Investments and Derivative Instruments

9 Months Ended

Sep. 30, 2012

Investments and Derivative Instruments [Abstract]

Investments and Derivative Instruments

Investments and Derivative Instruments

Net Realized Capital Gains (Losses)

	Three Months Ended September 30,						Nine Months Ended September 30,
(Before-tax)	2012			2011			2012			2011
Gross gains on sales	$	131		$	116		$	445		$	317
Gross losses on sales	(83		)	(26		)	(245		)	(159		)
Net OTTI losses recognized in earnings	(13		)	(42		)	(77		)	(92		)
Valuation allowances on mortgage loans	—			—			—			25
Japanese fixed annuity contract hedges, net [1]	(24		)	9			(42		)	(2		)
Periodic net coupon settlements on credit derivatives/Japan	4			4			4			—
Results of variable annuity hedge program
U.S. GMWB derivatives, net	381			(323		)	451			(97		)
U.S. macro hedge program	(109		)	107			(292		)	(222		)
Total U.S. program	272			(216		)	159			(319		)
International Program	(112		)	1,110			(459		)	(107		)
Total results of variable annuity hedge program	160			894			(300		)	(426		)
GMIB/GMAB/GMWB reinsurance	348			(548		)	599			(212		)
Coinsurance and modified coinsurance reinsurance contracts	(732		)	866			(1,164		)	370
Other, net [2]	42			(246		)	75			716
Net realized capital gains (losses)	$	(167	)	$	1,027		$	(705	)	$	537

[1] Relates to the Japanese fixed annuity product (adjustment of product liability for changes in spot currency exchange rates, related derivative hedging instruments, excluding net period coupon settlements, and Japan FVO securities).

[2] Primarily consists of gains and losses on non-qualifying derivatives and fixed maturities, FVO, Japan 3Win related foreign currency swaps, and other investment gains and losses.

Net realized capital gains and losses from investment sales, after deducting the life and pension policyholders’ share for certain products, are reported as a component of revenues and are determined on a specific identification basis. Gross gains and losses on sales and impairments previously reported as unrealized gains in AOCI were $35 and $123, respectively, for the three and nine months ended September 30, 2012 and $48 and $66 for the three and nine months ended September 30, 2011, respectively. Proceeds from sales of AFS securities totaled $7.1 billion and $21.3 billion for the three and nine months ended September 30, 2012, respectively, and $4.4 billion and $14.4 billion for the three and nine months ended September 30, 2011, respectively.

4. Investments and Derivative Instruments (continued)

Other-Than-Temporary Impairment Losses

The following table presents a roll-forward of the Company’s cumulative credit impairments on debt securities held.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Before-tax)	2012			2011			2012			2011
Balance, beginning of period	$	(1,158	)	$	(1,510	)	$	(1,319	)	$	(1,598	)
Additions for credit impairments recognized on [1]:
Securities not previously impaired	(4		)	(3		)	(21		)	(26		)
Securities previously impaired	(7		)	(26		)	(15		)	(42		)
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	96			121			279			243
Securities due to an increase in expected cash flows	1			1			4			6
Balance, end of period	$	(1,072	)	$	(1,417	)	$	(1,072	)	$	(1,417	)

[1] These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.

Available-for-Sale Securities

The following table presents the Company’s AFS securities by type.

	September 30, 2012												December 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-Credit OTTI [1]			Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Non-Credit OTTI [1]
ABS	$	1,874	$	40	$	(213	)	$	1,701	$	(3	)	$	2,361	$	38	$	(306	)	$	2,093	$	(3	)
CDOs [2]	2,331		50		(168		)	2,188		(2		)	2,055		15		(272		)	1,798		(29		)
CMBS	3,840		252		(160		)	3,932		(9		)	4,418		169		(318		)	4,269		(19		)
Corporate [2]	27,111		3,546		(296		)	30,361		(22		)	28,084		2,729		(539		)	30,229		—
Foreign govt./govt. agencies	1,403		119		(2		)	1,520		—			1,121		106		(3		)	1,224		—
Municipal	1,812		192		(18		)	1,986		—			1,504		104		(51		)	1,557		—
RMBS	5,009		221		(218		)	5,012		(42		)	4,069		170		(416		)	3,823		(97		)
U.S. Treasuries	3,332		176		(9		)	3,499		—			2,624		162		(1		)	2,785		—
Total fixed maturities, AFS	46,712		4,596		(1,084		)	50,199		(78		)	46,236		3,493		(1,906		)	47,778		(148		)
Equity securities, AFS	399		30		(43		)	386		—			443		21		(66		)	398		—
Total AFS securities	$	47,111	$	4,626	$	(1,127	)	$	50,585	$	(78	)	$	46,679	$	3,514	$	(1,972	)	$	48,176	$	(148	)

[1] Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of September 30, 2012 and December 31, 2011.

[2] Gross unrealized gains (losses) exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses).

The following table presents the Company’s fixed maturities, AFS, by contractual maturity year.

	September 30, 2012
Contractual Maturity	Amortized Cost		Fair Value
One year or less	$	1,444	$	1,471
Over one year through five years	9,386		9,932
Over five years through ten years	8,905		9,761
Over ten years	13,923		16,202
Subtotal	33,658		37,366
Mortgage-backed and asset-backed securities	13,054		12,833
Total fixed maturities, AFS	$	46,712	$	50,199

4. Investments and Derivative Instruments (continued)

Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.

Concentration of Credit Risk

As of September 30, 2012, the Company's only exposure to any credit concentration risk of a single issuer greater than 10% of the Company’s stockholder’s equity, other than U.S. government and certain U.S. government securities, was the Government of Japan, which represented $1.1 billion, or 10.1% of stockholders' equity and 1.6% of total invested assets. As of December 31, 2011, the Company was not exposed to any concentration of credit risk of a single issuer greater than 10% of the Company’s stockholder’s equity other than the U.S. government and certain U.S. government agencies. For further discussion of concentration of credit risk, see the Concentration of Credit Risk section in Note 4 of the Notes to Consolidated Financial Statements in the Company’s 2011 Form 10-K Annual Report.

Securities Unrealized Loss Aging

The following tables present the Company’s unrealized loss aging for AFS securities by type and length of time the security was in a continuous unrealized loss position.

	September 30, 2012
	Less Than 12 Months							12 Months or More							Total
	Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses
ABS	$	1	$	—	$	(1	)	$	945	$	733	$	(212	)	$	946	$	733	$	(213	)
CDOs [1]	20		19		(1		)	2,230		2,038		(167		)	2,250		2,057		(168		)
CMBS	163		133		(30		)	1,051		921		(130		)	1,214		1,054		(160		)
Corporate	941		901		(40		)	1,706		1,450		(256		)	2,647		2,351		(296		)
Foreign govt./govt. agencies	34		33		(1		)	7		6		(1		)	41		39		(2		)
Municipal	86		82		(4		)	115		101		(14		)	201		183		(18		)
RMBS	135		133		(2		)	1,021		805		(216		)	1,156		938		(218		)
U.S. Treasuries	584		575		(9		)	—		—		—			584		575		(9		)
Total fixed maturities	1,964		1,876		(88		)	7,075		6,054		(996		)	9,039		7,930		(1,084		)
Equity securities	81		77		(4		)	159		120		(39		)	240		197		(43		)
Total securities in an unrealized loss	$	2,045	$	1,953	$	(92	)	$	7,234	$	6,174	$	(1,035	)	$	9,279	$	8,127	$	(1,127	)

	December 31, 2011
	Less Than 12 Months							12 Months or More							Total
	Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses			Amortized Cost		Fair Value		Unrealized Losses
ABS	$	420	$	385	$	(35	)	$	1,002	$	731	$	(271	)	$	1,422	$	1,116	$	(306	)
CDOs [1]	80		58		(22		)	1,956		1,706		(250		)	2,036		1,764		(272		)
CMBS	911		830		(81		)	1,303		1,066		(237		)	2,214		1,896		(318		)
Corporate [1]	2,942		2,823		(119		)	2,353		1,889		(420		)	5,295		4,712		(539		)
Foreign govt./govt. agencies	24		23		(1		)	40		38		(2		)	64		61		(3		)
Municipal	202		199		(3		)	348		300		(48		)	550		499		(51		)
RMBS	355		271		(84		)	1,060		728		(332		)	1,415		999		(416		)
U.S. Treasuries	185		184		(1		)	—		—		—			185		184		(1		)
Total fixed maturities	5,119		4,773		(346		)	8,062		6,458		(1,560		)	13,181		11,231		(1,906		)
Equity securities	115		90		(25		)	104		63		(41		)	219		153		(66		)
Total securities in an unrealized loss	$	5,234	$	4,863	$	(371	)	$	8,166	$	6,521	$	(1,601	)	$	13,400	$	11,384	$	(1,972	)

[1] Unrealized losses exclude the change in fair value of bifurcated embedded derivative features of certain securities. Changes in fair value are recorded in net realized capital gains (losses).

4. Investments and Derivative Instruments (continued)

As of September 30, 2012, AFS securities in an unrealized loss position, comprised of 1,498 securities, primarily related to commercial real estate, corporate securities within the financial services sector, RMBS and ABS which have experienced price deterioration. As of September 30, 2012, 82% of these securities were depressed less than 20% of cost or amortized cost. The decline in unrealized losses during 2012 was primarily attributable to credit spread tightening and declining interest rates.

Most of the securities depressed for twelve months or more relate to structured securities with exposure to commercial and residential real estate, as well as certain floating rate corporate securities or those securities with greater than 10 years to maturity, concentrated in the financial services sector. Current market spreads continue to be significantly wider than spreads at the security's respective purchase date for structured securities with exposure to commercial and residential real estate largely due to the economic and market uncertainties regarding future performance of commercial and residential real estate. The majority of these securities have a floating-rate coupon referenced to a market index that has declined substantially. In addition, equity securities include investment grade perpetual preferred securities that contain “debt-like” characteristics where the decline in fair value is not attributable to issuer-specific credit deterioration, none of which have, nor are expected to, miss a periodic dividend payment. These securities have been depressed due to the securities’ floating-rate coupon in the current low interest rate environment, general market credit spread widening since the date of purchase and the long-dated nature of the securities. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined above.

Mortgage Loans

	September 30, 2012							December 31, 2011
	Amortized Cost [1]		Valuation Allowance			Carrying Value		Amortized Cost [1]		Valuation Allowance			Carrying Value
Commercial	$	5,071	$	(19	)	$	5,052	$	4,205	$	(23	)	$	4,182
Total mortgage loans	$	5,071	$	(19	)	$	5,052	$	4,205	$	(23	)	$	4,182

[1] Amortized cost represents carrying value prior to valuation allowances, if any.

As of September 30, 2012 and December 31, 2011, the carrying value of mortgage loans associated with the valuation allowance was $345 and $347, respectively. Included in the table above are mortgage loans held-for-sale with a carrying value and valuation allowance of $47 and $3, respectively, as of September 30, 2012 and $57 and $4, respectively, as of December 31, 2011. The carrying value of these loans is included in mortgage loans in the Company’s Condensed Consolidated Balance Sheets. As of September 30, 2012, loans within the Company’s mortgage loan portfolio that have had extensions or restructurings other than what is allowable under the original terms of the contract are immaterial.

The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.

	2012			2011
Balance as of January 1	$	(23	)	$	(62	)
Additions	—			25
Deductions	4			13
Balance as of September 30	$	(19	)	$	(24	)

The current weighted-average loan-to-value ("LTV") ratio of the Company’s commercial mortgage loan portfolio was 63% as of September 30, 2012, while the weighted-average LTV ratio at origination of these loans was 62%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan values are updated no less than annually through property level reviews of the portfolio. Factors considered in the property valuation include, but are not limited to, actual and expected property cash flows, geographic market data and capitalization rates. Debt service coverage ratios ("DSCRs") compare a property’s net operating income to the borrower’s principal and interest payments. The current weighted average DSCR of the Company’s commercial mortgage loan portfolio was 2.41x as of September 30, 2012. The Company held only one delinquent commercial mortgage loan past due by 90 days or more with a carrying value and valuation allowance of $32 and $0, respectively, as of September 30, 2012 and is not accruing income.

4. Investments and Derivative Instruments (continued)

The following table presents the carrying value of the Company’s commercial mortgage loans by LTV and DSCR.

Commercial Mortgage Loans Credit Quality
	September 30, 2012			December 31, 2011
Loan-to-value	Carrying Value		Avg. Debt-Service Coverage Ratio	Carrying Value		Avg. Debt-Service Coverage Ratio
Greater than 80%	$	240	1.84x	$	422	1.67x
65% - 80%	1,998		2.23x	1,779		1.57x
Less than 65%	2,814		2.59x	1,981		2.45x
Total commercial mortgage loans	$	5,052	2.41x	$	4,182	1.99x

The following tables present the carrying value of the Company’s mortgage loans by region and property type.

Mortgage Loans by Region
	September 30, 2012			December 31, 2011
	Carrying Value		Percent of Total	Carrying Value		Percent of Total
East North Central	$	98	1.9%	$	59	1.4%
Middle Atlantic	391		7.7%	401		9.6%
Mountain	62		1.2%	61		1.5%
New England	227		4.5%	202		4.8%
Pacific	1,557		30.8%	1,268		30.3%
South Atlantic	1,022		20.2%	810		19.4%
West North Central	16		0.3%	16		0.4%
West South Central	249		4.9%	115		2.7%
Other [1]	1,430		28.5%	1,250		29.9%
Total mortgage loans	$	5,052	100.0%	$	4,182	100.0%

[1] Primarily represents loans collateralized by multiple properties in various regions.

Mortgage Loans by Property Type
	September 30, 2012				December 31, 2011
	Carrying Value		Percent of Total		Carrying Value		Percent of Total
Commercial
Agricultural	$	107	2.1	%	$	127	3.0	%
Industrial	1,521		30.1	%	1,262		30.2	%
Lodging	82		1.6	%	84		2.0	%
Multifamily	971		19.2	%	734		17.6	%
Office	1,126		22.3	%	836		20.0	%
Retail	1,046		20.7	%	918		22.0	%
Other	199		4.0	%	221		5.2	%
Total mortgage loans	$	5,052	100.0	%	$	4,182	100.0	%

Variable Interest Entities

The Company is involved with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral manager and as an investor through normal investment activities, as well as a means of accessing capital. A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest or lacks sufficient funds to finance its own activities without financial support provided by other entities.

The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.

4. Investments and Derivative Instruments (continued)

Consolidated VIEs

The following table presents the carrying value of assets and liabilities, and the maximum exposure to loss relating to the VIEs for which the Company is the primary beneficiary. Creditors have no recourse against the Company in the event of default by these VIEs nor does the Company have any implied or unfunded commitments to these VIEs. The Company’s financial or other support provided to these VIEs is limited to its investment management services and original investment.

	September 30, 2012						December 31, 2011
	Total Assets		Total Liabilities  [1]		Maximum Exposure to Loss [2]		Total Assets		Total Liabilities  [1]		Maximum Exposure to Loss [2]
CDOs [3]	$	446	$	420	$	14	$	491	$	474	$	25
Investment funds [4]	133		20		106		—		—		—
Limited partnerships	6		3		3		7		3		4
Total	$	585	$	443	$	123	$	498	$	477	$	29

[1] Included in other liabilities in the Company’s Condensed Consolidated Balance Sheets.

[2] The maximum exposure to loss represents the maximum loss amount that the Company could recognize as a reduction in net investment income or as a realized capital loss and is the cost basis of the Company’s investment.

[3] Total assets included in fixed maturities, AFS, and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance

Sheets.

[4] Total assets included in fixed maturities, AFS, and short-term investments in the Company’s Condensed Consolidated Balance Sheets.

CDOs represent structured investment vehicles for which the Company has a controlling financial interest as it provides collateral management services, earns a fee for those services and also holds investments in the securities issued by these vehicles. Investment funds represents wholly-owned fixed income funds established in 2012 for which the Company has exclusive management and control including management of investment securities which is the activity that most significantly impacts its economic performance. Limited partnerships represent one hedge fund for which the Company holds a majority interest in the fund as an investment.

Non-Consolidated VIEs

The Company does not hold any investments issued by VIEs for which the Company is not the primary beneficiary as of September 30, 2012 and December 31, 2011.

In addition, the Company, through normal investment activities, makes passive investments in structured securities issued by VIEs for which the Company is not the manager which are included in ABS, CDOs, CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.

Repurchase Agreements and Dollar Roll Agreements

The Company enters into repurchase agreements and dollar roll transactions to earn spread income, or to access liquidity relating to derivative instruments. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. A dollar roll is a type of repurchase transaction where a mortgage backed security is sold with an agreement to repurchase substantially the same security at specified time in the future. These transactions are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value.

As part of repurchase agreements and dollar roll transactions, the Company transfers U.S. government and government agency securities and receives cash. For the repurchase agreements, the Company obtains collateral in an amount equal to at least 95% of the fair value of the securities transferred, and the agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities. The Company accounts for the repurchase agreements and dollar roll transactions as collateralized borrowings. The securities transferred under repurchase agreements and dollar roll transactions are included in fixed maturity, available-for-sale securities with the obligation to repurchase those securities recorded in Other Liabilities on the Company's Condensed Consolidated Balance Sheets. The fair value of the securities transferred was $1.6 billion as of September 30, 2012. Securities sold under agreement to repurchase were $(1.6) billion as of September 30, 2012.

Derivative Instruments

The Company utilizes a variety of over-the-counter and exchange traded derivative instruments as a part of its overall risk management strategy, as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate risk or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that would be permissible investments under the Company’s investment policies. The Company also purchases and issues financial instruments and products that either are accounted for as free-standing derivatives, such as certain reinsurance contracts, or may contain features that are deemed to be embedded derivative instruments, such as the GMWB rider included with certain variable annuity products.

Cash flow hedges

Interest rate swaps

Interest rate swaps are primarily used to convert interest receipts on floating-rate fixed maturity securities. These derivatives are predominantly used to better match cash receipts from assets with cash disbursements required to fund liabilities. The Company also enters into forward starting swap agreements to hedge the interest rate exposure related to the purchase of fixed-rate securities. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.

Foreign currency swaps

Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.

Fair value hedges

Interest rate swaps

Interest rate swaps are used to hedge the changes in fair value of certain fixed rate liabilities and fixed maturity securities due to fluctuations in interest rates.

Foreign currency swaps

Foreign currency swaps are used to hedge the changes in fair value of certain foreign currency-denominated fixed rate liabilities due to changes in foreign currency rates by swapping the fixed foreign payments to floating rate U.S. dollar denominated payments.

Non-qualifying strategies

Interest rate swaps, swaptions, caps, floors, and futures

The Company uses interest rate swaps, swaptions, caps, floors, and futures to manage duration between assets and liabilities in certain investment portfolios. In addition, during the three months ended September 30, 2012, the Company entered into interest rate swaptions to hedge the interest rate risk of the securities being transferred related to the sale of the Retirement Plan business segment.

The Company also enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap. As of September 30, 2012 and December 31, 2011, the notional amount of interest rate swaps in offsetting relationships was $5.1 billion.

Foreign currency swaps and forwards

The Company enters into foreign currency swaps and forwards to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.

Japan 3Win foreign currency swaps

Prior to the second quarter of 2009, an affiliate of the Company offered certain variable annuity products with a GMIB rider in Japan. The GMIB rider is reinsured to a wholly-owned U.S. subsidiary, which invests in U.S. dollar denominated assets to support the liability. The U.S. subsidiary entered into pay U.S. dollar, receive yen swap contracts to hedge the currency and interest rate exposure between the U.S. dollar denominated assets and the yen denominated fixed liability reinsurance payments.

Japanese fixed annuity hedging instruments

Prior to the second quarter of 2009, The Company offered a yen denominated fixed annuity product through HLIKK and reinsured to a wholly-owned U.S. subsidiary. The U.S. subsidiary invests in U.S. dollar denominated securities to support the yen denominated fixed liability payments and entered into currency rate swaps to hedge the foreign currency exchange rate and yen interest rate exposures that exist as a result of U.S. dollar assets backing the yen denominated liability.

4. Investments and Derivative Instruments (continued)

Credit derivatives that purchase credit protection

Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in value on fixed maturity securities. These contracts require the Company to pay a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract.

Credit derivatives that assume credit risk

Credit default swaps are used to assume credit risk related to an individual entity, referenced index, or asset pool, as a part of replication transactions. These contracts entitle the Company to receive a periodic fee in exchange for an obligation to compensate the derivative counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company is also exposed to credit risk due to credit derivatives embedded within certain fixed maturity securities. These securities are primarily comprised of structured securities that contain credit derivatives that reference a standard index of corporate securities.

Credit derivatives in offsetting positions

The Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.

Equity index swaps and options

The Company offers certain equity indexed products, which may contain an embedded derivative that requires bifurcation. The Company enters into S&P index swaps and options to economically hedge the equity volatility risk associated with these embedded derivatives. In addition, during the third quarter of 2011, the Company entered into equity index options and futures with the purpose of hedging the impact of an adverse equity market environment on the investment portfolio.

U.S. GMWB product derivatives

The Company offers certain variable annuity products with a GMWB rider in the U.S. Effective May 1, 2012, all new U.S. annuity policies, including the GMWB rider, sold by the Company will be reinsured to a third party. The GMWB is a bifurcated embedded derivative that provides the policyholder with a guaranteed remaining balance (“GRB”) if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The notional value of the embedded derivative is the GRB.

U.S. GMWB reinsurance contracts

The Company has entered into reinsurance arrangements to offset a portion of its risk exposure to the GMWB for the remaining lives of covered variable annuity contracts. Reinsurance contracts covering GMWB are accounted for as free-standing derivatives. The notional amount of the reinsurance contracts is the GRB amount.

U.S. GMWB hedging instruments

The Company enters into derivative contracts to partially hedge exposure associated with a portion of the GMWB liabilities that are not reinsured. These derivative contracts include customized swaps, interest rate swaps and futures, and equity swaps, options, and futures, on certain indices including the S&P 500 index, EAFE index, and NASDAQ index.

The following table represents notional and fair value for U.S. GMWB hedging instruments.

	Notional Amount				Fair Value
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Customized swaps	$	8,153	$	8,389	$	269	$	385
Equity swaps, options, and futures	6,330		5,320		308		498
Interest rate swaps and futures	5,330		2,697		97		11
Total	$	19,813	$	16,406	$	674	$	894

4. Investments and Derivative Instruments (continued)

U.S. macro hedge program

The Company utilizes equity options and futures contracts to partially hedge against a decline in the equity markets and the resulting statutory surplus and capital impact primarily arising from GMDB, GMIB and GMWB obligations.

The following table represents notional and fair value for the U.S. macro hedge program.

	Notional Amount				Fair Value
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Equity futures	$	—	$	59	$	—	$	—
Equity options	5,583		6,760		82		357
Total	$	5,583	$	6,819	$	82	$	357

International program product derivatives

The Company formerly offered certain variable annuity products with GMWB or GMAB riders in the U.K. and reinsured GMWB and GMAB riders from an affiliate in Japan. The GMWB and GMAB are bifurcated embedded derivatives. The GMWB provides the policyholder with a GRB if the account value is reduced to zero through a combination of market declines and withdrawals. The GRB is generally equal to premiums less withdrawals. Certain contract provisions can increase the GRB at contractholder election or after the passage of time. The GMAB provides the policyholder with their initial deposit in a lump sum after a specified waiting period. The notional amount of the embedded derivatives are the foreign currency denominated GRBs converted to U.S. dollars at the current foreign spot exchange rate as of the reporting period date.

International program hedging instruments

The Company utilizes equity futures, options and swaps, and currency forwards and options to partially hedge against a decline in the debt and equity markets or changes in foreign currency exchange rates and the resulting statutory surplus and capital impact primarily arising from GMDB, GMIB and GMWB obligations issued in the U.K. and reinsured from Japan. The Company also enters into foreign currency denominated interest rate swaps and swaptions to hedge the interest rate exposure related to the potential annuitization of certain benefit obligations.

The following table represents notional and fair value for the international program hedging instruments.

	Notional Amount				Fair Value
	September 30, 2012		December 31, 2011		September 30, 2012			December 31, 2011
Credit derivatives	$	50	$	—	$	6		$	—
Currency forwards [1]	10,148		8,622		14			446
Currency options	9,088		7,038		107			72
Equity futures	2,356		2,691		—			—
Equity options	3,299		1,120		(151		)	(3		)
Equity swaps [2]	2,588		392		34			(8		)
Interest rate futures	727		739		—			—
Interest rate swaps and swaptions	23,921		8,117		196			35
Total	$	52,177	$	28,719	$	206		$	542

[1] As of September 30, 2012 and December 31, 2011 net notional amounts are $1.9 billion and $7.2 billion, respectively, which include $6.0 billion and $7.9 billion, respectively, related to long positions and $4.1 billion and $0.7 billion, respectively, related to short positions.

[2] As of September 30, 2012the net notional amount is $0.8 billion which includes $1.7 billion related to long positions and $0.9 billion related to short positions. As of December 31, 2011the net notional amount of $0.4 billion related to long positions only.

4. Investments and Derivative Instruments (continued)

GMAB, GMWB and GMIB reinsurance contracts

The Company reinsured the GMAB, GMWB, and GMIB embedded derivatives for host variable annuity contracts written by HLIKK. The reinsurance contracts are accounted for as free-standing derivative contracts. The notional amount of the reinsurance contracts is the yen denominated GRB balance value converted at the period-end yen to U.S. dollar foreign spot exchange rate. For further information on this transaction, refer to Note 10 of the Notes to Condensed Consolidated Financial Statements.

Coinsurance and modified coinsurance reinsurance contracts

During 2010, a subsidiary entered into a coinsurance with funds withheld and modified coinsurance reinsurance agreement with an affiliated captive reinsurer, which creates an embedded derivative. In addition, provisions of this agreement include reinsurance to cede a portion of direct written U.S. GMWB riders, which is accounted for as an embedded derivative. Additional provisions of this agreement cede variable annuity contract GMAB, GMWB and GMIB riders reinsured by the Company that have been assumed from HLIKK and is accounted for as a free-standing derivative. For further information on this transaction, refer to Note 10 of the Notes to Condensed Consolidated Financial Statements.

4. Investments and Derivative Instruments (continued)

Derivative Balance Sheet Classification

The table below summarizes the balance sheet classification of the Company’s derivative related fair value amounts, as well as the gross asset and liability fair value amounts. The fair value amounts presented below do not include income accruals or cash collateral held amounts, which are netted with derivative fair value amounts to determine balance sheet presentation. Derivatives in the Company’s separate accounts are not included because the associated gains and losses accrue directly to policyholders. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the table below. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.

	Net Derivatives										Asset Derivatives				Liability Derivatives
	Notional Amount				Fair Value						Fair Value				Fair Value
Hedge Designation/ Derivative Type	Sep 30, 2012		Dec 31, 2011		Sep 30, 2012			Dec 31, 2011			Sep 30, 2012		Dec 31, 2011		Sep 30, 2012			Dec 31, 2011
Cash flow hedges
Interest rate swaps	$	5,587	$	6,339	$	234		$	276		$	234	$	276	$	—		$	—
Foreign currency swaps	164		229		(17		)	(5		)	4		17		(21		)	(22		)
Total cash flow hedges	5,751		6,568		217			271			238		293		(21		)	(22		)
Fair value hedges
Interest rate swaps	776		1,007		(61		)	(78		)	—		—		(61		)	(78		)
Foreign currency swaps	40		677		15			(39		)	15		64		—			(103		)
Total fair value hedges	816		1,684		(46		)	(117		)	15		64		(61		)	(181		)
Non-qualifying strategies
Interest rate contracts
Interest rate swaps, swaptions, caps, floors, and futures	9,494		6,252		(412		)	(435		)	448		417		(860		)	(852		)
Foreign exchange contracts
Foreign currency swaps and forwards	224		208		(10		)	(10		)	5		3		(15		)	(13		)
Japan 3Win foreign currency swaps	2,054		2,054		78			184			78		184		—			—
Japanese fixed annuity hedging instruments	1,648		1,945		371			514			392		540		(21		)	(26		)
Credit contracts
Credit derivatives that purchase credit protection	679		1,134		(1		)	23			10		35		(11		)	(12		)
Credit derivatives that assume credit risk [1]	2,596		2,212		(308		)	(545		)	12		2		(320		)	(547		)
Credit derivatives in offsetting positions	5,342		5,020		(28		)	(43		)	66		101		(94		)	(144		)
Equity contracts
Equity index swaps and options	748		1,433		42			23			55		36		(13		)	(13		)
Variable annuity hedge program
U.S. GMWB product derivatives [2]	30,213		34,569		(1,413		)	(2,538		)	—		—		(1,413		)	(2,538		)
U.S. GMWB reinsurance contracts	6,116		7,193		199			443			199		443		—			—
U.S. GMWB hedging instruments	19,813		16,406		674			894			842		1,022		(168		)	(128		)
U.S. macro hedge program	5,583		6,819		82			357			82		357		—			—
International program product derivatives [2]	1,949		2,009		(22		)	(30		)	—		—		(22		)	(30		)
International program hedging instruments	52,177		28,719		206			542			695		672		(489		)	(130		)
Other
GMAB, GMWB, and GMIB reinsurance contracts	20,598		21,627		(2,673		)	(3,207		)	—		—		(2,673		)	(3,207		)
Coinsurance and modified coinsurance reinsurance contracts	47,871		50,756		1,712			2,630			2,370		2,901		(658		)	(271		)
Total non-qualifying strategies	207,105		188,356		(1,503		)	(1,198		)	5,254		6,713		(6,757		)	(7,911		)
Total cash flow hedges, fair value hedges, and non-qualifying strategies	$	213,672	$	196,608	$	(1,332	)	$	(1,044	)	$	5,507	$	7,070	$	(6,839	)	$	(8,114	)
Balance Sheet Location
Fixed maturities, available-for-sale	$	416	$	416	$	(25	)	$	(45	)	$	—	$	—	$	(25	)	$	(45	)
Other investments	59,244		51,231		890			1,971			1,651		2,745		(761		)	(774		)
Other liabilities	47,183		28,717		12			(254		)	1,287		981		(1,275		)	(1,235		)
Consumer notes	27		35		(2		)	(4		)	—		—		(2		)	(4		)
Reinsurance recoverable	50,815		55,140		1,911			3,073			2,569		3,344		(658		)	(271		)
Other policyholder funds and benefits payable	55,987		61,069		(4,118		)	(5,785		)	—		—		(4,118		)	(5,785		)
Total derivatives	$	213,672	$	196,608	$	(1,332	)	$	(1,044	)	$	5,507	$	7,070	$	(6,839	)	$	(8,114	)

[1] The derivative instruments related to this strategy are held for other investment purposes.

[2] These derivatives are embedded within liabilities and are not held for risk management purposes.

4. Investments and Derivative Instruments (continued)

Change in Notional Amount

The net increase in notional amount of derivatives since December 31, 2011, was primarily due to the following:

• The $52.2 billion notional amount related to the international program hedging instruments as of September 30, 2012, consisted of $47.2 billion of long positions and $5.0 billion of offsetting short positions, resulting in a net notional amount of $42.2 billion. The $28.7 billion notional amount as of December 31, 2011, consisted of $28.0 billion of long positions and $0.7 billion of offsetting short positions, resulting in a net notional amount of $27.3 billion. The increase in net notional of $14.9 billion primarily resulted from the Company increasing its hedging of interest rate exposure.

Change in Fair Value

The net decrease in the total fair value of derivative instruments since December 31, 2011, was primarily related to the following:

• The increase in fair value related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily due to a liability model assumption update, favorable policyholder behavior, and lower equity market volatility.

• The increase in fair value related to credit derivatives that assume credit risk was primarily due to credit spread tightening.

• The fair value related to the international program hedging instruments decreased as a result of an improvement in global and domestic equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar.

• The fair value related to the U.S. macro hedge program decreased due to an improvement in domestic equity markets, passage of time, and lower equity volatility.

• The fair value related to the Japanese fixed annuity hedging instruments and Japan 3Win foreign currency swaps decreased primarily due to a decline in U.S. interest rates, depreciation of the Japanese yen in relation to the U.S. dollar and strengthening of the currency basis swap spread between U.S. dollar and Japanese yen.

• GMAB, GMWB and GMIB reinsurance contracts represent the guarantees that are internally reinsured from HLIKK.  The fair value of these liabilities has declined as a result of a sustained recovery in the equity markets and exchange rates, partially offset by decreases in interest rates and volatility.  For a discussion related to the reinsurance agreement refer to Note 10 of the Notes to Condensed Consolidated Financial Statements for more information on this transaction.

• The Coinsurance and modified coinsurance reinsurance contracts represents U.S. and International guarantees that are ceded to an affiliate.  The primary driver of the decline in the fair value of these derivatives is a result of changes in the unrealized gains/losses of the underlying portfolios associated with these contract.  For a discussion related to the reinsurance agreement refer to Note 10 of the Notes to Condensed Consolidated Financial Statements for more information on this transaction.

Cash Flow Hedges

The following tables presents the components of the gain or loss on derivatives that qualify as cash flow hedges:

Derivatives in Cash Flow Hedging Relationships

	Gain (Loss) Recognized in OCI on Derivative (Effective Portion)												Net Realized Capital Gains (Losses) Recognized in Income on Derivative (Ineffective Portion)
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011			2012			2011			2012		2011			2012		2011
Interest rate swaps	$	21		$	211		$	82		$	253		$	—	$	(2	)	$	—	$	(2	)
Foreign currency swaps	(1		)	(4		)	(18		)	(2		)	—		—			—		—
Total	$	20		$	207		$	64		$	251		$	—	$	(2	)	$	—	$	(2	)

4. Investments and Derivative Instruments (continued)

Derivatives in Cash Flow Hedging Relationships (continued)

		Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended September 30,					Nine Months Ended September 30,
	Location	2012		2011			2012			2011
Interest rate swaps	Net realized capital gain/(loss)	$	1	$	4		$	5		$	6
Interest rate swaps	Net investment income	26		20			77			59
Foreign currency swaps	Net realized capital gain/(loss)	1		(9		)	(7		)	2
Total		$	28	$	15		$	75		$	67

As of September 30, 2012, the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $83. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to interest income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows (for forecast transactions, excluding interest payments on existing variable-rate financial instruments) is less than one year.

During the three months ended September 30, 2012, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring. During the nine months ended September 30, 2012, the Company had $7 of net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring. During the three and nine months ended September 30, 2011, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.

Fair Value Hedges

The Company recognized in income gains (losses) representing the ineffective portion of fair value hedges as follows:

Derivatives in Fair-Value Hedging Relationships

	Gain or (Loss) Recognized in Income [1]
	Three Months Ended September 30,										Nine Months Ended September 30,
	2012					2011					2012					2011
	Derivative			Hedge Item		Derivative			Hedge Item		Derivative			Hedge Item		Derivative			Hedge Item
Interest rate swaps
Net realized capital gain/(loss)	$	(2	)	$	1	$	(42	)	$	43	$	(8	)	$	4	$	(57	)	$	57
Foreign currency swaps
Net realized capital gain/(loss)	(6		)	6		(28		)	28		(8		)	8		8			(8		)
Benefits, losses and loss adjustment expenses	—			—		(5		)	5		(6		)	6		(14		)	14
Total	$	(8	)	$	7	$	(75	)	$	76	$	(22	)	$	18	$	(63	)	$	63

[1] The amounts presented do not include the periodic net coupon settlements of the derivative or the coupon income (expense) related to the hedged item. The net of the amounts presented represents the ineffective portion of the hedge.

4. Investments and Derivative Instruments (continued)

Non-qualifying Strategies

The following table presents the gain or loss recognized in income on non-qualifying strategies:

Derivatives Used in Non-Qualifying Strategies

Gain or (Loss) Recognized within Net Realized Capital Gains and Losses
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest rate contracts
Interest rate swaps, caps, floors, and forwards	$	(4	)	$	9		$	(6	)	$	16
Foreign exchange contracts
Foreign currency swaps and forwards	(1		)	11			12			4
Japan 3Win foreign currency swaps [1]	15			39			(106		)	14
Japanese fixed annuity hedging instruments [2]	24			103			(46		)	98
Credit contracts
Credit derivatives that purchase credit protection	4			18			(15		)	5
Credit derivatives that assume credit risk	61			(146		)	194			(143		)
Equity contracts
Equity index swaps and options	(9		)	(40		)	(22		)	(38		)
Variable annuity hedge program
U.S. GMWB product derivatives	823			(1,315		)	1,235			(1,047		)
U.S. GMWB reinsurance contracts	(184		)	241			(265		)	180
U.S. GMWB hedging instruments	(258		)	751			(519		)	567
U.S. macro hedge program	(109		)	107			(292		)	6
International program product derivatives	5			(32		)	13			(27		)
International program hedging instruments	(117		)	1,142			(472		)	857
Other
GMAB, GMWB, and GMIB reinsurance contracts	348			(548		)	599			(212		)
Coinsurance and modified coinsurance reinsurance contracts	(732		)	866			(1,164		)	370
Total	$	(134	)	$	1,206		$	(854	)	$	650

[1] The associated liability is adjusted for changes in spot rates through realized capital gains and was $(46) and $(93) for the three months ended September 30, 2012 and 2011, respectively, and $19 and $(100) for the ninemonths ended September 30, 2012 and 2011, respectively.

[2]  The associated liability is adjusted for changes in spot rates through realized capital gains and was $(54) and $(115) for the three months ended September 30, 2012 and 2011, respectively and $33 and $(125) for the ninemonths ended September 30, 2012 and 2011, respectively.

For the three and nine months ended September 30, 2012, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:

• The net loss for the three months ended September 30, 2012, associated with the international program hedging instruments was primarily driven by an improvement in global and domestic equity markets, partially offset by appreciation of the Japanese yen in relation to the euro and the U.S. dollar. The net loss for the nine months ended September 30, 2012, was primarily driven by an improvement in global and domestic equity markets and depreciation of the Japanese yen in relation to the euro and the U.S. dollar, partially offset by a decrease in interest rates.

• The net gain for the three and nine months ended September 30, 2012, on derivatives associated with GMAB, GMWB, and GMIB reinsurance contracts, which are reinsured to an affiliated captive reinsurer, was primarily due to an improvement in global and domestic equity markets and a decrease in currency volatility.

• The net loss for the nine and nine months ended September 30, 2012 on the coinsurance and modified coinsurance reinsurance agreement, which is accounted for as a derivative instrument, primarily offsets the net gain on GMAB, GMWB, and GMIB reinsurance contracts. For a discussion related to the reinsurance agreement refer to Note 10 for more information on this transaction.

• For the nine months ended September 30, 2012, the net loss related to the Japan 3Win foreign currency swaps was primarily due to a decline in U.S. interest rates, depreciation of the Japanese yen in relation to the U.S. dollar and strengthening of the currency basis swap spread between U.S. dollar and Japanese yen.

4. Investments and Derivative Instruments (continued)

• The net gain for the nine months ended September 30, 2012 on the credit derivatives that assume credit risk was primarily driven by credit spread tightening.

• For the three and nine months ended September 30, 2012 the net gain related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily a result of a liability model assumption update, a decrease in domestic equity volatility and outperformance of the underlying actively managed funds as compared to their respective indices.

For the three and nine months ended September 30, 2011, the net realized capital gain (loss) related to derivatives used in non-qualifying strategies was primarily comprised of the following:

• The net gain associated with the international program hedging instruments was primarily due to a decrease in equity markets and foreign currency movements, primarily the Japanese yen strengthening in comparison to the euro.

• For the three months ended September 30, 2011, the net loss associated with GMAB, GMWB, and GMIB product reinsurance contracts, which are reinsured to an affiliated captive reinsurer, was primarily due to a decrease in the equity markets and the strengthening of the Japanese yen in comparison to the euro. For the nine months ended September 30, 2011, the net loss associated with GMAB, GMWB, and GMIB product reinsurance contracts, which are reinsured to an affiliated captive reinsurer, was primarily due to a decrease in equity markets and an increase in Japan currency volatility.

• The net gain on the coinsurance and modified coinsurance reinsurance agreement, which is accounted for as a derivative instrument primarily offsets the net loss on GMAB, GMWB, and GMIB reinsurance contracts. For a discussion related to the reinsurance agreement refer to Note 10 of the Notes to Condensed Consolidated Financial Statements for more information on this transaction.

• The loss related to the combined U.S. GMWB hedging program, which includes the U.S. GMWB product, reinsurance, and hedging derivatives, was primarily a result of a general decrease in long-term interest rates and higher interest rate volatility.

• The loss on credit derivatives that assume credit risk was primarily due to credit spread widening.

• The net gain related to the Japanese fixed annuity hedging instruments was primarily due to the U.S. dollar weakening in comparison to the Japanese yen.

Refer to Note 10 for additional disclosures regarding contingent credit related features in derivative agreements.

Credit Risk Assumed through Credit Derivatives

The Company enters into credit default swaps that assume credit risk of a single entity, referenced index, or asset pool in order to synthetically replicate investment transactions. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard and customized diversified portfolios of corporate issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.

4. Investments and Derivative Instruments (continued)

The following tables present the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type and average credit ratings, and offsetting notional amounts and fair value for credit derivatives in which the Company is assuming credit risk.

As of September 30, 2012

							Underlying Referenced Credit Obligation(s) [1]
Credit Derivative type by derivative risk exposure	Notional Amount [2]		Fair Value			Weighted Average Years to Maturity	Type	Average Credit Rating	Offsetting Notional Amount [3]		Offsetting Fair Value [3]
Single name credit default swaps
Investment grade risk exposure	$	1,864	$	(4	)	3 years	Corporate Credit/ Foreign Gov.	A	$	899	$	(23	)
Below investment grade risk exposure	114		(1		)	1 year	Corporate Credit	B+	114		(3		)
Basket credit default swaps [4]
Investment grade risk exposure	2,259		3			3 years	Corporate Credit	BBB+	1,306		(1		)
Investment grade risk exposure	238		(18		)	4 years	CMBS Credit	A	237		18
Below investment grade risk exposure	352		(282		)	3 years	Corporate Credit	BB	—		—
Below investment grade risk exposure	115		(31		)	4 years	CMBS Credit	B+	115		31
Embedded credit derivatives
Investment grade risk exposure	125		114			4 years	Corporate Credit	BBB-	—		—
Below investment grade risk exposure	200		176			4 years	Corporate Credit	BB+	—		—
Total	$	5,267	$	(43	)				$	2,671	$	22

As of December 31, 2011

							Underlying Referenced Credit Obligation(s) [1]
Credit Derivative type by derivative risk exposure	Notional Amount [2]		Fair Value			Weighted Average Years to Maturity	Type	Average Credit Rating	Offsetting Notional Amount [3]		Offsetting Fair Value [3]
Single name credit default swaps
Investment grade risk exposure	$	1,067	$	(18	)	3 years	Corporate Credit/ Foreign Gov.	A+	$	915	$	(19	)
Below investment grade risk exposure	125		(7		)	2 years	Corporate Credit	B+	114		(3		)
Basket credit default swaps [4]
Investment grade risk exposure	2,375		(71		)	3 years	Corporate Credit	BBB+	1,128		17
Investment grade risk exposure	353		(63		)	5 years	CMBS Credit	BBB+	353		62
Below investment grade risk exposure	477		(441		)	3 years	Corporate Credit	BBB+	—		—
Embedded credit derivatives
Investment grade risk exposure	25		24			3 years	Corporate Credit	BBB-	—		—
Below investment grade risk exposure	300		245			5 years	Corporate Credit	BB+	—		—
Total	$	4,722	$	(331	)				$	2,510	$	57

[1] The average credit ratings are based on availability and the midpoint of the applicable ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.

[2] Notional amount is equal to the maximum potential future loss amount. There is no specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.

[3] The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.

[4] Includes $2.6 billion and $2.7 billion as of September 30, 2012 and December 31, 2011, respectively, of standard market indices of diversified portfolios of corporate issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. Also includes $353 and $478 as of September 30, 2012 and December 31, 2011, respectively, of customized diversified portfolios of corporate issuers referenced through credit default swaps.