Christopher Neczypor
Executive Vice President Chief Financial Officer at Lincoln National
Thank you, Ellen, and good morning, everyone. We appreciate you dialing in and listening to our call. I'm going to discuss three things this morning. First, we'll provide a recap of the quarter. Second, we'll go through the segment level financials included on our annual review of reserve assumptions. And lastly, we'll finish up with an update on our investment portfolio. So let's start with a recap of the quarter. Last night, we reported third adjusted operating income available to common stockholders of $39 million or $0.23 per share.
This includes the impact from this year's assumption review, which lowered earnings by $144 million or $0.84 per share. Also included in the quarter are $48 million of unfavorable items that are nonrecurring. This consists of $40 million impacting our Life business and $8 million impacting other operations. I will discuss the impacts on life in greater detail when I discuss our segment results. Additionally, alternative returns for the quarter were $23 million lower than implied by our long-term expectation of an annualized 10% return.
These items combined impacted the quarter by $215 million. However, even after adjusting for these items, the quarterly results still fell short of our expectations, and we are taking the necessary steps to address the issues. Now turning to net income. Net income available to common stockholders was $819 million or $4.79 per diluted share. The difference between net and adjusted operating income for the quarter was predominantly driven by two factors. First, there was a favorable impact to net income within nonoperating income, driven by positive market risk benefits as the benefit of higher interest rates more than offset the impact from lower equity markets.
Second, as Ellen mentioned, we expect the transaction with Fortitude to close and as a result, we impaired securities down to fair market value as of September 30, resulting in an after-tax realized loss of $369 million. As I mentioned last quarter, the amount of the quarterly impairment only included assets that were in an unrealized loss position. Any gains in the portfolio and any market movement after September 30 will be realized upon closing of the transaction. This impairment has no impact to statutory capital.
Before turning to the segments, I thought it would be useful to highlight three general themes we see impacting the businesses. The first is what we view as a number of short-term pressures. Some examples here include the lingering excess mortality in life from the endemic, slightly weaker alternatives performance and spread pressures in annuity. We expect some of these headwinds to abate or normalize over the next few quarters. The second big theme we're seeing is higher expenses. This is a large driver of earnings pressure year-to-date and a key area of focus.
And lastly, while overall, the reported numbers this quarter fell short of our expectations, we see significant progress being made under the surface to reposition the company for longer-term value creation. And as we go through the segments, we will discuss each of these themes. So now let's turn to the segment results, starting with Group. Taking a step back, this was a business in 2022 with reported margin under 1% for the full year. And while the pandemic certainly contributed to this, the results underscored the need for ongoing enhancements.
Through the first three quarters this year, the Group margin has improved substantially, in part due to strategic actions we've taken, but this is also a reflection of a favorable macro environment, coupled with favorable seasonality in the first half of the year. And while we began to see the very favorable incidents we experienced in the first half of the year normalized in the third quarter, we are seeing significant improvement in the underlying fundamentals of our business compared to where we were a year ago.
Now turning to the numbers. This quarter, excluding the $24 million net favorable impact from the assumption review, Group reported operating income of $44 million compared to $109 million in the prior quarter. Results from both Disability and Life drove a sequential decline. Starting with Disability, excluding annual assumption review, loss ratio was 76% in the third quarter, an increase of five percentage points versus the prior quarter. The sequential increase reflects higher incidents, which is consistent with seasonal patterns we've experienced in past years and in line with our expectations.
However, compared to the prior year quarter, the loss ratio was favorable by roughly seven percentage points, excluding the impacts of the assumption review. This improvement reflects the continued execution of our repricing efforts and continued operational investments to support our claimants in their return-to-work journey. Turning to Group Life. The loss ratio of 81% increased roughly nine percentage points sequentially when removing impacts from the annual assumption review. Results in the second quarter benefited from very favorable mortality.
However, this quarter, we experienced volatility due to elevated severity driven by increased mortality and younger age bands, who typically have higher claim amounts. This dynamic also drove the increase in the life loss ratio versus the prior year quarter, but when we're moving this, the underlying mortality and morbidity results present a favorable trend.
Overall, group results were below expectations in the third. Despite this, we continue to see progress under the surface given pricing actions and operational improvements in our claims function and expect our margin to be roughly 5% for the full year. Looking beyond 2023, we remain focused on achieving a long-term margin of 7%. It will take time, and the path towards that target will not always follow a straight line, but we are confident that the work we are doing today will lead to sustained improvement.
Turning to Annuities. Annuities reported operating income of $248 million, which includes a $12 million unfavorable impact from our assumption review compared to $275 million in the prior year quarter, which included a $1 million favorable impact from that assumption review. This decrease was primarily due to higher expenses and variable annuity outflows partially offset by higher equity markets. Sequentially, excluding the impact of the assumption review, earnings declined $11 million, primarily due to the spread pressures we noted last quarter.
While we expect these pressures to persist into the fourth quarter, the drivers behind this short-term headwinds are behind us, and we expect will abate starting next year. Lastly, turning to account balances. VAs with living benefit guarantees now represents 44% of total account balances, a decrease of three percentage points from the prior year. Additionally, RILA account balances now represent 17% of total account balances, up from 13% in the prior year.
So overall, while spread pressure and increased expenses are expected to continue through the fourth quarter, underlying earnings continue to be strong, and we see growth in this business heading into 2024. Next, focusing on Retirement Plan Services. Retirement reported operating income of $43 million compared to $47 million in the prior year quarter. The decline was primarily driven by higher expenses and increased stable value outflows, partially offset by an increase in base spreads.
Base spreads expanded s basis points over the prior year quarter, though sequentially faced some modest pressure. Average account balances for the quarter increased over 9% versus the prior year quarter driven by positive net flows for the trailing 12 months, combined with favorable equity markets. Looking ahead, we expect to end 2023 with positive net flows for the year and have a strong pipeline heading into 2024. Spread expansion for 2023 should be mid-single-digits, and the rate environment will influence the outlook heading into 2024.
Expenses are a headwind, and we are focused on addressing this issue, both for retirement and the company. Overall, we continue to expect consistent underlying long-term earnings growth and steady free cash flow from the retirement business. Lastly, turning to Life Insurance. As a result of this year's assumption unlocking, Life had a negative impact of $156 million, driven by updates to our policyholder behavior and mortality assumptions. Importantly, there is no negative impact to statutory capital or free cash flow related to the annual review of reserve assumptions.
Turning to this quarter's results. Excluding the assumption review impacts, Life reported an operating loss of $17 million compared to an operating loss of $64 million in the prior year quarter. The year-over-year improvement was driven by alternative investment income and underlying mortality, partially offset by the run rate impact from the assumption review and two additional nonrecurring items.
First, there was an unfavorable mortality impact of $25 million related to unclaimed property identified by process enhancement. Excluding this impact, mortality was in line with our expectations. Second, there was an unfavorable impact of $15 million as a result of the surrender benefit program that concluded this quarter for GU well products. Lastly, on Spreads, we continue to anticipate spreads to bottom in the fourth quarter before beginning to expand in 2024.
Overall, while the headwinds we have discussed throughout the first half of the year remains, we continue to make progress on strengthening the foundation of the life business. We are confident in our assumptions and continue to make progress on repositioning our in-force block of business and shifting new business to a more capital-efficient mix. Turning briefly to company-wide expenses. Expenses in the quarter remained elevated and are one of the key pressures to earnings and free cash flow for the company.
As such, expenses are an important area of focus and opportunity for us as a management team and we are actively engaged in a comprehensive review in which we are closely examining our expense base across the organization in order to mitigate expense growth and identify opportunities for further cost reduction. There are three primary drivers behind our increased expenses. First, there are both onetime and short-term expense headwinds that will decrease over time.
Examples here include certain advisory and consultant costs were expenses related to strategic projects like the reinsurance transaction. These expenses will lessen naturally over time as we execute on our strategic initiatives. The second driver is recent inflationary headwinds, which are impacting Lincoln as well as the rest of the industry. And third, there are expenses that are associated with some deferred maintenance. These are costs that we need to incur to best position Lincoln as a stronger and more profitable company down the road.
These expenses will live with us, think new systems and new people needed in certain areas. But for both the inflationary headwinds and the cost of the deferred maintenance, it's incumbent on us to find offsetting savings elsewhere in the organization, and this is a project we're currently shaping. Put simply, there is opportunity to continue to rightsize the expense base of the company. We look forward to discussing more on this topic early next year as part of our broader outlook.
Moving to investments where we again reported solid credit results. We continue to maintain a high-quality portfolio, which is currently 97% investment grade. Our conservative positioning reflects disciplined portfolio construction, regular stress testing and proactive credit risk management. Now turning to a brief update on our commercial mortgage loan portfolio, which continues to perform very well with no material loan modifications, no delinquencies and no forced extensions.
A key area of focus in office remains near-term maturities. Given our conservatively positioned office portfolio, we have had 100% of our loans pay off in full and have less than $1 million of remaining maturities in 2022. We have future maturities of $135 million and $186 million coming due in 2024 and 2025, respectively, which represents less than 2% of our CML portfolio. Office loans with near-term maturities continued to perform well with an average debt-to-service coverage ratio of 3.5x.
Lastly, our alternative investment performance generated a return of 1.6% this quarter, below our long-term quarterly targeted return of 2.5%. However, the portfolio is well diversified, and we expect it to continue to deliver strong results over the long term. As we look forward to the fourth quarter, I want to highlight the fact that we report our private equity returns on a three-month lag and given broader public equity market weakness last quarter, we expect that our alternative returns will likely be below our long-term target in the fourth quarter.
Before we close, I'd like to step back and make a few comments. To reiterate, the results this quarter were below our expectations. Some of the pressures are temporary and will normalize over the next few quarters, while others are more structural, but are within our control such as expenses. I also think it is important to reiterate the progress we're making as we work to position Lincoln for sustainable value creation. First, the work done to structure the reinsurance deal in the first half of the year was significant and will result in a big step forward for the company both from a capital and a free cash flow perspective.
Additionally, we've discussed the new VA hedge program and are very pleased that three quarters of the way through the year through a variety of different market environments, the performance has been better than expected, allowing us to take a modest dividend out by this quarter. And while it is still early in the program's tenure, the success so far has us increasingly confident in the long-term implications for free cash flow from that block.
It is also important to note that we've been able to modestly improve RBC this year despite the headwinds we've discussed and several other unexpected onetime earnings or credit headwinds throughout. And as a reminder, the fourth quarter tends to have unfavorable seasonality impacts. Rebuilding capital is a top priority for the company, and we will be in position to discuss incremental steps forward early next year. Most recently, the annual assumption review was a major undertaking for the organization and a big step forward.
Over the past year, we have assembled a new team of leaders across Finance, Risk and within the business units. This included a new Chief Risk Officer and new Chief Actuary, who are charged with leading the assumption review process and brought additional deep industry knowledge into our existing strong governance framework. We feel good about our holistic and comprehensive review. Validation of our assumptions allows us to move forward strategically as we work to position the company for sustainable value creation.
Ultimately, the actions we are taking today will benefit the franchise over the long term and are foundational to delivering higher earnings and free cash flow, which will be a true measure of our progress. And then lastly, I'd like to reiterate that we plan to provide increased specifics to help the investment community better understand the outlook for our business.
We have invested substantial time and energy and doing a deep dive on each of our business lines as well as on our financials and operations, including significant enhancements to data, infrastructure and analytics needed to manage and measure our business effectively, the work we've been discussing over the last several quarters. Expenses will be a focus as we're ensuring we're optimizing our capital allocation. As a result of these reviews, we anticipate that we will be able to share more details early next year.
With that, let me turn the call back to Adam.
