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 March 31, 2012

¨	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. (Check one):

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 April 30, 2012, there were 285,414,653 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		40
		Forward-Looking Statements – Cautionary Language	40
		Introduction	41
		Executive Summary	41
		Critical Accounting Policies and Estimates	42
		Acquisitions and Dispositions	44
		Results of Consolidated Operations	45
		Results of Annuities	46
		Results of Retirement Plan Services	51
		Results of Life Insurance	57
		Results of Group Protection	64
		Results of Other Operations	67
		Realized Gain (Loss) and Benefit Ratio Unlocking	69
		Consolidated Investments	71
		Review of Consolidated Financial Condition	85
		Liquidity and Capital Resources	85
		Other Matters	88
		Other Factors Affecting Our Business	88
		Recent Accounting Pronouncements	88

3.	Quantitative and Qualitative Disclosures About Market Risk		88

4.	Controls and Procedures		91

PART II

1.	Legal Proceedings		92

2.	Unregistered Sales of Equity Securities and Use of Proceeds		92

6.	Exhibits		92

	Signatures		93

	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,
							2012			2011
						(Unaudited)
ASSETS
Investments:
	Available-for-sale securities, at fair value:
		Fixed maturity securities (amortized cost: 2012 - $69,889; 2011 - $68,988)					$	76,254		$	75,433
		Variable interest entities' fixed maturity securities (amortized cost: 2012 - $674; 2011 - $673)						702			700
		Equity securities (cost: 2012 - $114; 2011 - $135)						126			139
	Trading securities							2,650			2,675
	Mortgage loans on real estate							6,938			6,942
	Real estate							113			137
	Policy loans							2,842			2,884
	Derivative investments							2,244			3,151
	Other investments							1,043			1,069
			Total investments					92,912			93,130
Cash and invested cash								3,516			4,510
Deferred acquisition costs and value of business acquired								6,880			6,776
Premiums and fees receivable								437			408
Accrued investment income								1,026			981
Reinsurance recoverables								6,534			6,526
Funds withheld reinsurance assets								866			874
Goodwill								2,273			2,273
Other assets								2,486			2,536
Separate account assets								91,088			83,477
					Total assets		$	208,018		$	201,491

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future contract benefits							$	18,784		$	19,813
Other contract holder funds								70,027			69,466
Short-term debt								300			300
Long-term debt								5,606			5,391
Reinsurance related embedded derivatives								158			168
Funds withheld reinsurance liabilities								1,043			1,045
Deferred gain on business sold through reinsurance								375			394
Payables for collateral on investments								2,875			3,733
Variable interest entities' liabilities								149			193
Other liabilities								4,352			4,273
Separate account liabilities								91,088			83,477
				Total liabilities				194,757			188,253

Contingencies and Commitments (See Note 8)

Stockholders' Equity
Preferred stock - 10,000,000 shares authorized; Series A - 9,632 and 10,072 shares
	issued and outstanding as of March 31, 2012, and December 31, 2011, respectively							-			-
Common stock - 800,000,000 shares authorized; 285,412,303 and 291,319,222 shares
	issued and outstanding as of March 31, 2012, and December 31, 2011, respectively							7,448			7,590
Retained earnings								3,191			2,969
Accumulated other comprehensive income (loss)								2,622			2,679
				Total stockholders' equity				13,261			13,238
					Total liabilities and stockholders' equity		$	208,018		$	201,491

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in millions, except per share data)

	For the Three
	Months Ended
	March 31,
	2012			2011
Revenues
Insurance premiums	$	589		$	568
Insurance fees		907			818
Net investment income		1,166			1,191
Realized gain (loss):
Total other-than-temporary impairment losses on securities		(97	)		(44	)
Portion of loss recognized in other comprehensive income		50			3
Net other-than-temporary impairment losses on securities
recognized in earnings		(47	)		(41	)
Realized gain (loss), excluding other-than-temporary
impairment losses on securities		(38	)		43
Total realized gain (loss)		(85	)		2
Amortization of deferred gain on business sold through reinsurance		19			19
Other revenues and fees		118			120
Total revenues		2,714			2,718
Benefits and Expenses
Interest credited		625			614
Benefits		858			835
Underwriting, acquisition, insurance and other expenses		856			768
Interest and debt expense		68			72
Total benefits and expenses		2,407			2,289
Income (loss) from continuing operations before taxes		307			429
Federal income tax expense (benefit)		61			115
Income (loss) from continuing operations		246			314
Income (loss) from discontinued operations, net of federal
income taxes		(1	)		-
Net income (loss)		245			314
Other comprehensive income (loss), net of tax		(57	)		22
Comprehensive income (loss)	$	188		$	336

Earnings (Loss) Per Common Share - Basic
Income (loss) from continuing operations	$	0.85		$	1.00
Income (loss) from discontinued operations		-			-
Net income (loss)	$	0.85		$	1.00

Earnings (Loss) Per Common Share - Diluted
Income (loss) from continuing operations	$	0.83		$	0.97
Income (loss) from discontinued operations		-			-
Net income (loss)	$	0.83		$	0.97

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,
	2012			2011
Common Stock
Balance as of beginning-of-year	$	7,590		$	8,124
Stock compensation/issued for benefit plans		8			2
Retirement of common stock/cancellation of shares		(150	)		(62	)
Balance as of end-of-period		7,448			8,064

Retained Earnings
Balance as of beginning-of-year		2,969			3,933
Cumulative effect from adoption of new accounting standards		-			(1,095	)
Net income (loss)		245			314
Retirement of common stock		-			(13	)
Dividends declared: Common (2012 - $0.080; 2011 - $0.050)		(23	)		(17	)
Balance as of end-of-period		3,191			3,122

Accumulated Other Comprehensive Income (Loss)
Balance as of beginning-of-year		2,679			748
Cumulative effect from adoption of new accounting standards		-			103
Other comprehensive income (loss), net of tax		(57	)		22
Balance as of end-of-period		2,622			873
Total stockholders' equity as of end-of-period	$	13,261		$	12,059

See accompanying Notes to Consolidated Financial Statements

	For the Three
	Months Ended
	March 31,
	2012			2011
Cash Flows from Operating Activities
Net income (loss)	$	245		$	314
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		(44	)		(31	)
Trading securities purchases, sales and maturities, net		15			5
Change in premiums and fees receivable		(29	)		(66	)
Change in accrued investment income		(45	)		(56	)
Change in future contract benefits and other contract holder funds		(144	)		124
Change in reinsurance related assets and liabilities		(2	)		(67	)
Change in federal income tax accruals		185			131
Realized (gain) loss		85			(2	)
Amortization of deferred gain on business sold through reinsurance		(19	)		(19	)
(Gain) loss on disposal of discontinued operations		1			-
Other		34			7
Net cash provided by (used in) operating activities		282			340

Cash Flows from Investing Activities
Purchases of available-for-sale securities		(2,497	)		(3,111	)
Sales of available-for-sale securities		185			556
Maturities of available-for-sale securities		1,341			1,431
Purchases of other investments		(830	)		(855	)
Sales or maturities of other investments		780			740
Increase (decrease) in payables for collateral on investments		(858	)		(105	)
Other		(34	)		(23	)
Net cash provided by (used in) investing activities		(1,913	)		(1,367	)

Cash Flows from Financing Activities
Issuance of long-term debt, net of issuance costs		298			-
Deposits of fixed account values, including the fixed portion of variable		2,391			2,570
Withdrawals of fixed account values, including the fixed portion of variable		(1,320	)		(1,200	)
Transfers to and from separate accounts, net		(556	)		(772	)
Common stock issued for benefit plans and excess tax benefits		(3	)		(5	)
Repurchase of common stock		(150	)		(75	)
Dividends paid to common and preferred stockholders		(23	)		(16	)
Net cash provided by (used in) financing activities		637			502

Net increase (decrease) in cash and invested cash, including discontinued operations		(994	)		(525	)
Cash and invested cash, including discontinued operations, as of beginning-of-year		4,510			2,741
Cash and invested cash, including discontinued operations, as of end-of-period	$	3,516		$	2,216

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 13 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, 2011 (“2011 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 2011 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, 2012, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012. All material intercompany accounts and transactions have been eliminated in consolidation.

See Note 2 “Financial Services – Insurance Industry Topic” below for information about the retrospective restatement of amounts due to the adoption of new accounting guidance. In addition, 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

Comprehensive Income Topic

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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”); however, in December 2011, the FASB deferred a portion of the presentation requirements by issuing ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011- 12”). For a more detailed description of ASU 2011-05 and ASU 2011-12, see “Future Adoption of New Accounting Standards – Comprehensive Income Topic” in Note 2 of our 2011 Form 10-K. We adopted the provisions of ASU 2011-05 as of January 1, 2012, after considering the deferral in ASU 2011-12, and have included a single continuous statement of comprehensive income in Item 1 of this quarterly report on Form 10-Q for the quarterly period ended March 31, 2012.

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. For a more detailed description of ASU 2011-04 see “Future Adoption of New Accounting Standards – Fair Value Measurements and Disclosures Topic” in Note 2 of our 2011 Form 10-K. We adopted the provisions of ASU 2011-04 effective January 1, 2012, and have included the additional disclosures required for fair value measurements in Note 12 for the quarterly period ended March 31, 2012.

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. Only those costs incurred that result directly from and are essential to the successful acquisition of new or renewal insurance contracts may be capitalized as deferrable acquisition costs. The determination of deferability must be made on a contract-level basis.

Prior to the adoption of ASU 2010-26, we defined deferred acquisition costs (“DAC”) as commissions and other costs of acquiring UL insurance, VUL insurance, traditional life insurance, annuities and other investments contracts that vary with and are related primarily to new or renewal business, regardless of whether the acquisition efforts were successful or unsuccessful. Upon the adoption of ASU 2010-26, we revised our accounting policy to only defer acquisition costs directly related to successful contract acquisitions or renewals, and excluded from DAC those costs incurred for soliciting potential customers, market research, training, administration, management of distribution and underwriting functions, unsuccessful acquisition or renewal efforts and product development. In addition, indirect acquisition costs including administrative costs, rent, depreciation, occupancy costs, equipment costs and other general overhead are excluded from DAC. The costs that are considered non-deferrable acquisition costs under ASU 2010-26 are expensed in the period incurred.

We adopted the provisions of ASU 2010-26 as of January 1, 2012, and elected to retrospectively restate all prior periods. The following summarizes the prior period increases (decreases) (in millions) reflected in our Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity related to the adoption:

	As of December 31,
	2011			2010
Assets
Deferred acquisition costs	$	(1,415	)	$	(1,516	)

Liabilities and Stockholders' Equity
Other liabilities - deferred income taxes	$	(490	)	$	(524	)

Stockholders' equity:
Retained earnings		(1,157	)		(1,095	)
Accumulated other comprehensive income (loss)		232			103
Total stockholders' equity		(925	)		(992	)
Total liabilities and stockholders' equity	$	(1,415	)	$	(1,516	)

The following summarizes the prior period increases (decreases) to income from continuing operations and earnings (loss) per share (“EPS”) (in millions, except per share data) reflected in our Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2011, related to the adoption:

Revenues
Realized gain (loss)	$	4

Expenses
Underwriting, acquisition, insurance and other expenses		(43	)
Income (loss) from continuing operations before taxes		(39	)
Federal income tax expense (benefit)		14
Income (loss) from continuing operations	$	(25	)

Earnings (Loss) Per Common Share - Basic	$	(0.08	)

Earnings (Loss) Per Common Share - Diluted	$	(0.08	)

Intangibles – Goodwill and Other Topic

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”), which provides an option to first assess qualitative factors to determine if it is necessary to complete the two-step goodwill impairment test. For a more detailed description of ASU 2011-08, see “Future Adoption of New Accounting Standards – Intangibles – Goodwill and Other Topic” in Note 2 of our 2011 Form 10-K. We adopted the provisions of ASU 2011-08 effective January 1, 2012. The adoption did not have a material effect 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. For a more detailed description of ASU 2011-03, see “Future Adoption of New Accounting Standards – Transfers and Servicing Topic” in Note 2 of our 2011 Form 10-K. We adopted the provisions of ASU 2011-03 effective January 1, 2012. The adoption did not have a material effect on our consolidated financial condition and results of operations.

Future Adoption of New Accounting Standards

Balance Sheet Topic

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), to address certain comparability issues between financial statements prepared in accordance with GAAP and those prepared in accordance with International Financial Reporting Standards. For a more detailed description of ASU 2011-11, see “Future Adoption of New Accounting Standards – Balance Sheet Topic” in Note 2 of our 2011 Form 10-K. We will adopt the disclosure requirements in ASU 2011-11 beginning with our first quarter 2013 financial statements and are currently evaluating the appropriate location for these disclosures in the notes to our financial statements.

3. Variable Interest Entities (“VIEs”)

Consolidated VIEs

See Note 4 in our 2011 Form 10-K for a detailed discussion of our consolidated VIEs, which information is incorporated herein by reference.

The following summarizes information regarding the credit-linked note (“CLN”) structures (dollars in millions) as of March 31, 2012:

	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

The following summarizes the exposure of the CLN structures’ underlying collateral by industry and rating as of March 31, 2012:


	AAA		AA		A		BBB		BB		B		CCC		Total
Industry
Telecommunications	-	%	0.3	%	5.1	%	4.8	%	0.3	%	0.5	%	-	%	11.0	%
Financial intermediaries	0.3	%	2.8	%	6.9	%	0.5	%	-	%	-	%	-	%	10.5	%
Oil and gas	-	%	0.7	%	1.0	%	4.6	%	-	%	-	%	-	%	6.3	%
Utilities	-	%	-	%	2.6	%	2.0	%	-	%	-	%	-	%	4.6	%
Chemicals and plastics	-	%	-	%	2.3	%	1.2	%	0.3	%	-	%	-	%	3.8	%
Drugs	0.3	%	2.7	%	0.7	%	-	%	-	%	-	%	-	%	3.7	%
Retailers (except food and drug)	-	%	-	%	2.1	%	0.9	%	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	-	%	2.5	%	15.5	%	17.8	%	3.2	%	1.4	%	0.3	%	40.7	%
Total	0.6	%	12.6	%	43.1	%	35.8	%	5.7	%	1.9	%	0.3	%	100.0	%

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

	As of March 31, 2012							As of December 31, 2011
	Number							Number
	of		Notional		Carrying			of		Notional		Carrying
	Instruments		Amounts		Value			Instruments		Amounts		Value
Assets
Fixed maturity securities:
Asset-backed credit card loan		N/A	$	-	$	596			N/A	$	-	$	592
U.S. Government bonds		N/A		-		106			N/A		-		108
Excess mortality swap		1		100		-			1		100		-
Total assets (1)		1	$	100	$	702			1	$	100	$	700

Liabilities
Non-qualifying hedges:
Credit default swaps		2	$	600	$	224			2	$	600	$	295
Contingent forwards		2		-		(3	)		2		-		(4	)
Total non-qualifying hedges		4		600		221			4		600		291
Federal income tax		N/A		-		(72	)		N/A		-		(98	)
Total liabilities (2)		4	$	600	$	149			4	$	600	$	193

(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 4.

As described more fully in Note 1 of our 2011 Form 10-K, we regularly review our investment holdings for other-than-temporary impairment (“OTTI”). Based upon this review, we believe that the fixed maturity securities were not other-than-temporarily impaired as of March 31, 2012.

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

	For the Three
	Months Ended
	March 31,
	2012			2011
Non-Qualifying Hedges
Credit default swaps	$	71		$	8
Contingent forwards		(2	)		(2	)
Total non-qualifying hedges (1)	$	69		$	6

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

Unconsolidated VIEs

See Note 4 in our 2011 Form 10-K for a detailed discussion of our unconsolidated VIEs, which information is incorporated herein by reference.

4. 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 2011 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, 2012
	Amortized		Gross Unrealized						Fair
	Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
Corporate bonds	$	55,255	$	5,854	$	407	$	103	$	60,599
U.S. Government bonds		450		41		5		-		486
Foreign government bonds		585		65		-		-		650
Residential mortgage-backed securities ("RMBS")		7,196		524		48		100		7,572
Commercial mortgage-backed securities ("CMBS")		1,533		76		67		19		1,523
Collateralized debt obligations ("CDOs")		117		-		15		-		102
State and municipal bonds		3,497		637		8		-		4,126
Hybrid and redeemable preferred securities		1,256		62		122		-		1,196
VIEs' fixed maturity securities		674		28		-		-		702
Total fixed maturity securities		70,563		7,287		672		222		76,956
Equity securities		114		19		7		-		126
Total AFS securities	$	70,677	$	7,306	$	679	$	222	$	77,082

	As of December 31, 2011
	Amortized		Gross Unrealized						Fair
	Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
Corporate bonds	$	53,661	$	6,185	$	517	$	68	$	59,261
U.S. Government bonds		439		55		-		-		494
Foreign government bonds		668		65		-		-		733
RMBS		7,690		548		73		126		8,039
CMBS		1,642		73		106		9		1,600
CDOs		121		-		19		-		102
State and municipal bonds		3,490		566		9		-		4,047
Hybrid and redeemable preferred securities		1,277		50		170		-		1,157
VIEs' fixed maturity securities		673		27		-		-		700
Total fixed maturity securities		69,661		7,569		894		203		76,133
Equity securities		135		16		12		-		139
Total AFS securities	$	69,796	$	7,585	$	906	$	203	$	76,272

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

	As of March 31, 2012
	Amortized		Fair
	Cost		Value
Due in one year or less	$	2,854	$	2,914
Due after one year through five years		12,020		12,955
Due after five years through ten years		22,816		25,040
Due after ten years		24,027		26,850
Subtotal		61,717		67,759
Mortgage-backed securities ("MBS")		8,729		9,095
CDOs		117		102
Total fixed maturity AFS securities	$	70,563	$	76,956

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

	As of March 31, 2012
	Less Than or Equal					Greater Than
	to Twelve Months					Twelve Months				Total
				Gross				Gross				Gross
				Unrealized				Unrealized				Unrealized
	Fair			Losses and		Fair		Losses and		Fair		Losses and
	Value			OTTI		Value		OTTI		Value		OTTI
Fixed maturity securities:
Corporate bonds		$	3,186	$	194	$	1,335	$	316	$	4,521	$	510
U.S. Government bonds			213		5		1		-		214		5
RMBS			572		99		351		49		923		148
CMBS			119		22		130		64		249		86
CDOs			3		1		75		14		78		15
State and municipal bonds			2		-		26		8		28		8
Hybrid and redeemable preferred securities			159		6		370		116		529		122
Total fixed maturity securities			4,254		327		2,288		567		6,542		894
Equity securities			12		7		-		-		12		7
Total AFS securities		$	4,266	$	334	$	2,288	$	567	$	6,554	$	901

Total number of AFS securities in an unrealized loss position													828

	As of December 31, 2011
	Less Than or Equal				Greater Than
	to Twelve Months				Twelve Months				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair		Losses and		Fair		Losses and		Fair		Losses and
	Value		OTTI		Value		OTTI		Value		OTTI
Fixed maturity securities:
Corporate bonds	$	2,848	$	162	$	1,452	$	423	$	4,300	$	585
RMBS		565		125		429		74		994		199
CMBS		178		15		146		100		324		115
CDOs		9		1		80		18		89		19
State and municipal bonds		31		-		30		9		61		9
Hybrid and redeemable preferred securities		324		23		353		147		677		170
Total fixed maturity securities		3,955		326		2,490		771		6,445		1,097
Equity securities		38		12		-		-		38		12
Total AFS securities	$	3,993	$	338	$	2,490	$	771	$	6,483	$	1,109

Total number of AFS securities in an unrealized loss position												897

For information regarding our investments in VIEs, see Note 3.

We perform detailed analysis on the AFS securities backed by pools of residential and commercial mortgages that are most at risk of impairment based on factors discussed in Note 1 in our 2011 Form 10-K. Selected information for these securities in a gross unrealized loss position (in millions) was as follows:

	As of March 31, 2012
	Amortized		Fair		Unrealized
	Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages	$	1,875	$	1,480	$	395
AFS securities backed by pools of commercial mortgages		367		270		97
Total	$	2,242	$	1,750	$	492

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages	$	1,862	$	1,467	$	395
AFS securities backed by pools of commercial mortgages		109		59		50
Total	$	1,971	$	1,526	$	445

	As of December 31, 2011
	Amortized		Fair		Unrealized
	Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages	$	2,023	$	1,553	$	470
AFS securities backed by pools of commercial mortgages		472		344		128
Total	$	2,495	$	1,897	$	598

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages	$	2,015	$	1,545	$	470
AFS securities backed by pools of commercial mortgages		126		61		65
Total	$	2,141	$	1,606	$	535

For the three months ended March 31, 2012 and 2011, we recorded OTTI for AFS securities backed by pools of residential and commercial mortgages of $21 million, pre-tax, and before associated amortization expense for DAC, value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”), of which $(21) million and $(26) million, respectively, was recognized in OCI and $42 million and $47 million, respectively, was recognized in net income (loss).

The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:

	As of March 31, 2012
							Number
	Fair		Gross Unrealized				of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	81	$	32	$	3		23
Six months or greater, but less than nine months		111		42		14		19
Nine months or greater, but less than twelve months		50		17		14		16
Twelve months or greater		579		343		151		166
Total	$	821	$	434	$	182		224

	As of December 31, 2011
							Number
	Fair		Gross Unrealized				of
	Value		Losses		OTTI		Securities (1)
Less than six months	$	385	$	125	$	31	56
Six months or greater, but less than nine months		53		30		12	18
Nine months or greater, but less than twelve months		2		-		1	7
Twelve months or greater		615		470		111	175
Total	$	1,055	$	625	$	155	256

(1)	We may reflect a security in more than one aging category based on various purchase dates.

We regularly review our investment holdings for OTTI. Our gross unrealized losses on AFS securities decreased $208 million for the three months ended March 31, 2012. As discussed further below, we believe the unrealized loss position as of March 31, 2012, did not represent OTTI as we did not intend to sell these fixed maturity AFS securities, it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis, the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities, or we had the ability and intent to hold the equity AFS securities for a period of time sufficient for recovery.

Based upon this evaluation as of March 31, 2012, management believed we had the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums and fees and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our temporarily-impaired securities.

As of March 31, 2012, the unrealized losses associated with our corporate bond securities were attributable primarily to securities that were backed by commercial loans and individual issuer companies. For our corporate bond securities with commercial loans as the underlying collateral, we evaluated the projected credit losses in the underlying collateral and concluded that we had sufficient subordination or other credit enhancement when compared with our estimate of credit losses for the individual security and we expected to recover the entire amortized cost for each security. For individual issuers, we performed detailed analysis of the financial performance of the issuer and determined that we expected to recover the entire amortized cost for each security.

As of March 31, 2012, the unrealized losses associated with our MBS and CDOs were attributable primarily to collateral losses and credit spreads. We assessed for credit impairment using a cash flow model as discussed above. The key assumptions included default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost basis of each security.

As of March 31, 2012, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of specific issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the issuer based upon credit performance and investment ratings and determined we expected to recover the entire amortized cost of each security.

Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:

	For the Three
	Months Ended
	March 31,
	2012			2011
Balance as of beginning-of-period	$	390		$	319
Increases attributable to:
Credit losses on securities for which an OTTI was not previously recognized		34			25
Credit losses on securities for which an OTTI was previously recognized		23			22
Decreases attributable to:
Securities sold		(37	)		(14	)
Balance as of end-of-period	$	410		$	352

During the three months ended March 31, 2012 and 2011, we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security. The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons:

·	Failure of the issuer of the security to make scheduled payments;

·	Deterioration of creditworthiness of the issuer;

·	Deterioration of conditions specifically related to the security;

·	Deterioration of fundamentals of the industry in which the issuer operates;

·	Deterioration of fundamentals in the economy including, but not limited to, higher unemployment and lower housing prices; and

·	Deterioration of the rating of the security by a rating agency.

We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on AFS securities.

Details of the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions), were as follows:

	As of March 31, 2012
			Gross Unrealized						OTTI in
	Amortized				Losses and		Fair		Credit
	Cost		Gains		OTTI		Value		Losses
Corporate bonds	$	242	$	1	$	100	$	143	$	63
RMBS		688		4		100		592		290
CMBS		39		-		19		20		57
Total	$	969	$	5	$	219	$	755	$	410

	As of December 31, 2011
			Gross Unrealized						OTTI in
	Amortized				Losses and		Fair		Credit
	Cost		Gains		OTTI		Value		Losses
Corporate bonds	$	169	$	1	$	67	$	103	$	51
RMBS		690		1		128		563		301
CMBS		17		-		10		7		38
Total	$	876	$	2	$	205	$	673	$	390

Mortgage Loans on Real Estate

Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the U.S. with the largest concentrations in California and Texas, which accounted for approximately 32% of mortgage loans on real estate as of March 31, 2012, and December 31, 2011.

The following provides the current and past due composition of our mortgage loans on real estate (in millions):

	As of			As of
	March 31,			December 31,
	2012			2011
Current	$	6,853		$	6,858
60 to 90 days past due		-			26
Greater than 90 days past due		99			76
Valuation allowance associated with impaired mortgage loans on real estate		(27	)		(31	)
Unamortized premium (discount)		13			13
Total carrying value	$	6,938		$	6,942

The number of impaired mortgage loans on real estate, each of which had an associated specific valuation allowance, and the carrying value of impaired mortgage loans on real estate (dollars in millions) were as follows:

		As of			As of
	March 31,				December 31,
		2012			2011
Number of impaired mortgage loans on real estate		10			12

Principal balance of impaired mortgage loans on real estate		$	85		$	100
Valuation allowance associated with impaired mortgage loans on real estate			(27	)		(31	)
Carrying value of impaired mortgage loans on real estate		$	58		$	69

The average carrying value on the impaired mortgage loans on real estate (in millions) was as follows:

	For the Three
	Months Ended
	March 31,
	2012		2011
Average carrying value for impaired mortgage loans on real estate	$	64	$	55
Interest income recognized on impaired mortgage loans on real estate		-		1
Interest income collected on impaired mortgage loans on real estate		-		1

As described in Note 1 in our 2011 Form 10-K, we use the loan-to-value and debt-service coverage ratios as credit quality indicators for our mortgage loans, which were as follows (dollars in millions):

	As of March 31, 2012							As of December 31, 2011
						Debt-						Debt-
						Service						Service
	Principal			% of		Coverage		Principal		% of		Coverage
Loan-to-Value	Amount			Total		Ratio		Amount		Total		Ratio
Less than 65%		$	5,419	77.9	%		1.62	$	5,338	76.7	%		1.61
65% to 74%			1,121	16.1	%		1.39		1,198	17.2	%		1.37
75% to 100%			311	4.5	%		0.90		308	4.4	%		0.92
Greater than 100%			101	1.5	%		0.37		116	1.7	%		0.36
Total mortgage loans on real estate		$	6,952	100.0	%			$	6,960	100.0	%

Alternative Investments

As of March 31, 2012, and December 31, 2011, alternative investments included investments in approximately 97 and 96 different partnerships, respectively, and the portfolio represented less than 1% of our overall invested assets.

Realized Gain (Loss) Related to Certain Investments

The detail of the realized gain (loss) related to certain investments (in millions) was as follows:

	For the Three
	Months Ended
	March 31,
	2012		2011
Fixed maturity AFS securities:
Gross gains	$	5	$	36
Gross losses <