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 September 30, 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 November 5, 2012, there were 275,015,830 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		48
		Forward-Looking Statements – Cautionary Language	48
		Introduction	49
		Executive Summary	49
		Critical Accounting Policies and Estimates	50
		Acquisitions and Dispositions	53
		Results of Consolidated Operations	53
		Results of Annuities	55
		Results of Retirement Plan Services	61
		Results of Life Insurance	67
		Results of Group Protection	74
		Results of Other Operations	77
		Realized Gain (Loss) and Benefit Ratio Unlocking	79
		Consolidated Investments	81
		Review of Consolidated Financial Condition	96
		Liquidity and Capital Resources	96
		Other Matters	100
		Other Factors Affecting Our Business	100
		Recent Accounting Pronouncements	100

3.	Quantitative and Qualitative Disclosures About Market Risk		100

4.	Controls and Procedures		104

PART II

1.	Legal Proceedings		104

1A.	Risk Factors		104

2.	Unregistered Sales of Equity Securities and Use of Proceeds		105

6.	Exhibits		105

	Signatures		106

	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
						September 30,		December 31,
						2012		2011
						(Unaudited)
ASSETS
Investments:
	Available-for-sale securities, at fair value:
		Fixed maturity securities (amortized cost: 2012 - $71,778; 2011 - $68,988)				$	81,179	$	75,433
		Variable interest entities' fixed maturity securities (amortized cost: 2012 - $676; 2011 - $673)					706		700
		Equity securities (cost: 2012 - $143; 2011 - $135)					156		139
	Trading securities						2,650		2,675
	Mortgage loans on real estate						6,690		6,942
	Real estate						112		137
	Policy loans						2,780		2,884
	Derivative investments						3,072		3,151
	Other investments						1,123		1,069
			Total investments				98,468		93,130
Cash and invested cash							4,373		4,510
Deferred acquisition costs and value of business acquired							5,813		6,776
Premiums and fees receivable							366		408
Accrued investment income							1,067		981
Reinsurance recoverables							6,424		6,526
Funds withheld reinsurance assets							846		874
Goodwill							2,273		2,273
Other assets							2,502		2,536
Separate account assets							93,326		83,477
				Total assets		$	215,458	$	201,491

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future contract benefits						$	19,232	$	19,813
Other contract holder funds							70,706		69,466
Short-term debt							200		300
Long-term debt							5,494		5,391
Reinsurance related embedded derivatives							215		168
Funds withheld reinsurance liabilities							987		1,045
Deferred gain on business sold through reinsurance							338		394
Payables for collateral on investments							4,566		3,733
Variable interest entities' liabilities							121		193
Other liabilities							5,036		4,273
Separate account liabilities							93,326		83,477
				Total liabilities			200,221		188,253

Contingencies and Commitments (See Note 9)

Stockholders' Equity
Preferred stock - 10,000,000 shares authorized; Series A - 9,532 and 10,072 sharesissued and outstanding as of September 30, 2012, and December 31, 2011, respectively							-		-
Common stock - 800,000,000 shares authorized; 275,073,618 and 291,319,222 shares issued and outstanding as of September 30, 2012, and December 31, 2011, respectively							7,214		7,590
Retained earnings							3,873		2,969
Accumulated other comprehensive income (loss)							4,150		2,679
				Total stockholders' equity			15,237		13,238
					Total liabilities and stockholders' equity	$	215,458	$	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						For the Nine
						Months Ended						Months Ended
						September 30,						September 30,
						2012			2011			2012			2011
Revenues
Insurance premiums						$	606		$	559		$	1,825		$	1,721
Insurance fees							990			864			2,784			2,582
Net investment income							1,146			1,151			3,509			3,522
Realized gain (loss):
	Total other-than-temporary impairment losses on securities						(47	)		(44	)		(194	)		(135	)
	Portion of loss recognized in other comprehensive income						15			18			82			37
		Net other-than-temporary impairment losses on securitiesrecognized in earnings					(32	)		(26	)		(112	)		(98	)
		Realized gain (loss), excluding other-than-temporaryimpairment losses on securities					102			(137	)		140			(72	)
			Total realized gain (loss)				70			(163	)		28			(170	)
Amortization of deferred gain on business sold through reinsurance							19			19			56			56
Other revenues and fees							123			117			366			362
		Total revenues					2,954			2,547			8,568			8,073
Expenses
Interest credited							610			625			1,851			1,864
Benefits							811			664			2,615			2,527
Commissions and other expenses							1,047			1,024			2,731			2,467
Interest and debt expense							68			79			203			223
	Total expenses						2,536			2,392			7,400			7,081
		Income (loss) from continuing operations before taxes					418			155			1,168			992
		Federal income tax expense (benefit)					45			(6	)		224			214
			Income (loss) from continuing operations				373			161			944			778
			Income (loss) from discontinued operations, net of federalincome taxes				29			(8	)		27			(8	)
				Net income (loss)			402			153			971			770
				Other comprehensive income (loss), net of tax			771			1,437			1,471			1,813
					Comprehensive income (loss)	$	1,173		$	1,590		$	2,442		$	2,583

Earnings (Loss) Per Common Share - Basic
Income (loss) from continuing operations						$	1.35		$	0.53		$	3.33		$	2.51
Income (loss) from discontinued operations							0.10			(0.03	)		0.10			(0.03	)
	Net income (loss)					$	1.45		$	0.50		$	3.43		$	2.48

Earnings (Loss) Per Common Share - Diluted
Income (loss) from continuing operations						$	1.31		$	0.50		$	3.26		$	2.43
Income (loss) from discontinued operations							0.10			(0.03	)		0.09			(0.03	)
	Net income (loss)					$	1.41		$	0.47		$	3.35		$	2.40

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in millions, except per share data)

			For the Nine
			Months Ended
			September 30,
			2012			2011

Common Stock
Balance as of beginning-of-year			$	7,590		$	8,124
Stock compensation/issued for benefit plans				24			13
Retirement of common stock/cancellation of shares				(400	)		(345	)
	Balance as of end-of-period			7,214			7,792

Retained Earnings
Balance as of beginning-of-year				2,969			3,934
Cumulative effect from adoption of new accounting standards				-			(1,095	)
Net income (loss)				971			770
Retirement of common stock				-			(30	)
Dividends declared: Common (2012 - $0.240; 2011 - $0.150)				(67	)		(48	)
	Balance as of end-of-period			3,873			3,531

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				1,471			1,813
	Balance as of end-of-period			4,150			2,664
		Total stockholders' equity as of end-of-period	$	15,237		$	13,987

See accompanying Notes to Consolidated Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)

			For the Nine
			Months Ended
			September 30,
			2012			2011
Cash Flows from Operating Activities
Net income (loss)			$	971		$	770
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			(96	)		(44	)
	Trading securities purchases, sales and maturities, net			124			33
	Change in premiums and fees receivable			42			(48	)
	Change in accrued investment income			(86	)		(90	)
	Change in future contract benefits and other contract holder funds			(264	)		141
	Change in reinsurance related assets and liabilities			71			(210	)
	Change in federal income tax accruals			44			255
	Realized (gain) loss			(28	)		170
	(Gain) loss on early extinguishment of debt			-			8
	Amortization of deferred gain on business sold through reinsurance			(56	)		(56	)
	(Gain) loss on disposal of discontinued operations			1			3
	Other			(57	)		2
		Net cash provided by (used in) operating activities		666			934

Cash Flows from Investing Activities
Purchases of available-for-sale securities				(8,437	)		(8,540	)
Sales of available-for-sale securities				965			1,274
Maturities of available-for-sale securities				4,471			3,988
Purchases of other investments				(1,418	)		(2,202	)
Sales or maturities of other investments				1,622			2,336
Increase (decrease) in payables for collateral on investments				833			2,196
Other				(103	)		(63	)
		Net cash provided by (used in) investing activities		(2,067	)		(1,011	)

Cash Flows from Financing Activities
Payment of long-term debt, including current maturities				(300	)		(275	)
Issuance of long-term debt, net of issuance costs				300			298
Increase (decrease) in commercial paper, net				-			(100	)
Deposits of fixed account values, including the fixed portion of variable				7,612			8,187
Withdrawals of fixed account values, including the fixed portion of variable				(4,103	)		(3,750	)
Transfers to and from separate accounts, net				(1,775	)		(1,763	)
Common stock issued for benefit plans and excess tax benefits				(3	)		(6	)
Repurchase of common stock				(400	)		(375	)
Dividends paid to common and preferred stockholders				(67	)		(48	)
		Net cash provided by (used in) financing activities		1,264			2,168

Net increase (decrease) in cash and invested cash, including discontinued operations				(137	)		2,091
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		$	4,373		$	4,832

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, 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 nine month period ended September 30, 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 September 30, 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 13 for the quarterly period ended September 30, 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 and nine months ended September 30, 2011, related to the adoption:

			For the Three			For the Nine
			Months			Months
			Ended			Ended
			September 30,			September 30,
			2011			2011
Revenues
Realized gain (loss)			$	-		$	8

Expenses
Commissions and other expenses				15			(66	)
	Income (loss) from continuing operations before taxes			15			(58	)
	Federal income tax expense (benefit)			(5	)		20
		Income (loss) from continuing operations	$	10		$	(38	)

Earnings (Loss) Per Common Share - Basic			$	0.03		$	(0.12	)

Earnings (Loss) Per Common Share - Diluted			$	0.03		$	(0.12	)

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.

Intangibles – Goodwill and Other

In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”), which provides an option to first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If based on the qualitative assessment an entity determines that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the quantitative impairment test is not required. In addition, an entity has the option to bypass the qualitative assessment in any period and proceed directly to

the quantitative assessment, with the option to return to the qualitative assessment in any subsequent period. The amendments in ASU 2012-02 are effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We will adopt the provisions of ASU 2012-02 in the fourth quarter of 2012 and do not expect the adoption will have a material effect on our consolidated financial condition and results of operations.

3. Dispositions

Discontinued Operations

On January 4, 2010, we closed on the stock sale of our subsidiary Delaware Management Holdings, Inc. (“Delaware”), which provided investment products and services to individuals and institutions, to Macquarie Bank Limited. 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.

Amounts (in millions) reflected in income (loss) from discontinued operations on our Consolidated Statements of Comprehensive Income (Loss) were as follows:

			For the Three						For the Nine
			Months Ended						Months Ended
			September 30,						September 30,
			2012			2011			2012			2011
Disposal
Gain (loss) on disposal, before federal income taxes			$	-		$	(3	)	$	(1	)	$	(3	)
Federal income tax expense (benefit)				(29	)		5			(28	)		5
	Gain (loss) on disposal			29			(8	)		27			(8	)
		Income (loss) from discontinued operations	$	29		$	(8	)	$	27		$	(8	)

The income from discontinued operations for the three and nine months ended September 30, 2012, related to the release of reserves associated with prior tax years that were closed out during the quarter associated with our former subsidiaries. In addition, the nine months ended September 30, 2012, included a purchase price adjustment associated with the termination of a portion of the investment advisory agreement with Delaware. The loss from discontinued operations for the three and nine months ended September 30, 2011, related to prior year tax return true-ups.

4. 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 September 30, 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		BB-		Ba2
Current rating of underlying collateral pool		Aa1-B3		Aaa-Caa2
Number of defaults in underlying collateral pool		2		2
Number of entities		123		99
Number of countries		20		21

The following summarizes the exposure of the CLN structures’ underlying collateral by industry and rating as of September 30, 2012:


		AAA		AA		A		BBB		BB		B		CCC		Total
Industry
Financial intermediaries		-	%	2.1	%	7.6	%	0.9	%	-	%	-	%	-	%	10.6	%
Telecommunications		-	%	-	%	5.5	%	4.5	%	-	%	0.5	%	-	%	10.5	%
Oil and gas		0.3	%	2.1	%	1.0	%	4.6	%	-	%	-	%	-	%	8.0	%
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 foodand drug)		-	%	-	%	2.1	%	0.9	%	0.5	%	-	%	-	%	3.5	%
Industrial equipment		-	%	-	%	3.0	%	0.3	%	-	%	-	%	-	%	3.3	%
Sovereign		-	%	0.7	%	1.2	%	1.3	%	-	%	-	%	-	%	3.2	%
Conglomerates		-	%	2.3	%	0.9	%	-	%	-	%	-	%	-	%	3.2	%
Forest products		-	%	-	%	-	%	1.6	%	1.4	%	-	%	-	%	3.0	%
Other		-	%	4.5	%	14.9	%	17.9	%	4.1	%	0.9	%	0.3	%	42.6	%
	Total	0.6	%	14.4	%	41.8	%	35.2	%	6.3	%	1.4	%	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 September 30, 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		-		110			N/A		-		108
Excess mortality swap					1		100		-			1		100		-
			Total assets (1)		1	$	100	$	706			1	$	100	$	700

Liabilities
Non-qualifying hedges:
	Credit default swaps				2	$	600	$	175			2	$	600	$	295
	Contingent forwards				2		-		(1	)		2		-		(4	)
		Total non-qualifying hedges			4		600		174			4		600		291
Federal income tax					N/A		-		(53	)		N/A		-		(98	)
			Total liabilities (2)		4	$	600	$	121			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 September 30, 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						For the Nine
		Months Ended						Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Non-Qualifying Hedges
Credit default swaps		$	58		$	(105	)	$	120		$	(92	)
Contingent forwards			(1	)		2			(3	)		1
	Total non-qualifying hedges (1)	$	57		$	(103	)	$	117		$	(91	)

(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.

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 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 September 30, 2012
				Amortized		Gross Unrealized						Fair
				Cost		Gains		Losses		OTTI		Value
Fixed maturity securities:
	Corporate bonds			$	58,531	$	8,335	$	292	$	98	$	66,476
	U.S. government bonds				441		67		-		-		508
	Foreign government bonds				570		91		-		-		661
	Residential mortgage-backed securities ("RMBS")				6,278		530		11		60		6,737
	Commercial mortgage-backed securities ("CMBS")				1,104		75		32		21		1,126
	Collateralized debt obligations ("CDOs")				159		-		4		8		147
	State and municipal bonds				3,519		826		7		-		4,338
	Hybrid and redeemable preferred securities				1,176		95		85		-		1,186
	VIEs' fixed maturity securities				676		30		-		-		706
		Total fixed maturity securities			72,454		10,049		431		187		81,885
Equity securities					143		21		8		-		156
			Total AFS securities	$	72,597	$	10,070	$	439	$	187	$	82,041

				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) as of September 30, 2012, were as follows:

			Amortized		Fair
			Cost		Value
Due in one year or less			$	2,841	$	2,895
Due after one year through five years				12,308		13,414
Due after five years through ten years				24,171		27,194
Due after ten years				25,593		30,372
	Subtotal			64,913		73,875
Mortgage-backed securities ("MBS")				7,382		7,863
CDOs				159		147
		Total fixed maturity AFS securities	$	72,454	$	81,885

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 September 30, 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			$	1,534	$	140	$	1,095	$	250	$	2,629	$	390
	RMBS				257		41		226		30		483		71
	CMBS				64		21		137		32		201		53
	CDOs				20		8		57		4		77		12
	State and municipal bonds				-		-		23		7		23		7
	Hybrid and redeemable preferred securities				12		3		405		82		417		85
		Total fixed maturity securities			1,887		213		1,943		405		3,830		618
Equity securities					8		1		4		7		12		8
			Total AFS securities	$	1,895	$	214	$	1,947	$	412	$	3,842	$	626

Total number of AFS securities in an unrealized loss position															583

				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 redeemablepreferred 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 4.

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 September 30, 2012
		Amortized		Fair		Unrealized
		Cost		Value		Loss
Total
AFS securities backed by pools of residential mortgages		$	1,283	$	1,016	$	267
AFS securities backed by pools of commercial mortgages			282		219		63
	Total	$	1,565	$	1,235	$	330

Subject to Detailed Analysis
AFS securities backed by pools of residential mortgages		$	1,279	$	1,012	$	267
AFS securities backed by pools of commercial mortgages			63		39		24
	Total	$	1,342	$	1,051	$	291

		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 nine months ended September 30, 2012 and 2011, we recorded OTTI for AFS securities backed by pools of residential and commercial mortgages of $6 million and $42 million, pre-tax, respectively, and before associated amortization expense for DAC, value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”), of which $(31) million and $9 million, respectively, was recognized in OCI and $37 million and $33 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 September 30, 2012
								Number
		Fair		Gross Unrealized				of
		Value		Losses		OTTI		Securities		(1)
Less than six months		$	13	$	5	$	1		11
Six months or greater, but less than nine months			18		10		-		5
Nine months or greater, but less than twelve months			7		2		-		1
Twelve months or greater			546		289		142		154
	Total	$	584	$	306	$	143		171

		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 $483 million for the nine months ended September 30, 2012. As discussed further below, we believe the unrealized loss position as of September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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				For the Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Balance as of beginning-of-period	$	415	$	340	$	390	$	319