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, 2013
 OR

¨
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 29, 2013, there were 268,461,779 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
 44
   
Results of Annuities
 46
   
Results of Retirement Plan Services
 51
   
Results of Life Insurance
 56
   
Results of Group Protection
 62
   
Results of Other Operations
 66
   
Realized Gain (Loss) and Benefit Ratio Unlocking
 68
   
Consolidated Investments
 70
   
Review of Consolidated Financial Condition
 84
   
    Liquidity and Capital Resources
 84
   
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
 91
     
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,
 
2013
 
2012
 
ASSETS
(Unaudited)
 
 
 
Investments:
 
 
 
 
Available-for-sale securities, at fair value:
 
 
 
 
Fixed maturity securities (amortized cost: 2013 – $74,078; 2012 – $72,718)
$ 82,711   $ 82,036  
Variable interest entities' fixed maturity securities (amortized cost: 2013 – $679; 2012 – $677)
  708     708  
Equity securities (cost: 2013 – $131; 2012 – $137)
  148     157  
Trading securities
  2,528     2,554  
Mortgage loans on real estate
  7,057     7,029  
Real estate
  65     65  
Policy loans
  2,727     2,766  
Derivative investments
  2,268     2,652  
Other investments
  1,073     1,098  
Total investments
  99,285     99,065  
Cash and invested cash
  3,107     4,230  
Deferred acquisition costs and value of business acquired
  6,936     6,667  
Premiums and fees receivable
  440     380  
Accrued investment income
  1,078     1,015  
Reinsurance recoverables
  6,489     6,449  
Funds withheld reinsurance assets
  798     837  
Goodwill
  2,273     2,273  
Other assets
  2,569     2,580  
Separate account assets
  101,366     95,373  
                    Total assets $ 224,341   $ 218,869  
 
           
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Liabilities
           
Future contract benefits
$ 19,149   $ 19,780  
Other contract holder funds
  72,760     72,218  
Short-term debt
  706     200  
Long-term debt
  4,889     5,439  
Reinsurance related embedded derivatives
  199     215  
Funds withheld reinsurance liabilities
  926     940  
Deferred gain on business sold through reinsurance
  301     319  
Payables for collateral on investments
  4,107     4,181  
Variable interest entities' liabilities
  83     92  
Other liabilities
  4,993     5,139  
Separate account liabilities
  101,366     95,373  
Total liabilities
  209,479     203,896  
 
           
Contingencies and Commitments (See Note 8)
           
 
           
Stockholders' Equity
           
Preferred stock – 10,000,000 shares authorized; Series A – 9,532 shares issued and outstanding as of March 31, 2013, and December 31, 2012   -     -  
Common stock – 800,000,000 shares authorized; 268,457,558 and 271,402,586 shares issued and outstanding as of March 31, 2013, and December 31, 2012, respectively   7,043     7,121  
Retained earnings
  4,238     4,044  
Accumulated other comprehensive income (loss)
  3,581     3,808  
Total stockholders' equity
  14,862     14,973  
Total liabilities and stockholders' equity
$ 224,341   $ 218,869  

See accompanying Notes to Consolidated Financial Statements
 
 

 
1

 
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions, except per share data)
 
 

 
For the Three
 
 
Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Revenues
 
 
 
 
Insurance premiums
$ 654   $ 589  
Insurance fees
  958     903  
Net investment income
  1,150     1,166  
Realized gain (loss):
           
Total other-than-temporary impairment losses on securities
  (20 )   (97 )
Portion of loss recognized in other comprehensive income
  6     50  
Net other-than-temporary impairment losses on securities recognized in earnings
  (14 )   (47 )
Realized gain (loss), excluding other-than-temporary impairment losses on securities
  (40 )   (38 )
Total realized gain (loss)
  (54 )   (85 )
Amortization of deferred gain on business sold through reinsurance
  19     19  
Other revenues and fees
  117     118  
Total revenues
  2,844     2,710  
Expenses
           
Interest credited
  622     625  
Benefits
  958     853  
Commissions and other expenses
  895     856  
Interest and debt expense
  64     68  
Total expenses
  2,539     2,402  
Income (loss) from continuing operations before taxes
  305     308  
Federal income tax expense (benefit)
  66     64  
Income (loss) from continuing operations
  239     244  
Income (loss) from discontinued operations, net of federal income taxes
  -     (1 )
Net income (loss)
  239     243  
Other comprehensive income (loss), net of tax
  (227 )   (57 )
Comprehensive income (loss)
$ 12   $ 186  
 
           
Earnings (Loss) Per Common Share - Basic
           
Income (loss) from continuing operations
$ 0.89   $ 0.84  
Income (loss) from discontinued operations
  -     -  
Net income (loss)
$ 0.89   $ 0.84  
 
           
Earnings (Loss) Per Common Share - Diluted
           
Income (loss) from continuing operations
$ 0.86   $ 0.82  
Income (loss) from discontinued operations
  -     -  
Net income (loss)
$ 0.86   $ 0.82  

See accompanying Notes to Consolidated Financial Statements
 
 

 
2

 
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions, except per share data)
 
 

 
For the Three
 
 
Months Ended
 
 
March 31,
 
 
2013
 
2012
 
 
 
 
 
 
Common Stock
 
 
 
 
Balance as of beginning-of-year
$ 7,121   $ 7,590  
Stock compensation/issued for benefit plans
  10     8  
Retirement of common stock/cancellation of shares
  (88 )   (150 )
Balance as of end-of-period
  7,043     7,448  
 
           
Retained Earnings
           
Balance as of beginning-of-year
  4,044     2,831  
Net income (loss)
  239     243  
Retirement of common stock
  (12 )   -  
Dividends declared:  Common (2013 – $0.120; 2012 – $0.080)
  (33 )   (23 )
Balance as of end-of-period
  4,238     3,051  
 
           
Accumulated Other Comprehensive Income (Loss)
           
Balance as of beginning-of-year
  3,808     2,680  
Other comprehensive income (loss), net of tax
  (227 )   (57 )
Balance as of end-of-period
  3,581     2,623  
Total stockholders' equity as of end-of-period
$ 14,862   $ 13,122  

See accompanying Notes to Consolidated Financial Statements
 
 

 
3

 
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
 

 
For the Three
 
 
Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
$ 239   $ 243  
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
  (77 )   (44 )
Trading securities purchases, sales and maturities, net
  12     15  
Change in premiums and fees receivable
  (60 )   (29 )
Change in accrued investment income
  (63 )   (45 )
Change in future contract benefits and other contract holder funds
  (203 )   (144 )
Change in reinsurance related assets and liabilities
  (112 )   (2 )
Change in federal income tax accruals
  66     187  
Realized (gain) loss
  54     85  
Amortization of deferred gain on business sold through reinsurance
  (19 )   (19 )
(Gain) loss on disposal of discontinued operations
  -     1  
Other
  (88 )   34  
Net cash provided by (used in) operating activities
  (251 )   282  
 
           
Cash Flows from Investing Activities
           
Purchases of available-for-sale securities
  (3,194 )   (2,497 )
Sales of available-for-sale securities
  189     185  
Maturities of available-for-sale securities
  1,882     1,341  
Purchases of other investments
  (629 )   (830 )
Sales or maturities of other investments
  573     780  
Increase (decrease) in payables for collateral on investments
  (74 )   (858 )
Other
  (36 )   (34 )
Net cash provided by (used in) investing activities
  (1,289 )   (1,913 )
 
           
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
  2,517     2,391  
Withdrawals of fixed account values, including the fixed portion of variable
  (1,281 )   (1,320 )
Transfers to and from separate accounts, net
  (684 )   (556 )
Common stock issued for benefit plans and excess tax benefits
  (2 )   (3 )
Repurchase of common stock
  (100 )   (150 )
Dividends paid to common and preferred stockholders
  (33 )   (23 )
Net cash provided by (used in) financing activities
  417     637  
 
           
Net increase (decrease) in cash and invested cash, including discontinued operations
  (1,123 )   (994 )
Cash and invested cash, including discontinued operations, as of beginning-of-year
  4,230     4,510  
Cash and invested cash, including discontinued operations, as of end-of-period
$ 3,107   $ 3,516  

See accompanying Notes to Consolidated Financial Statements
 
 

 
4

 
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 and solutions.  These products include fixed and indexed annuities, variable annuities, universal life insurance (“UL”), variable universal life insurance (“VUL”), linked-benefit universal life, term life insurance, employer-sponsored retirement plans and services, 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, 2012 (“2012 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 2012 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, 2013, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013.  All material intercompany accounts and transactions have been eliminated in consolidation.

2.  New Accounting Standards

Adoption of New Accounting Standards

Balance Sheet Topic

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), and in January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”).  For a more detailed description of ASU 2011-11 and ASU 2013-01, see “Future Adoption of New Accounting Standards – Balance Sheet Topic” in Note 2 of our 2012 Form 10-K.  We adopted the disclosure requirements of ASU 2011-11, after considering the scope clarification in ASU 2013-01, as of January 1, 2013, and have included the required disclosures for all comparative periods in Note 5 of this quarterly report on Form 10-Q.

Comprehensive Income Topic

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires enhanced reporting of such amounts either on the face of the financial statements or in the notes to the financial statements.  For a more detailed description of ASU 2013-02, see “Future Adoption of New Accounting Standards – Comprehensive Income Topic” in Note 2 of our 2012 Form 10-K.  We adopted the disclosure requirements in ASU 2013-02 as of January 1, 2013, and have elected to provide the required disclosure in the notes to our consolidated financial statements.  We have prospectively included the required disclosures in Note 9 of this quarterly report on Form 10-Q.

3.  Variable Interest Entities (“VIEs”)

Consolidated VIEs
 
See Note 4 in our 2012 Form 10-K for a detailed discussion of our consolidated VIEs, which information is incorporated herein by reference.

 
5

 

The following summarizes information regarding the credit-linked note (“CLN”) structures (dollars in millions) as of March 31, 2013:

 
   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 March 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AAA
 
AA
  A  
BBB
 
BB
  B  
CCC
 
Total
 
Industry
 
 
 
       
 
 
 
       
 
 
 
 
Financial intermediaries
  - %   2.1 %   7.0 %   1.4 %   - %   - %   - %   10.5 %
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 %   2.2 %   - %   - %   - %   4.8 %
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)   - %   - %   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 %   15.4 %   17.4 %   4.6 %   0.3 %   0.3 %   42.5 %
Total
  0.6 %   13.9 %   42.2 %   35.4 %   6.8 %   0.8 %   0.3 %   100.0 %

 
6

 
 
Asset and liability information (dollars in millions) for these consolidated VIEs included on our Consolidated Balance Sheets was as follows:
 
 
As of March 31, 2013
 
As of December 31, 2012
 
 
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   $ -   $ 599     N/A   $ -   $ 598  
U.S. government bonds
  N/A     -     109     N/A     -     110  
Excess mortality swap
  1     100     -     1     100     -  
Total assets (1)
  1   $ 100   $ 708     1   $ 100   $ 708  
                                     
Liabilities
                                   
Non-qualifying hedges:
                                   
Credit default swaps
  2   $ 600   $ 113     2   $ 600   $ 129  
Contingent forwards
  2     -     -     2     -     (1 )
Total non-qualifying hedges
  4     600     113     4     600     128  
Federal income tax
  N/A     -     (30 )   N/A     -     (36 )
Total liabilities (2)
  4   $ 600   $ 83     4   $ 600   $ 92  

(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 2012 Form 10-K, we regularly review our investment holdings for other-than-temporary impairment (“OTTI”).  Based upon this review, we believe that the AFS fixed maturity securities were not other-than-temporarily impaired as of March 31, 2013.

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

 
For the Three
 
 
Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Non-Qualifying Hedges
 
 
 
 
Credit default swaps
$ 15   $ 71  
Contingent forwards
  -     (2 )
Total non-qualifying hedges (1)
$ 15   $ 69  

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

Unconsolidated VIEs
 
See Note 4 in our 2012 Form 10-K for a detailed discussion of our unconsolidated VIEs, which information is incorporated herein by reference.

We invest in certain limited partnerships that operate qualified affordable housing projects that we have concluded are VIEs.  We receive returns from the limited partnerships in the form of income tax credits which are guaranteed by creditworthy third parties, and our exposure to loss is limited to the capital we invest in the limited partnership.  We are not the primary beneficiary of these VIEs as we do not have the power to direct the most significant activities of the limited partnerships.  Our maximum exposure to loss was $86 million and $92 million as of March 31, 2013, and December 31, 2012, respectively.
 
 
7

 

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 2012 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, 2013
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
OTTI
 
Value
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$ 62,030   $ 7,574   $ 238   $ 92   $ 69,274  
U.S. government bonds
  381     51     -     -     432  
Foreign government bonds
  546     80     -     -     626  
Residential mortgage-backed securities (“RMBS”)
  5,200     429     -     43     5,586  
Commercial mortgage-backed securities ("CMBS")
  926     61     14     17     956  
Collateralized debt obligations (“CDOs”)
  181     1     2     7     173  
State and municipal bonds
  3,625     810     5     -     4,430  
Hybrid and redeemable preferred securities
  1,189     113     68     -     1,234  
VIEs' fixed maturity securities
  679     29     -     -     708  
Total fixed maturity securities
  74,757     9,148     327     159     83,419  
Equity securities
  131     19     2     -     148  
Total AFS securities
$ 74,888   $ 9,167   $ 329   $ 159   $ 83,567  

 
As of December 31, 2012
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
Cost
 
Gains
 
Losses
 
OTTI
 
Value
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$ 60,124   $ 8,219   $ 219   $ 108   $ 68,016  
U.S. government bonds
  383     59     -     -     442  
Foreign government bonds
  562     92     -     -     654  
RMBS
  5,763     471     3     60     6,171  
CMBS
  970     68     16     19     1,003  
CDOs
  189     2     3     8     180  
State and municipal bonds
  3,546     814     7     -     4,353  
Hybrid and redeemable preferred securities
  1,181     106     70     -     1,217  
VIEs' fixed maturity securities
  677     31     -     -     708  
Total fixed maturity securities
  73,395     9,862     318     195     82,744  
Equity securities
  137     22     2     -     157  
Total AFS securities
$ 73,532   $ 9,884   $ 320   $ 195   $ 82,901  
 
 
8

 

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of March 31, 2013, were as follows:

 
Amortized
 
Fair
 
 
Cost
 
Value
 
Due in one year or less
$ 2,468   $ 2,518  
Due after one year through five years
  12,878     14,081  
Due after five years through ten years
  25,137     27,924  
Due after ten years
  27,967     32,181  
Subtotal
  68,450     76,704  
Mortgage-backed securities (“MBS”)
  6,126     6,542  
CDOs
  181     173  
Total fixed maturity AFS securities
$ 74,757   $ 83,419  

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 other comprehensive income (loss) (“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, 2013
 
 
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
$ 4,005   $ 186   $ 802   $ 144   $ 4,807   $ 330  
RMBS
  350     27     161     16     511     43  
CMBS
  29     14     65     17     94     31  
CDOs
  9     7     51     2     60     9  
State and municipal bonds
  63     1     26     4     89     5  
Hybrid and redeemable preferred securities
  66     1     278     67     344     68  
Total fixed maturity securities
  4,522     236     1,383     250     5,905     486  
Equity securities
  7     2     -     -     7     2  
Total AFS securities
$ 4,529   $ 238   $ 1,383   $ 250   $ 5,912   $ 488  
 
                                   
Total number of AFS securities in an unrealized loss position
    663  
 
 
9

 

 
As of December 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
$ 2,853   $ 145   $ 934   $ 182   $ 3,787   $ 327  
RMBS
  272     39     199     24     471     63  
CMBS
  66     16     113     19     179     35  
CDOs
  10     8     53     3     63     11  
State and municipal bonds
  64     1     24     6     88     7  
Hybrid and redeemable preferred securities
  71     3     293     67     364     70  
Total fixed maturity securities
  3,336     212     1,616     301     4,952     513  
Equity securities
  7     2     -     -     7     2  
Total AFS securities
$ 3,343   $ 214   $ 1,616   $ 301   $ 4,959   $ 515  
 
                                   
Total number of AFS securities in an unrealized loss position
    626  

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 2012 Form 10-K.  Selected information for these securities in a gross unrealized loss position (in millions) was as follows:

 
As of March 31, 2013
 
 
Amortized
 
Fair
 
Unrealized
 
 
Cost
 
Value
 
Loss
 
Total
 
 
 
 
 
 
AFS securities backed by pools of residential mortgages
$ 1,107   $ 956   $ 151  
AFS securities backed by pools of commercial mortgages
  148     109     39  
Total
$ 1,255   $ 1,065   $ 190  
 
                 
Subject to Detailed Analysis
                 
AFS securities backed by pools of residential mortgages
$ 1,022   $ 872   $ 150  
AFS securities backed by pools of commercial mortgages
  44     33     11  
Total
$ 1,066   $ 905   $ 161  
 
 
10

 

 
As of December 31, 2012
 
 
Amortized
 
Fair
 
Unrealized
 
 
Cost
 
Value
 
Loss
 
Total
 
 
 
 
 
 
AFS securities backed by pools of residential mortgages
$ 1,181   $ 980   $ 201  
AFS securities backed by pools of commercial mortgages
  236     192     44  
Total
$ 1,417   $ 1,172   $ 245  
 
                 
Subject to Detailed Analysis
                 
AFS securities backed by pools of residential mortgages
$ 1,173   $ 972   $ 201  
AFS securities backed by pools of commercial mortgages
  56     40     16  
Total
$ 1,229   $ 1,012   $ 217  

For the three months ended March 31, 2013 and 2012, we recorded OTTI for AFS securities backed by pools of residential and commercial mortgages of $16 million and $21 million, pre-tax, respectively, and before associated amortization expense for deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”), of which $(33) million and $(21) million, respectively, was recognized in OCI and $17 million and $42 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, 2013
   
 
 
 
 
 
 
 
Number
   
 
Fair
 
Gross Unrealized
 
of
   
 
Value
 
Losses
 
OTTI
 
Securities
(1)  
Less than six months
$ 46   $ 22   $ 3     16    
Twelve months or greater
  357     143     106     118    
Total
$ 403   $ 165   $ 109     134    

 
As of December 31, 2012
   
 
 
 
 
 
 
 
Number
   
 
Fair
 
Gross Unrealized
 
of
   
 
Value
 
Losses
 
OTTI
 
Securities
(1)  
Less than six months
$ 34   $ 9   $ 1     14    
Nine months or greater, but less than twelve months
  15     10     -     3    
Twelve months or greater
  395     179     128     131    
Total
$ 444   $ 198   $ 129     148    

(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, including the portion of OTTI recognized in OCI, on AFS securities decreased $27 million for the three months ended March 31, 2013.  As discussed further below, we believe the unrealized loss position as of March 31, 2013, did not represent OTTI as (i) we did not intend to sell these fixed maturity AFS securities; (ii) 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; (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities; and (iv) 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, 2013, management believes we have 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.
 
 
11

 

As of March 31, 2013, 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, 2013, 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 which incorporates key assumptions including 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 temporarily-impaired security.

As of March 31, 2013, 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 that 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,
 
 
2013
 
2012
 
Balance as of beginning-of-period
$ 424   $ 390  
Increases attributable to:
           
Credit losses on securities for which an OTTI was not previously recognized
  1     34  
Credit losses on securities for which an OTTI was previously recognized
  16     23  
Decreases attributable to:
           
Securities sold
  (4 )   (37 )
Balance as of end-of-period
$ 437   $ 410  

During the three months ended March 31, 2013 and 2012, 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.

 
12

 
 
Details of the amount of credit loss of OTTI recognized in net income (loss) for which a portion related to other factors was recognized in OCI (in millions), were as follows:
 
 
As of March 31, 2013
 
 
 
 
Gross Unrealized
 
 
 
OTTI in
 
 
Amortized
 
 
 
Losses and
 
Fair
 
Credit
 
 
Cost
 
Gains
 
OTTI
 
Value
 
Losses
 
Corporate bonds
$ 290   $ 9   $ 86   $ 213   $ 108  
RMBS
  630     25     28     627     234  
CMBS
  38     3     14     27     95  
Total
$ 958   $ 37   $ 128   $ 867   $ 437  

 
As of December 31, 2012
 
 
 
 
Gross Unrealized
 
 
 
OTTI in
 
 
Amortized
 
 
 
Losses and
 
Fair
 
Credit
 
 
Cost
 
Gains
 
OTTI
 
Value
 
Losses
 
Corporate bonds
$ 299   $ 4   $ 98   $ 205   $ 104  
RMBS
  636     22     40     618     227  
CMBS
  41     1     16     26     93  
Total
$ 976   $ 27   $ 154   $ 849   $ 424  

Mortgage Loans on Real Estate
 
See Note 1 in our 2012 Form 10-K for information regarding our accounting policy relating to 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 32% of mortgage loans on real estate as of March 31, 2013, and December 31, 2012.

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,  
 
2013
 
2012
   
Current
$ 7,047   $ 7,011    
60 to 90 days past due
  8     8    
Greater than 90 days past due
  3     24    
Valuation allowance associated with impaired mortgage loans on real estate
  (8 )   (21 )  
Unamortized premium (discount)
  7     7    
Total carrying value
$ 7,057   $ 7,029    

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,
 
 
2013
 
2012
 
 
Number of impaired mortgage loans on real estate
6
 
10
 
 
 
 
 
 
 
 
 
 
Principal balance of impaired mortgage loans on real estate
$
 46
 
$
 75
 
 
Valuation allowance associated with impaired mortgage loans on real estate
 
 (8
)
 
 (21
)
 
Carrying value of impaired mortgage loans on real estate
$
 38
 
$
 54
 
 
 
 
13

 

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

 
For the Three
 
 
Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Average carrying value for impaired mortgage loans on real estate
$ 46   $ 64  
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 2012 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, 2013
 
As of December 31, 2012
 
 
 
 
 
 
Debt-
 
 
 
 
 
Debt-
 
 
 
 
 
 
Service
 
 
 
 
 
Service
 
 
Principal
  % of  
Coverage
 
Principal
  % of  
Coverage
 
Loan-to-Value
Amount
  Total  
Ratio
 
Amount
  Total  
Ratio
 
Less than 65%
$ 5,738     81.3 %   1.69   $ 5,677     80.6 %   1.68  
65% to 74%
  877     12.4 %   1.39     897     12.7 %   1.39  
75% to 100%
  389     5.5 %   0.82     386     5.5 %   0.84  
Greater than 100%
  54     0.8 %   0.80     83     1.2 %   0.66  
Total mortgage loans on real estate
$ 7,058     100.0 %       $ 7,043     100.0 %      

Alternative Investments 

As of March 31, 2013, and December 31, 2012, alternative investments included investments in 100 and 98 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,
 
 
2013
 
2012
 
Fixed maturity AFS securities:
 
 
 
 
Gross gains
$ 7   $ 5  
Gross losses
  (19 )   (63 )
Equity AFS securities:
           
Gross gains
  6     1  
Gain (loss) on other investments
  (1 )   7  
Associated amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds
  (7 )   2  
Total realized gain (loss) related to certain investments
$ (14 ) $ (48 )
 
 
14

 

Details underlying write-downs taken as a result of OTTI (in millions) that were recognized in net income (loss) and included in realized gain (loss) on AFS securities above, and the portion of OTTI recognized in OCI (in millions) were as follows:

 
For the Three
 
 
Months Ended
 
 
March 31,
 
 
2013
 
2012
 
OTTI Recognized in Net Income (Loss)
 
 
 
 
Corporate bonds
$ (3 ) $ (19 )
RMBS
  (11 )   (18 )
CMBS
  (2 )   (20 )
CDOs
  (1 )   -  
Gross OTTI recognized in net income (loss)
  (17 )   (57 )
Associated amortization of DAC, VOBA, DSI and DFEL
  3     10  
Net OTTI recognized in net income (loss), pre-tax
$ (14 ) $ (47 )
 
           
Portion of OTTI Recognized in OCI
           
Gross OTTI recognized in OCI
$ 7   $ 58  
Change in DAC, VOBA, DSI and DFEL
  (1 )   (8 )
Net portion of OTTI recognized in OCI, pre-tax
$ 6   $ 50  

Determination of Credit Losses on Corporate Bonds and CDOs

As of March 31, 2013, and December 31, 2012, we reviewed our corporate bond and CDO portfolios for potential shortfall in contractual principal and interest based on numerous subjective and objective inputs.  The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers.

Credit ratings express opinions about the credit quality of a security.  Securities rated investment grade, that is those rated BBB- or higher by Standard & Poor’s (“S&P”) Rating Services or Baa3 or higher by Moody’s Investors Service (“Moody’s”), are generally considered by the rating agencies and market participants to be low credit risk.  As of March 31, 2013, and December 31, 2012, 96% of the fair value of our corporate bond portfolio was rated investment grade.  As of March 31, 2013, and December 31, 2012, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $2.9 billion and $3.0 billion, respectively, and a fair value of $2.9 billion.  As of March 31, 2013, and December 31, 2012, 93% of the fair value of our CDO portfolio was rated investment grade.  As of March 31, 2013, and December 31, 2012, the portion of our CDO portfolio rated below investment grade had an amortized cost of $19 million and $21 million, respectively, and fair value of $12 million and $13 million, respectively. Based upon the analysis discussed above, we believed as of March 31, 2013, and December 31, 2012, that we would recover the amortized cost of each investment grade corporate bond and CDO security.

For securities where we recorded an OTTI recognized in net income (loss) for the three months ended March 31, 2013 and 2012, the recovery as a percentage of amortized cost was 98% and 92% for corporate bonds, respectively, and 94% and 0% for CDOs, respectively.

Determination of Credit Losses on MBS

As of March 31, 2013, and December 31, 2012, default rates were projected by considering underlying MBS loan performance and collateral type.  Projected default rates on existing delinquencies vary between 10% to 100% depending on loan type and severity of delinquency status.  In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent history.  Finally, we develop a default rate timing curve by aggregating the defaults for all loans in the pool (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) and the associated loan-level loss severities. 

We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans.  Second lien loans are assigned 100% severity, if defaulted.  For first lien loans, we assume a minimum of 30% severity with higher severity assumed for investor properties and further adjusted by housing price assumptions. With the default rate timing curve and loan-level severity, we derive the future expected credit losses.

 
15

 

Payables for Collateral on Investments

The carrying values of the payables for collateral on investments (in millions) included on our Consolidated Balance Sheets and the fair value of the related investments or collateral consisted of the following:
 
 
 
 
 
 
As of March 31, 2013
 
As of December 31, 2012
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Value
 
Value
 
Value
 
Value
 
Collateral payable held for derivative investments (1)
$ 1,992   $ 1,992   $ 2,567   $ 2,567  
Securities pledged under securities lending agreements (2)
  199     192     197     189  
Securities pledged under reverse repurchase agreements (3)
  280     293     280     294  
Securities pledged for Term Asset-Backed Securities Loan Facility ("TALF") (4)
  36     51     37     52  
Investments pledged for Federal Home Loan Bank of Indianapolis ("FHLBI") (5)
  1,600     2,764     1,100     1,936  
Total payables for collateral on investments
$ 4,107   $ 5,292   $ 4,181   $ 5,038  

(1)  
We obtain collateral based upon contractual provisions with our counterparties.  These agreements take into consideration the counterparties’ credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that if exceeded result in the receipt of cash that is typically invested in cash and invested cash.  See Note 5 for details about maximum collateral potentially required to post on our credit default swaps.
(2)  
Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets.  We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively.  We value collateral daily and obtain additional collateral when deemed appropriate.  The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities.
(3)  
Our pledged securities under reverse repurchase agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets.  We obtain collateral in an amount equal to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary.  The cash received in our reverse repurchase program is typically invested in fixed maturity AFS securities.
(4)  
Our pledged securities for TALF are included in fixed maturity AFS securities on our Consolidated Balance Sheets.  We obtain collateral in an amount that has typically averaged 90% of the fair value of the TALF securities.  The cash received in these transactions is invested in fixed maturity AFS securities.
(5)  
Our pledged investments for FHLBI are included in fixed maturity AFS securities and mortgage loans on real estate on our Consolidated Balance Sheets.  The collateral requirements are generally 105% to 115% of the fair value for fixed maturity AFS securities and 155% to 175% of the fair value for mortgage loans on real estate.  The cash received in these transactions is primarily invested in cash and invested cash or fixed maturity AFS securities.

For information related to balance sheet offsetting of our securities lending and reverse repurchase agreements see Note 5.

Increase (decrease) in payables for collateral on investments (in millions) included on the Consolidated Statements of Cash Flows consisted of the following:

 
For the Three
 
 
Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Collateral payable held for derivative investments
$ (575 ) $ (848 )
Securities pledged under securities lending agreements
  2     -  
Securities pledged for TALF
  (1 )   (10 )
Investments pledged for FHLBI
  500     -  
Total increase (decrease) in payables for collateral on investments
$ (74 ) $ (858 )

Investment Commitments

As of March 31, 2013, our investment commitments were $888 million, which included $369 million of limited partnerships (“LPs”), $372 million of private placement securities and $147 million of mortgage loans on real estate.

 
16

 

Concentrations of Financial Instruments

As of March 31, 2013, and December 31, 2012, our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $3.4 billion and $3.8 billion, respectively, or 3% and 4% of our invested assets portfolio, respectively, and our investments in securities issued by Fannie Mae with a fair value of $2.1 billion and $2.2 billion, respectively, or 2% of our invested assets portfolio.  These investments are included in corporate bonds in the tables above.

As of March 31, 2013, and December 31, 2012, our most significant investments in one industry were our investment securities in the electric industry with a fair value of $8.8 billion and $8.7 billion, respectively, or 9% of our invested assets portfolio, and our investment securities in the banking industry with a fair value of $5.0 billion, or 5% of our invested assets portfolio.  We utilized the industry classifications to obtain the concentration of financial instruments amount; as such, this amount will not agree to the AFS securities table above.

5.  Derivative Instruments
 
We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, default risk, basis risk and credit risk.  See Note 1 in our 2012 Form 10-K for a detailed discussion of the accounting treatment for derivative instruments.  See Note 6 in our 2012 Form 10-K for a detailed discussion of our derivative instruments and use of them in our overall risk management strategy, which information is incorporated herein by reference.  See Note 12 for additional disclosures related to the fair value of our derivative instruments and Note 3 for derivative instruments related to our consolidated VIEs.

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

 
As of March 31, 2013
 
As of December 31, 2012
 
 
Notional
 
Fair Value
 
Notional
 
Fair Value
 
 
Amounts
 
Asset
 
Liability
 
Amounts
 
Asset
 
Liability
 
Qualifying Hedges
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts (1)
$ 3,094   $ 487   $ 197   $ 3,214   $ 462   $ 224  
Foreign currency contracts (1)
  532     46     22     420     39     26  
Total cash flow hedges
  3,626     533     219     3,634     501     250  
Fair value hedges:
                                   
Interest rate contracts (1)
  875     227     -     875     269     -  
Non-Qualifying Hedges
                                   
Interest rate contracts (1)
  43,609     845     466     36,539     1,042     475  
Foreign currency contracts (1)
  230     -     -     48     -     -  
Equity market contracts (1)
  19,993     1,417     69     19,857     1,734     170  
Equity collar (1)
  9     -     -     9     1     -  
Credit contracts (2)
  148     -     10     148     -     11  
Embedded derivatives:
                                   
Indexed annuity contracts (3)
  -     -     853     -     -     732  
Guaranteed living benefit reserves (“GLB”) (3)
  -     -     199     -     -     909  
Reinsurance related (4)
  -     -     199     -     -     215  
Total derivative instruments
$ 68,490   $ 3,022   $ 2,015   $ 61,110   $ 3,547   $ 2,762  

(1)  
Reported in derivative investments on our Consolidated Balance Sheets.
(2)  
Reported in other liabilities on our Consolidated Balance Sheets.
(3)  
Reported in future contract benefits on our Consolidated Balance Sheets.
(4)  
Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.
 
 
17

 

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

 
Remaining Life as of March 31, 2013
 
 
Less Than
  1 – 5   6 – 10   11 – 30  
Over 30
 
 
 
 
1 Year
 
Years
 
Years
 
Years
 
Years
 
Total
 
Interest rate contracts (1)
$ 3,174   $ 20,682   $ 12,917   $ 9,592   $ 1,213   $ 47,578  
Foreign currency contracts (2)
  255     180     200     127     -     762  
Equity market contracts
  10,707     4,049     5,224     21     1     20,002  
Credit contracts
  -     148     -     -     -     148  
Total derivative instruments with notional amounts
$ 14,136   $ 25,059   $ 18,341   $ 9,740   $ 1,214   $ 68,490  

(1)  
As of March 31, 2013, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was June 2042.
(2)  
As of March 31, 2013, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was April 2028.

The change in our unrealized gain (loss) on derivative instruments in accumulated OCI (in millions) was as follows:

 
For the Three
 
 
Months Ended
 
 
March 31,
 
 
2013
 
2012
 
Unrealized Gain (Loss) on Derivative Instruments
 
 
 
 
Balance as of beginning-of-year
$ 163   $ 119  
Other comprehensive income (loss):
           
Unrealized holding gains (losses) arising during the year:
           
Cash flow hedges:
           
Interest rate contracts
  34     (40 )
Foreign currency contracts
  13     (3 )
Fair value hedges:
           
Interest rate contracts
  1     1  
Change in foreign currency exchange rate adjustment
  11     (9 )
Change in DAC, VOBA, DSI and DFEL
  2     4  
Income tax benefit (expense)
  (22 )   15  
Less:
           
Reclassification adjustment for gains (losses) included in net income (loss):
           
Cash flow hedges:
           
Interest rate contracts (1)
  (5 )   (6 )
Foreign currency contracts (1)
  2     2  
Fair value hedges:
           
Interest rate contracts (2)
  1     1  
Associated amortization of DAC, VOBA, DSI and DFEL
  1     -  
Income tax benefit (expense)
  -     1  
Balance as of end-of-year
$ 203   $ 89