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 2012 Form 10-K for a detailed discussion of the accounting treatment for derivative instruments. See Note 6 in our 2012 Form 10-K for a detailed discussion of our derivative instruments and use of them in our overall risk management strategy, which information is incorporated herein by reference. See Note 12 for additional disclosures related to the fair value of our derivative instruments and Note 3 for derivative instruments related to our consolidated VIEs.

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



	As of March 31, 2013						As of December 31, 2012
	Notional		Fair Value				Notional		Fair Value
	Amounts		Asset		Liability		Amounts		Asset		Liability
Qualifying Hedges
Cash flow hedges:
Interest rate contracts⁽¹⁾	$	3,094	$	487	$	197	$	3,214	$	462	$	224
Foreign currency contracts⁽¹⁾		532		46		22		420		39		26
Total cash flow hedges		3,626		533		219		3,634		501		250
Fair value hedges:
Interest rate contracts⁽¹⁾		875		227		-		875		269		-
Non-Qualifying Hedges
Interest rate contracts⁽¹⁾		43,609		845		466		36,539		1,042		475
Foreign currency contracts⁽¹⁾		230		-		-		48		-		-
Equity market contracts⁽¹⁾		19,993		1,417		69		19,857		1,734		170
Equity collar⁽¹⁾		9		-		-		9		1		-
Credit contracts⁽²⁾		148		-		10		148		-		11
Embedded derivatives:
Indexed annuity contracts⁽³⁾		-		-		853		-		-		732
Guaranteed living benefit ("GLB") Reserves⁽³⁾		-		-		199		-		-		909
Reinsurance related ⁽⁴⁾		-		-		199		-		-		215
Total derivative instruments	$	68,490	$	3,022	$	2,015	$	61,110	$	3,547	$	2,762

⁽¹⁾	Reported in derivative investments on our Consolidated Balance Sheets.

⁽²⁾	Reported in other liabilities on our Consolidated Balance Sheets.

⁽³⁾	Reported in future contract benefits on our Consolidated Balance Sheets.

⁽⁴⁾	Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.

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



	Remaining Life as of March 31, 2013
	Less Than 1 Year		1 – 5 Years		6 – 10 Years		11 – 30 Years		Over 30 Years		Total
Interest rate contracts⁽¹⁾	$	3,174	$	20,682	$	12,917	$	9,592	$	1,213	$	47,578
Foreign currency contracts⁽²⁾		255		180		200		127		-		762
Equity market contracts		10,707		4,049		5,224		21		1		20,002
Credit contracts		-		148		-		-		-		148
Total derivative instruments with notional amounts	$	14,136	$	25,059	$	18,341	$	9,740	$	1,214	$	68,490

⁽¹⁾	As of March 31, 2013, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was June 2042.

⁽²⁾	As of March 31, 2013, 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 Three Months Ended March 31,
	2013		2012
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year	$	163	$	119
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the year:
Cash flow hedges:
Interest rate contracts		34		(40)
Foreign currency contracts		13		(3)
Fair value hedges:
Interest rate contracts		1		1
Change in foreign currency exchange rate adjustment		11		(9)
Change in DAC, VOBA, DSI and DFEL		2		4
Income tax benefit (expense)		(22)		15
Less:
Reclassification adjustment for gains (losses) included in net income (loss):
Cash flow hedges:
Interest rate contracts⁽¹⁾		(5)		(6)
Foreign currency contracts⁽¹⁾		2		2
Fair value hedges:
Interest rate contracts⁽²⁾		1		1
Associated amortization of DAC, VOBA, DSI and DFEL		1		-
Income tax benefit (expense)		-		1
Balance as of end-of-period	$	203	$	89

⁽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).

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,
	2013		2012
Qualifying Hedges
Cash flow hedges:
Interest rate contracts⁽¹⁾	$	(6)	$	(7)
Foreign currency contracts⁽¹⁾		2		2
Total cash flow hedges		(4)		(5)
Fair value hedges:
Interest rate contracts⁽²⁾		9		12
Non-Qualifying Hedges
Interest rate contracts⁽³⁾		(178)		(416)
Foreign currency contracts⁽³⁾		(10)		(4)
Equity market contracts⁽³⁾		(534)		(815)
Equity market contracts⁽⁴⁾		12		14
Credit contracts⁽³⁾		(1)		(3)
Embedded derivatives:
Indexed annuity contracts⁽³⁾		(130)		104
GLB reserves⁽³⁾		710		1,153
Reinsurance related⁽³⁾		16		10
Total derivative instruments	$	(110)	$	50

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

As of March 31, 2013, $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 the three months ended March 31, 2013 and 2012, 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:

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



As of March 31, 2013
Maturity	Reason for Entering	Nature of Recourse	Credit Rating of Underlying Obligation⁽¹⁾	Number of Instruments	Fair Value⁽²⁾		Maximum Potential Payout
12/20/2016⁽³⁾	⁽⁴⁾	⁽⁵⁾	BBB-	3		(4)		68
3/20/2017⁽³⁾	⁽⁴⁾	⁽⁵⁾	BBB-	4		(7)		81
				7	$	(11)	$	149



As of December 31, 2012
Maturity	Reason for Entering	Nature of Recourse	Credit Rating of Underlying Obligation⁽¹⁾	Number of Instruments	Fair Value⁽²⁾		Maximum Potential Payout
12/20/2016⁽³⁾	⁽⁴⁾	⁽⁵⁾	BBB-	3		(4)		68
3/20/2017⁽³⁾	⁽⁴⁾	⁽⁵⁾	BBB-	4		(7)		81
				7	$	(11)	$	149

⁽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 credit default swaps.

⁽³⁾	These credit default swaps were sold to a counter-party of the consolidated VIEs discussed in Note 4 in our 2012 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), are as follows:



	As of March 31, 2013		As of December 31, 2012
Maximum potential payout	$	149	$	149
Less: Counterparty thresholds		-		-
Maximum collateral potentially required to post	$	149	$	149

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 $10 million as of March 31, 2013, 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 (“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, 2013, the NPR adjustment was $3 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 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, 2013, our exposure was $67 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, 2013				As of December 31, 2012
S&P Credit Rating of Counterparty	Collateral Posted by Counter-Party (Held by LNC)		Collateral Posted by LNC (Held by Counter-Party)		Collateral Posted by Counter-Party (Held by LNC)		Collateral Posted by LNC (Held by Counter-Party)

AA	$	36	$	-	$	41	$	-
AA-		44		-		58		-
A+		508		-		605		-
A		621		(55)		770		(68)
A-		1,021		-		1,214		-
BBB		16		-		4		-
	$	2,246	$	(55)	$	2,692	$	(68)

Balance Sheet Offsetting

Information related to our derivative instruments, securities lending transactions and reverse repurchase agreements and the effects of offsetting on our Consolidated Balance Sheets (in millions) were as follows:



	As of March 31, 2013
	Derivative Instruments		Embedded Derivative Instruments		Securities Lending and Reverse Repurchase Agreements		Total
Financial Assets
Gross amount of recognized assets	$	3,022	$	-	$	-	$	3,022
Gross amounts offset		(754)		-		-		(754)
Net amount of assets		2,268		-		-		2,268
Gross amounts not offset:
Cash collateral received		(2,191)		-		-		(2,191)
Net amount	$	77	$	-	$	-	$	77

Financial Liabilities
Gross amount of recognized liabilities	$	764	$	1,251	$	2,115	$	4,130
Gross amounts offset		(754)		-		-		(754)
Net amount of liabilities		10		1,251		2,115		3,376
Gross amounts not offset:
Financial instruments		-		-		(2,115)		(2,115)
Net amount	$	10	$	1,251	$	-	$	1,261



	As of December 31, 2012
	Derivative Instruments		Embedded Derivative Instruments		Securities Lending and Reverse Repurchase Agreements		Total
Financial Assets
Gross amount of recognized assets	$	3,547	$	-	$	-	$	3,547
Gross amounts offset		(895)		-		-		(895)
Net amount of assets		2,652		-		-		2,652
Gross amounts not offset:
Cash collateral received		(2,624)		-		-		(2,624)
Net amount	$	28	$	-	$	-	$	28

Financial Liabilities
Gross amount of recognized liabilities	$	906	$	1,856	$	1,614	$	4,376
Gross amounts offset		(895)		-		-		(895)
Net amount of liabilities		11		1,856		1,614		3,481
Gross amounts not offset:
Financial instruments		-		-		(1,614)		(1,614)
Net amount	$	11	$	1,856	$	-	$	1,867

For the Three Months Ended March 31,

Gain (loss) recognized as a component of OCI with the offset to net investment income