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Derivative Instruments

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements [Abstract]

5. Derivative Instruments

We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, default risk, basis risk and credit risk. See Note 1 in our 2011 Form 10-K for a detailed discussion of the accounting treatment for derivative instruments. See Note 6 in our 2011 Form 10-K for a detailed discussion of our derivative instruments and use of them in our overall risk management strategy which information is incorporated herein by reference. See Note 12 for additional disclosures related to the fair value of our derivative instruments and Note 3 for derivative instruments related to our consolidated VIEs.

We have derivative instruments with off-balance-sheet risks whose notional or contract amounts exceed the credit exposure. Outstanding derivative instruments with off-balance-sheet risks (in millions) were as follows:

				As of March 31, 2012						As of December 31, 2011
				Notional		Fair Value				Notional		Fair Value
				Amounts		Asset		Liability		Amounts		Asset		Liability
Qualifying Hedges
Cash flow hedges:
	Interest rate contracts⁽¹⁾			$	2,205	$	101	$	-	$	2,512	$	130	$	-
	Foreign currency contracts⁽¹⁾				340		26		-		340		38		-
		Total cash flow hedges			2,545		127		-		2,852		168		-
Fair value hedges:
	Interest rate contracts⁽¹⁾				1,175		215		-		1,675		319		-
Non-Qualifying Hedges
Interest rate contracts⁽¹⁾					36,178		156		-		30,232		568		-
Foreign currency contracts⁽¹⁾					94		-		-		4		-		-
Equity market contracts⁽¹⁾					16,411		1,749		-		16,401		2,096		-
Credit contracts⁽¹⁾					47		(3)		-		48		-		-
Credit contracts⁽²⁾					148		-		10		148		-		16
Embedded derivatives:
	Indexed annuity contracts⁽³⁾				-		-		480		-		-		399
	Guaranteed living benefits ("GLB")
		reserves⁽³⁾			-		-		1,064		-		-		2,217
	Reinsurance related ⁽⁴⁾				-		-		158		-		-		168
			Total derivative instruments	$	56,598	$	2,244	$	1,712	$	51,360	$	3,151	$	2,800

Reported in derivative investments on our Consolidated Balance Sheets.
Reported in other liabilities on our Consolidated Balance Sheets.
Reported in future contract benefits on our Consolidated Balance Sheets.
Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.

The maturity of the notional amounts of derivative instruments (in millions) was as follows:

			Remaining Life as of March 31, 2012
			Less Than		1 – 5		6 – 10		11 – 30		Over 30
			1 Year		Years		Years		Years		Years		Total
Interest rate contracts⁽¹⁾			$	3,060	$	9,774	$	11,595	$	15,122	$	7	$	39,558
Foreign currency contracts⁽²⁾				94		61		179		100		-		434
Equity market contracts				8,041		23		3,168		5,176		3		16,411
Credit contracts				40		-		108		47		-		195
	Total derivative instruments
		with notional amounts	$	11,235	$	9,858	$	15,050	$	20,445	$	10	$	56,598

As of March 31, 2012, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was June 2042.
As of March 31, 2012, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was July 2022.

The change in our unrealized gain (loss) on derivative instruments in accumulated OCI (in millions) was as follows:

						For the Three
						Months Ended
						March 31,
						2012		2011
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year						$	119	$	(15)
Other comprehensive income (loss):
Cumulative effect from adoption of new accounting standards							-		3
	Unrealized holding gains (losses) arising during the year:
		Cash flow hedges:
			Interest rate contracts				(40)		(6)
			Foreign currency contracts				(3)		2
		Fair value hedges:
			Interest rate contracts				1		1
	Change in foreign currency exchange rate adjustment						(9)		(9)
	Change in DAC, VOBA, DSI and DFEL						4		4
	Income tax benefit (expense)						15		3
	Less:
		Reclassification adjustment for gains (losses) included in net income (loss):
			Cash flow hedges:
				Interest rate contracts⁽¹⁾			(6)		(1)
				Interest rate contracts⁽²⁾			-		1
				Foreign currency contracts⁽¹⁾			2		2
			Fair value hedges:
				Interest rate contracts⁽²⁾			1		1
		Associated amortization of DAC, VOBA, DSI and DFEL					-		1
		Income tax benefit (expense)					1		(1)
					Balance as of end-of-period	$	89	$	(20)

The OCI offset is reported within net investment income on our Consolidated Statements of Comprehensive Income (Loss).
The OCI offset is reported within interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).

The gains (losses) on derivative instruments (in millions) recorded within income (loss) from continuing operations on our Consolidated Statements of Comprehensive Income (Loss) were as follows:

				For the Three
				Months Ended
				March 31,
				2012		2011
Qualifying Hedges
Cash flow hedges:
	Interest rate contracts⁽¹⁾			$	(7)	$	(1)
	Foreign currency contracts⁽¹⁾				2		1
		Total cash flow hedges			(5)		-
Fair value hedges:
	Interest rate contracts⁽²⁾				12		13
		Total fair value hedges			12		13
Non-Qualifying Hedges
Interest rate contracts⁽¹⁾					(3)		(6)
Interest rate contracts⁽³⁾					(413)		(61)
Foreign currency contracts⁽³⁾					(4)		(5)
Equity market contracts⁽³⁾					(672)		(199)
Equity market contracts⁽⁴⁾					(135)		(19)
Credit contracts⁽³⁾					3		4
Embedded derivatives:
	Indexed annuity contracts⁽³⁾				104		48
	GLB reserves⁽³⁾				1,153		289
	Reinsurance related⁽³⁾				10		11
	AFS securities⁽¹⁾				-		1
			Total derivative instruments	$	50	$	76

Reported in net investment income on our Consolidated Statements of Comprehensive Income (Loss).
Reported in interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).
Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
Reported in underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Comprehensive Income (Loss).

Gains (losses) (in millions) on derivative instruments designated and qualifying as cash flow hedges were as follows:

		For the Three
		Months Ended
		March 31,
		2012		2011
Gain (loss) recognized as a component of OCI with
	the offset to net investment income	$	(4)	$	-

As of March 31, 2012, $20 million of the deferred net losses on derivative instruments in accumulated OCI were expected to be reclassified to earnings during the next 12 months. This reclassification would be due primarily to the interest rate variances related to the interest rate swap agreements.

For the three months ended March 31, 2012 and 2011, there were no material reclassifications to earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time period.

Gains (losses) (in millions) on derivative instruments designated and qualifying as fair value hedges were as follows:

		For the Three
		Months Ended
		March 31,
		2012		2011
Gain (loss) recognized as a component of OCI with
	the offset to interest expense	$	1	$	1

Information related to our open credit default swap liabilities for which we are the seller (dollars in millions) was as follows:

As of March 31, 2012

Credit

Reason

Nature

Rating of

Number

Maximum

for

Underlying

Fair

Potential

Maturity

Entering

Recourse

Obligation⁽¹⁾

Instruments

Value⁽²⁾

Payout

12/20/2012⁽³⁾

⁽⁵⁾

⁽⁶⁾

BBB+

12/20/2016⁽⁴⁾

⁽⁵⁾

⁽⁶⁾

BBB+

(7)

03/20/2017⁽⁴⁾

⁽⁵⁾

⁽⁶⁾

BBB

(3)

(10)

148

As of December 31, 2011

Credit

Reason

Nature

Rating of

Number

Maximum

for

Underlying

Fair

Potential

Maturity

Entering

Recourse

Obligation⁽¹⁾

Instruments

Value⁽²⁾

Payout

12/20/2012⁽³⁾

⁽⁵⁾

⁽⁶⁾

BBB+

12/20/2016⁽⁴⁾

⁽⁵⁾

⁽⁶⁾

BBB+

(12)

03/20/2017⁽⁴⁾

⁽⁵⁾

⁽⁶⁾

BBB

(4)

(16)

148

Represents average credit ratings based on the midpoint of the applicable ratings among Moody's, S&P and Fitch Ratings, as scaled to the corresponding S&P ratings.
Broker quotes are used to determine the market value of credit default swaps.
These credit default swaps were sold to our contract holders prior to 2007, where we determined there was a spread versus premium mismatch.
These credit default swaps were sold to a counter-party of the consolidated VIEs as discussed in Note 4 in our 2011 Form 10-K.
Credit default swaps were entered into in order to generate income by providing default protection in return for a quarterly payment.
Sellers do not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the contract.

Details underlying the associated collateral of our open credit default swaps for which we are the seller, if credit risk related contingent features were triggered (in millions), are as follows:

				As of			As of
			March 31,			December 31,
				2012			2011
Maximum potential payout				$	148		$	148
Less:
	Counterparty thresholds				-			-
		Maximum collateral potentially required to post		$	148		$	148

Certain of our credit default swap agreements contain contractual provisions that allow for the netting of collateral with our counterparties related to all of our collateralized financing transactions that we have outstanding. If these netting agreements were not in place, we would have been required to post approximately $10 million as of March 31, 2012, after considering the fair values of the associated investments counterparties' credit ratings as compared to ours and specified thresholds that once exceeded result in the payment of cash.

Credit Risk

We are exposed to credit loss in the event of nonperformance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or nonperformance risk. The nonperformance risk is based upon assumptions for each counterparty's credit spread over the estimated weighted average life of the counterparty exposure less collateral held. As of March 31, 2012, the nonperformance risk adjustment was $6 million. The credit risk associated with such agreements is minimized by purchasing such agreements from financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement. We are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements. Under some ISDA agreements, our insurance subsidiaries have agreed to maintain certain financial strength or claims-paying ratings. A downgrade below these levels could result in termination of the derivatives contract, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contract. In certain transactions, we and the counterparty have entered into a collateral support agreement requiring either party to post collateral when net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor. As of March 31, 2012, the exposure was $61 million.

The amounts recognized (in millions) by S&P credit rating of counterparty, for which we had the right to reclaim cash collateral or were obligated to return cash collateral, were as follows:

	As of March 31, 2012				As of December 31, 2011
	Collateral		Collateral		Collateral		Collateral
	Posted by		Posted by		Posted by		Posted by
S&P	Counter-		LNC		Counter-		LNC
Credit	Party		(Held by		Party		(Held by
Rating of	(Held by		Counter-		(Held by		Counter-
Counterparty	LNC)		Party)		LNC)		Party)

AA	$	34	$	-	$	35	$	-
AA-		59		(3)		219		-
A+		624		-		848		-
A		1,232		(82)		1,681		(120)
A-		335		(31)		387		-
BBB		2		-		-		-
	$	2,286	$	(116)	$	3,170	$	(120)