Derivative Instruments

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements [Abstract]

Derivative Instruments

6. 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. In addition, we have entered into forward-starting interest rate swaps that hedge the interest rate risk of floating rate bond coupon payments by replicating a fixed rate bond.  See Note 13 for additional disclosures related to the fair value of our derivative instruments and Note 4 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 September 30, 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)			$	3,336	$	210	$	-	$	2,512	$	130	$	-
	Foreign currency contracts (1)				420		25		-		340		38		-
		Total cash flow hedges			3,756		235		-		2,852		168		-
Fair value hedges:
	Interest rate contracts (1)				875		307		-		1,675		319		-
	Equity collar (1)				9		-		-		-		-		-
		Total fair value hedges			884		307		-		1,675		319		-
Non-Qualifying Hedges
Interest rate contracts (1)					36,714		750		-		30,232		568		-
Foreign currency contracts (1)					138		-		-		4		-		-
Equity market contracts (1)					19,276		1,780		-		16,401		2,096		-
Credit contracts (1)					47		-		3		48		-		-
Credit contracts (2)					188		-		16		148		-		16
Embedded derivatives:
	Indexed annuity contracts (3)				-		-		733		-		-		399
	Guaranteed living benefits ("GLB")
		reserves (3)			-		-		1,411		-		-		2,217
	Reinsurance related (4)				-		-		215		-		-		168
			Total derivative instruments	$	61,003	$	3,072	$	2,378	$	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 September 30, 2012
			Less Than		1 – 5		6 – 10		11 – 30		Over 30
			1 Year		Years		Years		Years		Years		Total
Interest rate contracts (1)			$	3,110	$	20,203	$	6,307	$	10,092	$	1,213	$	40,925
Foreign currency contracts (2)				138		179		191		50		-		558
Equity market contracts				9,917		3,863		5,477		25		3		19,285
Credit contracts				40		195		-		-		-		235
	Total derivative instruments
		with notional amounts	$	13,205	$	24,440	$	11,975	$	10,167	$	1,216	$	61,003

• As of September 30, 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 September 30, 2012, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was April 2028.

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

						For the Nine
						Months Ended
						September 30,
						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							-		4
	Unrealized holding gains (losses) arising during the year:
		Cash flow hedges:
			Interest rate contracts				67		178
			Foreign currency contracts				(3)		7
		Fair value hedges:
			Interest rate contracts				3		3
	Change in foreign currency exchange rate adjustment						(7)		(1)
	Change in DAC, VOBA, DSI and DFEL						9		(1)
	Transfers from derivative instruments to bonds through basis adjustment						13		-
	Income tax benefit (expense)						(30)		(65)
	Less:
		Reclassification adjustment for gains (losses) included in net income (loss):
			Cash flow hedges:
				Interest rate contracts (1)			(17)		(6)
				Interest rate contracts (2)			-		3
				Foreign currency contracts (1)			3		(3)
			Fair value hedges:
				Interest rate contracts (2)			3		3
		Associated amortization of DAC, VOBA, DSI and DFEL					2		-
		Income tax benefit (expense)					3		1
					Balance as of end-of-period	$	177	$	112

• 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				For the Nine
				Months Ended				Months Ended
				September 30,				September 30,
				2012		2011		2012		2011
Qualifying Hedges
Cash flow hedges:
	Interest rate contracts (1)			$	(6)	$	(2)	$	(17)	$	(7)
	Foreign currency contracts (1)				2		2		4		3
		Total cash flow hedges			(4)		-		(13)		(4)
Fair value hedges:
	Interest rate contracts (2)				5		13		28		38
Non-Qualifying Hedges
Interest rate contracts (1)					(4)		(25)		(23)		(41)
Interest rate contracts (3)					(2)		982		206		1,008
Foreign currency contracts (3)					(4)		(5)		(8)		(11)
Equity market contracts (3)					(343)		694		(773)		560
Equity market contracts (4)					(136)		154		(246)		120
Credit contracts (1)					-		(1)		(1)		(1)
Credit contracts (3)					(7)		(8)		(2)		(6)
Embedded derivatives:
	Indexed annuity contracts (3)				(63)		135		(143)		81
	GLB reserves (3)				570		(2,065)		861		(1,935)
	Reinsurance related (3)				(30)		(58)		(48)		(76)
	AFS securities (1)				-		-		-		1
			Total derivative instruments	$	(18)	$	(184)	$	(162)	$	(266)

• 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 commissions 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				For the Nine
		Months Ended				Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Gain (loss) recognized as a component of OCI with
	the offset to net investment income	$	(5)	$	-	$	(15)	$	(4)

As of September 30, 2012, $22 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 thethree and nine months ended September 30, 2012and 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				For the Nine
		Months Ended				Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Gain (loss) recognized as a component of OCI with
	the offset to interest expense	$	1	$	1	$	3	$	3

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

As of September 30, 2012
				Credit
	Reason	Nature		Rating of		Number			Maximum
	for	of	Underlying			of	Fair		Potential
Maturity	Entering	Recourse	Obligation (1)		Instruments		Value (2)		Payout
12/20/2012 (3)	(5)	(6)		BBB+		4	$	-	$	40
12/20/2016 (4)	(5)	(6)		BBB-		3		(6)		68
03/20/2017 (4)	(5)	(6)		BBB-		4		(11)		81
						11	$	(17)	$	189

As of December 31, 2011
				Credit
	Reason	Nature		Rating of		Number			Maximum
	for	of	Underlying			of	Fair		Potential
Maturity	Entering	Recourse	Obligation (1)		Instruments		Value (2)		Payout
12/20/2012 (3)	(5)	(6)		BBB+		4	$	-	$	40
12/20/2016 (4)	(5)	(6)		BBB+		3		(12)		68
03/20/2017 (4)	(5)	(6)		BBB		2		(4)		40
						9	$	(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 swapswere 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
			September 30,			December 31,
				2012			2011
Maximum potential payout				$	189		$	148
Less:
	Counterparty thresholds				-			-
		Maximum collateral potentially required to post		$	189		$	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 $16 million as of September 30, 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 September 30, 2012, the nonperformance risk adjustment was $4 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 derivative contracts, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contracts. 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 September 30, 2012, our exposure was $50 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 September 30, 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	$	46	$	-	$	35	$	-
AA-		76		-		219		-
A+		668		-		848		-
A		879		(83)		1,681		(120)
A-		1,415		-		387		-
BBB		2		-		-		-
	$	3,086	$	(83)	$	3,170	$	(120)