So, we think that there’s going to be a number of things that we’re going to be able to do depending on market conditions and where we see our debt trading out and so forth.
Tom Gallagher: Got you. Thanks. And then just on 1 question on Life Insurance free cash flow by the 2026 free cash flow guide by segment. I noticed Life still doesn’t have any. I think the one concern that’s still out there on your stock is that you had obviously a reserve strengthening for SGUL. And when I look at 2026 free cash flow, there’s none coming from Life Insurance. Is that signaling that the reserves still need to be strengthened there since there’s effectively no free cash flow? Or do you think you’re out of the woods as it comes to balance sheet risk and Life Insurance reserves?
Chris Neczypor: Yes. So, thanks for the question, Tom. And look, at the end of the day, if you think about free cash flow at the business segment level, there’s lots of ways to define it. But at the end of the day, it’s really the capital generation that’s coming out of that business less the amount of money that we’re investing for new business, right? So, what I would say is that rest assured that over the next couple of years, we are continuing to invest in the Life business. And sales in that segment obviously require capital strain in any given year. So, we are by 2026, more comfortable with the capital generation coming from that block. Obviously, the Fortitude deal last year took a big step forward in terms of derisking the GUL block.
But at the end of the day, we do still invest a significant amount of money into new business capital in the Life business. One of the things that we highlight though is, and Ellen has talked a lot about the move to a more capital-efficient product portfolio that will help — and then obviously, to Alex’s question, as we look at different jurisdictions and domiciles from an economic framework, that should be able to help with the new business capital as well. So, at the end of the day, we feel increasingly better obviously after the deal, but I would just remind you that when you think about free cash flow, it’s not just the reserve build and the capital that you’re generating, it also takes into account any new business capital that you’re investing in the business.
Does that help?
Tom Gallagher: Yes, fair point. Thanks.
Operator: We’ll go next to Ryan Krueger at KBW.
Ryan Krueger: Hey thanks. Good morning. My first question was on the affiliated reinsurance. Is this something that you’re thinking about primarily as using for new business to improve free cash flow and improve capital efficiency? Are you also of the view that, that could also release capital from the in-force upfront?
Chris Neczypor: So, Ryan, it’s a good question. What I would say is we’re looking at everything, right? I think to go back to the earlier point, we are one of the few that haven’t worked to build out multiple tools in the toolkit. I think it would be fair to say that at the end of the day, if you’re going to stand up an affiliated reinsurance subsidiary that you would see that initially with some liabilities. So, I would imagine that there would be an element of current in-force would go to start the reinsurance affiliate. And then more importantly, over time, it would absolutely be a tool in the toolkit and a thoughtful way of us deploying for new business.
Ryan Krueger: Got it. Thanks. And then I don’t think you talked too much yet about the optimization of legacy life liabilities that you listed, which I think policy buyouts could maybe be 1 option, but also probably require capital to do so. So, I was just hoping you could expand a little bit on what you’re looking to do there and how we should think about the potential, I guess, cost of doing something like that?
Chris Neczypor: Yes. Right. So, we put it on the page to basically make the point that this is — continues to be a significant focus for us, as you would expect. But I think when you’re thinking about a legacy Life block, right, it runs the gamut. There’s the transactions that — the transaction that we did last year, right with Fortitude. That obviously helped to optimize the results for the block that we ceded. I think at the other end of the spectrum, you could think about something around the affiliated reinsurance. But really in between, there’s all the other dynamics that you can work towards thinking about hedging, you can think about different asset allocations within that block. So, the point is that looking at everything, as you would expect. We took a big step forward last year. But we think that there’s a lot of upside over the next two years there.
Ryan Krueger: Okay guys. Thank you.
Operator: We’ll take our next question from Mike Ward at Citi.
Mike Ward: Thanks guys. Good morning. I was just wondering, is there any kind of metric that we or you are tracking? It’s probably early for this, but in terms of like a buyback resumption, should we think about that as like maybe a 2026 target or longer term target than that?
Ellen Cooper: So, Mike, I think importantly, first of all, just to reiterate the fact that every action that we took last year and everything that we have, as we contemplate our path to go forward are all focused on the strategic objectives around strengthening the balance sheet improving free cash flow and profitable growth. And so importantly, that as we are growing our earnings, as we are improving our free cash flow over time that those things obviously are going to support are increasing in terms of overall shareholder returns. So, we’re not today going to provide any specific timing as it relates to buybacks. But it goes without saying that as we are improving and growing our free cash flow as we’re growing our earnings as we’re shifting the overall earnings mix and everything that you’ve heard about today that, that will also just increase our overall financial flexibility.
Mike Ward: Got it. Totally. It makes sense. Thanks. And then just on the wealth management sales. It seems like a pretty solid deal for you guys. Just kind of wondering if you could sort of elaborate kind of on what exactly you’re giving up in that transaction?
Ellen Cooper: Sure, Mike. So, if I take a step back and there are — there is one transaction that we closed last year, the Fortitude Re transaction, I want to spend a moment talking about that. So, as you all know, complicated transaction, $28 billion of liabilities, 40% of our GUL. And as part of that transaction, we were able to really stick to our overall strategic objectives. So, we reduced our balance sheet risk, we improved our capital, and we also improved, and increased our ongoing free cash flow. So, in the announcement of the Wealth Management transaction and as we thought about that broadly, and we really looked at the overall opportunity for wealth management, and we evaluated the fact that, A, we did not believe that we had scale in that business, but it was a very good business.
We made the decision to divest of it and recognize that in the comments of a net capital benefit of $700 million, we are improving our capital position, and we have also communicated that there are no material earnings or free cash flow impacts as well. So, again, really sticking as we think about these overall transactions importantly to maximizing relative to the strategic objectives that we’ve laid out for you.
Mike Ward: Okay. Thanks. I guess just — it seems like it’s very solid proceeds for wealth management. Is it just — is it, I guess, other competitors being on the same platform for distribution and wealth. Like it just seems like really solid deal. Wondering what the puts and takes are?
Ellen Cooper: Yes. So, Mike, these are — so the Wealth Management business is a very attractive business. And in particular, if it has profitable growth with scale. And so it really gets to this point around the fact that as we evaluated our Wealth Management business, which is a great business that we really determined that unlike the other businesses that we’re in, where we have where we have significant scale where they’re very mature, where we have all the levers that we need around competitive advantages around our distribution strength, our product manufacturing, our customer-centric delivery, et cetera, that there was quite a bit that we ourselves would need to do to really build out the business to be at that same level and that it would really be in best for us and best ultimately for this business to be in the hands of an organization that does this as part of what they do, 24/7 each and every day that has the ultimate scale to really drive the profitable growth that we know can come out of this business.
Mike Ward: Okay. Thanks.
Operator: We’ll go next to Wilma Burdis at Raymond James.
Wilma Burdis: Hey good morning. Could you talk a little bit about the Life segment earnings outlook? We were expecting our model and loss in the segment or the 2024 guidance was better than we anticipated. Is there anything that changed? Or is there — is this just kind of what shook out after the deal?
Chris Neczypor: So, Wilma, if you step back, the Life business for Lincoln, you earned about $600 million a year if you go back a couple of years. And over the course of the year in 2023, we tried to lay out the drivers of the degradation over time and how we went from $600 million to basically flat for 2023. And embedded in that were a number of things that we’ve highlighted that actually turned from headwinds to tailwinds over the next couple of years. So, if you step back, right, part of the lost earnings power for the Life business was obviously tied to the assumption reset in 2022. Part of it was due to significant prepay income that we used to earn when interest rates were lower part of it was reinsurance related. And so there’s a number of those dynamics that we’re not when you look out the next couple of years, obviously, don’t recover prepay income, maybe a question mark depending on what happens with rates.
But generally speaking, are not what we would expect. However, there’s a number of dynamics that ultimately do reverse. And so one example that we’ve highlighted just at a high level is our alternatives income. We had a great year for ops from a relative perspective and relative to markets. But at the end of the day, it was still below our long-term target. When we look out to 2024, we see that recovering. We also see the opportunity to be more efficient as it relates to expenses. I think the Life business is one of the examples when you think about some of the longer term expense ratio dynamics that we’ve highlighted that we see opportunity there. And then the last thing I would say is we’ve spent some time over the past couple of quarters, making this point.
We really haven’t seen spread expansion in the Life business despite higher rates from the past couple of years. And the point that we’ve made is that we had a duration extension program in place, which as short rates went up became a headwind. And so as that program has run down, you would now expect to see spread expansion move through that portfolio. And obviously, it’s a big portfolio even after the transaction with Fortitude. So you put all that together on Page 10 of the outlook, we have a relatively high earnings CAGR expected over the next three years, but it’s obviously off of a very low base. So, if you think about what the math is implied when you look at the starting point and then the growth numbers, it gets you back to a number that is not where we used to be, but certainly accounts for a number of the headwinds turning a little bit to tailwinds over the next two or three years.
