Edgar Filing: LINCOLN NATIONAL CORP

d10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________

FORM 10-Q

________________________

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-6028

________________________

LINCOLN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

________________________


Indiana	35-1140070
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

150 N. Radnor Chester Road, Suite A305, Radnor, Pennsylvania	19087
(Address of principal executive offices)	(Zip Code)

(484) 583-1400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 2, 2011, there were 313,468,372 shares of the registrant’s common stock outstanding.

__________________________________________________________________________________________________________

Lincoln National Corporation

Table of Contents

Item			Page
PART I
1.	Financial Statements		1

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		50
		Forward-Looking Statements – Cautionary Language	51
		Introduction	52
		Executive Summary	52
		Critical Accounting Policies and Estimates	54
		Acquisitions and Dispositions	56
		Results of Consolidated Operations	57
		Results of Retirement Solutions	60
		Retirement Solutions – Annuities	61
		Retirement Solutions – Defined Contribution	68
		Results of Insurance Solutions	76
		Insurance Solutions – Life Insurance	76
		Insurance Solutions – Group Protection	83
		Results of Other Operations	86
		Realized Gain (Loss)	89
		Consolidated Investments	93
		Review of Consolidated Financial Condition	116
		Liquidity and Capital Resources	116
		Other Matters	120
		Other Factors Affecting Our Business	120
		Recent Accounting Pronouncements	120

3.	Quantitative and Qualitative Disclosures About Market Risk		120

PART II

1.	Legal Proceedings		124

2.	Unregistered Sales of Equity Securities and Use of Proceeds		124

6.	Exhibits		124

	Signatures		125

	Exhibit Index for the Report on Form 10-Q		E-1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

							As of			As of
						March 31,			December 31,
							2011			2010
						(Unaudited)
ASSETS
Investments:
	Available-for-sale securities, at fair value:
		Fixed maturity securities (amortized cost: 2011 - $66,521; 2010 - $65,175)					$	69,231		$	68,030
		Variable interest entities' fixed maturity securities (amortized cost: 2011 - $571; 2010 - $570)						587			584
		Equity securities (cost: 2011 - $120; 2010 - $179)						145			197
	Trading securities							2,598			2,596
	Mortgage loans on real estate							6,749			6,752
	Real estate							189			202
	Policy loans							2,837			2,865
	Derivative investments							946			1,076
	Other investments							1,029			1,038
			Total investments					84,311			83,340
Cash and invested cash								2,216			2,741
Deferred acquisition costs and value of business acquired								9,272			8,930
Premiums and fees receivable								401			335
Accrued investment income								989			933
Reinsurance recoverables								6,580			6,527
Goodwill								3,019			3,019
Other assets								3,293			3,369
Separate account assets								88,236			84,630
					Total assets		$	198,317		$	193,824

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future contract benefits							$	17,313		$	17,562
Other contract holder funds								67,125			66,376
Short-term debt								351			351
Long-term debt								5,370			5,399
Reinsurance related embedded derivatives								91			102
Funds withheld reinsurance liabilities								1,135			1,149
Deferred gain on business sold through reinsurance								450			468
Payables for collateral on investments								1,554			1,659
Variable interest entities' liabilities								130			132
Other liabilities								3,472			3,190
Separate account liabilities								88,236			84,630
				Total liabilities				185,227			181,018

Contingencies and Commitments (See Note 9)

Stockholders' Equity
Preferred stock - 10,000,000 shares authorized:
	Series A preferred stock - 10,914 and 10,914 shares issued and outstanding
		as of March 31, 2011, and December 31, 2010, respectively						-			-
Common stock - 800,000,000 shares authorized; 313,456,824 and 315,718,554 shares
	issued and outstanding as of March 31, 2011, and December 31, 2010, respectively							8,064			8,124
Retained earnings								4,243			3,934
Accumulated other comprehensive income (loss)								783			748
				Total stockholders' equity				13,090			12,806
					Total liabilities and stockholders' equity		$	198,317		$	193,824

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited, in millions, except per share data)

							For the Three
							Months Ended
							March 31,
							2011		2010
Revenues
Insurance premiums							$	568	$	532
Insurance fees								818		788
Net investment income								1,191		1,106
Realized gain (loss):
	Total other-than-temporary impairment losses on securities							(45)		(77)
	Portion of loss recognized in other comprehensive income							6		24
		Net other-than-temporary impairment losses on securities
			recognized in earnings					(39)		(53)
		Realized gain (loss), excluding other-than-temporary
			impairment losses on securities					37		27
				Total realized gain (loss)				(2)		(26)
Amortization of deferred gain on business sold through reinsurance								19		19
Other revenues and fees								120		108
		Total revenues						2,714		2,527
Benefits and Expenses
Interest credited								614		618
Benefits								835		779
Underwriting, acquisition, insurance and other expenses								725		714
Interest and debt expense								72		68
	Total benefits and expenses							2,246		2,179
		Income (loss) from continuing operations before taxes						468		348
		Federal income tax expense (benefit)						129		93
			Income (loss) from continuing operations					339		255
			Income (loss) from discontinued operations, net of federal
				income taxes				-		28
					Net income (loss)			339		283
					Preferred stock dividends and accretion of discount			-		(18)
						Net income (loss) available to common stockholders	$	339	$	265

Earnings (Loss) Per Common Share - Basic
Income (loss) from continuing operations							$	1.08	$	0.79
Income (loss) from discontinued operations								-		0.09
	Net income (loss)						$	1.08	$	0.88

Earnings (Loss) Per Common Share - Diluted
Income (loss) from continuing operations							$	1.05	$	0.76
Income (loss) from discontinued operations								-		0.09
	Net income (loss)						$	1.05	$	0.85

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in millions, except per share data)

			For the Three
			Months Ended
			March 31,
			2011		2010
Preferred Stock
Balance as of beginning-of-year			$	-	$	806
Accretion of discount on Series B preferred stock				-		6
	Balance as of end-of-period			-		812

Common Stock
Balance as of beginning-of-year				8,124		7,840
Stock compensation/issued for benefit plans				2		5
Retirement of common stock/cancellation of shares				(62)		-
	Balance as of end-of-period			8,064		7,845

Retained Earnings
Balance as of beginning-of-year				3,934		3,316
Cumulative effect from adoption of new accounting standards				-		(169)
Comprehensive income (loss)				374		666
Less other comprehensive income (loss), net of tax				35		383
	Net income (loss)			339		283
Retirement of common stock				(13)		-
Dividends declared: Common (2011 - $0.050; 2010 - $0.010)				(17)		(3)
Dividends on preferred stock				-		(12)
Accretion of discount on Series B preferred stock				-		(6)
	Balance as of end-of-period			4,243		3,409

Accumulated Other Comprehensive Income (Loss)
Balance as of beginning-of-year				748		(262)
Cumulative effect from adoption of new accounting standards				-		181
Other comprehensive income (loss), net of tax				35		383
	Balance as of end-of-period			783		302
		Total stockholders' equity as of end-of-period	$	13,090	$	12,368

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)

			For the Three
			Months Ended
			March 31,
			2011		2010
Cash Flows from Operating Activities
Net income (loss)			$	339	$	283
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Deferred acquisition costs, value of business acquired, deferred sales inducements
		and deferred front-end loads deferrals and interest, net of amortization		(74)		(48)
	Trading securities purchases, sales and maturities, net			5		2
	Change in premiums and fees receivable			(66)		(27)
	Change in accrued investment income			(56)		(51)
	Change in future contract benefits and other contract holder funds			124		318
	Change in reinsurance related assets and liabilities			(67)		(139)
	Change in federal income tax accruals			145		315
	Realized (gain) loss			2		26
	Amortization of deferred gain on business sold through reinsurance			(19)		(19)
	(Gain) loss on disposal of discontinued operations			-		(64)
	Other			7		(31)
		Net cash provided by (used in) operating activities		340		565

Cash Flows from Investing Activities
Purchases of available-for-sale securities				(3,111)		(3,418)
Sales of available-for-sale securities				556		805
Maturities of available-for-sale securities				1,431		919
Purchases of other investments				(855)		(694)
Sales or maturities of other investments				740		695
Increase (decrease) in payables for collateral on investments				(105)		(79)
Proceeds from sale of subsidiaries/businesses, net of cash disposed				-		293
Other				(23)		(10)
		Net cash provided by (used in) investing activities		(1,367)		(1,489)

Cash Flows from Financing Activities
Payment of long-term debt, including current maturities				-		(250)
Increase (decrease) in commercial paper, net				-		1
Deposits of fixed account values, including the fixed portion of variable				2,570		2,382
Withdrawals of fixed account values, including the fixed portion of variable				(1,200)		(1,251)
Transfers to and from separate accounts, net				(772)		(682)
Common stock issued for benefit plans and excess tax benefits				(5)		-
Repurchase of common stock				(75)		-
Dividends paid to common and preferred stockholders				(16)		(15)
		Net cash provided by (used in) financing activities		502		185

Net increase (decrease) in cash and invested cash, including discontinued operations				(525)		(739)
Cash and invested cash, including discontinued operations, as of beginning-of-year				2,741		4,184
	Cash and invested cash, including discontinued operations, as of end-of-period		$	2,216	$	3,445

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations and Basis of Presentation

Nature of Operations

Lincoln National Corporation and its majority-owned subsidiaries (“LNC” or the “Company,” which also may be referred to as “we,” “our” or “us”) operate multiple insurance businesses through four business segments. See Note 14 for additional details. The collective group of businesses uses “Lincoln Financial Group” as its marketing identity. Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income products. These products include institutional and/or retail fixed and indexed annuities, variable annuities, universal life insurance (“UL”), variable universal life insurance (“VUL”), linked-benefit UL, term life insurance, mutual funds and group life, disability and dental.

Basis of Presentation

The accompanying unaudited consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, the information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, (“2010 Form 10-K”) should be read in connection with the reading of these interim unaudited consolidated financial statements.

Certain GAAP policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized in our 2010 Form 10-K.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the three month period ended March 31, 2011, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011. All material intercompany accounts and transactions have been eliminated in consolidation.

Certain amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the presentation adopted in the current year. These reclassifications had no effect on net income or stockholders’ equity of the prior years.

2. New Accounting Standards

Adoption of New Accounting Standards

Fair Value Measurements and Disclosures Topic

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which requires additional disclosure related to the three-level fair value hierarchy. For a more detailed description of ASU 2010-06, see “Adoption of New Accounting Standards – Fair Value Measurements and Disclosures Topic” in Note 2 of our 2010 Form 10-K. We adopted the remaining disclosure requirements in ASU 2010-06 effective January 1, 2011, and have prospectively included the disclosures related to purchases, sales, issuances and settlements for Level 3 fair value measurements in Note 13 for the period ended March 31, 2011.

Financial Services – Insurance Industry Topic

In April 2010, the FASB issued ASU No. 2010-15, “How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments” (“ASU 2010-15”), to clarify a consolidation issue for insurance entities that hold a controlling interest in an investment fund either partially or completely through separate accounts. For a more detailed description of ASU 2010-15, see “Future Adoption of New Accounting Standards – Financial Services – Insurance Industry Topic” in Note 2 of our 2010 Form 10-K. We adopted the accounting guidance in ASU 2010-15 effective January 1, 2011. The adoption did not have a material effect on our consolidated financial condition and results of operations.

Intangibles – Goodwill and Other Topic

In December 2010, the FASB issued ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”). For a more detailed description of ASU 2010-28, see “Future Adoption of New Accounting Standards – Intangibles – Goodwill and Other Topic” in Note 2 of our 2010 Form 10-K. We adopted ASU 2010-28 effective January 1, 2011, and evaluated the reporting units within scope under this new accounting guidance. The adoption did not have a material effect on our consolidated financial condition and results of operations.

Receivables Topic

In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”), in order to enhance and expand the financial statement disclosures. For a more detailed description of ASU 2010-20, see “Adoption of New Accounting Standards – Receivables Topic” in Note 2 of our 2010 Form 10-K. We adopted the remaining disclosure requirements in ASU 2010-20 effective January 1, 2011, and have prospectively included the required financial statement disclosures related to the activity in our allowance for mortgage loan on real estate losses in Note 5 for the period ended March 31, 2011.

Future Adoption of New Accounting Standards

Financial Services – Insurance Industry Topic

In October 2010, the FASB issued ASU No. 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”), which clarifies the types of costs incurred by an insurance entity that can be capitalized in the acquisition of insurance contracts. For a more detailed description of ASU 2010-26, see “Future Adoption of New Accounting Standards – Financial Services – Insurance Industry Topic” in Note 2 of our 2010 Form 10-K. We will adopt the provisions of ASU 2010-26 effective January 1, 2012, and are currently evaluating the effect of the adoption on our consolidated financial condition and results of operations.

Transfers and Servicing Topic

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”), which revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. ASU 2011-03 removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in ASU 2011-03 will be effective for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited, and the amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. We will adopt the provisions of ASU 2011-03 effective January 1, 2012, and are currently evaluating the effect of the adoption on our consolidated financial condition and results of operations.

3. Dispositions

Discontinued Investment Management Operations

On January 4, 2010, we closed on the stock sale of Delaware Management Holdings, Inc. (“Delaware”), our subsidiary, which provided investment products and services to individuals and institutions, to Macquarie Bank Limited (“MBL”) with net of tax proceeds of approximately $405 million.

We have reclassified the results of operations of Delaware into income (loss) from discontinued operations, net of federal income taxes, for all periods presented on our Consolidated Statements of Income (Loss), and selected amounts (in millions) were as follows:

				For the
				Three
				Months
				Ended
				March 31,
				2010
Discontinued Operations Before Disposal
Income (loss) from discontinued operations before disposal,
	before federal income taxes			$	(17)
Federal income tax expense (benefit)					(3)
		Income (loss) from discontinued operations before disposal			(14)

Disposal
Gain (loss) on disposal, before federal income taxes					37
Federal income tax expense (benefit)					13
		Gain (loss) on disposal			24
			Income (loss) from discontinued operations	$	10

The income (loss) from discontinued operations for the three months ended March 31, 2010, reflected stock compensation expense attributable to the acceleration of vesting of equity awards for certain Delaware employees upon the sale of Delaware.

Discontinued Lincoln UK Operations

On October 1, 2009, we closed on the stock sale of Lincoln National (UK) plc (“Lincoln UK”), our subsidiary, which focused primarily on providing life and retirement income products in the United Kingdom to SLF of Canada UK Limited (“SLF”), and we retained Lincoln UK’s pension plan assets and liabilities.

We have reclassified the results of operations of Lincoln UK into income (loss) from discontinued operations, net of federal income taxes, for all periods presented on our Consolidated Statements of Income (Loss), and selected amounts (in millions) were as follows:

			For the
			Three
			Months
			Ended
			March 31,
			2010
Disposal
Gain (loss) on disposal, before federal income taxes			$	27
Federal income tax expense (benefit)				9
	Gain (loss) on disposal			18
		Income (loss) from discontinued operations	$	18

The income (loss) from discontinued operations for the three months ended March 31, 2010, related to additional consideration received attributable to a post-closing adjustment of the purchase price based upon a final actuarial appraisal of the value of the business as set forth in the share purchase agreement.

4. Variable Interest Entities (“VIEs”)

Consolidated VIEs

We have invested in the Class 1 Notes of two credit-linked note (“CLN”) structures, which represent special purpose trusts combining asset-backed securities with credit default swaps to produce multi-class structured securities. The CLN structures also include subordinated Class 2 Notes, which are held by third parties, and, together with the Class 1 Notes, represent 100% of the outstanding notes of the CLN structures. The entities that issued the CLNs are financed by the note holders, and, as such, the note holders participate in the expected losses and residual returns of the entities. Because the note holders do not have voting rights or similar rights, we determined the entities issuing the CLNs are VIEs, and as a note holder, our interest represented a variable interest. We have the power to direct the most significant activity impacting the performance of both CLN structures, as we have the ability to actively manage the reference portfolio underlying the credit default swaps. As a result, we have concluded we are the primary beneficiary of the VIEs associated with the CLNs and have consolidated the assets and liabilities of both CLN structures in our Consolidated Balance Sheets.

Asset and liability information (dollars in millions) for these consolidated VIEs included on our Consolidated Balance Sheets was as follows:

							As of March 31, 2011							As of December 31, 2010
							Number							Number
							of		Notional		Carrying			of		Notional		Carrying
						Instruments			Amounts		Value		Instruments			Amounts		Value
Assets
Fixed maturity corporate asset-backed
	credit card loan securities (1)							N/A	$	-	$	587			N/A	$	-	$	584

Liabilities
Derivative instruments not designated
	and not qualifying as hedging
	instruments:
		Credit default swaps (2)						2	$	600	$	207			2	$	600	$	215
		Contingent forwards (2)						2		-		(4)			2		-		(6)
			Total derivative instruments not
				designated and not qualifying
				as hedging instruments				4		600		203			4		600		209
Federal income tax (2)								N/A		-		(73)			N/A		-		(77)
					Total liabilities			4	$	600	$	130			4	$	600	$	132

(1)	Reported in VIEs’ fixed maturity securities on our Consolidated Balance Sheets.

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

For details related to the fixed maturity available-for-sale (“AFS”) securities for these VIEs, see Note 5.

The credit default swaps create variability in the CLN structures and expose the note holders to the credit risk of the referenced portfolio. The contingent forwards transfer a portion of the loss in the underlying fixed maturity corporate asset-backed credit card loan securities back to the counterparty after credit losses reach our attachment point.

The gains (losses) for these consolidated VIEs (in millions) recorded on our Consolidated Statements of Income (Loss) were as follows:

			For the Three
			Months Ended
			March 31,
			2011		2010
Derivative Instruments Not Designated and
	Not Qualifying as Hedging Instruments
Credit default swaps (1)			$	8	$	1
Contingent forwards (1)				(2)		(5)
	Total derivative instruments not designated and
		not qualifying as hedging instruments	$	6	$	(4)

(1)	Reported in realized gain (loss) on our Consolidated Statements of Income (Loss).

The following summarizes information regarding the CLN structures (dollars in millions) as of March 31, 2011:

	Amount and Date of Issuance
		$400		$200
		December		April
		2006		2007
Original attachment point (subordination)		5.50	%	2.05	%
Current attachment point (subordination)		4.17	%	1.48	%
Maturity	12/20/2016			3/20/2017
Current rating of tranche		B		Ba2
Current rating of underlying collateral pool		Aa1-B3		Aaa-B1
Number of defaults in underlying collateral pool		2		2
Number of entities		123		99
Number of countries		19		22

There has been no event of default on the CLNs themselves. Based upon our analysis, the remaining subordination as represented by the attachment point should be sufficient to absorb future credit losses, subject to changing market conditions. Similar to other debt market instruments, our maximum principal loss is limited to our original investment as of March 31, 2011.

As described more fully in Note 1 of the 2010 Form 10-K, we regularly review our investment holdings for other-than-temporary impairments (“OTTIs”). Based upon this review, we believe that the fixed maturity corporate asset-backed credit card loan securities were not other-than-temporarily impaired as of March 31, 2011.

The following summarizes the exposure of the CLN structures’ underlying collateral by industry and rating as of March 31, 2011:


Industry			AAA		AA		A		BBB		BB		B		CCC		Total
Telecommunications			-	%	-	%	6.4	%	4.3	%	0.5	%	-	%	-	%	11.2	%
Financial intermediaries			0.4	%	4.0	%	6.2	%	0.5	%	-	%	-	%	-	%	11.1	%
Oil and gas			-	%	1.0	%	1.2	%	4.1	%	-	%	-	%	-	%	6.3	%
Utilities			-	%	-	%	3.1	%	1.4	%	-	%	-	%	-	%	4.5	%
Chemicals and plastics			-	%	-	%	2.3	%	1.2	%	0.3	%	-	%	-	%	3.8	%
Drugs			0.3	%	2.2	%	1.2	%	-	%	-	%	-	%	-	%	3.7	%
Retailers (except food
	and drug)		-	%	-	%	1.2	%	1.2	%	1.1	%	-	%	-	%	3.5	%
Industrial equipment			-	%	-	%	3.0	%	0.3	%	-	%	-	%	-	%	3.3	%
Sovereign			-	%	0.7	%	1.6	%	1.0	%	-	%	-	%	-	%	3.3	%
Food products			-	%	0.3	%	1.8	%	1.1	%	-	%	-	%	-	%	3.2	%
Conglomerates			-	%	2.6	%	0.5	%	-	%	-	%	-	%	-	%	3.1	%
Forest products			-	%	-	%	-	%	1.6	%	1.4	%	-	%	-	%	3.0	%
Other industry < 3%
	(28 industries)		-	%	2.0	%	15.4	%	17.3	%	3.6	%	1.4	%	0.3	%	40.0	%
		Total	0.7	%	12.8	%	43.9	%	34.0	%	6.9	%	1.4	%	0.3	%	100.0	%

Unconsolidated VIEs

Effective December 31, 2010, we issued a $500 million long-term senior note in exchange for a corporate bond AFS security of like principal and duration from a non-affiliated VIE whose primary activities are to acquire, hold and issue notes and loans, as well as pay and collect interest on the notes and loans. We have concluded that we are not the primary beneficiary of this VIE because we do not have power over the activities that most significantly affect its economic performance. In addition, the terms of the senior note provide us with a set-off right to the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets. We assigned the corporate bond AFS security to one of our subsidiaries and issued a guarantee to our subsidiary for the timely payment of the corporate bond’s principal.

Through our investment activities, we make passive investments in structured securities issued by VIEs for which we are not the manager. These structured securities include our mortgage-backed securities (“MBS”), which include collateralized mortgage obligations (“CMOs”), mortgage pass through securities (“MPTS”) and commercial mortgage-backed securities (“CMBS”) and our asset-backed securities (“ABS”) collateralized debt obligations (“CDOs”). We have not provided financial or other support with respect to these VIEs other than our original investment. We have determined that we are not the primary beneficiary of these VIEs due to the relative size of our investment in comparison to the principal amount of the structured securities issued by the VIEs and the level of credit subordination which reduces our obligation to absorb losses or right to receive benefits. Our maximum exposure to loss on these structured securities is limited to the amortized cost for these investments. We recognize our variable interest in these VIEs at fair value on our consolidated financial statements. For information about these structured securities, see Note 5.

5. Investments

AFS Securities

Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards CodificationTM (“ASC”), we have categorized AFS securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in Note 1 in our 2010 Form 10-K, which also includes additional disclosures regarding our fair value measurements.

The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:

				As of March 31, 2011
				Amortized		Gross Unrealized						Fair
				Cost		Gains		Losses		OTTI		Value
Fixed Maturity Securities
Corporate bonds				$	50,575	$	3,285	$	615	$	69	$	53,176
U.S. Government bonds					149		16		3		-		162
Foreign government bonds					478		39		1		-		516
MBS:
	CMOs				5,438		303		58		135		5,548
	MPTS				2,986		83		7		-		3,062
	CMBS				1,966		89		116		7		1,932
ABS CDOs					149		5		18		-		136
State and municipal bonds					3,323		38		81		-		3,280
Hybrid and redeemable preferred securities					1,457		74		112		-		1,419
VIEs' fixed maturity securities					571		16		-		-		587
		Total fixed maturity securities			67,092		3,948		1,011		211		69,818

Equity Securities
Banking securities					2		-		-		-		2
Insurance securities					27		4		-		-		31
Other financial services securities					17		14		-		-		31
Other securities					74		7		-		-		81
		Total equity securities			120		25		-		-		145
			Total AFS securities	$	67,212	$	3,973	$	1,011	$	211	$	69,963

				As of December 31, 2010
				Amortized		Gross Unrealized						Fair
				Cost		Gains		Losses		OTTI		Value
Fixed Maturity Securities
Corporate bonds				$	48,863	$	3,571	$	607	$	87	$	51,740
U.S. Government bonds					150		17		2		-		165
Foreign government bonds					473		38		3		-		508
MBS:
	CMOs				5,693		324		114		146		5,757
	MPTS				2,980		106		5		-		3,081
	CMBS				2,144		95		180		6		2,053
ABS CDOs					174		22		13		9		174
State and municipal bonds					3,222		27		94		-		3,155
Hybrid and redeemable preferred securities					1,476		56		135		-		1,397
VIEs' fixed maturity securities					570		14		-		-		584
		Total fixed maturity securities			65,745		4,270		1,153		248		68,614

Equity Securities
Banking securities					61		-		3		-		58
Insurance securities					33		4		-		-		37
Other financial services securities					18		14		-		-		32
Other securities					67		7		4		-		70
		Total equity securities			179		25		7		-		197
			Total AFS securities	$	65,924	$	4,295	$	1,160	$	248	$	68,811

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) were as follows:

	As of March 31, 2011
	Amortized		Fair
	Cost		Value
Due in one year or less	$	2,388	$	2,442
Due after one year through five years		12,032		12,873