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 2016 Form 10-K for a detailed discussion of the accounting treatment for derivative instruments. See Note 6 in our 2016 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 June 30, 2017						As of December 31, 2016
	Notional		Fair Value				Notional		Fair Value
	Amounts		Asset		Liability		Amounts		Asset		Liability
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)	$	3,607	$	47	$	92	$	3,552	$	68	$	122
Foreign currency contracts (1)		1,512		116		21		1,177		153		10
Total cash flow hedges		5,119		163		113		4,729		221		132
Fair value hedges:
Interest rate contracts (1)		1,477		263		182		1,512		258		182
Non-Qualifying Hedges
Interest rate contracts (1)		78,622		766		151		70,290		985		701
Foreign currency contracts (1)		8		-		-		14		-		-
Equity market contracts (1)		29,704		529		390		28,315		541		616
Credit contracts (1)		63		-		-		66		-		-
Embedded derivatives:
Guaranteed living benefit ("GLB") (2)		-		298		-		-		-		-
GLB (3)		-		-		-		-		-		371
Reinsurance related (4)		-		-		53		-		-		53
Indexed annuity and IUL contracts (5)		-		-		1,268		-		-		1,139
Total derivative instruments	$	114,993	$	2,019	$	2,157	$	104,926	$	2,005	$	3,194

⁽¹⁾

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

⁽²⁾

Reported in other assets on our Consolidated Balance Sheets.

⁽³⁾

Reported in other liabilities on our Consolidated Balance Sheets.

⁽⁴⁾

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

⁽⁵⁾

Reported in future contract benefits on our Consolidated Balance Sheets.

Beginning in the first quarter 2017, consistent with changes enacted by the Chicago Mercantile Exchange (“CME”), the Company offset the variation margin payments with the derivative balances that are cleared through CME.

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



	Remaining Life as of June 30, 2017
	Less Than		1 - 5		6 - 10		11 - 30		Over 30
	1 Year		Years		Years		Years		Years		Total
Interest rate contracts (1)	$	15,024	$	22,369	$	30,174	$	14,926	$	1,213	$	83,706
Foreign currency contracts (2)		19		151		378		962		10		1,520
Equity market contracts		17,594		9,784		869		15		1,442		29,704
Credit contracts		-		63		-		-		-		63
Total derivative instruments
with notional amounts	$	32,637	$	32,367	$	31,421	$	15,903	$	2,665	$	114,993

⁽¹⁾

As of June 30, 2017, 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 June 30, 2017, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was September 2049.

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



	For the Six
	Months Ended
	June 30,
	2017			2016
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year	$	49		$	132
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period:
Cash flow hedges:
Interest rate contracts		1			(240	)
Foreign currency contracts		45			32
Change in foreign currency exchange rate adjustment		(75	)		35
Change in DAC, VOBA, DSI and DFEL		(8	)		(6	)
Income tax benefit (expense)		13			62
Less:
Reclassification adjustment for gains (losses)
included in net income (loss):
Cash flow hedges:
Interest rate contracts (1)		2			4
Interest rate contracts (2)		(9	)		(2	)
Foreign currency contracts (1)		9			3
Foreign currency contracts (3)		5			4
Associated amortization of DAC, VOBA, DSI and DFEL		(2	)		(1	)
Income tax benefit (expense)		(2	)		(3	)
Balance as of end-of-period	$	22		$	10

⁽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						For the Six
	Months Ended						Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)	$	1		$	3		$	2		$	4
Interest rate contracts (2)		(5	)		(2	)		(9	)		(2	)
Foreign currency contracts (1)		4			1			9			3
Foreign currency contracts (3)		-			-			5			4
Total cash flow hedges		-			2			7			9
Fair value hedges:
Interest rate contracts (1)		(6	)		(7	)		(13	)		(15	)
Interest rate contracts (2)		7			8			15			16
Interest rate contracts (3)		(9	)		(32	)		-			(86	)
Total fair value hedges		(8	)		(31	)		2			(85	)
Non-Qualifying Hedges
Interest rate contracts (3)		193			614			143			1,590
Foreign currency contracts (3)		(2	)		(7	)		1			(3	)
Equity market contracts (3)		(289	)		(252	)		(817	)		(582	)
Equity market contracts (4)		5			3			14			2
Credit contracts (3)		-			(4	)		-			(7	)
Embedded derivatives:
GLB (3)		72			(542	)		669			(1,505	)
Reinsurance related (3)		(3	)		(23	)		-			(47	)
Indexed annuity and IUL contracts (3)		(64	)		(19	)		(184	)		(12	)
Total derivative instruments	$	(96	)	$	(259	)	$	(165	)	$	(640	)

⁽¹⁾

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

⁽²⁾

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

⁽³⁾

Reported in realized gain (loss) 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						For the Six
	Months Ended						Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Offset to net investment income	$	5		$	4		$	11		$	7
Offset to realized gain (loss)		-			-			5			4
Offset to interest and debt expense		(5	)		(2	)		(9	)		(2	)

As of June 30, 2017, $6 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 six months ended June 30, 2017 and 2016, 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 credit default swaps for which we are the seller (dollars in millions) was as follows:

As of June 30, 2017

Credit

Reason

Nature

Rating of

Number

Maximum

for

Underlying

Fair

Potential

Credit Contract Type

Maturity

Entering

Recourse

Obligation (1)

Instruments

Value (2)

Payout

Basket credit default swaps

6/20/2022

(3)

(4)

BBB+

As of December 31, 2016

Credit

Reason

Nature

Rating of

Number

Maximum

for

Underlying

Fair

Potential

Credit Contract Type

Maturity

Entering

Recourse

Obligation (1)

Instruments

Value (2)

Payout

Single name credit default swaps

3/20/2017 (5)

(6)

(4)

BBB+

⁽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 our credit default swaps.

⁽³⁾

Credit default swaps were entered into in order to hedge the liability exposure on certain variable annuity products.

⁽⁴⁾

Sellers do not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the contract.

⁽⁵⁾

These credit default swaps were sold to a counterparty of the consolidated VIEs discussed in Note 4 in our 2016 Form 10-K.

⁽⁶⁾

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

Details underlying the associated collateral of our 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
	June 30,			December 31,
		2017			2016
Maximum potential payout		$	63		$	40
Less: Counterparty thresholds			-			-
Maximum collateral potentially required to post		$	63		$	40

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 collateral if the market value was less than zero. As of June 30, 2017 the market value was $1 million.

Credit Risk

We are exposed to credit losses 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 June 30, 2017, 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 June 30, 2017, our exposure was $4 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 June 30, 2017					As of December 31, 2016
	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-	$	96	$	-		$	53	$	(32	)
A+		39		(235	)		10		(217	)
A		579		(287	)		466		(381	)
A-		39		-			67		-
BBB+		301		(5	)		298		-
	$	1,054	$	(527	)	$	894	$	(630	)

Balance Sheet Offsetting

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



		As of June 30, 2017
					Embedded
	Derivative				Derivative
	Instruments				Instruments			Total

Financial Assets
Gross amount of recognized assets		$	1,600			$	298	$	1,898
Gross amounts offset			(546	)			-		(546	)
Net amount of assets			1,054				298		1,352
Gross amounts not offset:
Cash collateral			(1,054	)			-		(1,054	)
Net amount		$	-			$	298	$	298

Financial Liabilities
Gross amount of recognized liabilities		$	611			$	1,321	$	1,932
Gross amounts offset			(121	)			-		(121	)
Net amount of liabilities			490				1,321		1,811
Gross amounts not offset:
Cash collateral			(527	)			-		(527	)
Net amount		$	(37	)		$	1,321	$	1,284


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

Financial Assets
Gross amount of recognized assets		$	1,470			$	-	$	1,470
Gross amounts offset			(543	)			-		(543	)
Net amount of assets			927				-		927
Gross amounts not offset:
Cash collateral			(894	)			-		(894	)
Net amount		$	33			$	-	$	33

Financial Liabilities
Gross amount of recognized liabilities		$	1,089			$	1,563	$	2,652
Gross amounts offset			(536	)			-		(536	)
Net amount of liabilities			553				1,563		2,116
Gross amounts not offset:
Cash collateral			(630	)			-		(630	)
Net amount		$	(77	)		$	1,563	$	1,486