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 2013 Form 10-K for a detailed discussion of the accounting treatment for derivative instruments. See Note 6 in our 2013 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, 2014						As of December 31, 2013
	Notional		Fair Value				Notional		Fair Value
	Amounts		Asset		Liability		Amounts		Asset		Liability
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)	$	4,269	$	534	$	138	$	4,339	$	562	$	148
Foreign currency contracts (1)		590		34		50		615		32		46
Total cash flow hedges		4,859		568		188		4,954		594		194
Fair value hedges:
Interest rate contracts (1)		875		129		9		875		92		33
Non-Qualifying Hedges
Interest rate contracts (1)		53,270		367		560		45,620		215		744
Foreign currency contracts (1)		51		-		-		102		-		-
Equity market contracts (1)		20,479		860		239		19,917		957		193
Credit contracts (2)		126		-		2		126		-		2
Embedded derivatives:
Guaranteed living benefit
reserves (3) ("GLB")		-		1,022		-		-		1,244		-
GLB reserves (2)		-		-		43		-		-		-
Reinsurance related (4)		-		-		135		-		-		108
Indexed annuity and universal life
contracts (5)		-		-		1,090		-		-		1,048
Total derivative instruments	$	79,660	$	2,946	$	2,266	$	71,594	$	3,102	$	2,322

⁽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 other assets 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.

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



	Remaining Life as of March 31, 2014
	Less Than		1 – 5		6 – 10		11 – 30		Over 30
	1 Year		Years		Years		Years		Years		Total
Interest rate contracts (1)	$	4,232	$	31,532	$	11,230	$	10,207	$	1,213	$	58,414
Foreign currency contracts (2)		99		110		305		127		-		641
Equity market contracts		10,894		4,221		5,342		20		2		20,479
Credit contracts		-		126		-		-		-		126
Total derivative instruments
with notional amounts	$	15,225	$	35,989	$	16,877	$	10,354	$	1,215	$	79,660

⁽¹⁾

As of March 31, 2014, 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, 2014, 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,
	2014			2013
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year	$	256		$	163
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the year:
Cash flow hedges:
Interest rate contracts		(29	)		34
Foreign currency contracts		(2	)		13
Fair value hedges:
Interest rate contracts		1			1
Change in foreign currency exchange rate adjustment		(2	)		11
Change in DAC, VOBA, DSI and DFEL		-			2
Income tax benefit (expense)		11			(22	)
Less:
Reclassification adjustment for gains (losses)
included in net income (loss):
Cash flow hedges:
Interest rate contracts (1)		(7	)		(5	)
Foreign currency contracts (1)		-			2
Fair value hedges:
Interest rate contracts (2)		1			1
Associated amortization of DAC, VOBA, DSI and DFEL		-			1
Income tax benefit (expense)		2			-
Balance as of end-of-period	$	239		$	203

⁽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,
	2014			2013
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)	$	(7	)	$	(6	)
Foreign currency contracts (1)		-			2
Total cash flow hedges		(7	)		(4	)
Fair value hedges:
Interest rate contracts (2)		9			9
Non-Qualifying Hedges
Interest rate contracts (3)		332			(178	)
Foreign currency contracts (3)		1			(10	)
Equity market contracts (3)		(155	)		(534	)
Equity market contracts (4)		1			12
Credit contracts (3)		-			(1	)
Embedded derivatives:
GLB reserves (3)		(281	)		710
Reinsurance related (3)		(27	)		16
Indexed annuity and universal life
contracts (3)		(49	)		(130	)
Total derivative instruments	$	(176	)	$	(110	)

⁽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:



	For the Three
	Months Ended
	March 31,
	2014			2013
Gain (loss) recognized as a component of OCI with
the offset to net investment income	$	(7	)	$	(4	)

As of March 31, 2014, $25 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 interest rate variances related to our interest rate swap agreements.

For the three months ended March 31, 2014 and 2013, there were no material reclassifications to earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time period.

Gains (losses) (in millions) on derivative instruments designated and qualifying as fair value hedges were as follows:



	For the Three
	Months Ended
	March 31,
	2014		2013
Gain (loss) recognized as a component of OCI with
the offset to interest expense	$	1	$	1

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, 2014
				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-	3	$	(1	)	$	68
3/20/2017 (3)	(4)	(5)		BBB-	3		(1	)		58
					6	$	(2	)	$	126



As of December 31, 2013
				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-	3	$	(1	)	$	68
3/20/2017 (3)	(4)	(5)		BBB-	3		(1	)		58
					6	$	(2	)	$	126

⁽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 counterparty of the consolidated VIEs discussed in Note 4 in our 2013 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,
		2014			2013
Maximum potential payout		$	126		$	126
Less: Counterparty thresholds			-			-
Maximum collateral potentially required to post		$	126		$	126

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 $2 million as of March 31, 2014, 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 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, 2014, the NPR adjustment was $1 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, 2014, our exposure was $52 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, 2014					As of December 31, 2013
	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-	$	38	$	(6	)	$	34	$	(10	)
A+		37		-			19		-
A		847		(110	)		339		(183	)
A-		-		-			468		(123	)
BBB+		71		-			79		-
	$	993	$	(116	)	$	939	$	(316	)

Balance Sheet Offsetting

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



		As of March 31, 2014
								Securities
					Embedded			Lending and
	Derivative				Derivative			Repurchase
	Instruments				Instruments			Agreements				Total
Financial Assets
Gross amount of recognized assets		$	1,848			$	1,022		$	-		$	2,870
Gross amounts offset			(804	)			-			-			(804	)
Net amount of assets			1,044				1,022			-			2,066
Gross amounts not offset:
Cash collateral received			(877	)			-			-			(877	)
Net amount		$	167			$	1,022		$	-		$	1,189

Financial Liabilities
Gross amount of recognized liabilities		$	193			$	1,268		$	2,573		$	4,034
Gross amounts offset			(75	)			-			-			(75	)
Net amount of liabilities			118				1,268			2,573			3,959
Gross amounts not offset:
Cash collateral received			-				-			(2,573	)		(2,573	)
Net amount		$	118			$	1,268		$	-		$	1,386



		As of December 31, 2013
								Securities
					Embedded			Lending and
	Derivative				Derivative			Repurchase
	Instruments				Instruments			Agreements				Total
Financial Assets
Gross amount of recognized assets		$	1,805			$	1,244		$	-		$	3,049
Gross amounts offset			(924	)			-			-			(924	)
Net amount of assets			881				1,244			-			2,125
Gross amounts not offset:
Cash collateral received			(623	)			-			-			(623	)
Net amount		$	258			$	1,244		$	-		$	1,502

Financial Liabilities
Gross amount of recognized liabilities		$	242			$	1,156		$	2,600		$	3,998
Gross amounts offset			(55	)			-			-			(55	)
Net amount of liabilities			187				1,156			2,600			3,943
Gross amounts not offset:
Cash collateral received			-				-			(2,600	)		(2,600	)
Net amount		$	187			$	1,156		$	-		$	1,343