Edgar Filing: LINCOLN NATIONAL CORP

d10-q.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 June 30, 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 July 28, 2011, there were 308,340,501 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		54
		Forward-Looking Statements – Cautionary Language	55
		Introduction	56
		Executive Summary	56
		Critical Accounting Policies and Estimates	58
		Acquisitions and Dispositions	60
		Results of Consolidated Operations	61
		Results of Retirement Solutions	65
		Annuities	66
		Defined Contribution	73
		Results of Insurance Solutions	80
		Life Insurance	81
		Group Protection	89
		Results of Other Operations	92
		Realized Gain (Loss)	95
		Consolidated Investments	100
		Review of Consolidated Financial Condition	122
		Liquidity and Capital Resources	122
		Other Matters	127
		Other Factors Affecting Our Business	127
		Recent Accounting Pronouncements	128

3.	Quantitative and Qualitative Disclosures About Market Risk		128

4.	Controls and Procedures		132

PART II

1.	Legal Proceedings		133

2.	Unregistered Sales of Equity Securities and Use of Proceeds		133

6.	Exhibits		133

	Signatures		134

	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
						June 30,			December 31,
							2011			2010
						(Unaudited)
ASSETS
Investments:
	Available-for-sale securities, at fair value:
		Fixed maturity securities (amortized cost: 2011 - $67,373; 2010 - $65,175)					$	70,920		$	68,030
		Variable interest entities' fixed maturity securities (amortized cost: 2011 - $572; 2010 - $570)						593			584
		Equity securities (cost: 2011 - $121; 2010 - $179)						144			197
	Trading securities							2,625			2,596
	Mortgage loans on real estate							6,871			6,752
	Real estate							150			202
	Policy loans							2,877			2,865
	Derivative investments							1,097			1,076
	Other investments							1,001			1,038
			Total investments					86,278			83,340
Cash and invested cash								2,912			2,741
Deferred acquisition costs and value of business acquired								9,271			8,930
Premiums and fees receivable								370			335
Accrued investment income								994			933
Reinsurance recoverables								6,556			6,527
Goodwill								3,019			3,019
Other assets								3,308			3,369
Separate account assets								88,846			84,630
					Total assets		$	201,554		$	193,824

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future contract benefits							$	17,855		$	17,460
Other contract holder funds								67,864			66,478
Short-term debt								251			351
Long-term debt								5,729			5,399
Reinsurance related embedded derivatives								119			102
Funds withheld reinsurance liabilities								1,107			1,149
Deferred gain on business sold through reinsurance								431			468
Payables for collateral on investments								1,805			1,659
Variable interest entities' liabilities								130			132
Other liabilities								3,831			3,190
Separate account liabilities								88,846			84,630
				Total liabilities				187,968			181,018

Contingencies and Commitments (See Note 9)

Stockholders' Equity
Preferred stock - 10,000,000 shares authorized; Series A - 10,854 and 10,914 shares
	issued and outstanding as of June 30, 2011, and December 31, 2010, respectively							-			-
Common stock - 800,000,000 shares authorized; 308,339,163 and 315,718,554 shares
	issued and outstanding as of June 30, 2011, and December 31, 2010, respectively							7,938			8,124
Retained earnings								4,536			3,934
Accumulated other comprehensive income (loss)								1,112			748
				Total stockholders' equity				13,586			12,806
					Total liabilities and stockholders' equity		$	201,554		$	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				For the Six
							Months Ended				Months Ended
							June 30,				June 30,
							2011		2010		2011		2010
Revenues
Insurance premiums							$	594	$	551	$	1,162	$	1,083
Insurance fees								900		793		1,718		1,581
Net investment income								1,181		1,120		2,372		2,226
Realized gain (loss):
	Total other-than-temporary impairment losses on securities							(45)		(11)		(90)		(88)
	Portion of loss recognized in other comprehensive income							15		-		21		24
		Net other-than-temporary impairment losses on securities
			recognized in earnings					(30)		(11)		(69)		(64)
		Realized gain (loss), excluding other-than-temporary
			impairment losses on securities					17		16		54		43
				Total realized gain (loss)				(13)		5		(15)		(21)
Amortization of deferred gain on business sold through reinsurance								19		19		38		38
Other revenues and fees								123		117		243		225
		Total revenues						2,804		2,605		5,518		5,132
Benefits and Expenses
Interest credited								625		614		1,239		1,232
Benefits								1,028		838		1,862		1,617
Underwriting, acquisition, insurance and other expenses								638		754		1,362		1,467
Interest and debt expense								72		69		144		137
	Total benefits and expenses							2,363		2,275		4,607		4,453
		Income (loss) from continuing operations before taxes						441		330		911		679
		Federal income tax expense (benefit)						116		78		246		171
			Income (loss) from continuing operations					325		252		665		508
			Income (loss) from discontinued operations, net of federal
				income taxes				-		3		-		31
					Net income (loss)			325		255		665		539
					Preferred stock dividends and accretion of discount			-		(149)		-		(168)
						Net income (loss) available to common stockholders	$	325	$	106	$	665	$	371

Earnings (Loss) Per Common Share - Basic
Income (loss) from continuing operations							$	1.04	$	0.34	$	2.12	$	1.12
Income (loss) from discontinued operations								-		0.01		-		0.10
	Net income (loss)						$	1.04	$	0.35	$	2.12	$	1.22

Earnings (Loss) Per Common Share - Diluted
Income (loss) from continuing operations							$	1.01	$	0.32	$	2.07	$	1.08
Income (loss) from discontinued operations								-		0.01		-		0.10
	Net income (loss)						$	1.01	$	0.33	$	2.07	$	1.18

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in millions, except per share data)

			For the Six
			Months Ended
			June 30,
			2011		2010
Preferred Stock
Balance as of beginning-of-year			$	-	$	806
Issuance (redemption) of Series B preferred stock				-		(950)
Accretion of discount on Series B preferred stock				-		144
	Balance as of end-of-period			-		-

Common Stock
Balance as of beginning-of-year				8,124		7,840
Issuance of common stock				-		368
Stock compensation/issued for benefit plans				9		9
Effect of amendment to deferred compensation plans				-		(29)
Retirement of common stock/cancellation of shares				(195)		-
	Balance as of end-of-period			7,938		8,188

Retained Earnings
Balance as of beginning-of-year				3,934		3,316
Cumulative effect from adoption of new accounting standards				-		(169)
Comprehensive income (loss)				1,029		1,558
Less other comprehensive income (loss), net of tax				364		1,019
	Net income (loss)			665		539
Retirement of common stock				(31)		-
Dividends declared: Common (2011 - $0.100; 2010 - $0.020)				(32)		(6)
Dividends on preferred stock				-		(24)
Accretion of discount on Series B preferred stock				-		(144)
	Balance as of end-of-period			4,536		3,512

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				364		1,019
	Balance as of end-of-period			1,112		938
		Total stockholders' equity as of end-of-period	$	13,586	$	12,638

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)

			For the Six
			Months Ended
			June 30,
			2011		2010
Cash Flows from Operating Activities
Net income (loss)			$	665	$	539
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		(296)		(86)
	Trading securities purchases, sales and maturities, net			26		31
	Change in premiums and fees receivable			(35)		4
	Change in accrued investment income			(61)		(56)
	Change in future contract benefits and other contract holder funds			371		604
	Change in reinsurance related assets and liabilities			(72)		(253)
	Change in federal income tax accruals			322		202
	Realized (gain) loss			15		21
	Amortization of deferred gain on business sold through reinsurance			(38)		(38)
	(Gain) loss on disposal of discontinued operations			-		(64)
	Other			(19)		(31)
		Net cash provided by (used in) operating activities		878		873

Cash Flows from Investing Activities
Purchases of available-for-sale securities				(5,901)		(7,474)
Sales of available-for-sale securities				1,042		2,057
Maturities of available-for-sale securities				2,857		1,925
Purchases of other investments				(1,701)		(1,245)
Sales or maturities of other investments				1,527		1,443
Increase (decrease) in payables for collateral on investments				146		469
Proceeds from sale of subsidiaries/businesses, net of cash disposed				-		321
Other				(42)		(29)
		Net cash provided by (used in) investing activities		(2,072)		(2,533)

Cash Flows from Financing Activities
Payment of long-term debt, including current maturities				-		(250)
Issuance of long-term debt, net of issuance costs				298		749
Increase (decrease) in commercial paper, net				(100)		(1)
Deposits of fixed account values, including the fixed portion of variable				5,335		5,132
Withdrawals of fixed account values, including the fixed portion of variable				(2,515)		(2,483)
Transfers to and from separate accounts, net				(1,391)		(1,353)
Common stock issued for benefit plans and excess tax benefits				(5)		-
Issuance (redemption) of Series B preferred stock				-		(950)
Issuance of common stock				-		368
Repurchase of common stock				(226)		-
Dividends paid to common and preferred stockholders				(31)		(36)
		Net cash provided by (used in) financing activities		1,365		1,176

Net increase (decrease) in cash and invested cash, including discontinued operations				171		(484)
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		$	2,912	$	3,700

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 six month period ended June 30, 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 June 30, 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 June 30, 2011.

Future Adoption of New Accounting Standards

Comprehensive Income Topic

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), with an objective of increasing the prominence of items reported in other comprehensive income (“OCI”). The amendments in ASU 2011-05 provide entities with the option to present the total of comprehensive income, the components of net income and the components of OCI in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, entities must present on the face of the financial statement, items reclassified from OCI to net income in the section of the financial statement where the components of net income and OCI are presented, regardless of the option selected to present comprehensive income. ASU 2011-05 is applicable retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early adoption is permitted. We will adopt the provisions of ASU 2011-05 effective January 1, 2012, and are currently evaluating our options for the presentation of comprehensive income upon adoption.

Fair Value Measurements and Disclosures Topic

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards” (“ASU 2011-04”), which was issued to create a consistent framework for the application of fair value measurement across jurisdictions. The amendments include wording changes to GAAP in order to clarify the FASB’s intent about the application of existing fair value measurements and disclosure requirements, as well as to change a particular principle or existing requirement for measuring fair value or disclosing information about fair value measurements. There are no additional fair value measurements required upon the adoption of ASU 2011-04. The amendments are effective, prospectively, for interim and annual reporting periods beginning after December 15, 2011. Early adoption is prohibited. We will adopt the provisions of ASU 2011-04 effective January 1, 2012, and are currently evaluating the effect of adoption on our consolidated financial condition and results of operations.

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 do not expect the adoption will have a material effect 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 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		For the
				Three		Six
				Months		Months
				Ended		Ended
				June 30,		June 30,
				2010		2010
Discontinued Operations Before Disposal
Revenues - gain (loss) on sale of business				$	4	$	4

Income (loss) from discontinued operations before disposal,
	before federal income taxes			$	4	$	(13)
Federal income tax expense (benefit)					1		(2)
		Income (loss) from discontinued operations before disposal			3		(11)

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	$	3	$	13

The income (loss) from discontinued operations for the three and six months ended June 30, 2010, included final cash received toward the purchase price for certain institutional taxable fixed income business sold during the fourth quarter 2007. The income (loss) from discontinued operations for the six months ended June 30, 2010, also 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, 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		For the
			Three		Six
			Months		Months
			Ended		Ended
			June 30,		June 30,
			2010		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 six months ended June 30, 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 affecting 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 June 30, 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	$	-	$	593		N/A	$	-	$	584

Liabilities
Derivative instruments not designated
	and not qualifying as hedging
	instruments:
		Credit default swaps (2)					2	$	600	$	202		2	$	600	$	215
		Contingent forwards (2)					2		-		(3)		2		-		(6)
			Total derivative instruments not
				designated and not qualifying
				as hedging instruments			4		600		199		4		600		209
Federal income tax (2)							N/A		-		(69)		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				For the Six
			Months Ended				Months Ended
			June 30,				June 30,
			2011		2010		2011		2010
Derivative Instruments Not Designated and
	Not Qualifying as Hedging Instruments
Credit default swaps (1)			$	6	$	(70)	$	13	$	(69)
Contingent forwards (1)				(1)		2		(3)		(3)
	Total derivative instruments not designated and
		not qualifying as hedging instruments	$	5	$	(68)	$	10	$	(72)

(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 June 30, 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-Caa1
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 June 30, 2011.

As described more fully in Note 1 of our 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 June 30, 2011.

The following summarizes the exposure of the CLN structures’ underlying collateral by industry and rating as of June 30, 2011:


Industry			AAA		AA		A		BBB		BB		B		CCC		Total
Telecommunications			-	%	-	%	6.4	%	4.3	%	0.5	%	-	%	-	%	11.2	%
Financial intermediaries			0.3	%	4.0	%	6.2	%	0.5	%	-	%	-	%	-	%	11.0	%
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	%	1.8	%	0.5	%	-	%	-	%	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%
	(27 industries)		-	%	2.0	%	15.4	%	17.3	%	3.7	%	1.4	%	0.3	%	40.1	%
		Total	0.6	%	12.8	%	43.9	%	34.6	%	6.4	%	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 June 30, 2011
				Amortized		Gross Unrealized						Fair
				Cost		Gains		Losses		OTTI		Value
Fixed Maturity Securities
Corporate bonds				$	51,639	$	3,802	$	541	$	70	$	54,830
U.S. Government bonds					224		18		2		-		240
Foreign government bonds					551		43		-		-		594
MBS:
	CMOs				5,248		334		66		137		5,379
	MPTS				3,028		124		3		-		3,149
	CMBS				1,819		89		100		2		1,806
ABS CDOs					137		5		16		-		126
State and municipal bonds					3,370		137		28		-		3,479
Hybrid and redeemable preferred securities					1,357		67		107		-		1,317
VIEs' fixed maturity securities					572		21		-		-		593
		Total fixed maturity securities			67,945		4,640		863		209		71,513

Equity Securities
Banking securities					2		-		-		-		2
Insurance securities					29		4		-		-		33
Other financial services securities					17		14		-		-		31
Other securities					73		7		2		-		78
		Total equity securities			121		25		2		-		144
			Total AFS securities	$	68,066	$	4,665	$	865	$