Christopher Neczypor
Executive Vice President & Chief Financial Officer at Lincoln National
Thank you, Ellen, and good morning, everyone. Our third quarter results demonstrate broad-based improvements across all our businesses, highlighting the positive momentum driven by our strategic priorities and disciplined execution. While the strength we experienced across all four businesses may not always occur simultaneously like we saw this quarter, overall, we are pleased with continued progress in our results.
I'm going to focus on three areas this morning. First, I'll recap our third quarter results, including a review of our segment level financials and our annual review of reserve assumptions. 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 third quarter adjusted operating income available to common stockholders of $358 million or $2.06 per share. This includes the impact from this year's assumption review, which increased earnings by $8 million or $0.05 per share. Additionally, our alternative investments portfolio delivered an 11% annualized return in the quarter or $100 million. On an after-tax basis, this amount was $7 million above our return target or $0.04 per share.
Turning to net income for the quarter. We reported a net loss available to common stockholders of $562 million or $3.29 per diluted share. The difference between the net loss and adjusted operating income was predominantly driven by two factors. First, there was a negative change of $446 million in the fair value of the GAAP embedded derivative related to the Fortitude Re reinsurance transaction. This change was primarily driven by the impact of lower interest rates on available-for-sale securities in the funds withheld portfolio backing the agreement with the corresponding offset flowing through accumulated other comprehensive income, or AOCI.
And second, there was unfavorable non-economic impact of $381 million within non-operating income, in part driven by the negative movement in market risk benefits, as the impact of lower interest rates more than offset the impact from higher equity markets. Of note, our hedge program continues to perform in line with our expectations. And as a result, we were able to take a $50 million distribution from LNBAR.
Before turning to our segment results, I want to briefly touch on the impacts of our annual review of reserve assumptions. As I noted earlier, the net operating impacts from the review this quarter were minimal, resulting in an $8 million benefit to adjusted operating income. The majority of the benefits stemmed from updates made in our life business, which favorably benefited earnings by $8 million. In our annuities business, we had a small benefit of $1 million, which was offset by an equally small negative impact in our group business of $1 million.
As it relates to our life assumptions, it is important to highlight that both GUL policyholder behavior and mortality assumptions continue to be in line with our experience and expectations. The impacts of our annual assumption review on our segment results in the prior year period are detailed in our earnings release issued this morning.
Let's now start with Group, which had a record third quarter. Excluding the impact of the assumption review, Group reported operating income of $110 million and a margin of 8.5% compared to $44 million in the prior year quarter and a margin of 3.5%. The year-over-year improvement was driven by several factors, and given the considerable improvement in our results, not only in the third quarter, but also year-to-date, I want to provide additional color on the drivers supporting our earnings growth.
First, our strategic focus on diversifying our book of business, discipline in our pricing actions and strong operational execution within our disability business has led to improvements in the core earnings of the business. This will continue to be supportive of our results in the quarters to come.
Second, we continue to experience improving mortality trends. And while there can be some volatility in mortality results in any given quarter, overall, we expect that trend to persist, as we become further removed from the pandemic.
And third, the benefits from the favorable macro backdrop persisted supporting the strong results within disability. However, as the current tailwinds from the macro backdrop are unlikely to persist indefinitely, we anticipate that when these conditions normalize, overall growth could moderate for a period of time, as the benefits from our strategic actions and improving mortality will temporarily be offset.
Now turning to Group product line results for the quarter, excluding the impacts of the annual assumption review. The disability loss ratio was 71%, improving by approximately five percentage points year-over-year. The loss ratio remains favorable relative to our longer-term expectations and benefited from low claim incidents and strong LTD recoveries, enabling positive return to work outcomes for our claimants. The Group life loss ratio was 72%, a nine percentage point improvement versus the prior year quarter. The lower loss ratio was driven by favorable volatility in Group life incidents, which more than offset slightly elevated severity.
As we look to the fourth quarter, consistent with historical trends, we expect seasonal headwinds within our disability results to drive a sequential decline in earnings, but continue their improvement year-over-year. Overall, with our focused execution against our margin expansion strategy and the benefits from the favorable macro tailwinds, we are positioned to deliver over 200 basis points of margin expansion over our 2023 result.
As we look beyond 2024, while the results this year are encouraging and reflect our focus on expanding Group to become a larger and more profitable part of our overall business, our priority remains sustaining a margin at or above 7% in the quarters to come.
Now turning to annuities. Excluding the impact of the assumption review, annuities reported operating income of $300 million compared to $260 million in the prior year quarter. The strength we experienced in the first half of the year continued this quarter, resulting in year-over-year improvement, driven by a broad set of factors, including higher account balances, increased spread income and reduced expenses.
Turning to account balances, ending account balances totaled $165 billion, a nearly 13% increase versus the prior year quarter, as higher equity markets more than offset the impact of outflows. RILA account balances surpassed 20% of total account balances for the first time and were up three percentage points versus the prior year quarter. As we continue to optimize our investment strategy and leverage our capital-efficient strategies, total spread earnings will continue to grow, as RILA and fixed products become a larger part of our overall business mix.
Our annuities results this quarter reflect the benefits of higher account balances and improving spread income. While we expect seasonally higher expenses and elevated reinsurance financing charges in the fourth quarter to outweigh the tailwinds we've been experiencing through the first three quarters of the year, overall annuities will continue to be supported by the strong underlying fundamentals of the business.
Now turning to Retirement Plan Services, which reported operating income of $44 million compared to $43 million in the prior year quarter, as tailwinds from higher equity markets were offset by elevated participant driven stable value outflows over the last 12 months, driven by the higher interest rate environment. Our base spread for the quarter was 105 basis points, compressing roughly 5 basis points compared to the prior year quarter. And while we've experienced a modest level of sequential expansion over the last two quarters, as we look ahead, we expect our fourth quarter spread to stabilize at around 100 basis points.
Turning to net flows for the quarter. Net flows were $651 million, which were supported by the strong sales that Ellen noted, in addition to an improvement in stable value participant activity. While we are pleased with the moderating levels of stable value outflows and the overall level of net inflows during the quarter, as we look ahead, it is important to remember that fourth quarter sales and terminations can be lumpy, as plans typically change providers. As a result, we anticipate that net flows will be impacted by the timing of known plan terminations, challenging positive net flows for the fourth quarter.
Now turning to account balances. Average account balances for the quarter increased 15% year-over-year and end-of-period account balances were nearly $114 billion, up 21% versus the prior year quarter. Overall, earnings continue to trend in a positive direction, as a number of the headwinds that pressured the business over the last year dissipate. While spreads will be a slight headwind, as we look towards the fourth quarter, overall, higher account balances, increased sales and our ongoing focus on expenses will continue to be supportive of retirement earnings.
Lastly, turning to Life Insurance. Life reported operating income of $14 million compared to operating income of $23 million in the prior year quarter, excluding assumption review impacts in both periods and $40 million of significant items in the prior year quarter. The run rate impacts of the Fortitude Re transaction and slightly elevated mortality in the quarter were partially offset by above-target alternative investment income and lower expenses.
Expanding on mortality results for the quarter, the slightly elevated mortality we experienced was primarily due to an increase in severity from a small number of large claims in our universal life type products. Our term experience for the quarter was in line with expectations.
Net G&A expenses were down $12 million versus the prior year quarter. The improvements in the expense base highlight our ongoing focus on targeted expense reductions and over time, we continue to see an opportunity to further increase operating leverage in the Life business.
As we look towards the fourth quarter, we currently expect elevated mortality driven by a small number of large claims that have occurred this month. While this could create quarter-over-quarter pressure on life results, this type of volatility is within the range of our long-term expectations.
Let me now touch briefly on company-wide expenses. Expenses continued to trend favorably relative to the prior year, driven by the broad-based actions we took in the first half of the year focused on reducing organizational complexity. Although seasonal items that typically contribute to sequential expense growth throughout the year resulted in slightly higher expenses compared to the previous quarter, we also took further actions during the quarter to continue streamlining the expense base. This quarter, our efforts have been centered on identifying specific actionable opportunities to reduce our expense base, particularly, where ongoing expenses were misaligned with ongoing free cash flow.
While the benefits from the actions we took in the third quarter will begin to materialize in 2025, in the fourth quarter, we will have a seasonal increase in expenses. Our focus on expense management will continue to be targeted, as we seek opportunities for efficiency in alignment with our earnings that will manifest, as both reductions and investments, as our businesses dictate.
Shifting to capital. We ended the quarter with an estimated RBC ratio above 420%, as our capital position continues to strengthen. The RBC ratio improvement this year has been driven by free cash flow, tracking above expectations and the execution of strategic initiatives, such as the sale of our wealth management business. Delevering remains a strategic priority for the organization. And sequentially, the leverage ratio improved 50 basis points, driven by organic equity growth.
Lastly, as we announced last quarter, with the creation of Alpine, our affiliate reinsurer in Bermuda, we continue to work towards establishing an increased reinsurance capacity centered around affiliate flow reinsurance. We remain on track to achieve the initial phase of this new business flow support starting in 2025.
Now moving to investments. Overall performance was solid, as we continue to focus on maintaining a high-quality and well-diversified portfolio, while capitalizing on less liquid assets and structured asset class premiums. The portfolio remained high quality at 97% investment grade.
Starting with an update on our general account optimization efforts, where we continue to leverage our multi-manager platform to drive increased value to the organization. We continue to source incremental yield driven by a targeted shift in our asset mix toward investment-grade private assets and high-quality structured products.
As a result, despite declines in market interest rates during the quarter, we experienced year-over-year improvement in our new money yield with new money invested at a 6.4% yield, approximately 160 basis points above the yield on comparably rated public bonds during the quarter. While the prevailing interest rate environment will influence our overall new money yield, the execution of our optimization strategy will continue to generate an increased level of incremental spread.
Turning to 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 3% of total invested assets. Despite near-term headwinds in the office sector, the broader office portfolio remains conservatively positioned from a debt service coverage and loan-to-value perspective. Additional information can be found in our quarterly earnings supplement.
Lastly, our alternative investments generated a quarterly return of 2.7% this quarter, above our quarterly expectation of 2.5%. Our returns during the quarter were broad-based with positive contributions from all underlying asset categories.
In closing, I want to reiterate three points. First, our strong results this quarter reflect our sustained momentum supported by strong underlying fundamentals and continued progress towards strategic objectives. Second, our capital position continues to strengthen, supported by our free cash flow generation, and we are tracking well towards our 2026 outlook target. And third, as I've said in recent quarters, while we remain pleased with the progress we've made thus far, our broader focus remains unchanged, as we continue to 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.
