Morning, everyone. I'm Jay Gelb. I'm the insurance equity analyst here for the U.S. stocks at Barclays. It's our great pleasure to have AXA Equitable's President and Chief Executive Officer, Mark Pearson, here with us. Mark has held this role for more than seven years. AXA Equitable Holdings comprises two well-established franchises, those being AXA Equitable Life Insurance, which is among the largest U.S. providers of life insurance and annuities, and AllianceBernstein, which is a leading asset manager and research firm. The company completed its IPO in May of this year. With that, it's my pleasure to turn it over to Mark Pearson.
Thank you, Jay, and good morning, everybody. Thank you for coming along. We're delighted to be here today at the Barclays Conference for the very first time as a public company, and we thank you all in the audience for taking time to learn more about our company. Before I begin, I'd just like to note that some of the information I'll be giving this morning will be forward-looking. I point out to you our website and SEC filings for all the necessary disclosure.
One of the things that struck me, as I've spoken to the investment community and others about our IPO, is the warm reaction I get with comments like, "It's great to see the Equitable back." As you probably know, Equitable has been around a long time, since 1859, and there are not too many businesses still operating today that were around before the Civil War. In addition, as Jay mentioned, we have an asset management subsidiary, AllianceBernstein, which just last year celebrated its 50th anniversary and will be well-known to all of you in this room. Our recent listing provides a great opportunity to showcase and put even more emphasis into these two brands. Moving on to slide four, I'll just dive in a little bit to more detail on our two principal subsidiaries.
Firstly, we have 100% ownership of AXA Equitable Life, which serves 2.8 million clients with individual retirement, group retirement, and protection solutions. Secondly, we own 65% of AllianceBernstein, the investment management and research house, which is itself listed on the New York Stock Exchange with a market cap of over $8 billion. Although our businesses are distinct with different brands, they have grown up together and complement each other well. For example, AB manages approximately 69% of AXA Equitable Life's general account and 27% of the separate account. That's a total of over $90 billion of assets under management. AB also provides deep expertise for Equitable's hedging and asset liability matching, and in return, AXA Equitable provides a source of seed capital for new product development, which has been a key part of AB's recent success.
The combination of AB and AXA Equitable gives us a leading position at the intersection of advice, asset management, and financial protection. We believe that this provides our clients with products and solutions that meet their long-term financial needs and gives our shareholders attractive returns. As shown in slide five, our strategy is supported by initiatives designed to grow our business, enhance productivity, and optimize our capital. Underpinning these strategies is our commitment to disciplined risk management and a sound people strategy built on a culture of inclusion, professional excellence, and continuous learning. I'll touch on each of these components throughout the presentation to explain how we run the business and also our plans to deliver against our key financial targets. Of course, strategy wouldn't matter if we weren't in the right markets. We believe that the fundamentals of our business are good.
We are positioned in growing segments, which will benefit from the increasing need for retirement, protection, and investment solutions. The macro numbers on these slides are well known to you all. We expect to continue to benefit from the tailwinds in growth of U.S. retirees and overall global investment assets. The foundation of our business is advice and research-based investment solutions. In today's complex world, there continues to be a strong need for advice. We see these trends continuing to favorably impact our business. Of course, it would be naive of us not to talk about some of the headwinds facing the industry, and we cover some of these on slide seven. I'm very proud of how the organization has responded to some of the challenges facing the industry over the past few years.
For example, our line distribution, AXA Advisors, is strongly orientated towards advice and has shown the ability to pivot and adjust to changing regulatory and market scenarios. We see technology as making us better, making us safer, helping us provide better advice and better service, helping us be more productive, and thereby offset some of the pressures on margins. AllianceBernstein stands out for its ingenuity and has developed new services such as AB FlexFee and other alternative strategies that are difficult to replicate through passive strategies. This means that AB has been one of the very few active managers that has been able to keep fee income rates stable. Of course, I'm not saying we're totally immune from these headwinds. I believe our resilience and our ability to find innovative solutions is repeatable and will be needed in the future.
We're well aware that in competing for clients and capital, investors have choices. What I'd like to do today is to be very clear on what sets us apart and why we are confident about the future. Our businesses are well-regarded and have leading positions in select markets, backed by strong affiliated and third-party distribution platforms. In addition, over the last decade, we have repositioned the company towards attractive and less capital-intensive segments of the market. Today, the maturity and scale of our in-force portfolios means that we have the benefit of robust cash flows, giving us significant capital flexibility. The strength of our balance sheet and our enterprise risk management discipline provide us confidence for the future. In looking forward, in addition to having well-positioned businesses, we see multiple levers for near-term growth.
I'll illustrate each one of these points in the remaining part of the presentation. On slide nine, you can see our focus is on markets where we have scale, competitive advantage, and can get attractive returns on the capital invested. We are number three in the $90 billion variable annuity market. Here, we have strong relationships with third-party distributors, such as banks, insurance partners, who are drawn to our innovation in manufacturing both accumulation and income in retirement products. An example here would be that we were first in the market with buffered annuity products in 2010 and have long been the market leader in that space. On the group retirement side, we are the number one player in the U.S., 403(b) K-12 educators market.
Although this is a smaller market, it does have higher barriers to entry and higher margins not experienced in other parts of the retirement market. Here, we serve teachers and public sector workers through our unique work site advice model. This is supported by over 1,000 proprietary advisors, and we have 8,700-plus school districts across the country. In leveraging this model, we have built a foundation for growth through deep relationships, best-in-class client service, and strong client retention. In Protection Solutions, as you will know, we trace our heritage back as one of the earliest life insurance companies in the country. Our focus today is on less capital intensive products where the design features align well with our distribution channel. Today, we are the number three player in the VUL accumulation space. We are also building a new employee benefits business which was launched in 2015.
Finally, through AllianceBernstein, we provide diversified investment management and research services globally to institutions, high net worth, and retail investors. Our teams in AB have built a strong investment performance track record whilst delivering innovative new offerings for clients. 80% of AB's U.S. retail-rated assets are 4 or 5-star Morningstar funds. In addition, the depth and global presence of AB's distribution and best-in-class sell side research set us apart from other asset managers. Let me turn now to earnings on slide 10. Last year, AXA Equitable Holdings generated $1.7 billion of pro forma non-GAAP operating earnings across our four business units. Our biggest contributor, as you can see, is the individual retirement business, which generated $1.3 billion of operating earnings from $103 billion of account values. The pre-tax return on assets for the business is 178 basis points, and our return on solvency capital here is 19%.
Our group retirement business manages $34 billion of assets and generated $283 million of operating earnings in 2017, 14% of our total. The pre-tax ROA in this business was 116 basis points, and ROC was 23%. AB, as you can see, provides AXA Equitable Holdings with 15% of its operating earnings, and this is generated from fees received, which averaged 41 basis points in 2017, and giving rise to an adjusted operating margin of 27.7%. Protection Solutions is our individual life insurance business and generated $137 million of operating earnings, 7% of our total. In line with the rest of the market, returns for this business are low single digit. However, the life insurance segment also provides us with significant capital diversification and positive cash flows. In summary, at $1.7 billion in earnings for the year, we had a non-GAAP operating ROE of 12.3%.
As of the second quarter this year, ROE expanded to 14.6%, in line with our mid-teens target. Distribution is obviously key to our ability to grow future earnings, and we illustrate our platform on slide 11. On the affiliated side, we have one of the largest networks in the country, over 4,500 AXA Advisors, as well as a direct network of 200 Bernstein financial advisors. We have a long track record of being able to run distribution within the pricing allowables. On our individual retirement and protection businesses, we have built a broad range of more than 1,000 third-party partnerships, and AB itself distributes to more than 500 institutional clients worldwide, and this accounted for 83% of the AUM as at the end of 2017.
We believe that this close alignment of an affiliated platform, in conjunction with a network of third-party partners, differentiates us in the market. Bottom line, looking through all of these agreements, we have a line of sight to over 150,000 advisors. This distribution platform and strength has been a key enabler in repositioning our business towards less capital-intensive parts of the market. The impact of the changes we've made in our VA product portfolio is illustrated on this slide number 12. As you can see at the top of the slide, 90% of our VA sales in 2008 had fixed rate living benefits with rich guarantees commensurate with the market at that time. Last year, by comparison, approximately 65% of our new sales had no living benefit, and most of the balance being a less rich floating rate living benefits linked to the 10-year treasury rate.
As a result of the significant change in sales mix, natural attrition, and our success with in-force liquidity offers, our in-force book today has less than 50% in fixed rate living benefit products. In terms of future trends, if you look at disclosure for flows in individual retirement, you'll notice that the pre-2011 fixed rate GMXB book has typical outflows of $4 billion per annum. Taking this into account and reflecting approximately $7 billion of new sales each year, we should see continuation of this shift in mix towards less capital-intensive products. I believe that this ability to respond thoughtfully and quickly to changing circumstances is an important competence for the future. AllianceBernstein has also seen a strong turnaround of the business since 2011.
Underpinning the recovery of the business has been research-based investment performance, and building on this, a number of innovative new products which have had great success through our strong global distribution platform. As you can see from the slide, AB's 2017 adjusted operating margin of 27.7% is up more than 10 percentage points since 2011. Last quarter, we increased our ownership of AB from 45% to 65% by buying AXA Group's direct holdings. We feel very good about having this capital-light business as part of our portfolio. It helps drive ROE and provides a source of non-insurance regulated cash flows each year, approximately 10% to 15% of what we expect in normal markets. In terms of cash flows, all four of our business segments are forecast to be cash flow positive, the most significant source coming from our VA portfolio.
On slide 14, we present the lifetime cash flow projections for our variable annuity portfolio, discounted at 4% across different economic scenarios. We also include the next three years forecasted distributable earnings for this portfolio. Please note these illustrations we're showing you here have no assumption as to future new business, but do reflect our hedging program. You can see that our VA portfolio generates significant cash flows even in adverse scenarios. Let me illustrate this. For our base case, we assume an equity return of six and a quarter percent per annum, and that the 10-year treasury rates will follow the forward curve. Under this scenario, the present value of cash flows from our VA portfolio would amount to $12.9 billion and provide distributable earnings up to the holding company of $4.1 billion over the next three years.
Going further to the right on the slide, in a downside market scenario of a 25% shock to equities and a simultaneous drop in the 10-year treasury rate to 1.4%, our cash flows, assuming a slow recovery in both, would fall but still be over $9 billion. Even in this downside scenario, we would still have distributable earnings in the next three years. Our VA portfolio provides attractive and robust free cash flows. Downside is protected, and investors have the option to participate in market upside. As you can see from the substantial growth in present value of cash flows if equity returns were to reach 10%. On slide five, we explain why we are in the position of having such robust cash flows.
As a result of the maturity of our GMXB portfolio and the mix of business sold since 2009, we are in the advantageous position of now being past the peak funding requirement under the CTE risk framework. The release of CTE98 over time represents a source of cash flow for us and provides us with additional financial flexibility. To illustrate the significance of being positioned beyond the peak TAR funding, you should note, in 2017 year-end, the target CTE98 asset levels was $12.6 billion. One year previously, the TAR funding level was $13.9 billion. Although I should point out that this was against the backdrop of favorable equity markets. To repeat, we're in an advantageous position. We are past the peak TAR funding, and our VA portfolio is providing robust cash flows across different market environments.
Supported by the cash flows generated from our operating subsidiaries, we recently announced the commencement of our capital management program. The first part of our capital management program is our common stock dividend. We recently paid our first quarterly cash dividend of $0.13 per share, giving an annualized yield of approximately 2.3%. Second, our board of directors approved a 500 million share repurchase program, the commencement of this program is an important step in demonstrating that we are delivering on our commitments we have made to shareholders. In this case, our long-term objective of achieving a 40%-60% payout ratio. Supporting the cash flows is our strong balance sheet and hedging program. Our hedging program isn't new as part of the AXA Group. It was part of our well-developed enterprise risk management framework and is designed to protect the balance sheet. This discipline will continue.
Specifically for our VA business, we have in place a hedging program to offset changes in the economic liability of our living benefits due to changes into the market, interest rate, and some volatility. In addition to this, we have some static hedges in place to protect asset levels at CTE98 across most scenarios. We believe that CTE98 is the best way to look at the VA business capitalization. It's a deep in-the-tail risk measure, which is where the cost of guarantees can hurt. In addition, for our non-VA businesses, we aim to maintain a 350%-400% RBC ratio. For the life company, this results in an overall combined RBC ratio in excess of 700% at June 30th.
In summary, our company is well capitalized, and our risk management discipline will continue with the goal of protecting capital, securing a foundation for future growth, and supporting those cash flows. In terms of future growth, we see multiple near-term levers to grow earnings. We estimate that the overall impact of the 2017 tax reform will give us a $150 million uplift in operating earnings. Overall, after this benefit from the tax reform, the guidance we are giving on operating earnings is a 5%-7% CAGR by 2020. This is at our base case market assumptions, basically 6.25% equity growth and rates following the forward curve. Our first source of growth stems from improving yields on our general account. Currently, we have an outside position on U.S. Treasury bonds relative to U.S. peers and a short portfolio duration. These reflect our past European Solvency II driven investment strategy.
We've already started to transition a portion of our portfolio from Treasury bonds to high-quality investment grade corporates, as well as extending our duration. We are about 50% complete in terms of progress, and we would expect to see in total, a $160 million improvement from this source. With regards to productivity, we see a further improvement of $75 million net of any incremental costs. We've got a very good track record here, as over the last five years we've delivered over $350 million in productivity gains. Earnings CAGR from growth would be reasonable in the 3%-4% range, and this allows for AB's margin improvement to 30% by 2020. Organic growth within our life business and assuming our base case market scenario.
Calculating all this out, we should see earnings in the $2.2 billion-$2.3 billion range by 2020, giving rise to an adjusted operating ROE in the mid-teens. I'd like to just give you an update on our consolidated results through the first two quarters, our first two quarters as a public company. We're very pleased with our early progress. Overall, first half non-GAAP operating earnings were up $267 million-$970 million. This reflects the benefits of tax reform and increased ownership in AB and improved business performance through the GA optimization initiatives and higher AUM. Total AUM increased 4% to $656 billion, supported by equity market performance and net inflows across a number of our target markets in the retirement and investment management businesses. From the year-end, ROE expanded 230 basis points from 12.3%-14.6%, primarily driven by increases in operating earnings.
This level of ROE is in line with our mid-teens objective previously highlighted. Let me bring all of this together. We have established the following financial goals, which we believe will show successful execution of our strategy. Our medium-term plan is to grow operating earnings by 5%-7% CAGR after tax reform benefits through 2020, supported by a 30% operating margin from AB. With regards to cash flows, our goal is to return capital to stockholders equal to at least 40%-60% of our total operating earnings starting this year. This trajectory of earnings and payout ratio should see us at a mid-teens adjusted operating ROE by 2020. To protect the balance sheet, we target asset levels for our VA business at or above CTE98 and an RBC ratio of 350%-400% for other insurance lines. Thank you very much for your time.
In summary, we're well-positioned. We have good momentum. Our management team is highly engaged and capable of executing to grow our business and deliver attractive returns. Let me hand it back to Jay, if I may.
That was excellent, Mark. Thanks for that overview. Let me start off with a couple questions, and then we're also happy to take questions from the audience. Mark, could you discuss the potential timeline for AXA to sell down its entire 65% ownership stake in AllianceBernstein?
I think there's two pieces.
Oh, I apologize.
You mean AXA-
AXA to sell down its 65% stake in AXA Equitable.
Equitable.
Apologize.
Okay. No strategy to sell down the AllianceBernstein. AXA has announced its intention to sell down fully, but it has not said when. It has said it is subject to market conditions being favorable. That's all I can tell you on that side. We are doing all of the work in preparing for full separation from the AXA Group, ranging from the work we need to do in thinking of our brand and the work we need to do in terms of IT systems being standalone. We're preparing the company for a sell-down as soon as AXA executes the strategy. I can't give you a specific date. I don't know.
Appreciate that. Any thoughts or perhaps an update on how the NAIC, that's the National Association of Insurance Commissioners, how their updated capital model for variable annuities will affect your company?
Yeah. It's a big issue for the industry. Look, bottom line for us is we welcome the moves because it converges. We believe the reforms and the framework that the NAIC has provided brings greater convergence to the economic way in which we manage the business. On that fundamental point, we are very supportive of the direction. There's still a lot of detail to go through, Jay. It's gone to the committees now on that side, but we are very supportive of the direction. We think it's a good thing to have more commonality across the industry in how these reserves are set, and it will reflect more accurately the economic realities of managing these. Very supportive of it.
From what we've seen so far, we don't see it impacting our dividend capability, but as I say, there's still quite a lot of detail to go through those committees there.
Okay. Let's open it up to questions from the audience. Let's see if there are any out there.
Got a mic for you. Got a question? Over here.
If you could maybe give a little framework or guidance on this thought anyway. Obviously, you're very big in the individual retirement area. There's expectation or potential that net flows are actually going to turn negative in the retirement plans as you showed the big turnover of the retirement balloon that's coming forward, obviously, it's a big focus for you. What is the ways that you will be able to grow your AUM? Maybe as part of what is the profile and age of the group you currently have? How much is retirement? How much is reliant on the markets to give you the AUM growth versus maybe the specific market you're in versus taking new clients? What is the framework we should be looking for that you keep growing in a market that at least the net flows potentially could be turning down?
Yeah. Maybe I'll give some color on the last few years.
Yeah.
Many of you will know, last five or six years, the VA market itself has had a net decline. We have not been in that position. I think there's two things which have set us apart and meant we've been able to grow our assets there. Firstly, deep inside the DNA of Equitable is product innovation. It has always been there. I mentioned to you we were the first to bring a buffered annuity into the market. Our SCS product. That's been a huge winner for us. The benefit of this product is it gives the customer sound downside protection, not deep in the tail, which costs us a lot, plus some upside. We've really been tackling the market by having an all-weather portfolio.
If you take VAs as a label, it covers many different things, we're able to provide value to consumers who want protection, value to consumers who are willing to take some, want some upside on that, through really good product innovation. I think that is one thing. The second thing which I think our teams have done well is on the distribution side. If you look at our distribution, it's sort of 60, 65 third party, 30, 35% is our affiliated sales force, Equitable Advisors. Having the affiliated sales force is really important if a market is changing, because they eat your cooking. You're able to go to your affiliated advisors. They give you instant feedback on what's working with consumers, what we need to tweak.
Something that's been a huge success, these buffered annuities, was a slow start. In having Equitable Advisors, we were able to tweak and adjust the market. Looking forward to the second part of your question. Looking forward, look, we remain very positive about the retirement market in the U.S. Simply because the need is so great. You all know the stats about baby boomers retiring every year. We all know the stats about the retirement gap. There is a societal need there, we're well placed to meet that need. I just think we're going to have to be quite innovative and creative on both product design and distribution means to continue to grow that AUM. We've done so in the last five or six years, which is rather unique in the market.
Additional questions from the audience?
Yeah, please.
Thanks for the question. Next one comes from State your name and your question.
Hi, I'm Pierce Crosby from Davis Advisors. I was wondering if you could comment a little bit on sort of how the economics of the business that you're selling today in the VA space compares to the back book. You mentioned that the return on the total book was about 1.8% last year. You also talked about how you've shifted towards more sort of lower, less capital intensity product. One imagines that you make less as you have less capital invested, but maybe that's not the case. Could you talk a little bit again, how it sort of compares to the way you wrote business in the past?
Yeah. Kevin, I think we've given some disclosure somewhere on the amount of capital you need for the old book and the new book in terms of new sales. Have we given that out?
Not return on capital for that.
Kevin Molloy is our head of IR. I just don't want to overstep what we've disclosed.
In short, we have return on capital figures for the overall book of business, which are just over 20% for the entire portfolio. New business that we're writing in that space tends to be much shorter duration, lower risk, somewhat slightly lower revenue, but also lower risk. On a return on capital basis, we should be able to support the same level of returns that we're seeing in the portfolio overall.
The new business we're writing is north of 20 IRR as well on that side. I think the important stat I gave there was the old book is running off at about $4 billion per annum, our new sales today are about $7 billion per annum. If you look at the $7 billion, 65% of it had no living benefit guarantee in it. It's very capital efficient.
Additional audience questions? I've got a couple more.
Under what circumstances would the company consider increasing its stake in AllianceBernstein?
Yeah. It's 65% stake now. As I said in the presentation, we like the business. It's low capital intensive. It also provides us with non-regulated cash flows, so we don't have to go through the New York formula. It comes straight into the holding company. 65% has been with us for a long time. We've had connections between those two businesses for 30 odd years now, so it's not news to us. We have from time to time looked at that. Do we go up to the full 100%? In the past, when we've looked at it, we've been aware that AllianceBernstein values and likes being listed itself. They see it as providing them with a currency. A currency for attracting talent, but also a currency for winning mandates. When we've looked at it in the past, we've looked at it financially, but also strategically it's an important thing.
In setting out that plan that I've showed you to the $2.2 billion, $2.3 billion, that assumes the 65% stake will continue at 65%, no change to it. We'll look at it from time to time, but as I say, there are a number of factors to look in there. It's not new news for us. We've been operating this way for some time.
Other questions from the audience?
Might have been a good move to do a year ago because I think the share price was up 28% or something yesterday.
Mark, can you discuss your perspective on share buybacks and dividends as a newly public company, and whether shares would primarily be repurchased in the open market or from AXA when it sells its shares?
Jay, we're going to do both. We're going to go in the open market, but primarily our focus will be on when AXA sells down. The reason why primarily we want to do it is we want to keep the liquidity in the system. We will do both, but primarily it will be on AXA's sell down. That's why when we made the announcement, we said that execution of this could trip over into 2019. Dependent on what AXA does between now and the end of the year.
Right. Okay. Do you have a sense of how much distributable capital could be received by the holding company, AXA Equitable, in this year, in 2019?
The Holdings company receives capital from the two operating subsidiaries. In terms of the holding company's direct holding of AB, that's about $200 million. In terms of dividends coming from the insurance subsidiaries, we just announced $1.1 billion. That's sustainable. That's within the New York formula. It'll be $1.1 billion-$1.2 billion a year. Combined, Jay, about $1.4 billion.
Excellent. Any final questions? Excellent. With that, please join me in thanking Mark Pearson-
Thank you very much for coming along
from AXA Equitable. Excellent. Great job, Mark.
Thank you.
Well done. Thank you.