Christopher Neczypor
Executive Vice President Chief Financial Officer at Lincoln National
Thank you, Ellen, and good morning, everyone. Our second quarter results demonstrated further execution against our strategic priorities and our underlying results came in at the high end of our expectations. I'm going to focus on three areas this morning. First, I'll recap our second quarter results, including a review of our segment level financials. Second, I'll touch on capital; and third, I'll review our investment portfolio. So let's start with a recap of the quarter.
This morning, we reported second quarter adjusted operating income available to common stockholders of $319 million or $1.84 per share. There were no significant items in the quarter, but there were two normalizing items. First, our alternative investments portfolio delivered a 4% annualized return in the quarter were $36 million. On an after-tax basis, this amount was $41 million below our return target or $0.23 per share. Second, there was a $23 million benefit in Group Protection due to the timing of an experience refund. I'll touch on this further when discussing our segment results.
Now turning to net income for the quarter. We reported net income available to common stockholders of $884 million or $5.11 per diluted share. The difference between net and adjusted operating income was predominantly driven by three factors that impacted net income. The first was a favorable impact of $436 million related to the closing of the sale of our Wealth Management business. The second was a favorable impact of $198 million within nonoperating income.
This was driven by a net positive movement in market risk benefits that resulted from higher interest rates and equity markets in the second quarter and was inclusive of hedge program performance. The third was a positive change of $158 million in the fair value of the GAAP embedded derivative related to our Fortitude Re reinsurance transaction. This change was primarily driven by the impact of higher interest rates on available-for-sale securities in the funds withheld portfolio back in the agreement with a corresponding offset flowing through accumulated other comprehensive income or AOCI.
Partially offsetting these positive impacts were GAAP accounting losses driven by the expected turnover of assets by Fortitude Re in our reinsured block. Now turning to the segment results. Let's start with group, which reported a record quarter with operating income of $130 million and a margin of 10% compared to $109 million in the prior year quarter and a margin of 8.6%. Of note, included in this quarter's results was a $23 million benefit within our disability results from the timing of an annual experience refund related to one state's Paid Family Leave program. In prior years, this benefit was recognized in the third quarter.
Excluding this benefit, group's operating income was $107 million and a margin of 8.2%. Group's results this quarter are a continued reflection of the execution of our strategy to diversify our book of business and maintain discipline in our pricing actions. Additionally, the benefits from the favorable macro backdrop, including low unemployment and a supportive interest rate environment persisted in the quarter.
Turning to group product line results for the quarter.
The Group life loss ratio was 76% this quarter, four percentage points higher versus the prior year quarter. The increased loss ratio was driven by severity volatility as our mortality trended towards younger age populations, we typically have higher benefit amounts. For disability, the loss ratio was 66% this quarter, decreasing by approximately five percentage points year-over-year. The timing of the annual experience refund accounted for four percentage points of this improvement.
The loss ratio was favorable relative to our longer-term expectations and benefited from record low claim incidents and strong LTD recoveries, enabling positive return to work outcomes for our claimants. As we look to the second half of the year, there are a couple of items to keep in mind. First, disability results are seasonally favorable in the first half of the year and we expect moderation of the strong results in the third and fourth quarters, consistent with historical trends.
And second, as I mentioned earlier, our third quarter results have historically included the benefit from the annual experience refund. Overall, group results continue to reflect our commitment to and execution against our margin expansion strategy. And while the results in the second half of the year will moderate relative to the record results we experienced in the first half, we remain confident that our results will get the high end of our 50 to 100 basis points of expected margin expansion in 2024.
Now turning to Annuities.
Annuities reported operating income of $297 million compared to $271 million in the prior year quarter. On a sequential basis, results improved $7 million, excluding the unfavorable significant items that impacted first quarter results. The year-over-year and sequential improvements were broad-based, driven by higher account balances, increased spread income and reduced expense. Turning to account balances. Ending account balances totaled $160 billion, a 5% increase versus the prior year quarter as higher equity markets more than offset the impact of outflows.
Overall outflow levels were elevated in the quarter, which was expected given the higher interest rate environment and strong equity market performance. However, net flows improved relative to the first quarter due to strong sales in both fixed and variable annuities. At the end of the quarter, general account products represented more than 25% of total account balances as we continue to focus on expanding our spread and spread like product lines.
RILA now represents 20% of total account balances, up four percentage points versus the prior year quarter. This quarter's results reflect not only the strength of our in-force Annuities business, but also our continued execution of our product mix shift. Our Annuities business remains well positioned to deliver strong earnings in the second half of the year. Now turning to Retirement Plan Services, which reported operating income of $40 million compared to $47 million in the prior year quarter.
The decline was primarily driven by elevated participant driven stable value outflows over the last 12 months, resulting from higher interest rates, partially offset by reduced net G&A expenses. However, results increased by $4 million or 11% sequentially due to higher account balances and lower net G&A expenses. Our base spread for the quarter was 103 basis points compressing roughly 15 basis points compared to the prior year quarter.
In the current rate environment, we expect spreads to stabilize at around 100 basis points in the second half of the year. While stable value outflows persisted in the quarter, the quarterly trend continues to be encouraging, and we experienced our lowest level of stable value outflows in the last seven quarters. Now turning to account balances. Average account balances for the quarter increased over 13% year-over-year and end-of-period account balances were nearly $108 billion, up 12% versus the prior year quarter.
Overall, the sequential improvement reflects our disciplined focus on revenue growth and continued focus on expense efficiencies, and we remain well positioned to deliver solid earnings in the coming quarters. Lastly, turning to Life Insurance. Life reported an operating loss of $35 million compared to operating income of $33 million in the prior year quarter as the run rate impacts of the Fortitude Re transaction and below-target alternative investment income were partially offset by lower expenses.
Mortality in the retail Life business was in line with expectations this quarter as slightly elevated mortality in our Universal Life business driven by a small number of high faced amount claims, was offset by favorability in our Term business. Net G&A expenses for the quarter were down $11 million versus the prior year quarter, reflecting the targeted expense reductions we made in the first half of the year. Overall, while lower alternative investment income pressured Life's reported earnings this quarter, the underlying result was in line with our expectation, reflecting the strategic actions we've been taking to improve the earnings profile of this business.
We expect favorability from mortality seasonality and the actions we have taken on expenses to support improvement in the Life business in the second half of the year. Let me now touch briefly on company-wide expenses. Managing expenses remains a key strategic area of focus. In the first quarter, we announced the actions that were focused on reducing organizational complexity, resulting in a reduction in head count across the organization, in addition to the ongoing efforts focused on removing unnecessary discretionary spending.
As a result of these actions, excluding significant items from the first quarter of this year, G&A expenses have declined both sequentially and year-over-year. As we think about expenses more broadly, I want to highlight three items. First, seasonal items, particularly higher sales volumes drive sequential expense growth over the course of the year. We saw those impacts in the second quarter, and we'll continue to experience this impact in the second half of the year. Second, we continue to evaluate opportunities to invest in talent, process efficiencies and technology to improve the overall profitability of our businesses.
And third, while the financial outcomes from our actions earlier this year strengthen the efficiency of our operations, we continue to see further opportunity to rationalize our expense base, while growing the franchise alongside our strategic objectives. Shifting to capital. We ended the quarter with an estimated RBC ratio above 420%. As a reminder, our target RBC ratio is 400%, and we view a 420% RBC level as allowing a buffer to maintain our target RBC during a recessionary environment.
As we discussed last quarter, the sequential improvement was driven by the completion of the sale of our Wealth Management business to Osaic, delivering roughly $650 million of statutory capital benefit. Our leverage ratio improved 120 basis points sequentially to 28.9%, driven by the after-tax gain related to the close of the Osaic transaction and pay down of outstanding debt of over $50 million. Overall, as Ellen mentioned, achieving an RBC ratio above 420% is a key milestone, reflecting the targeted actions we've taken to rebuild and protect capital and should provide significantly greater capital flexibility over the next few years.
Lastly, I want to provide an update on our newly licensed Bermuda-based reinsurance subsidiary, L Pine. In June, the Bermuda Monetary Authority issued a Class E license for L Pine, a wholly owned subsidiary of LNC. Additionally, we executed an initial reinsurance transaction covering in-force blocks of fixed indexed annuities and certain group disability business to drive scale into the entity. Looking ahead, L Pine will operate as an affiliated Life and Annuity Reinsurance company. We are very pleased to join the Bermuda marketplace.
The creation of L Pine and the increased reinsurance capacity centered around affiliate flow reinsurance renew business will support our strategy of improving free cash flow and ensuring a competitive presence in the products and markets that are in line with our long-term strategic objectives. We expect to achieve the initial phase of this new business flow support later in 2024 or early 2025. Now moving to investments. Overall performance was solid and continues to reflect the high quality nature of our portfolio. The portfolio remains 97% investment grade and continued to deliver positive net ratings migrations.
Similar to last quarter, I want to provide three updates on the portfolio. First, on our general account optimization efforts; second, on our commercial mortgage loan portfolio; and third, on our alternative investment performance. Starting with the progress on our general account portfolio optimization efforts, where we continue to leverage our multi-manager platform to drive increased value to the organization. We experienced sequential improvement in our new money yield in the second quarter, with new money invested at a 6.9% yield.
While a portion of this increase was driven by higher rates, the primary driver was a targeted shift in our asset mix to less liquid assets and high-quality structured products. As we look ahead to the second half of the year, we expect continued progress as we execute our optimization strategy, which will further support spread earnings and product competitiveness. Next, a brief update on our commercial mortgage loan portfolio.
The portfolio remains high quality and represents 15% of total invested assets with office representing only 2.9% of total invested assets. The office is going through a longer-term transition, and there are headwinds in the sector, but we believe we are well positioned to navigate the environment. As discussed on prior calls, near-term maturities within our office portfolio remain manageable and are conservatively positioned from a debt service coverage and loan-to-value perspective. Additional details on our CML portfolio can be found in our quarterly earnings supplement.
Lastly, our alternative investments generated a quarterly return of 1% this quarter, below our quarterly expectation of 2.5%. As a reminder, our alternatives portfolio is comprised of a diverse mix of private equity and real asset strategies with relatively small allocations to hedge fund and real estate-related strategies. However, over the last several quarters, our returns have been slightly below expectations, primarily due to lower merger and acquisition activity, which has reduced the pace of realizations in certain private equity strategies.
And higher interest rates, which negatively impacted valuations on certain sub strategies, such as real estate. As we look ahead to the third quarter, similar to recent quarters, we expect alternative investment returns to be moderately below the 2.5% expectation. In closing, I want to reiterate three points. First, building a strong capital foundation has been a primary focus.
With the execution of key strategic initiatives over the last year, including the closing of the sale of our Wealth Management business this quarter, we have made significant progress towards building the capital foundation that will support enterprise stability across market cycles and ensure investment for profitable growth. Second, momentum in our earnings this quarter reflects the progress being made from our operating model optimization effort and ongoing expense discipline. And third, while we are pleased with the progress we've made, our overall focus remains unchanged as we execute against our longer-term strategic objectives to maintain a strong balance sheet, improve free cash flow and grow the franchise.
With that, let me turn the call back over to Tina.
