6. 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, basis risk and credit risk. We assess these risks by continually identifying and monitoring changes in our exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities.

Derivative activities are monitored by various management committees. The committees are responsible for overseeing the implementation of various hedging strategies that are developed through the analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are incorporated into our overall risk management strategies.

See Note 13 for additional disclosures related to the fair value of our derivative instruments and Note 4 for derivative instruments related to our consolidated VIEs.

We adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in 2019. See Note 2 for additional information.

Interest Rate Contracts

We use derivative instruments as part of our interest rate risk management strategy. These instruments are economic hedges unless otherwise noted and include:

Forward-Starting Interest Rate Swaps

We use forward-starting interest rate swaps designated and qualifying as cash flow hedges to hedge our exposure to interest rate fluctuations related to the forecasted purchases of certain assets and anticipated issuances of fixed-rate securities.

We also use forward-starting interest rate swaps to hedge the interest rate exposure within our life products related to the forecasted purchases of certain assets.

Interest Rate Cap Corridors

We use interest rate cap corridors to provide a level of protection from the effect of rising interest rates for certain life insurance products and annuity contracts. Interest rate cap corridors involve purchasing an interest rate cap at a specific cap rate and selling an interest rate cap with a higher cap rate. For each corridor, the amount of quarterly payments, if any, is determined by the rate at which the underlying index rate resets above the original capped rate. The corridor limits the benefit the purchaser can receive as the related interest rate index rises above the higher capped rate. There is no additional liability to us other than the purchase price associated with the interest rate cap corridor.

Interest Rate Futures

We use interest rate futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.

Interest Rate Swap Agreements

We use interest rate swap agreements to hedge the liability exposure on certain options in variable annuity products.

We also use interest rate swap agreements designated and qualifying as cash flow hedges to hedge the interest rate risk of floating-rate bond coupon payments by replicating a fixed-rate bond.

Finally, we use interest rate swap agreements designated and qualifying as fair value hedges to hedge against changes in the fair value of certain fixed-rate long-term debt and fixed maturity securities due to interest rate risks.

Treasury and Reverse Treasury Locks

We use treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to our issuance of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. In addition, we use reverse treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to the anticipated purchase of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.

Foreign Currency Contracts

We use derivative instruments as part of our foreign currency risk management strategy. These instruments are economic hedges unless otherwise noted and include:

Currency Futures

We use currency futures to hedge foreign exchange risk associated with certain options in variable annuity products. Currency futures exchange one currency for another at a specified date in the future at a specified exchange rate.

Foreign Currency Swaps

We use foreign currency swaps designated and qualifying as cash flow hedges, to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency swap is a contractual agreement to exchange one currency for another at specified dates in the future at a specified exchange rate.

Equity Market Contracts

We use derivative instruments as part of our equity market risk management strategy that are economic hedges and include:

Call Options Based on the S&P 500

We use call options to hedge the liability exposure on certain options in variable annuity products.

Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500. Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. As of each renewal date, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We purchase call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period.

Consumer Price Index Swaps

We use consumer price index swaps to hedge the liability exposure on certain options in fixed annuity products. Consumer price index swaps are contracts entered into at no cost and whose payoff is the difference between the consumer price index inflation rate and the fixed-rate determined as of inception.

Equity Futures

We use equity futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts

require payment between our counterparty and us on a daily basis for changes in the futures index price.

Put Options

We use put options to hedge the liability exposure on certain options in variable annuity products. Put options are contracts that require counterparties to pay us at a specified future date the amount, if any, by which a specified equity index is less than the strike rate stated in the agreement, applied to a notional amount.

Total Return Swaps

We use total return swaps to hedge the liability exposure on certain options in variable annuity products.

In addition, we use total return swaps to hedge a portion of the liability related to our deferred compensation plans. We receive the total return on a portfolio of indexes and pay a floating-rate of interest.

Variance Swaps

We use variance swaps to hedge the liability exposure on certain options in variable annuity products. Variance swaps are contracts entered into at no cost whose payoff is the difference between the realized variance rate of an underlying index and the fixed variance rate determined as of inception of the contract.

Credit Contracts

We use derivative instruments as part of our credit risk management strategy that are economic hedges and include:

Credit Default Swaps – Buying Protection

We use credit default swaps to hedge the liability exposure on certain options in variable annuity products.

We buy credit default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows us to put the bond back to the counterparty at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.

Credit Default Swaps – Selling Protection

We use credit default swaps to hedge the liability exposure on certain options in variable annuity products.

We sell credit default swaps to offer credit protection to contract holders and investors. The credit default swaps hedge the contract holders and investors against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows the investor to put the bond back to us at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.

Embedded Derivatives

We have embedded derivatives that include:

GLB Reserves Embedded Derivatives

We use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with GLBs offered in our variable annuity products, including products with GWB and GIB features. Changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities hedge the income statement effect of changes in embedded derivative GLB reserves caused by those same factors. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these hedge positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices,

divergence between the actual and expected performance of the hedge instruments and our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off.

Certain features of these guarantees have elements of both insurance benefits accounted for under the Financial Services – Insurance – Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC (“benefit reserves”) and embedded derivatives accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“embedded derivative reserves”). We calculate the value of the benefit reserves and the embedded derivative reserves based on the specific characteristics of each GLB feature.

Indexed Annuity and IUL Contracts Embedded Derivatives

Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500. Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. As of each renewal date, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We purchase S&P 500 call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period.

Reinsurance Related Embedded Derivatives

We have certain modified coinsurance arrangements and coinsurance with funds withheld reinsurance arrangements with embedded derivatives related to the withheld assets of the related funds. These derivatives are considered total return swaps with contractual returns that are attributable to various assets and liabilities associated with these reinsurance arrangements.

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



	As of March 31, 2019						As of December 31, 2018
	Notional		Fair Value				Notional		Fair Value
	Amounts		Asset		Liability		Amounts		Asset		Liability
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)	$	2,567	$	64	$	51	$	2,741	$	70	$	9
Foreign currency contracts (1)		2,442		153		36		2,326		167		39
Total cash flow hedges		5,009		217		87		5,067		237		48
Fair value hedges:
Interest rate contracts (1)		1,261		80		163		1,268		55		137
Non-Qualifying Hedges
Interest rate contracts (1)		95,308		588		105		100,628		464		138
Foreign currency contracts (1)		11		-		-		47		-		-
Equity market contracts (1)		32,795		613		404		30,487		676		162
Credit contracts (1)		60		-		-		-		-		-
Embedded derivatives:
GLB direct (2)		-		439		-		-		123		-
GLB ceded (2) (3)		-		50		8		-		72		-
Reinsurance related (4)		-		-		177		-		-		3
Indexed annuity and IUL contracts (2) (5)		-		872		1,730		-		902		1,305
Total derivative instruments	$	134,444	$	2,859	$	2,674	$	137,497	$	2,529	$	1,793

⁽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.

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



	Remaining Life as of March 31, 2019
	Less Than		1 - 5		6 - 10		11 - 30		Over 30
	1 Year		Years		Years		Years		Years		Total
Interest rate contracts (1)	$	11,465	$	9,727	$	51,648	$	24,583	$	1,713	$	99,136
Foreign currency contracts (2)		66		264		764		1,278		81		2,453
Equity market contracts		22,440		5,198		1,996		13		3,148		32,795
Credit contracts		-		-		60		-		-		60
Total derivative instruments
with notional amounts	$	33,971	$	15,189	$	54,468	$	25,874	$	4,942	$	134,444

⁽¹⁾

As of March 31, 2019, 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, 2019, 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 following amounts (in millions) were recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:


	As of March 31, 2019

				Cumulative
				Fair Value Hedging
				Adjustment Included
	Amortized Cost			in the Amortized
	of the Hedged			Cost of the Hedged
	Assets (Liabilities)			Assets (Liabilities)
Line Items in which the Hedged Items are Recorded
Fixed maturity AFS securities, at fair value	$	457		$	161
Long-term debt (1)		(976	)		(101	)

⁽¹⁾

The balance includes $(122) million of unamortized adjustments from discontinued hedges as of March 31, 2019.

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



	For the Three
	Months Ended
	March 31,
	2019			2018
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year	$	139		$	(29	)
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period:
Cumulative effect from adoption of
new accounting standard		-			(6	)
Cash flow hedges:
Interest rate contracts		(47	)		53
Foreign currency contracts		11			(37	)
Change in foreign currency exchange rate adjustment		(14	)		(50	)
Change in DAC, VOBA, DSI and DFEL		6			4
Income tax benefit (expense)		10			7
Less:
Reclassification adjustment for gains (losses)
included in net income (loss):
Cash flow hedges:
Interest rate contracts (1)		1			1
Interest rate contracts (2)		(1	)		(3	)
Foreign currency contracts (1)		7			5
Foreign currency contracts (3)		1			-
Associated amortization of DAC, VOBA, DSI and DFEL		(1	)		(1	)
Income tax benefit (expense)		(1	)		-
Balance as of end-of-period	$	99		$	(60	)

⁽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 effects of qualifying and non-qualifying hedges on the Consolidated Statements of Comprehensive Income (Loss) were as follows:



		Gain (Loss) Recognized in Income
		For the Three Months Ended March 31, 2019
		Realized			Net		Commissions			Interest
		Gain			Investment			and Other		and Debt
		(Loss)			Income			Expenses		Expense
Total Line Items in which the Effects of Fair Value
or Cash Flow Hedges are Recorded	$	(362	)	$	1,251		$	1,176	$	71

Qualifying Hedges
Gain or (loss) on fair value hedging relationships:
Interest rate contracts:
Hedged items		-			24			-		(34	)
Derivatives designated as hedging instruments		-			(24	)		-		34
Gain or (loss) on cash flow hedging relationships:
Interest rate contracts:
Amount of gain or (loss) reclassified from AOCI into income		-			1			-		(1	)
Foreign currency contracts
Amount of gain or (loss) reclassified from AOCI into income		1			7			-		-

Non-Qualifying Hedges
Interest rate contracts		357			-			-		-
Equity market contracts		(458	)		-			-		-
Embedded derivatives:
GLB		286			-			-		-
Reinsurance related		(174	)		-			-		-
Indexed annuity and IUL contracts		(239	)		-			-		-

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,
		2018
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)		$	1
Interest rate contracts (2)			(3	)
Foreign currency contracts (1)			5
Total cash flow hedges			3
Fair value hedges:
Interest rate contracts (1)			(4	)
Interest rate contracts (2)			6
Interest rate contracts (3)			33
Total fair value hedges			35
Non-Qualifying Hedges
Interest rate contracts (3)			(314	)
Foreign currency contracts (3)			2
Equity market contracts (3)			7
Equity market contracts (4)			(2	)
Embedded derivatives:
GLB (3)			157
Reinsurance related (3)			23
Indexed annuity and IUL contracts (3)			52
Total derivative instruments		$	(37	)

⁽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
	Months Ended
		March 31,
		2018
Offset to net investment income		$	6
Offset to interest and debt expense			(3	)

As of March 31, 2019, $35 million of the deferred net gains (losses) on derivative instruments in AOCI were expected to be reclassified to earnings during the next 12 months. This reclassification would be due primarily to interest rate variances related to our interest rate swap agreements.

For the three months ended March 31, 2019 and 2018, 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.

As of March 31, 2019, and December 31, 2018, we did not have any exposure related to credit default swaps for which we are the seller.

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 March 31, 2019, the NPR adjustment was zero. The credit risk associated with such agreements is minimized by entering into agreements with financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement. We are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements. Under some ISDA agreements, our insurance subsidiaries have agreed to maintain certain financial strength or claims-paying ratings. A downgrade below these levels could result in termination of derivative contracts, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contracts. In certain transactions, we and the counterparty have entered into a credit support annex requiring either party to post collateral when net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor. As of March 31, 2019, and December 31, 2018, our exposure was zero.

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, 2019					As of December 31, 2018
	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-	$	56	$	(3	)	$	33	$	(3	)
A+		389		(281	)		296		(96	)
A		5		-			106		(56	)
A-		244		(1	)		4		-
BBB+		-		-			197		-
	$	694	$	(285	)	$	636	$	(155	)

Balance Sheet Offsetting

Information related to the effects of offsetting (in millions) was as follows:



		As of March 31, 2019
					Embedded
	Derivative				Derivative
	Instruments				Instruments			Total

Financial Assets
Gross amount of recognized assets		$	1,350			$	1,361	$	2,711
Gross amounts offset			(369	)			-		(369	)
Net amount of assets			981				1,361		2,342
Gross amounts not offset:
Cash collateral			(694	)			-		(694	)
Non-cash collateral			(116	)			-		(116	)
Net amount		$	171			$	1,361	$	1,532

Financial Liabilities
Gross amount of recognized liabilities		$	910			$	1,915	$	2,825
Gross amounts offset			(148	)			-		(148	)
Net amount of liabilities			762				1,915		2,677
Gross amounts not offset:
Cash collateral			(285	)			-		(285	)
Non-cash collateral			(346	)			-		(346	)
Net amount		$	131			$	1,915	$	2,046


		As of December 31, 2018
					Embedded
	Derivative				Derivative
	Instruments				Instruments			Total

Financial Assets
Gross amount of recognized assets		$	1,330			$	1,097	$	2,427
Gross amounts offset			(223	)			-		(223	)
Net amount of assets			1,107				1,097		2,204
Gross amounts not offset:
Cash collateral			(636	)			-		(636	)
Non-cash collateral			(58	)			-		(58	)
Net amount		$	413			$	1,097	$	1,510

Financial Liabilities
Gross amount of recognized liabilities		$	784			$	1,308	$	2,092
Gross amounts offset			(103	)			-		(103	)
Net amount of liabilities			681				1,308		1,989
Gross amounts not offset:
Cash collateral			(155	)			-		(155	)
Non-cash collateral			(190	)			-		(190	)
Net amount		$	336			$	1,308	$	1,644