RADNOR, PA — Lincoln Financial (NYSE: LNC) agreed to reinsure approximately $5.8 billion of guaranteed universal life statutory reserves with Talcott Financial Group, shifting about 37% of its remaining in-force GUL block as the insurer reduces exposure to capital-intensive legacy liabilities and seeks to increase free cash flow.
The transaction is expected to increase annual subsidiary remittances by approximately $30 million to $40 million over the medium term, according to Lincoln. The company will also reinsure approximately $500 million of funding agreement business with a Talcott subsidiary.
Combined with Lincoln’s 2023 reinsurance transaction with Fortitude Re, approximately 60% of the insurer’s total in-force GUL business will be reinsured after the Talcott deal closes.
The transaction reduces Lincoln’s exposure to long-term mortality, policy lapse and interest-rate risks associated with the legacy block.
“This transaction reinforces the progress we reported this quarter by continuing to reshape our liability mix and enhancing our free cash flow,” Chairman, President and CEO Ellen Cooper said.
The deal will have an estimated $200 million statutory capital impact on a pro forma basis and reduce Lincoln’s estimated risk-based capital ratio by approximately 10 percentage points. Lincoln plans to fund the transaction using a portion of proceeds from its strategic partnership with Bain Capital.
The company expects its risk-based capital ratio to remain well above its 420% buffer target after closing.
Lincoln will retain policy administration, recordkeeping and claims management. The company stated that the reinsurance arrangement will not change its commitments to policyholders or distribution partners.
The transaction will use a combination of coinsurance with funds withheld and modified coinsurance. Counterparty protections include over-collateralization and investment guidelines established under Lincoln’s risk-management framework.
Lincoln expects the transaction to reduce net income because of amortization but does not anticipate a material effect on adjusted operating income under its current definition.
Beginning in the fourth quarter, the company plans to change its definition of adjusted operating income to exclude amortization of deferred gains and losses associated with blocks of business exited through reinsurance.
The transaction is subject to regulatory approvals and other customary closing conditions. Lincoln expects it to close in the fourth quarter with an effective date of Oct. 1.
Wells Fargo served as Lincoln’s exclusive financial adviser, while Skadden, Arps, Slate, Meagher & Flom LLP served as legal adviser.
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