Lincoln Financial Group Announces $28 Billion Reinsurance Transaction With Fortitude Re and Preliminary First Quarter 2023 Results

Lincoln Financial Group

RADNOR, PA — Lincoln Financial Group (NYSE: LNC) and Fortitude Reinsurance Company Ltd. recently announced that they have entered into an agreement under which Lincoln will cede approximately $28 billion of in-force ULSG, MoneyGuard and fixed annuity statutory reserves to Fortitude Re.

The reinsured block consists of approximately $9 billion of ULSG statutory reserves, or about 40% of Lincoln’s total in-force ULSG, nearly $12 billion of MoneyGuard statutory reserves, or about 80% of Lincoln’s total in-force MoneyGuard, and nearly $8 billion of fixed annuities statutory reserves, or about 40% of Lincoln’s total in-force fixed annuities.

“Today’s transaction with Fortitude Re marks significant progress in our efforts to reduce our balance sheet risk, improve our capital position and increase ongoing free cash flow,” said Ellen Cooper, president and CEO of Lincoln Financial Group. “With our leadership team in place, we are rapidly executing on actions to fortify our balance sheet, and we remain committed to further enhancing the pace of capital generation and long-term profitable growth.”

The transaction is expected to improve the Company’s capital position and be accretive to ongoing free cash flow:

  • A higher RBC ratio upon closing of approximately 15 percentage points.
  • Incremental ongoing free cash flow of over $100 million per year.

The transaction is expected to be dilutive on a GAAP basis with the following estimated financial impacts:

  • A negative quarterly impact to adjusted operating income of ($35–40) million.
  • This includes a ($30–35) million impact in Life Insurance and a ($5) million impact in Annuities.

The transaction is subject to customary closing conditions, including regulatory approvals, and is anticipated to close in the second quarter of 2023 with an effective date of April 1, 2023.

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The transaction is structured as a coinsurance treaty between Lincoln and Fortitude Re for the ULSG and fixed annuity blocks, and as coinsurance with funds withheld for the MoneyGuard block, with counterparty protections including a comfort trust established by Fortitude Re subject to investment guidelines to meet Lincoln’s risk management objectives. Fortitude Re is an authorized Bermuda reinsurer with reciprocal jurisdiction reinsurer status in Indiana.

Under the terms of the reinsurance agreement, Lincoln will retain account administration and recordkeeping of the policies including claims management. The transaction will have no impact on Lincoln’s commitments to its distribution partners and policyholders. Additionally, Lincoln remains focused on the continued growth of its Life Insurance and Annuities businesses.

Lazard acted as financial advisor and Sidley Austin LLP served as legal advisor to Lincoln.

Preliminary first quarter 2023 results

In addition to the May 02, 2023, block reinsurance transaction announcement, Lincoln also provided preliminary estimates for first quarter 2023 results. These preliminary first-quarter estimates do not affect the Company’s previously communicated 2023 outlook for distributable earnings or free cash flow. The Company expects:

  • Estimated net loss available to common stockholders of between ($919) and ($904) million, or ($5.43) to ($5.34) per diluted share. This estimate includes unfavorable impacts from the new accounting for market risk benefits (“MRBs”) as a result of the recent adoption of LDTI2, including a portion of MRB and hedge instrument fair value changes which sum to approximately ($1) billion. The estimated net loss excludes a favorable MRB-related item that flows through Accumulated Other Comprehensive Income (“AOCI”) of approximately $1 billion and which approximately offsets the combined MRB and hedge instrument fair value impacts on total stockholders’ equity.
  • Estimated adjusted income from operations available to common stockholders of between $250 and $265 million, or $1.47 to $1.56 per diluted share. This includes an estimated Life Insurance operating loss of between ($23) and $(8) million. These results reflect the 2023 headwinds the Company has previously discussed, such as higher expenses and lower prepayment income, and, in Life Insurance specifically, also higher reinsurance costs and lower base spreads.
  • Estimated first-quarter RBC ratio of between 377% and 380%, versus 377% at year-end 2022.
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