very strong flows in the first quarters, 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. We're very happy-
Okay
with Q1.
Thank you.
Thank you.
Our next question comes from the line of Joshua Shanker from Deutsche Bank. Please go ahead.
Yeah. About, Jimmy, in the flows question, I guess. Given that we had a huge sell-off in Q4 and a big recovery, has that changed consumer appetite in individual retirement? Does that cause any change in your producer education? Are there capital-intensive products that you'd like to sell more of because they're attractive, but the appetite's not there in the market?
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 capped into an index of choice, either over five, 10, or 15 years. It's a really good product in volatile times, because you can get the upside, and if there's any nervousness about the markets and volatility, you've got some protection on the way down. 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.
Yeah, 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 what Mark mentioned. It's really good to have an SCS type, but we also have Retirement Cornerstone, which is more income oriented. 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. There are times where volatility is lower, and that's where basically we see more sales in the other product. Overall, I think it's pretty stable. You would expect more volatility from a mix because of that, but I think it's more a macro trend that people like the downside protection of SCS, but people also like the income of the other product.
It really depends on the market environment, but also their needs.
Producer education, is there any ramp-ups or it's just steady?
This is very steady. I think our producers, they know that we have this all-weather portfolio. They know that different products suit different purposes, and I think we have a high education in our advisors. They have to go through a lot of training in order to be prepared for this and for doing their job.
Thank you very much.
Our next question comes from the line of Mark Hughes from SunTrust. Please go ahead.
Thank you very much. Good morning. On the Protection Solutions front, I wonder if you could just talk about, or refresh us where you're seeing more success in the employee benefits business. Overall there, any strategies for expanding distribution, both for the VUL and the employee benefits?
Hi, it's Mark. Let me deal with the EB one, I'll pass to Anders on the VUL. We're very pleased with the momentum inside the EB. If you remember three, four years ago, when we started, it was one of our big bets, if you like, for the future. In terms of employees recovering now, people recovering now. It's over 300,000, so that's a really nice number. I think in the quarter, we ticked over $100 million of premiums collected totally. Certainly the model is working out. There's still a couple of years before we can see meaningful profits coming out of the unit. We really are where we hoped we would be and we feel very confident about it. On the VUL side, Anders?
I think in particular on the individual life side, we are very selective where we operate 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, term life is not a key product for us. We have it, 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 sales has a strong momentum there. I think that's moving in the right direction.
On the benefit ratio was up this quarter. I think you talked about a higher large case mortality. What's a good run rate on that benefit ratio? Do you think that'll calm down in Q2?
Yeah, look, I think Ami 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 cases. I think overall you can expect somewhere in the high 60s. I think that's a good run rate.
Thank you.
Our next question comes from the line of Ian Rive from Bank of America. Please go ahead.
Good morning. Thanks for taking the question. Just revisiting a few questions that other analysts have asked about your ability to participate in further offerings. AXA is essentially, their intention is to continue to sell down. There's no material lockups 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. Should we take it that there's nothing really stopping you from being able to materially participate in any further offerings?
I want to reiterate what I said before. Our target payout ratio is 50%-60% of operating earnings. That's really key for us. We have an authorization of $800 million and $200 million left. This together with the dividends that we pay out, brings us in the middle of that range right now. The $200 million that are left, as we said before, we want to use the majority of that, particularly of the total one, but also of the $200 together with AXA. We're also opportunistically looking at open market repurchases. Don't expect that it's going to materially increase.
Okay. Thank you.
Thank you.
I'll now turn the call back over to Mr. Pearson for closing remarks.
Great. Thanks. This is Kevin Molloy, the Head of Investor Relations. Thanks for your participation today. If you have any follow-up questions, please don't hesitate to give us a call or send us an email. Thank you.
This concludes today's conference. You may now disconnect.