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 2015 Form 10-K for a detailed discussion of the accounting treatment for derivative instruments. See Note 6 in our 2015 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 related credit exposure. Outstanding derivative instruments with off-balance-sheet risks (in millions) were as follows:



	As of March 31, 2016						As of December 31, 2015
	Notional		Fair Value				Notional		Fair Value
	Amounts		Asset		Liability		Amounts		Asset		Liability
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)	$	2,873	$	215	$	210	$	2,937	$	192	$	46
Foreign currency contracts (1)		942		90		14		910		84		2
Total cash flow hedges		3,815		305		224		3,847		276		48
Fair value hedges:
Interest rate contracts (1)		1,517		365		251		1,529		269		198
Non-Qualifying Hedges
Interest rate contracts (1)		80,003		2,179		504		71,898		1,088		330
Foreign currency contracts (1)		74		-		-		74		-		-
Equity market contracts (1)		30,044		626		627		27,882		680		269
Credit contracts (2)		103		-		12		103		-		9
Embedded derivatives:
GLB reserves (2)		-		-		1,916		-		-		953
Reinsurance related (3)		-		-		111		-		-		87
Indexed annuity and IUL contracts (4)		-		-		1,088		-		-		1,100
Total derivative instruments	$	115,556	$	3,475	$	4,733	$	105,333	$	2,313	$	2,994

⁽¹⁾

Reported in derivative investments and other liabilities on our Consolidated Balance Sheets.

⁽²⁾

Reported in other liabilities on our Consolidated Balance Sheets.

⁽³⁾

Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.

⁽⁴⁾

Reported in future contract benefits 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, 2016
	Less Than		1 - 5		6 - 10		11 - 30		Over 30
	1 Year		Years		Years		Years		Years		Total
Interest rate contracts (1)	$	10,685	$	33,426	$	23,461	$	15,608	$	1,213	$	84,393
Foreign currency contracts (2)		120		120		327		449		-		1,016
Equity market contracts		19,766		7,880		2,097		17		284		30,044
Credit contracts		103		-		-		-		-		103
Total derivative instruments
with notional amounts	$	30,674	$	41,426	$	25,885	$	16,074	$	1,497	$	115,556

⁽¹⁾

As of March 31, 2016, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was April 2067.

⁽²⁾

As of March 31, 2016, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was December 2045.

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



	For the Three
	Months Ended
	March 31,
	2016			2015
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year	$	132		$	139
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period:
Cash flow hedges:
Interest rate contracts		(144	)		(150	)
Foreign currency contracts		15			42
Change in foreign currency exchange rate adjustment		(11	)		37
Change in DAC, VOBA, DSI and DFEL		(4	)		-
Income tax benefit (expense)		50			25
Less:
Reclassification adjustment for gains (losses)
included in net income (loss):
Cash flow hedges:
Interest rate contracts (1)		1			(197	)
Interest rate contracts (2)		-			1
Foreign currency contracts (1)		2			2
Foreign currency contracts (3)		4			-
Associated amortization of DAC, VOBA, DSI and DFEL		(1	)		1
Income tax benefit (expense)		(2	)		68
Balance as of end-of-period	$	34		$	218

⁽¹⁾

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

⁽²⁾

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

⁽³⁾

The OCI offset is reported within realized gain (loss) 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,
	2016			2015
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)	$	1		$	-
Foreign currency contracts (1)		2			2
Foreign currency contracts (2)		4			-
Total cash flow hedges		7			2
Fair value hedges:
Interest rate contracts (1)		(8	)		(7	)
Interest rate contracts (3)		8			9
Interest rate contracts (2)		(53	)		(230	)
Total fair value hedges		(53	)		(228	)
Non-Qualifying Hedges
Interest rate contracts (2)		975			441
Foreign currency contracts (2)		4			(1	)
Equity market contracts (2)		(330	)		(231	)
Equity market contracts (4)		(1	)		5
Credit contracts (2)		(3	)		-
Embedded derivatives:
GLB reserves (2)		(963	)		(378	)
Reinsurance related (2)		(24	)		(15	)
Indexed annuity and IUL contracts (2)		6			(38	)
Total derivative instruments	$	(382	)	$	(443	)

⁽¹⁾

Reported in net investment income on our Consolidated Statements of Comprehensive Income (Loss).

⁽²⁾

Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

⁽³⁾

Reported in interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).

⁽⁴⁾

Reported in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).

Gains (losses) recognized as a component of OCI (in millions) on derivative instruments designated and qualifying as cash flow hedges were as follows:



	For the Three
	Months Ended
	March 31,
	2016		2015
Offset to net investment income	$	3	$	3
Offset to realized gain (loss)		4		-
Offset to interest and debt expense		-		1

As of March 31, 2016, $15 million of the deferred net gains (losses) on derivative instruments in AOCI were expected to be reclassified to earnings during the next 12 months. This reclassification would be due primarily to interest rate variances related to our interest rate swap agreements.

For the three months ended March 31, 2016 and 2015, 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.

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



As of March 31, 2016
				Credit
	Reason	Nature		Rating of	Number				Maximum
	for	of	Underlying		of	Fair			Potential
Maturity	Entering	Recourse	Obligation (1)		Instruments	Value (2)			Payout
12/20/2016 (3)	(4)	(5)		BB+	2	$	(1	)	$	45
3/20/2017 (3)	(4)	(5)		BB	3		(11	)		58
					5	$	(12	)	$	103



As of December 31, 2015
				Credit
	Reason	Nature		Rating of	Number				Maximum
	for	of	Underlying		of	Fair			Potential
Maturity	Entering	Recourse	Obligation (1)		Instruments	Value (2)			Payout
12/20/2016 (3)	(4)	(5)		BBB-	2	$	(2	)	$	45
3/20/2017 (3)	(4)	(5)		BBB-	3		(7	)		58
					5	$	(9	)	$	103

⁽¹⁾

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.

⁽²⁾

Broker quotes are used to determine the market value of these credit default swaps.

⁽³⁾

These credit default swaps were sold to a counterparty of the consolidated VIEs discussed in Note 4 in our 2015 Form 10-K.

⁽⁴⁾

Credit default swaps were entered into in order to generate income by providing default protection in return for a quarterly payment.

⁽⁵⁾

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) were as follows:



		As of			As of
	March 31,			December 31,
		2016			2015
Maximum potential payout		$	103		$	103
Less: Counterparty thresholds			-			-
Maximum collateral potentially required to post		$	103		$	103

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 $12 million as of March 31, 2016.

Credit Risk

We are exposed to credit loss in the event of non-performance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or non-performance risk (“NPR”). The NPR 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, 2016, the NPR adjustment was less than $1 million. The credit risk associated with such agreements is minimized by entering into agreements with financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring 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 credit support annex 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, 2016, our exposure was $14 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, 2016					As of December 31, 2015
	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-	$	295	$	-		$	92	$	-
A+		56		(24	)		67		-
A		1,377		(296	)		866		(143	)
A-		7		-			11		-
BBB+		424		(26	)		351		-
	$	2,159	$	(346	)	$	1,387	$	(143	)

Balance Sheet Offsetting

Information related to our derivative instruments and the effects of offsetting on our Consolidated Balance Sheets (in millions) was as follows:



		As of March 31, 2016
					Embedded
	Derivative				Derivative
	Instruments				Instruments			Total

Financial Assets
Gross amount of recognized assets		$	3,214			$	-	$	3,214
Gross amounts offset			(1,129	)			-		(1,129	)
Net amount of assets			2,085				-		2,085
Gross amounts not offset:
Cash collateral			(2,159	)			-		(2,159	)
Net amount		$	(74	)		$	-	$	(74	)

Financial Liabilities
Gross amount of recognized liabilities		$	489			$	3,115	$	3,604
Gross amounts offset			(261	)			-		(261	)
Net amount of liabilities			228				3,115		3,343
Gross amounts not offset:
Cash collateral			(346	)			-		(346	)
Net amount		$	(118	)		$	3,115	$	2,997



		As of December 31, 2015
					Embedded
	Derivative				Derivative
	Instruments				Instruments			Total

Financial Assets
Gross amount of recognized assets		$	2,250			$	-	$	2,250
Gross amounts offset			(713	)			-		(713	)
Net amount of assets			1,537				-		1,537
Gross amounts not offset:
Cash collateral			(1,387	)			-		(1,387	)
Net amount		$	150			$	-	$	150

Financial Liabilities
Gross amount of recognized liabilities		$	139			$	2,140	$	2,279
Gross amounts offset			(61	)			-		(61	)
Net amount of liabilities			78				2,140		2,218
Gross amounts not offset:
Cash collateral			(143	)			-		(143	)
Net amount		$	(65	)		$	2,140	$	2,075