With this headcount reduction, we’re working to optimize our organizational structure and continue to set Lincoln on a more efficient and agile path. While these actions will be additive to the run rate value of the company, there is a cost associated with this reduction that will impact us in the first half of the year. Additionally, as we continue to diversify our product strategy, we see opportunity to optimize our general account. Our multi-manager sourcing model provides us that flexibility and we’re exploring the optimal way to strategically achieve the goals of adding incremental risk-adjusted yields. This initiative will begin to show value in the upcoming quarters, but it will take some time to reposition the portfolio and fully capture the run rate value.
Another strategic initiative being explored to optimize our operating model is an expanded use of affiliated reinsurance. As you know, we have utilized LNBAR effectively for years to manage our VA guarantees. However, going forward, we are exploring the potential to establish additional domiciles such as Bermuda has a tool to deliver profitable growth across a variety of our other products. We are actively working on this and expect it to be a meaningful positive to free cash flow over the next few years, given our increased focus on our capital framework. Ultimately, we expect the outcomes of these initiatives to result in substantial progress over the next few years and drive improvement in our free cash flow conversion. On Page 9, we show that by 2026, we expect free cash flow conversion to improve from roughly 35% in 2023 to a range of 45% to 55%.
At the same time, our operating income is expected to continue to grow. The enterprise growth in both operating income and free cash flow conversion will be driven by improvement across all our business segments. Some examples of the drivers within each segment can be found on Page 10 with three main dynamics to point out. First is that we expect Annuities and Retirement Plan Services to grow low single digits, consistent with recent historical growth rates as account balances grow and we experienced some continued lift from spread expansion. It is also worth noting, we are only assuming 6% market appreciation in our estimates. The more material driver to earnings growth will come from our less market-dependent businesses with group executing on its path to a 7% margin, while retail life benefits from some headwinds turning to tailwinds with improving mortality and spreads helping along with a more normalized alternatives return and a focus on expense rationalization.
The second key message is that we will be working to sustain RBC above 420% going forward. We ended the year above 400% RBC an estimated increase of more than 20 percentage points from the third quarter. Note, this does not include the significant benefit expected from the closing of the [Indiscernible] transaction in the first half of this year. We view a 420% RBC level as allowing enough buffer to maintain a minimum 400% RBC during a normal recessionary environment and are committed to taking additional steps to further minimize our capital volatility. The combination of higher free cash flow generation and the rebuild of capital above our target levels should provide a significantly greater capital flexibility over the next few years. The last key point is that these 2026 metrics should not be construed as long-term targets.
Over time, our free cash flow conversion should continue to increase, really driven by two dynamics. The first is the natural timing of reserve building for the legacy Life portfolio, which becomes less of a drag over time. The second dynamic is the mix shift as we evolve our mix and allocate capital to higher risk-adjusting businesses, the overall free cash flow conversion will trend higher, and we would expect long term to see free cash flow conversion closer to 65% to 75%. As Ellen mentioned, this is a multiyear journey, but the actions taken in 2023 to solidify the foundation of the company, coupled with our confidence in executing against the initiatives we’ve outlined today, will enable Lincoln to deliver sustainable growth in the years ahead.
I will now turn the call back over to Tina.
Tina Madon: Thank you, Chris. We will now begin the question-and-answer portion of the call. [Operator Instructions] With that, let me turn the call over to the operator to begin Q&A. Operator?
Operator: Thank you. [Operator Instructions] We’ll go first to Alex Scott at Goldman Sachs.
Alex Scott: Hi, good morning. First one I had for you is on the free cash flow and I know you’re not giving a 2024 specific guide, but I wanted to see if you can expand on the severance costs and how we should consider that in the context of 2024 cash flow? As well as helping us think through some of the year-over-year puts and takes?
Chris Neczypor: Hey Alex, good morning. Sure. So, look, I think the you step back, right, the goal of the outlook is really to think about over the next couple of years, the growth in income and then what we see is ultimately two to year years from now what the free cash flow conversion will look like. And then longer term, what do we think the mix of business should support. So, what I would say about 2024, is that it will improve relative to 2023 and 2025 will improve relative to 2024. I think when you look at the slides we’ve put out as an example on the — on Page 8 what you see is that there’s a number of initiatives that are embedded in the way that we’re thinking about the next couple of years. And so there’s some uncertainty around timing, right?
Affiliated reinsurance is a good example where it’s something we’re working on that could land in 2024, could land in 2025. The expense initiative that I mentioned to your question, I mean that’s another great example where the run rate impact from that will be a meaningful lift to free cash flow. But the one-time cost this year will be a negative to free cash flow in 2024. So, it’s — we think focusing on 2026 gets you to the point where you can understand the steady state. I think if you look at 2023, where we landed somewhere close to $400 million in terms of free cash flow, and we would expect that continue to improve. But there’s just some uncertainty around timing for some of the initiatives and then for some of the other initiatives, there was just a degree of one-time cost that will be required.
Ellen Cooper: And Alex, just to one additional point, just as it related to expenses in particular and your question about severance. So, as we think about expenses going forward, it is really critical to us that once we get through the initial upfront costs here that ultimately G&A expenses that you’ll see a downward trend. And the action that we took and the severance that we noted in our outlook. What you can see there is that it’s about a 5% reduction in our overall workforce. And as Chris commented in his script, this is really intended to remove the organizational complexity and just put us on a more efficient and agile path as we go forward.
Alex Scott: Got it.
Chris Neczypor: And to your specific question, it will be about a $40 million after-tax one-time item in first quarter.
Alex Scott: Okay. All right. And when you guys are defining free cash flow, is that before or after interest expense at the Holdco?
Chris Neczypor: So, that is after interest expense at the Holdco.
Alex Scott: Got it, okay. And if I could sneak 1 more in. I noticed affiliate reinsurance was mentioned, I think, five times in your outlook slides. So, it seems like that’s something you’re pretty focused on. Can you help us think through like what are the inefficiencies on the balance sheet today that you’re looking at?
Chris Neczypor: So, look, I think if you step back, we’ve utilized Barbados, as I mentioned, and as you know, effectively to manage some of our guarantees in the annuity block. I think that if you look across the industry, we’re one of the few that haven’t utilized other domiciles and so we mentioned Bermuda as an example. Ultimately, as we continue to move towards optimizing the capital framework and really thinking about economic capital, Bermuda makes a lot of sense a lot to like about the regulatory regime. There’s a lot to like about the US, obviously, as well. But it’s prudent to have multiple tools in the toolkit as we look out the next couple of years.
Alex Scott: Thank you.
Operator: We’ll move next to Tom Gallagher at Evercore ISI.
Tom Gallagher: Hi thanks. First, a question on capital plan, and then I had a follow-up on free cash flow. Just on the capital. So, I just want to make sure I understand the moving pieces here. So I heard you on the 420 RBC, so that would imply an extra 10 or 20 points of RBC. How much debt reduction, Chris, is embedded in your 2026 plan when I see the delevering, I assume part of that is growth of equity part is debt reduction. So, how much incremental debt reduction? And then would you look to be changing the holding company cash from the current $458 million. Are you looking to grow that? And if so, by how much? That’s — sorry, long-winded first question. I’ll stop there.
Chris Neczypor: That’s right. That was a solid first five questions, Tom, but we’re happy to answer them. So, I think you laid it out correctly, the — we’re ending the year somewhere between 400% and 410%. As a reminder, we started the year at 377%, right? So, we told you the focus for the year was going to be on rebuilding capital. We worked to get back to the 400% target. So, we feel really good about that. I would also remind you that this is before the capital that we’ll receive when the [indiscernible] deal closes. So, that will be a nice lift and should get us within the ballpark of the buffer that we’re looking to hold. As we mentioned when we put the press release out for that, we will look to use some of those proceeds to delever and opportunistically repurchase some debt.
So, as it relates to the 2026, what I would say is I think you’re exactly right that some of the leverage will naturally come down as equity grows. And what we’re looking at right now is what are the options as it relates to actually opportunistically bringing down debt. So given where spreads are in the markets and so forth, that it seems prudent to take a deep look at the liability management. At the end of the day, Tom, the other point that I think is worth making is that the preferred comes due in a couple of years, and that is an expensive cost of capital. So, net-net, when you step back, if you think about the free cash flow that is implied in 2026, and you think about the fact that we’re paying a $300 million dividend. There’s just a lot of financial flexibility.
