LINCOLN NATIONAL CORP – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

 The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the financial condition as of December 31, 2011, compared with December 31, 2010, and the results of operations in 2011 and 2010, compared with the immediately preceding year of Lincoln National Corporation and its consolidated subsidiaries. Unless otherwise stated or the context otherwise requires, "LNC," "Lincoln," "Company," "we," "our" or "us" refers to Lincoln National Corporation and its consolidated subsidiaries. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements ("Notes") presented in "Part II - Item 8. Financial Statements and Supplementary Data," as well as "Part I - Item 1A. Risk Factors" above.  In this report, in addition to providing consolidated revenues and net income (loss), we also provide segment operating revenues and income (loss) from operations because we believe they are meaningful measures of revenues and the profitability of our operating segments. Financial information that follows is presented in conformity with accounting principles generally accepted in the United States of America ("GAAP"), unless otherwise indicated. See Note 1 for a discussion of GAAP.  Operating revenues and income (loss) from operations are the financial performance measures we use to evaluate and assess the results of our segments. Accordingly, we define and report operating revenues and income (loss) from operations by segment in Note 22. Our management believes that operating revenues and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because the excluded items are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and, in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. In addition, we believe that our definitions of operating revenues and income (loss) from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our business.  

Certain reclassifications have been made to prior periods' financial information.

                FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE  Certain statements made in this report and in other written or oral statements made by us or on our behalf are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: "believe," "anticipate," "expect," "estimate," "project," "will," "shall" and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services or products, future performance or financial results and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.  Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others:  

· Deterioration in general economic and business conditions that may affect

account values, investment results, guaranteed benefit liabilities, premium

levels, claims experience and the level of pension benefit costs, funding and

investment results;

· Adverse global capital and credit market conditions could affect our ability

to raise capital, if necessary, and may cause us to realize impairments on

investments and certain intangible assets, including goodwill and a valuation

allowance against deferred tax assets, which may reduce future earnings and/or

affect our financial condition and ability to raise additional capital or

refinance existing debt as it matures;

· Because of our holding company structure, the inability of our subsidiaries to

pay dividends to the holding company in sufficient amounts could harm the

holding company's ability to meet its obligations;

· Legislative, regulatory or tax changes, both domestic and foreign, that affect

the cost of, or demand for, our subsidiaries' products, the required amount of

reserves and/or surplus, or otherwise affect our ability to conduct business,

including changes to statutory reserve requirements related to secondary

guarantees under universal life, such as a change to reserve calculations

under Actuarial Guideline 38 (also known as The Application of the Valuation

of Life Insurance Policies Model Regulation, or "AG38"), and variable annuity

products under Actuarial Guideline 43 (also known as Commissioners Annuity

Reserve Valuation Method for Variable Annuities, or "AG43"); restrictions on

revenue sharing and 12b-1 payments; and the potential for U.S. federal tax

reform;

· Uncertainty about the effect of rules and regulations to be promulgated under

the Dodd-Frank Wall Street Reform and Consumer Protection Act on us and the

economy and the financial services sector in particular;

· The initiation of legal or regulatory proceedings against us, and the outcome

of any legal or regulatory proceedings, such as: adverse actions related to

present or past business practices common in businesses in which we compete;

   adverse decisions in                                            35

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significant actions including, but not limited to, actions brought by federal

and state authorities and class action cases; new decisions that result in

changes in law; and unexpected trial court rulings;

· Changes in or sustained low interest rates causing a reduction in investment

income, the interest margins of our businesses, estimated gross profits and

demand for our products;

· A decline in the equity markets causing a reduction in the sales of our

subsidiaries' products, a reduction of asset-based fees that our subsidiaries

charge on various investment and insurance products, an acceleration of the

net amortization of deferred acquisition costs ("DAC"), value of business

acquired ("VOBA"), deferred sales inducements ("DSI") and deferred front-end

loads ("DFEL") and an increase in liabilities related to guaranteed benefit

features of our subsidiaries' variable annuity products;

· Ineffectiveness of our risk management policies and procedures, including

various hedging strategies used to offset the effect of changes in the value

of liabilities due to changes in the level and volatility of the equity

markets and interest rates;

· A deviation in actual experience regarding future persistency, mortality,

morbidity, interest rates or equity market returns from the assumptions used

in pricing our subsidiaries' products, in establishing related insurance

reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may

reduce future earnings;

· Changes in GAAP, including the potential incorporation of International

Financial Reporting Standards ("IFRS") into the U.S. financial reporting

system, that may result in unanticipated changes to our net income;

· Lowering of one or more of our debt ratings issued by nationally recognized

statistical rating organizations and the adverse effect such action may have

on our ability to raise capital and on our liquidity and financial condition;

· Lowering of one or more of the insurer financial strength ratings of our

insurance subsidiaries and the adverse effect such action may have on the

premium writings, policy retention, profitability of our insurance

subsidiaries and liquidity;

· Significant credit, accounting, fraud, corporate governance or other issues

that may adversely affect the value of certain investments in our portfolios,

as well as counterparties to which we are exposed to credit risk, requiring

that we realize losses on investments;

· The effect of acquisitions and divestitures, restructurings, product

withdrawals and other unusual items;

· The adequacy and collectibility of reinsurance that we have purchased;

· Acts of terrorism, a pandemic, war or other man-made and natural catastrophes

that may adversely affect our businesses and the cost and availability of

reinsurance;

· Competitive conditions, including pricing pressures, new product offerings and

the emergence of new competitors, that may affect the level of premiums and

fees that our subsidiaries can charge for their products;

· The unknown effect on our subsidiaries' businesses resulting from changes in

the demographics of their client base, as aging baby-boomers move from the

asset-accumulation stage to the asset-distribution stage of life; and

· Loss of key management, financial planners or wholesalers.

    The risks included here are not exhaustive. Other sections of this report, our quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed with the Securities and Exchange Commission ("SEC") include additional factors that could affect our businesses and financial performance, including "Part I - Item 1A. Risk Factors," "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk" and the risk discussions included in this section under "Critical Accounting Policies and Estimates," "Consolidated Investments" and "Reinsurance," which are incorporated herein by reference. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.  Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.                                    INTRODUCTION                                 Executive Summary  We are a holding company that operates multiple insurance and retirement businesses through subsidiary companies. 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 UL, term life insurance, employer-sponsored defined contribution retirement plans, mutual funds and group life, disability and dental.  We provide products and services and report results through our Annuities, Retirement Plan Services (formerly referred to as "Defined Contribution"), Life Insurance and Group Protection segments. We also have Other Operations. These segments and Other Operations are described in "Part I - Item 1. Business" above.                                          36 --------------------------------------------------------------------------------

For information on how we derive our revenues, see the discussion in results of operations by segment below.

  Current Market Conditions  

Recent unfavorable market conditions including, but not limited to, the following concerns are weighing on and threatening the financial stability of the economy:

· The effects of low interest rates;

· The effects of the European debt crisis;

· The effects of volatile equity and capital markets; and

· Slow growth in the U.S. economy:

§ Uncertainty regarding the long-term effect of the Budget Control Act of 2011;

    § Downgrades and threatened downgrades by credit rating agencies;  

§ The interest rate on overnight loans between banks controlled by the Federal

Reserve Board remaining unchanged in January 2012 at 0% to 0.25%, with low

rates expected to continue at least through late 2014, in anticipation of

    weakening economic conditions and a subdued outlook on inflation, an     indicator of general interest rate trends;  

§ Persistent high unemployment, shrinking unemployment benefits and weak job

    creation;     § Continued slow and unpredictable U.S. housing market; and  

§ Historically low consumer confidence as the Consumer Confidence Index fell

during 2011 to a level not seen since April 2009 when the U.S. was still

officially in recession, reflecting the lowest percentile since the inception

     of the index.    The Federal Reserve's projections for 2012 announced in the fourth quarter of 2011 reflect weak growth and a slowing economic recovery. In the face of these economic challenges, we continue to focus on building our businesses through these difficult markets and beyond by developing and introducing high quality products, expanding distribution into new and existing key accounts and channels and targeting market segments that have high growth potential while maintaining a disciplined approach to managing our expenses.  

Significant Operational Matters

Interest Rate Risk on Fixed Insurance Businesses

  Because the profitability of our fixed annuity, UL, VUL and defined contribution insurance business depends in part on interest rate spreads, interest rate fluctuations could negatively affect our profitability. Changes in interest rates may reduce both our profitability from spread businesses and our return on invested capital. Some of our products, principally our fixed annuities, UL and VUL, have interest rate guarantees that expose us to the risk that changes in interest rates or prolonged low interest rates will reduce our spread, or the difference between the interest that we are required to credit to contracts and the yields that we are able to earn on our general account investments supporting our obligations under the contracts. Although we have been proactive in our investment strategies, product designs, crediting rate strategies and overall asset-liability practices to mitigate the risk of unfavorable consequences in this type of environment, declines in our spread, or instances where the returns on our general account investments are not enough to support the interest rate guarantees on these products, could have an adverse effect on some of our businesses or results of operations.  Given the level of interest rates as of the end of 2011, we have provided disclosures around the effects of sustained low interest rates in "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - Interest Rate Risk on Fixed Insurance Businesses - Falling Rates" and "Part I - Item 1A. Risk Factors - Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease and changes in interest rates may also result in increased contract withdrawals."  

Earnings from Account Values

  The Annuities and Retirement Plan Services segments are the most sensitive to the equity markets, as well as, to a lesser extent, our Life Insurance segment. We discuss the earnings effect of the equity markets on account values and the related asset-based earnings below in "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Equity Market Risk - Effect of Equity Market Sensitivity." From December 31, 2010, to December 31, 2011, our account values were up $2.7 billion driven primarily by positive net flows during 2011.                                          37 --------------------------------------------------------------------------------

Variable Annuity Hedge Program Performance

  We offer variable annuity products with living benefit guarantees. As described below in "Critical Accounting Policies and Estimates - Derivatives - Guaranteed Living Benefits," we use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the guaranteed living benefit ("GLB") embedded derivatives in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite direction of the change in embedded derivative reserves. These results are excluded from the Annuities and Retirement Plan Services segments' operating revenues and income from operations. See "Realized Gain (Loss) and Benefit Ratio Unlocking - Variable Annuity Net Derivatives Results" below for information on our methodology for calculating the non-performance risk ("NPR"), which affects the discount rate used in the calculation of the GLB embedded derivative reserves.  We also offer variable products with death benefit guarantees. As described below in "Critical Accounting Policies and Estimates - Future Contract Benefits and Other Contract Holder Obligations - Guaranteed Death Benefits," we use derivative instruments to attempt to hedge the income statement effect in the opposite direction of the guaranteed death benefit ("GDB") benefit ratio unlocking for movements in equity markets. These results are excluded from income (loss) from operations.  

The costs of derivative instruments that we use to hedge these variable annuity products may increase as a result of the low interest rate environment.

  The variable annuity hedge program ended 2011 with assets of $2.9 billion, which were in excess of the estimated liability of $2.6 billion as of December 31, 2011.  

Credit Losses, Impairments and Unrealized Losses

  Related to our investments in fixed income and equity securities, we experienced net realized losses that reduced net income by $76 million for 2011 and included credit-related write-downs of securities for other-than-temporary impairments ("OTTI") of $77 million. Although economic conditions have improved, we expect a continuation of some level of OTTI. If we were to experience another period of weakness in the economic environment, it could lead to increased credit defaults, resulting in additional write-downs of securities for OTTI.  

Declines in overall market yields driven by improved credit fundamentals resulted in a $304 million decrease in gross unrealized losses on the available-for-sale ("AFS") fixed maturity securities in our general account as of December 31, 2011.

Improvement of Return on Equity

One of our highest priorities continues to be increasing our return on equity ("ROE"). Growth in ROE will be driven by a number of items including:

· Earnings mix shift to businesses with higher returns;

· Sales of products that have higher returns than the products already in force;

and

· Capital management actions consisting of redeployment of excess capital

(including returning capital to common stockholders) and further generation of

    excess capital.    Strategic Investments  We continue to make strategic investments in our businesses to grow revenues, further spur productivity and improve our efficiency and service to our customers. These efforts include investments in technology and system upgrades, new products for the voluntary market and expanded distribution focus.  

Industry Trends

We continue to be influenced by a variety of trends that affect the industry.

Financial Environment

  The level of long-term interest rates and the shape of the yield curve can have a negative effect on the demand for and the profitability of spread-based products such as fixed annuities and UL. A flat or inverted yield curve and low long-term interest rates will be a concern if new money rates on corporate bonds are lower than our overall life insurer investment portfolio yields. Equity market performance can also affect the profitability of life insurers, as product demand and fee revenue from variable annuities and fee revenue from pension products tied to separate account balances often reflect equity market performance. A steady economy is important as it provides for continuing demand for insurance and investment-type products. Insurance                                          38 --------------------------------------------------------------------------------   premium growth, with respect to group life and disability products, for example, is closely tied to employers' total payroll growth. Additionally, the potential market for these products is expanded by new business creation.  

Demographics

  In the coming decade, a key driver shaping the actions of the insurance industry will be the escalation of income protection and wealth accumulation goals and needs of the retiring baby-boomers. As a result of increasing longevity, retirees will need to accumulate sufficient savings to finance retirements that may span 30 or more years. Helping the baby-boomers to accumulate assets for retirement and subsequently to convert these assets into retirement income represents an opportunity for the insurance industry.  Insurers are well positioned to address the baby-boomers' rapidly increasing need for savings tools and for income protection. We believe that, among insurers, those with strong brands, high financial strength ratings and broad distribution are best positioned to capitalize on the opportunity to offer income protection products to baby-boomers.  Moreover, the insurance industry's products, and the needs they are designed to address, are complex. We believe that individuals approaching retirement age will need to seek information to plan for and manage their retirements. In the workplace, as employees take greater responsibility for their benefit options and retirement planning, they will need information about their possible individual needs. One of the challenges for the insurance industry will be the delivery of this information in a cost effective manner.  

Competitive Pressures

  The insurance industry remains highly competitive. The product development and product life cycles have shortened in many product segments, leading to more intense competition with respect to product features. Larger companies have the ability to invest in brand equity, product development, technology and risk management, which are among the fundamentals for sustained profitable growth in the life insurance industry. In addition, several of the industry's products can be quite homogeneous and subject to intense price competition. Sufficient scale, financial strength and financial flexibility are becoming prerequisites for sustainable growth in the life insurance industry. Larger market participants tend to have the capacity to invest in additional distribution capability and the information technology needed to offer the superior customer service demanded by an increasingly sophisticated industry client base.  

Regulatory Changes

  The insurance industry is regulated at the state level, with some products and services also subject to federal regulation. Regulators may refine capital requirements and introduce new reserving standards for the life insurance industry. Regulations recently adopted or currently under review, such as the Dodd-Frank Act, can potentially affect the capital requirements of the industry and result in increased regulation and oversight for the industry. In addition, changes in GAAP, including future convergence with IFRS, as well as the methodologies, estimations and assumptions thereunder, may result in unanticipated changes to our net income. See "Part I - Item 1. Business - Regulatory" for a discussion of the potential effects of regulatory changes on our industry.  Issues and Outlook 

Going into 2012, significant issues include:

· Continuation of the low interest rate environment in comparison to historical

periods;

· Planned reductions in sales levels, especially in our UL products with

secondary guarantees, due to economic factors; and

· Increased actions by government and regulatory authorities to introduce

regulations or change existing regulations or guidance in a manner that could

have a significant effect on our capital, earnings and/or business models,

such as changing long-standing reserving methods for products with guarantee

    features.    

In the face of these issues and potential issues, we expect to focus on the following:

· Closely monitoring our capital and liquidity positions taking into account the

uncertain economic recovery and changing statutory accounting and reserving

practices;

· Continuing to explore additional financing strategies addressing the statutory

reserve strain related to our secondary guarantee UL products in order to

manage our capital position effectively;

· Taking actions to manage the risk of a continuation of lower interest rates,

including re-pricing our products;

· Closely monitoring ongoing activities in the legal and regulatory environment

and taking an active role in the legislative and/or regulatory process;

· Continuing to make investments in our businesses to grow revenues and further

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· Shifting focus toward other life insurance products, such as indexed UL and

linked-benefit rider products, that have greater market acceptance in the

current environment; and

· Managing our expenses aggressively through process improvement initiatives

   combined with continued financial discipline and execution excellence    throughout our operations.   

For additional factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.

                   Critical Accounting Policies and Estimates  We have identified the accounting policies below as critical to the understanding of our results of operations and our financial position. In applying these critical accounting policies in preparing our financial statements, management must use critical assumptions, estimates and judgments concerning future results or other developments, including the likelihood, timing or amount of one or more future events. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our assumptions, estimates and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1.  DAC, VOBA, DSI and DFEL  Accounting for intangible assets requires numerous assumptions, such as estimates of expected future profitability for our operations and our ability to retain existing blocks of life and annuity business in force. Our accounting policies for DAC, VOBA, DSI and DFEL affect the Annuities, Retirement Plan Services, Life Insurance and Group Protection segments.  

Deferrals

  Qualifying deferrable acquisition expenses are recorded as an asset on our Consolidated Balance Sheets as DAC for products we sold during a period or VOBA for books of business we acquired during a period. In addition, we defer costs associated with DSI and revenues associated with DFEL. DSI increases interest credited and reduces income when amortized. DFEL is a liability included within other contract holder funds on our Consolidated Balance Sheets, and when amortized, increases insurance fees on our Consolidated Statements of Income (Loss).  

Our DAC, VOBA, DSI and DFEL balances (in millions) by business segment as of December 31, 2011, were as follows:

                                          Retirement                                            Plan          Life         Group                           Annuities      Services     Insurance    Protection      Total DAC and VOBA Gross                    $     2,941   $        526   $    7,227   $       195   $  10,889 Unrealized (gain) loss          (623 )         (195 )     (1,880 )           -      (2,698 )    Carrying value        $     2,318   $        331   $    5,347   $       195   $   8,191  DSI Gross                    $       322   $          3   $        -   $         -   $     325 Unrealized (gain) loss           (53 )           (1 )          -             -         (54 )    Carrying value        $       269   $          2   $        -   $         -   $     271  DFEL Gross                    $       268   $          -   $    1,810   $         -   $   2,078 Unrealized (gain) loss            (5 )            -         (704 )           -        (709 )    Carrying value        $       263   $          -   $    1,106   $         -   $   1,369    AFS securities and certain derivatives are stated at fair value with unrealized gains and losses included within accumulated other comprehensive income (loss), net of associated DAC, VOBA, DSI, other contract holder funds and deferred income taxes.  The unrealized balances in the table above represent the DAC, VOBA, DSI and DFEL balances for these effects of unrealized gains and losses on AFS securities and certain derivatives as of the end-of-period.                                          40 --------------------------------------------------------------------------------

New DAC Methodology

  In October 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2010-26, "Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts" (referred to herein as the "new DAC methodology"), 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. This determination of deferability must be made on a contract-level basis. This new DAC methodology contrasts to the existing guidance we follow that defines deferrable acquisition costs as costs that vary with and are related primarily to new or renewal business, regardless of whether the acquisition efforts were successful or unsuccessful.  

Some examples of acquisition costs that remain subject to deferral as part of the new DAC methodology include the following:

· Employee, agent or broker commissions for successful contract acquisitions;

· Wholesaler production bonuses for successful contract acquisitions;

· Renewal commissions and bonuses to agents or brokers;

· Medical and inspection fees for successful contract acquisitions;

· Premium-related taxes and assessments; and

· A portion of the salaries and benefits of certain employees involved in the

underwriting, contract issuance and processing, medical and inspection and

sales force contract selling functions related to the successful issuance or

renewal of an insurance contract.

    All other acquisition-related costs, including costs incurred by the insurer for soliciting potential customers, market research, training, administration, management of distribution and underwriting functions, unsuccessful acquisition or renewal efforts and product development, are considered non-deferrable acquisition costs and must be expensed in the period incurred.  

In addition, the following indirect costs are considered non-deferrable acquisition costs as part of the new DAC methodology and must be charged to expense in the period incurred:

 ·  Administrative costs;   ·  Rent;   ·  Depreciation;   ·  Occupancy costs;  

· Equipment costs (including data processing equipment dedicated to acquiring

    insurance contracts); and   ·  Other general overhead.    We will adopt the new DAC methodology effective January 1, 2012, and have elected to apply the guidance retrospectively. We expect that our adoption of the new DAC methodology will result in an overall reduction in deferrable acquisition costs, partially offset by lower DAC amortization, in each of our business segments. We currently estimate that retrospective adoption will result in the restatement of all years presented with a cumulative effect adjustment to the opening balance of retained earnings for the earliest period presented of approximately $950 million to $1.15 billion. In addition, the adoption of this accounting guidance will result in a lower DAC adjustment associated with unrealized gains and losses on AFS securities and certain derivatives; therefore, we will also adjust these DAC balances through a cumulative effect adjustment to the opening balance of accumulated other comprehensive income (loss) ("AOCI").  This adjustment is dependent on our unrealized position as of the date of adoption. We believe that the total of our segment results would have declined by approximately 5% to 7% for 2011 had we applied the provisions of the new DAC methodology during 2011. This decline would not have been uniform across our segments as the effect on the Life Insurance segment would have been greater due to its products having longer contract lives and its more significant VOBA balance that is not affected by the new methodology. This estimate does not include changes that management may make to mitigate the effects of this new DAC methodology.  

Amortization

  Deferrable acquisition costs for variable annuity and deferred fixed annuity contracts and UL and VUL policies are amortized over the lives of the contracts in relation to the incidence of estimated gross profits ("EGPs") derived from the contracts. Broker commissions or broker-dealer expenses, which vary with and are related to sales of mutual fund products, respectively, are expensed as incurred. For our traditional products, we amortized deferrable acquisition costs either on a straight-line basis or as a level percent of premium of the related contracts, depending on the block of business.  EGPs vary based on a number of sources including policy persistency, mortality, fee income, investment margins, expense margins and realized gains and losses on investments, including assumptions about the expected level of credit-related losses. Each of these sources of profit is, in turn, driven by other factors. For example, assets under management and the spread between earned and                                          41 --------------------------------------------------------------------------------  credited rates drive investment margins; net amount at risk ("NAR") drives the level of cost of insurance ("COI") charges and reinsurance premiums. The level of separate account assets under management is driven by changes in the financial markets (equity and bond markets, hereafter referred to collectively as "equity markets") and net flows. Realized gains and losses on investments include amounts resulting from differences in the actual level of impairments and the levels assumed in calculating EGPs.  We amortize DAC, VOBA, DSI and DFEL in proportion to our EGPs for interest-sensitive products. When actual gross profits are higher in the period than EGPs, we recognize more amortization than planned. When actual gross profits are lower in the period than EGPs, we recognize less amortization than planned. In a calendar year where the gross profits for a certain group of policies, or "cohorts," are negative, our actuarial process limits, or floors, the amortization expense offset to zero.  

For a discussion of the periods over which we amortize our DAC, VOBA, DSI and DFEL see "DAC, VOBA, DSI and DFEL" in Note 1.

Unlocking

  As discussed and defined in "DAC, VOBA, DSI and DFEL" in Note 1, we may record retrospective unlocking, prospective unlocking - assumption changes and prospective unlocking - model refinements on a quarterly basis that result in increases or decreases to the carrying values of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for life insurance and annuity products with living benefit and death benefit guarantees. The primary distinction between retrospective and prospective unlocking is that retrospective unlocking is driven by the difference between actual gross profits compared to EGPs each period, while prospective unlocking is driven by changes in assumptions or projection models related to our expectations of future EGPs.  For illustrative purposes, the following presents the hypothetical effects to EGPs and DAC (1) amortization attributable to changes in assumptions from those our model projections assume (i.e., prospective unlocking), assuming all other factors remain constant:                                         Hypothetical                         Hypothetical    Effect to Actual Experience Differs                  Effect to      Net Income    From Those Our    Model                 Net Income    for DAC (1)    Projections Assume     for EGPs     Amortization   Description of Expected Effect                                                       Increase to fee income and decrease to Higher equity markets    Favorable      Favorable     changes in                                                            reserves.                                                        Decrease to fee income and increase to Lower equity markets    Unfavorable    Unfavorable    changes in                                                            reserves.  Higher investment                                     Increase to interest rate spread on our margins                  Favorable      Favorable     fixed product                                                            line, including fixed portion of                                                            variable.  Lower investment                                      Decrease to interest rate spread on our margins                 Unfavorable    Unfavorable    fixed product                                                            line, including fixed portion of                                                            variable.                                                        Decrease to realized gains on Higher credit losses    Unfavorable    Unfavorable    investments.                                                        Increase to realized gains on Lower credit losses      Favorable      Favorable     investments.                                                        Decrease to fee income, partially offset Higher lapses           Unfavorable    Unfavorable    by decrease to                                                            benefits due to shorter contract                                                            life.                                                        Increase to fee income, partially offset Lower lapses             Favorable      Favorable     by increase to                                                            benefits due to longer contract                                                            life.                                                        Decrease to fee income and increase to Higher death claims     Unfavorable    Unfavorable    changes in                                                            reserves due to shorter contract                                                            life.                                                        Increase to fee income and decrease to Lower death claims       Favorable      Favorable     changes in                                                            reserves due to longer contract                                                            life.   

(1) DAC refers to the associated amortization of DAC, VOBA, DSI and DFEL and

    changes in future contract benefits.                                            42

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Details underlying the effect to income (loss) from continuing operations from prospective unlocking (in millions) were as follows:

                                                                          Assumption Changes                           Model Refinements                                                                   For the Years Ended December 31,            For the Years Ended December 31,                                                                2011           2010            2009            2011             2010         2009

Income (loss) from operations:

    Annuities                                                $      (17 )  $         27    $         (9 ) $           -      $      (6 )  $       -     Retirement Plan Services                                          -              10               5              (2 )           (5 )          -     Life Insurance                                                   26            (101 )            (7 )            25             18            - Excluded realized gain (loss)                                       (72 )            18            (151 )             -              -           (6 )         Income (loss) from continuing              operations                                      $      (63 )  $        (46 )  $       (162 ) $          23      $       7    $      (6 )   

Our prospective unlocking - assumption changes were attributable primarily to the following:

  2011  

· For Annuities, we lowered our long-term equity market growth rate and interest

margin assumptions, partially offset by lowering our lapse assumptions;

· For Life Insurance, we updated our crediting rate assumptions to reflect

actions implemented to reduce interest crediting rates; and

· For excluded realized gain (loss), we increased our lapse assumptions,

partially offset by lowering our assumptions for long-term volatility.

2010

· For Annuities, we included an estimate in our models for rider fees related to

our annuity products with living benefit guarantees and lowered our lapse

assumptions, partially offset by completing the planned conversion of our

actuarial valuation systems to a uniform platform for certain blocks of

business (see more discussion below);

· For Retirement Plan Services, we completed the planned conversion of our

actuarial valuation systems to a uniform platform for certain blocks of

business (see more discussion below);

· For Life Insurance, we lowered our new money investment yield assumption to

reflect the then current new money rates and to approximate the forward curve

for interest rates relevant at such time, as this effect alone represented

$114 million unfavorable unlocking; and

· For excluded realized gain (loss), we lowered our lapse assumptions, which was

significantly offset by shifting the mapping of approximately 5% of variable

annuity account values to blended equity and fixed maturity hedging indices,

whereas previously we had been mapped almost exclusively to equity.

    During 2010, we completed the planned conversion of our actuarial valuation systems to a uniform platform for certain blocks of business for our Annuities and Retirement Plan Services segments. This conversion harmonized assumptions, methods of calculations and processes and upgraded a critical platform for our financial reporting and analysis capabilities for these blocks of business. We recorded unfavorable prospective unlocking for Annuities and favorable prospective unlocking for Retirement Plan Services as a result of the planned conversion. We are in the process of completing a similar conversion for Life Insurance and also have other blocks of business in Annuities that we intend to convert. Although we expect some differences to emerge as a result of this exercise, based upon the current status of these efforts, we are not able to provide an estimate or range of the effects to our results of operations until completion of the conversion.  2009 

· For Annuities, we increased our assumptions related to maintenance expenses,

partially offset by increasing our assumptions for expense assessments and

modifying the valuation of variable annuity products that have elements of

both benefit reserves and embedded derivative reserves;

· For Retirement Plan Services, we modified our assumptions related to

   compensation in our wholesaling distribution organization that lowered    deferrals as a percentage of total expenses incurred and revised our    assumptions related to maintenance expenses;  

· For Life Insurance, we lowered our investment margin assumptions and increased

   our expense, death claim and lapse assumptions; and                                            43

--------------------------------------------------------------------------------

· For excluded realized gain (loss), we modified the valuation of variable

annuity products that have elements of both benefit reserves and embedded

derivative reserves, and we revised our fund assumptions related to hedged

    indices.    

Details underlying the effect to income (loss) from continuing operations from retrospective unlocking (in millions) were as follows:

                                             For the Years Ended December 31,                                            2011          2010          2009 

Income (loss) from operations:

    Annuities                           $       104    $      81    $        29     Retirement Plan Services                     10           (3 )           (1 )     Life Insurance                              (10 )         (3 )          (18 ) Benefit ratio unlocking                         (14 )         10             89         Income (loss) from continuing              operations                 $        90    $      85    $        99   

Our retrospective unlocking was attributable primarily to the following:

2011

· For Annuities, we experienced higher average equity markets and prepayment and

bond makewhole premiums and lower lapses than our model projections assumed;

· For Retirement Plan Services, we experienced lower lapses and higher average

equity markets than our model projections assumed;

· For Life Insurance, we received lower premiums and experienced higher death

claims than our model projections assumed; and

· For benefit ratio unlocking, the period to period equity markets were less

favorable than our model projections assumed.

2010

· For Annuities, we experienced higher average equity markets and expense

assessments and lower lapses than our model projections assumed;

· For Retirement Plan Services, we experienced higher lapses, partially offset

by higher average equity markets, than our model projections assumed;

· For Life Insurance, we received lower premiums and experienced higher death

claims, partially offset by lower lapses and expenses, than our model

projections assumed; and

· For benefit ratio unlocking, the period to period equity markets were more

favorable than our model projections assumed.

2009

· For Annuities, we experienced lower lapses and higher average equity markets

than our model projections assumed;

· For Retirement Plan Services, we experienced higher lapses and maintenance

expenses and lower average equity markets than our model projections assumed;

· For Life Insurance, we received lower premiums and experienced lower

investment income on alternative investments and prepayment and bond makewhole

premiums, partially offset by lower death claims and lapses, than our model

projections assumed; and

· For benefit ratio unlocking, the period to period equity markets were more

favorable than our model projections assumed.

Reversion to the Mean ("RTM")

  Because equity market movements have a significant effect on the value of variable annuity and VUL products and the fees earned on these accounts, EGPs could increase or decrease with movements in the equity markets; therefore, significant and sustained changes in equity markets have had and could in the future have an effect on DAC, VOBA, DSI and DFEL amortization for our variable annuity, annuity-based 401(k) and VUL businesses.  As equity markets do not move in a systematic manner, we reset the baseline of account values from which EGPs are projected, which we refer to as our RTM process. Under our RTM process, on each valuation date, future EGPs are projected using stochastic modeling of a large number of future equity market scenarios in conjunction with best estimates of lapse rates, interest                                          44 --------------------------------------------------------------------------------  rate spreads and mortality to develop a statistical distribution of the present value of future EGPs for our variable annuity, annuity-based 401(k) and VUL blocks of business. Because future equity market returns are unpredictable, the underlying premise of this process is that best estimate projections of future EGPs need not be affected by random short-term and insignificant deviations from expectations in equity market returns. However, long-term or significant deviations from expected equity market returns require a change to best estimate projections of EGPs and prospective unlocking of DAC, VOBA, DSI, DFEL and changes in future contract benefits. The statistical distribution is designed to identify when the equity market return deviations from expected returns have become significant enough to warrant a change of the future equity return EGP assumption.  The stochastic modeling performed for our variable annuity blocks of business as described above is used to develop a range of reasonably possible future EGPs. We compare the range of the present value of the future EGPs from the stochastic modeling to that used in our amortization model. A set of intervals around the mean of these scenarios is utilized to calculate two separate statistical ranges of reasonably possible EGPs. These intervals are then compared again to the present value of the EGPs used in the amortization model. If the present value of EGP assumptions utilized for amortization were to exceed the margin of the reasonable range of statistically calculated EGPs, a revision of the EGPs used to calculate amortization would occur. If a revision is deemed necessary, future EGPs would be re-projected using the current account values at the end of the period during which the revision occurred along with a revised long-term annual equity market gross return assumption such that the re-projected EGPs would be our best estimate of EGPs.  Notwithstanding these intervals, if a severe decline or advance in equity markets were to occur or should other circumstances, including contract holder behavior, suggest that the present value of future EGPs no longer represents our best estimate, we could determine that a revision of the EGPs is necessary.  Our practice is not necessarily to unlock immediately after exceeding the first of the two statistical ranges, but, rather, if we stay between the first and second statistical range for several quarters, we would likely unlock. Additionally, if we exceed the ranges as a result of a short-term market reaction, we would not necessarily unlock. However, if the second statistical range is exceeded for more than one quarter, it is likely that we would unlock. While this approach reduces adjustments to DAC, VOBA, DSI and DFEL due to short-term equity market fluctuations, significant changes in the equity markets that extend beyond one or two quarters could result in a significant favorable or unfavorable unlocking.  Our long-term equity market growth rate assumption, which is used in the determination of DAC, VOBA, DSI and DFEL amortization for the variable component of our variable annuity and VUL products, is an immediate drop of approximately 8% followed by growth going forward of 8% to 9% depending on the block of business and reflecting differences in contract holder fund allocations between fixed income and equity-type investments. If we were to have unlocked our RTM assumption in the corridor as of December 31, 2011, we would have recorded a favorable prospective unlocking of approximately $175 million, pre-tax, for Annuities, approximately $20 million, pre-tax, for Retirement Plan Services, and approximately $15 million, pre-tax, for Life Insurance.  

Goodwill and Other Intangible Assets

  Goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment tests conducted at least annually as of October 1. Intangibles that do not have indefinite lives are amortized over their estimated useful lives. We are required to perform a two-step test in our evaluation of the carrying value of goodwill for each of our reporting units, and the results of one test on one reporting unit cannot subsidize the results of another reporting unit. In Step 1 of the evaluation, the fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. If the fair value is greater than the carrying value, then the carrying value of the reporting unit is deemed to be recoverable, and Step 2 is not required. If the fair value estimate is less than the carrying value, it is an indicator that impairment may exist, and Step 2 is required. In Step 2, the implied fair value of goodwill is determined for each reporting unit. The reporting unit's fair value as determined in Step 1 is assigned to all of its net assets (recognized and unrecognized) as if the reporting unit were acquired in a business combination as of the date of the impairment test. If the implied fair value of the reporting unit's goodwill is lower than its carrying amount, goodwill is impaired and written down to its fair value.  The fair values of our insurance and annuities businesses are comprised of two components: the value of new business and the value of in-force business. Factors could cause us to believe our estimated fair value of the total business may be lower than the carrying value and trigger a Step 1 test, but may not require a Step 2 test if the fair value of the reporting unit is greater than its carrying value. We may also conduct a Step 2 test, but it may not result in goodwill impairment because the implied fair value of goodwill may exceed our carrying amount of goodwill. The value of our goodwill asset is supported by our value of new business, which is not affected by the same factors as our value of in-force business.  The implied fair value of goodwill is most sensitive to new business production levels, profitability and discount rates. Factors that could affect production levels and profitability include mix of new business, pricing changes, customer acceptance of our products and distribution strength. Recent declines in interest rates have applied downward pressure to the interest rate inputs used in the discount rate calculation. Spread compression and related effects to profitability caused by lower interest rates affect the valuation                                          45 --------------------------------------------------------------------------------   of in-force business much more significantly than the valuation of new business. The effect of interest rate movements on the value of new business is primarily related to the discount rate. However, current market conditions have led to re-pricing actions in the life insurance industry creating additional uncertainty around future sales returns and levels, which we believe has resulted in an increase in the discount rate a market participant would assume for new business in our Life Insurance segment.  Refer to Note 10 of our consolidated financial statements for goodwill and specifically identifiable intangible assets by segment as well as the results of our recoverability analysis for the years ended December 31, 2010 and 2009. All the discussion that follows represents our analysis as of October 1, 2011.  We performed a Step 1 analysis on all of our reporting units including: Annuities, Retirement Plan Services, Life Insurance, Group Protection and Media. Our Annuities, Retirement Plan Services and Group Protection reporting units passed the Step 1 analysis, and although the carrying value of the net assets for Group Protection was within the estimated fair value range, we deemed it prudent to validate the carrying value of goodwill through a Step 2 analysis. Given the Step 1 results, we also performed a Step 2 analysis for our Life Insurance and Media reporting units.  

Step 1 Results and Information for our Annuities and Retirement Plan Services Reporting Units

  For Annuities and Retirement Plan Services, we estimated the fair values of the reporting units based on a discounted cash flow valuation technique ("income approach") similar to that of our Life Insurance and Group Protection reporting units discussed below. We also updated our estimates of discount rates based upon current market observable inputs. We used discount rates ranging from 12.0% to 13.0% for both Annuities and Retirement Plan Services based upon the weighted average cost of capital adjusted for risks associated with the operations.  

Based upon our Step 1 analysis for Annuities and Retirement Plan Services, our estimated implied fair value was well in excess of each reporting unit's carrying value of net assets, including goodwill.

Step 2 Results and Information for our Life Insurance, Group Protection and Media Reporting Units

  In our Step 2 analyses of Life Insurance, Group Protection and Media, we estimated the implied fair value of goodwill for each reporting unit primarily through an income approach, although limited available market data was also considered. In determining the estimated implied fair value of goodwill for these reporting units, we considered discounted cash flow calculations and assumptions that market participants would make in valuing the new business of these reporting units. These analyses required us to make judgments about new business revenues, earnings projections, capital market assumptions and discount rates.  

The key assumptions used in the analyses to determine the implied fair value of goodwill for the Life Insurance and Group Protection reporting units included:

· New business for 10 years;

· Expense synergies assumption that would be expected to be realized in a

market-participant transaction similar to prior market observable transactions

and our prior experience; and

· Interest rates used to discount new business cash flows; we considered

discount rates ranging from 9.0% to 10.5% for our Life Insurance reporting

unit and from 9.0% to 10.0% for our Group Protection reporting unit based on

the weighted average cost of capital adjusted for the risk factors associated

    with the operations.    Based upon our Step 2 analysis for Life Insurance, we recorded a goodwill impairment of $650 million that was attributable primarily to marketplace dynamics, including product changes that we have implemented or will implement shortly that we believe will have an unfavorable effect on our sales levels for a period of time. We believe the assumptions used in our estimates of the implied fair value of our goodwill are reasonable.  

Based upon our Step 2 analysis for Group Protection, we determined that there was no impairment.

The key assumptions used in the analysis to determine the fair value of the Media reporting unit included:

· Broadcast cash flows for 10 years and a terminal value in year 11; and

· Interest rates used to discount broadcast cash flows; we considered discount

rates ranging from 12.0% to 14.0% that were based on the weighted average cost

of capital adjusted for the risk factors associated with the operations.

    Based upon our Step 2 analysis for Media, we recorded a goodwill impairment of $97 million, which represented the entire remaining balance of goodwill for this reporting unit. The goodwill impairment was primarily a result of the deterioration in operating environment and outlook for the business.                                          46 --------------------------------------------------------------------------------

Control Premium Information and Outlook

  We believe that our stock price has been unfavorably affected by macroeconomic events and concerns about the economic recovery as discussed above in "Current Market Conditions." Our stock price has experienced increased volatility and continues to be lower than our book value. We believe that our stock price is not representative of the underlying fair value of our reporting units.  

In addition, as discussed above in "New DAC Methodology," we currently estimate that retrospective adoption will result in lower carrying values for our Annuities, Retirement Plan Services, Life Insurance and Group Protection reporting units by approximately $950 million to $1.15 billion, which will provide a favorable change in next year's Step 1 evaluation.

  Because our stock is trading at a price below book value, we are required to evaluate and reassess each reporting period whether or not there is an indicator that would require us to perform an impairment test. Factors that can influence the value of goodwill include the capital markets, competitive landscape, regulatory environment, consumer confidence and any items that can directly or indirectly affect new business future cash flows.  For example, unfavorable changes to assumptions as compared to our October 1, 2011, analysis or factors that could result in impairment include, but are not limited to, the following:  

· Lower expectations for future sales levels or future sales profitability;

· Higher discount rates on new business assumptions;

· Weakened expectations for the ability to execute future reinsurance

transactions for life insurance business over the long-term or expectations

for significant increases in the associated costs.

· Legislative, regulatory or tax changes that affect the cost of, or demand for,

our subsidiaries' products, the required amount of reserves and/or surplus, or

   otherwise affect our ability to conduct business, including changes to    statutory reserve requirements or changes to risk-based capital ("RBC")    requirements; and  

· Valuations of mergers or acquisitions of companies or blocks of business that

would provide relevant market-based inputs for our impairment assessment that

could support different conclusions regarding the estimated fair value of our

    reporting units.    Investments  Invested assets are an integral part of our operations, and we invest in fixed maturity and equity securities that are primarily classified as available-for-sale and carried at fair value with the difference from amortized cost included in stockholders' equity as a component of AOCI. See "Consolidated Investments" below for more information.  

Investment Valuation

  Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which would include our own credit risk. Our estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability ("exit price") in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability ("entry price"). Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards CodificationTM ("ASC"), we categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined in Note 1.                                          47

--------------------------------------------------------------------------------  The following summarizes our AFS and trading securities and derivative investments carried at fair value by pricing source and fair value hierarchy level (in millions):                                                                                   As of December 31, 2011                                                                    Quoted                                                                    Prices                                                                   in Active                                                                  Markets for     Significant     Significant                                                                   Identical      Observable     Unobservable      Total                                                                    Assets          Inputs          Inputs         Fair                                                                   (Level 1)       (Level 2)       (Level 3)       Value Priced by third party pricing services                          $         700   $      67,361   $           -   $  68,061 Priced by independent broker quotations                                     -               -           3,058       3,058 Priced by matrices                                                          -           9,063               -       9,063 Priced by other methods (1)                                                 -               -           1,916       1,916         Total                                                   $         700   $      76,424   $       4,974   $  82,098  Percent of total                                                            1 %            93 %             6 %       100 %   

(1) Represents primarily securities for which pricing models were used to

compute fair value.

For the categories and associated fair value of our AFS fixed maturity securities classified within Level 3 of the fair value hierarchy as of December 31, 2011 and 2010, see Notes 1 and 21.

  Our investment securities are valued using market inputs, including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators and industry and economic events are monitored, and further market data is acquired if certain triggers are met. Credit risk is also considered in the valuation of our investment securities as we incorporate the issuer's credit rating and a risk premium, if warranted, given the issuer's industry and the security's time to maturity. The credit rating is based upon internal and external analysis of the issuer's financial strength. We use an internationally recognized pricing service as our primary pricing source, and we do not adjust prices received from third parties or obtain multiple prices when measuring the fair value of our investments. We generally use prices from the pricing service rather than broker quotes because we have documentation from the pricing service on the observable market inputs they use, which contrasts to the broker quotes where we have limited information on the pricing inputs. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For private placement securities, we use pricing matrices that utilize observable pricing inputs of similar public securities and Treasury yields as inputs to the fair value measurement. It is possible that different valuation techniques and models, other than those described above, could produce materially different estimates of fair value.  

When the volume and level of activity for an asset or liability has significantly decreased in relation to normal market activity for the asset or liability, we believe that the market is not active as indicated by the following:

· Few recent transactions based on volume and level of activity in the market;

therefore, there is not sufficient frequency and volume to provide pricing

information on an ongoing basis;

· Price quotations are not based on current information;

· Price quotations vary substantially either over time or among market makers;

· Indexes that previously were highly correlated with the fair values of the

asset are demonstrably uncorrelated with recent fair values;

· Abnormal, or significant increases in, liquidity risk premiums or implied

yields for quoted prices when compared with reasonable estimates using

realistic assumptions of credit and other nonperformance risk for the asset

class;

· Abnormally wide bid-ask spread or significant increases in the bid-ask spread;

and

· Limited public information available.

    After evaluating all factors and considering the significance and relevance of each factor, we evaluate whether there has been a significant decrease in the volume and level of activity for the asset when the market for that asset is not active. As of December 31, 2011, we evaluated the markets that our securities trade in and concluded that none were inactive. We will continue to re-evaluate this conclusion, as needed, based on market conditions.                                          48 --------------------------------------------------------------------------------  We use unobservable inputs to measure the fair value of securities trading in less liquid or illiquid markets with limited or no pricing information. We obtain broker quotes for securities such as synthetic convertibles, index-linked certificates of deposit and collateralized debt obligations ("CDOs") when sufficient security structure or other market information is not available to produce an evaluation. For broker-quoted only securities, non-binding quotes from market makers or broker-dealers are obtained from sources recognized as market participants. Broker-quoted securities are based solely on receipt of updated quotes from a single market maker or a broker-dealer recognized as a market participant. Our broker-quoted only securities are generally classified as Level 3 of the fair value hierarchy. As of December 31, 2011, we used broker quotes for 77 securities as our final price source, representing approximately 2% of total securities owned.  In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales and observations of general market movements for those security classes. Our primary third-party pricing service has policies and processes to ensure that it is using objectively verifiable observable market data. The pricing service regularly reviews the evaluation inputs for securities covered, including broker quotes, executed trades and credit information, as applicable. If the pricing service determines it does not have sufficient objectively verifiable information about a security's valuation, it discontinues providing a valuation for the security. The pricing service regularly publishes and updates a summary of inputs used in its valuations by major security type. In addition, we have policies and procedures in place to review the process that is utilized by the third-party pricing service and the output that is provided to us by the pricing service. On a periodic basis, we test the pricing for a sample of securities to evaluate the inputs and assumptions used by the pricing service, and we perform a comparison of the pricing service output to an alternative pricing source. In addition, we check prices provided by our primary pricing service to ensure that they are not stale or unreasonable by reviewing the prices for unusual changes from period to period based on certain parameters or for lack of change from one period to the next. If such anomalies in the pricing are observed, we may use pricing information from another pricing source.  

Valuation of Alternative Investments

  Recognition of investment income on alternative investments is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships' general partners, as our venture capital, real estate and oil and gas portfolios are generally reported to us on a three-month delay, and our hedge funds are reported to us on a one-month delay. In addition, the effect of audit adjustments related to completion of calendar-year financial statement audits of the investees are typically received during the first or second quarter of each calendar year. Accordingly, our investment income from alternative investments for any calendar year period may not include the complete effect of the change in the underlying net assets for the partnership for that calendar year period.  Annually, typically during the first or second quarter, we obtain audited financial statements for our alternative investment partnerships for the preceding calendar year and recognize adjustments to the extent that the audited equity of the investee differs from the equity used for reporting in prior quarters. Recorded audit adjustments affect our investment income on alternative investments in the period that the adjustments are recorded.  

Write-downs for OTTI and Allowance for Losses

We regularly review our AFS securities for declines in fair value that we determine to be other-than-temporary. For additional details, see "Consolidated Investments" below and Notes 1, 2 and 5.

  For certain securitized fixed maturity securities with contractual cash flows, including asset-backed securities, we use our best estimate of cash flows for the life of the security to determine whether there is an OTTI of the security. In addition, we review for other indicators of impairment as required by the Investments - Debt and Equity Securities Topic of the FASB ASC.  Based on our evaluation of securities with an unrealized loss as of December 31, 2011, we do not believe that any additional OTTI, other than those already reflected in the financial statements, are necessary. As of December 31, 2011, there were AFS securities with gross unrealized losses totaling $1.1 billion, pre-tax, and prior to the effect of DAC, VOBA, DSI and other contract holder funds.  As the discussion in Notes 1, 2 and 5 indicates, there are risks and uncertainties associated with determining whether declines in the fair value of investments are other-than-temporary. These include subsequent significant changes in general overall economic conditions, as well as specific business conditions affecting particular issuers, future financial market effects such as interest rate spreads, stability of foreign governments and economies, future rating agency actions and significant accounting, fraud or corporate governance issues that may adversely affect certain investments. In addition, there are often significant estimates and assumptions that we use to estimate the fair values of securities, including projections of expected future cash flows and pricing of private securities. We continually monitor developments and update underlying assumptions and financial models based upon new information.                                          49 --------------------------------------------------------------------------------   Write-downs and allowances for losses on select mortgage loans, real estate and other investments are established when the underlying value of the property is deemed to be less than the carrying value. All mortgage loans that are impaired have an established allowance for credit loss. Changing economic conditions affect our valuation of mortgage loans. Increasing vacancies, declining rents and the like are incorporated into the discounted cash flow analysis that we perform for monitored loans and may contribute to the establishment of (or an increase in) an allowance for credit losses. In addition, we continue to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis include properties that have deteriorating credits or have experienced debt-service coverage and/or loan-to-value reduction. Where warranted, we have established or increased loss reserves based upon this analysis.  

Derivatives

  We use derivative instruments to manage a variety of equity market and interest rate risks that are inherent in many of our life insurance and annuity products. Assessing the effectiveness of these hedging programs and evaluating the carrying values of the related derivatives often involve a variety of assumptions and estimates. We use derivatives to hedge equity market risks, interest rate risk and foreign currency exposures that are embedded in our annuity and life insurance product liabilities or investment portfolios. Derivatives held as of December 31, 2011, contain industry standard terms. Our accounting policies for derivatives and the potential effect on interest spreads in a falling rate environment are discussed in "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk," Note 1 and Note 6.  We measure our derivative instruments at fair value, which fluctuates from period to period due to the volatility of the inputs some of which are significantly affected by economic conditions. The effect to revenue is reported in realized gain (loss) and such amount along with the associated federal income taxes is excluded from income (loss) from operations of our segments. Subsequent to the adoption of the Fair Value Measurements and Disclosures Topic of the FASB ASC, we did not make any material changes to valuation techniques or models used to determine the fair value of the liabilities we carry at fair value. As part of our on-going valuation process, we assess the reasonableness of all our valuation techniques or models and make adjustments as necessary.  Our insurance liabilities that contain embedded derivatives are valued based on a stochastic projection of scenarios of the embedded derivative fees, benefits and expenses. The scenario assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market participant and include assumptions for capital markets, actuarial lapse, benefit utilization, mortality, risk margin, administrative expenses and a margin for profit. In addition, an NPR component is determined at each valuation date that reflects our risk of not fulfilling the obligations of the underlying liability. The spread for the NPR is added to the discount rates used in determining the fair value from the net cash flows. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value.  

Our future contract benefits (embedded derivatives) carried at fair value on a recurring basis are all classified as Level 3.

  Changes of our future contract benefits carried at fair value and classified within Level 3 of the fair value hierarchy result from changes in market conditions, as well as changes in mix and increases and decreases in fair values as a result of those classifications. During 2011, there was a significant increase in future contract benefits classified as Level 3 of the fair value hierarchy due primarily to lower equity markets and increased volatility as compared to 2010. For more information, see Notes 1 and 21.  

Guaranteed Living Benefits

  We have a dynamic hedging strategy designed to mitigate selected risk and income statement volatility caused by changes in the equity markets, interest rates and market implied volatilities associated with the Lincoln SmartSecurity® Advantage guaranteed withdrawal benefit ("GWB") feature and our i4LIFE® Advantage and 4LATER® Advantage guaranteed income benefit ("GIB") features that are available in our variable annuity products. We have certain GLB variable annuity products with GWB and GIB features that are embedded derivatives. Certain features of these guarantees, notably our GIB, 4LATER® and Lincoln Lifetime IncomeSMAdvantage features, have elements of both insurance benefits accounted for under the Financial Services - Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC ("benefit reserves") and embedded derivative reserves. We calculate the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each GLB feature. In addition to mitigating selected risk and income statement volatility, the hedge program is also focused on a long-term goal of accumulating assets that could be used to pay claims under these benefits, recognizing that such claims are likely to begin no earlier than approximately a decade in the future.  The hedging strategy is designed such that changes in the value of the hedge contracts move in the opposite direction of changes in GLB embedded derivative reserves. This dynamic hedging strategy utilizes options on U.S.-based equity indices, futures on U.S.-                                          50

--------------------------------------------------------------------------------   based and international equity indices and variance swaps on U.S.-based equity indices, as well as interest rate futures and swaps. The notional amounts of the underlying hedge instruments are such that the magnitude of the change in the value of the hedge instruments due to changes in equity markets, interest rates and implied volatilities is designed to offset the magnitude of the change in the fair value of the GLB guarantees caused by those same factors. See "Realized Gain (Loss) and Benefit Ratio Unlocking - Variable Annuity Net Derivatives Results" for information on how we determine our NPR.  As part of our current hedging program, equity market, interest rate and market implied volatility conditions are monitored on a daily basis. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these positions may not completely offset changes in the fair value embedded derivative reserve caused by movements in these factors due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets, interest rates and market implied volatilities, realized market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments or our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off.  Approximately 48% of our variable annuity account values contained a GWB rider as of December 31, 2011. Declines in the equity markets increase our exposure to potential benefits under the GWB contracts, leading to an increase in our existing liability for those benefits. For example, a GWB contract is "in the money" if the contract holder's account balance falls below the guaranteed amount. As of December 31, 2011 and 2010, 80% and 35% respectively, of all GWB in-force contracts were "in the money," and our exposure to the guaranteed amounts, after reinsurance, as of December 31, 2011 and 2010, was $2.5 billion and $1.1 billion, respectively. Our exposure before reinsurance for these same periods was $2.7 billion and $1.2 billion, respectively. However, the only way the GWB contract holder can monetize the excess of the guaranteed amount over the account value of the contract is upon death or through a series of withdrawals that do not exceed a specific percentage per year of the guaranteed amount. If, after the series of withdrawals, the account value is exhausted, the contract holder will receive a series of annuity payments equal to the remaining guaranteed amount, and, for our lifetime GWB products, the annuity payments can continue beyond the guaranteed amount. The account value can also fluctuate with equity market returns on a daily basis resulting in increases or decreases in the excess of the guaranteed amount over account value.  As a result of these factors, the ultimate amount to be paid by us related to GWB guarantees is uncertain and could be significantly more or less than $2.5 billion, net of reinsurance. Our fair value estimates of the GWB liabilities, which are based on detailed models of future cash flows under a wide range of market-consistent scenarios, reflect a more comprehensive view of the related factors and represent our best estimate of the present value of these potential liabilities. The market-consistent scenarios used in the determination of the fair value of the GWB liabilities are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. In our calculation, risk-neutral Monte Carlo simulations resulting in over 35 million scenarios are utilized to value the entire block of guarantees. The market-consistent scenario assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market participant. The market consistent inputs include assumptions for the capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, benefit utilization, mortality, etc.), risk margins, administrative expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop, we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value.  

For information on our variable annuity hedge program performance, see our discussion in "Realized Gain (Loss) and Benefit Ratio Unlocking - Variable Annuity Net Derivatives Results" below.

                                       51 --------------------------------------------------------------------------------   The following table presents our estimates of the potential instantaneous effect to realized gain (loss), which could result from sudden changes that may occur in equity markets, interest rates and implied market volatilities (in millions) at the levels indicated in the table and excludes the net cost of operating the hedging program. The amounts represent the estimated difference between the change in the portion of GLB reserves that is calculated on a fair value basis and the change in the value of the underlying hedge instruments after the amortization of DAC, VOBA, DSI and DFEL and taxes. These effects do not include any estimate of retrospective or prospective unlocking that could occur, nor do they estimate any change in the NPR component of the GLB reserve or any estimate of effects to our GLB benefit ratio unlocking. These estimates are based upon the recorded reserves as of December 30, 2011, and the related hedge instruments in place as of that date. The effects presented in the table below are not representative of the aggregate impacts that could result if a combination of such changes to equity market returns, interest rates and implied volatilities occurred.                                               In-Force Sensitivities Equity Market Return                -20%        -10%         -5%         5%

Hypothetical effect to net income $ (60 ) $ (16 ) $ (4 ) $

(3 )

  Interest Rates                     -50 bps     -25 bps     +25 bps     +50 

bps

Hypothetical effect to net income $ (14 ) $ (4 ) $ (1 ) $

(6 )

  Implied Volatilities                 -4%         -2%         2%          4% 

Hypothetical effect to net income $ 16 $ 8 $ (9 ) $ (18 )

    The following table shows the effect (dollars in millions) of indicated changes in instantaneous shifts in equity market returns, interest rate scenarios and market implied volatilities:                  Assumptions of Changes In         Hypothetical            Equity     Interest        Market        Effect to            Market       Rate         Implied           Net            Return      Yields      Volatilities      Income Scenario 1     -5 %    -12.5 bps             +1 % $         (11 ) Scenario 2    -10 %    -25.0 bps             +2 %           (36 ) Scenario 3    -20 %    -50.0 bps             +4 %          (130 )    The actual effects of the results illustrated in the two tables above could vary significantly depending on a variety of factors, many of which are out of our control, and consideration should be given to the following:  

· The analysis is only valid as of December 30, 2011, due to changing market

conditions, contract holder activity, hedge positions and other factors;

· The analysis assumes instantaneous shifts in the capital market factors and no

ability to rebalance hedge positions prior to the market changes;

· The analysis assumes constant exchange rates and implied dividend yields;

· Assumptions regarding shifts in the market factors, such as assuming parallel

shifts in interest rate and implied volatility term structures, may be overly

simplistic and not indicative of actual market behavior in stress scenarios;

· It is very unlikely that one capital market sector (e.g., equity markets) will

sustain such a large instantaneous movement without affecting other capital

market sectors; and

· The analysis assumes that there is no tracking or basis risk between the funds

and/or indices affecting the GLB reserves and the instruments utilized to

hedge these exposures.

Standard & Poor's ("S&P") 500 Index® ("S&P 500") Benefits

  Our indexed annuity and indexed UL contracts permit the holder to elect a fixed interest rate return or a return where interest credited to the contracts is linked to the performance of the S&P 500. Contract holders may elect to rebalance among the various accounts within the product at renewal dates, either annually or biannually. At the end of each 1-year or 2-year indexed term we have the opportunity to re-price the indexed component by establishing different caps, spreads or specified rates, subject to contractual guarantees. We purchase S&P 500 options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period. The mark-to-market of the options held generally offsets the change in value of the embedded derivative within the indexed annuity, both of which are recorded as a component of realized gain (loss) on our Consolidated Statements of Income (Loss). The Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC require that we calculate fair values of index options we may purchase in the future to hedge contract holder index allocations in future reset periods. These fair values                                          52

--------------------------------------------------------------------------------   represent an estimate of the cost of the options we will purchase in the future, discounted back to the date of the balance sheet, using current market indicators of volatility and interest rates. Changes in the fair values of these liabilities are included as a component of realized gain (loss) on our Consolidated Statements of Income (Loss). For information on our S&P 500 benefits hedging results, see our discussion in "Realized Gain (Loss) and Benefit Ratio Unlocking" below.  

Future Contract Benefits and Other Contract Holder Obligations

Reserves

  Reserves are the amounts that, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. Establishing adequate reserves for our obligations to contract holders requires assumptions to be made regarding mortality and morbidity. The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their outstanding contracts. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality and morbidity tables, interest rates, and methods of valuation.  The reserves reported in our financial statements contained herein are calculated in accordance with GAAP and differ from those specified by the laws of the various states and carried in the statutory financial statements of the life insurance subsidiaries. These differences arise from the use of mortality and morbidity tables, interest, persistency and other assumptions that we believe to be more representative of the expected experience for these contracts than those required for statutory accounting purposes and from differences in actuarial reserving methods.  The assumptions on which reserves are based are intended to represent an estimation of experience for the period that policy benefits are payable. If actual experience is better than or equal to the assumptions, then reserves should be adequate to provide for future benefits and expenses. If experience is worse than the assumptions, additional reserves may be required. This would result in a charge to our net income during the period the increase in reserves occurred. The key experience assumptions include mortality rates, policy persistency and interest rates. We periodically review our experience and update our policy reserves for new issues and reserve for all claims incurred, as we believe appropriate.  Guaranteed Death Benefits  The reserves related to the GDB features available in our variable annuity products are based on the application of a "benefit ratio" (the present value of total expected benefit payments over the life of the contract divided by the present value of total expected assessments over the life of the contract) to total variable annuity assessments received in the period. The level and direction of the change in reserves will vary over time based on the emergence of the benefit ratio and the level of assessments associated with the variable annuity.  We utilize a delta hedging strategy for variable annuity products with a GDB feature, which uses futures on U.S.-based equity market indices to hedge against movements in equity markets. The hedging strategy is designed such that changes in the value of the hedge contracts move in the opposite direction of equity market driven changes in the reserve for GDB contracts subject to the hedging strategy. Because the GDB reserves are based upon projected long-term equity market return assumptions, and because the value of the hedging contracts will reflect current capital market conditions, the quarterly changes in values for the GDB reserves and the hedging contracts may not exactly offset each other.  

For information on our variable annuity hedge program performance, see our discussion in "Realized Gain (Loss) and Benefit Ratio Unlocking - Variable Annuity Net Derivatives Results" below.

UL Products with Secondary Guarantees

  We issue UL contracts where we contractually guarantee to the contract holder a secondary guarantee. The policy can remain in force, even if the base policy account value is zero, as long as contractual secondary guarantee requirements have been met. The reserves related to UL products with secondary guarantees are based on the application of a benefit ratio the same as our GDB features, which are discussed above. The level and direction of the change in reserves will vary over time based on the emergence of the benefit ratio and the level of assessments associated with the contracts. For more discussion, see "Results of Life Insurance."  Contingencies  Management establishes separate reserves for each contingent matter when it is deemed probable and can be reasonably estimated. The outcomes of contingencies, which relate to corporate litigation and regulatory matters, are inherently difficult to predict, and the reserves that have been established for the estimated settlement are subject to significant changes. It is possible that the ultimate cost to LNC, including the tax-deductibility of payments, could exceed the reserve by an amount that would have a                                          53 --------------------------------------------------------------------------------   material adverse effect on our consolidated results of operations or cash flows in a particular quarterly or annual period. See Note 13 for more information on our contingencies.  

Stock-Based Incentive Compensation

  Determining the fair value of stock options at the grant date requires judgment, including estimates for the average risk-free interest rate, expected volatility, expected exercise behavior, expected dividend yield and expected forfeitures. If any of those assumptions differ significantly from actual, stock-based compensation expense could be affected, which could have a material effect on our consolidated results of operations in a particular quarterly or annual period. See Note 19 for more information on our stock-based incentive compensation plans.  Income Taxes  Management uses certain assumptions and estimates in determining the income taxes payable or refundable for the current year, the deferred income tax liabilities and assets for items recognized differently in its financial statements from amounts shown on its income tax returns, and the federal income tax expense.  Determining these amounts requires analysis and interpretation of current tax laws and regulations.  Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets.  These judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change. Legislative changes to the Internal Revenue Code of 1986, as amended, modification or new regulations, administrative rulings, or court decisions could increase our effective tax rate.  The application of GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance, if necessary, to reduce our deferred tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including:  the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of existing temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, including our capital loss deferred tax asset, will be realized. For additional information on our income taxes, see Note 7.                           Acquisitions and Dispositions

For information about acquisitions and divestitures, see Note 3.

                                       54 --------------------------------------------------------------------------------                         RESULTS OF CONSOLIDATED OPERATIONS

Details underlying the consolidated results, deposits, net flows and account values (in millions) were as follows:

                                                                   For the Years Ended December 31,           Change Over Prior Year                                                                  2011           2010           2009           2011             2010 Net Income (Loss) Income (loss) from operations:     Annuities                                                 $       592    $       484    $       353             22 %             37 %     Retirement Plan Services                                          167            154            133              8 %             16 %     Life Insurance                                                    604            513            569             18 %            -10 %     Group Protection                                                  101             72            124             40 %            -42 %     Other Operations                                                 (146 )         (186 )         (237 )           22 %             22 % Excluded realized gain (loss), after-tax                             (252 )          (95 )         (780 )           NM               88 % Gain (loss) on early extinguishment of debt, after-tax                 (5 )           (3 )           42            -67 %             NM 

Income (expense) from reserve changes (net of related amortization) on business sold through reinsurance, after-tax

<pre> 2 2 2 0 % 0 % Impairment of intangibles, after-tax (747 ) - (710 ) NM 100 % Benefit ratio unlocking, after-tax (14 ) 10 89 NM -89 % Income (loss) from continuing operations, after-tax 302 951 (415 ) -68 % NM Income (loss) from discontinued operations, after-tax (8 ) 29 (70 ) NM 141 % Net income (loss) $ 294 $ 980 $ (485 ) -70 % NM For the Years Ended December 31, Change Over Prior Year 2011 2010 2009 2011 2010 Deposits Annuities $ 10,650 $ 10,667 $ 10,362 0 % 3 % Retirement Plan Services 5,566 5,301 4,952 5 % 7 % Life Insurance 5,393 4,934 4,451 9 % 11 % Total deposits $ 21,609 $ 20,902 $ 19,765 3 % 6 % Net Flows Annuities $ 2,191 $ 3,555 $ 3,893 -38 % -9 % Retirement Plan Services 504 (291 ) 995 273 % NM Life Insurance 3,683 3,057 2,421 20 % 26 % Total net flows $ 6,378 $ 6,321 $ 7,309 1 % -14 % As of December 31, Change Over Prior Year 2011 2010 2009 2011 2010 Account Values Annuities $ 85,534 $ 84,848 $ 74,281 1 % 14 % Retirement Plan Services 39,133 38,824 35,302 1 % 10 % Life Insurance 35,278 33,585 31,744 5 % 6 % Total account values $ 159,945 $ 157,257 $ 141,327 2 % 11 % 55

--------------------------------------------------------------------------------

Comparison of 2011 to 2010

  Net income decreased due primarily to goodwill impairment in our Life Insurance segment and media business during 2011 (see "Critical Accounting Policies and Estimates - Goodwill and Other Intangible Assets" for more information).  

The decrease in net income was partially offset primarily by the following:

· Positive net flows and more favorable average equity markets driving higher

average daily variable account values;

· Growth in business and interest crediting rate actions driving higher net

investment income and flat interest credited, partially offset by new money

rates averaging below portfolio yields;

· Higher legal expenses during 2010; and

· Higher EGPs on rider fees related to our products with living benefit

guarantees resulting in a lower DAC, VOBA, DSI and DFEL amortization rate.

    Comparison of 2010 to 2009  

Net income increased due primarily to the following:

· Market volatility, the corresponding increase in discount rates and lower

annuity sales leading to goodwill impairment in our Annuities segment during

2009; and declining results and forecasted advertising revenues for the entire

radio market leading to goodwill and Federal Communications Commission

licenses impairment related to our radio clusters during 2009;

· Volatile capital markets during 2009 leading to realized losses;

· Positive net flows and more favorable average equity markets driving higher

average daily variable account values;

· More favorable investment income on alternative investments and higher

prepayment and bond makewhole premiums;

· The effect of unlocking during 2010 as compared to 2009;

· Income from discontinued operations during 2010 compared to loss from

discontinued operations during 2009, both related to our former Lincoln UK and

Investment Management segments; and

· Unfavorable adjustments during 2009 related to rescinding the reinsurance

agreement on certain disability income business sold to Swiss Re Life & Health

America, Inc. ("Swiss Re").   

The increase in net income was partially offset primarily by the following:

· Higher death claims in our Life Insurance segment, and unfavorable claims

incidence and termination experience in the long-term disability product line

in our Group Protection segment;

· Early extinguishing long-term debt resulting in a gain in 2009;

· Settlement of the Transamerica litigation matter during 2010; and

· Higher account values driving higher trail commissions.

                                             56

--------------------------------------------------------------------------------                                RESULTS OF ANNUITIES

Income (Loss) from Operations

Details underlying the results for Annuities (in millions) were as follows:

                                                                 For the Years Ended December 31,        Change Over Prior Year                                                                2011           2010           2009          2011         2010 Operating Revenues Insurance premiums (1)                                      $        74    $        53    $        89           40 %       -40 % Insurance fees                                                    1,247          1,098            841           14 %        31 % Net investment income                                             1,106          1,119          1,037           -1 %         8 % Operating realized gain (loss)                                       89             69             54           29 %        28 % Other revenues and fees (2)                                         349            315            280           11 %        13 %    Total operating revenues                                       2,865          2,654          2,301            8 %        15 % Operating Expenses Interest credited                                                   698            726            682           -4 %         6 % Benefits                                                            213            174            242           22 %       -28 % Underwriting, acquisition, insurance and other expenses           1,248          1,168            983            7 %        19 %    Total operating expenses                                       2,159          2,068          1,907            4 %         8 % Income (loss) from operations before taxes                          706            586            394           20 %        49 % Federal income tax expense (benefit)                                114            102             41           12 %       149 %       Income (loss) from operations                         $       592    $       484    $       353           22 %        37 %   

(1) Includes primarily our single-premium immediate annuities ("SPIA"), which

     have a corresponding offset in benefits for changes in reserves.   (2)  Consists primarily of fees attributable to broker-dealer services that are      subject to market volatility.   

Comparison of 2011 to 2010

Income from operations for this segment increased due primarily to the following:

· Higher insurance fees attributable to more favorable average equity markets

driving higher average daily variable account values;

· More favorable tax return true-ups recorded in 2011 than in 2010 driven by the

separate account dividends-received deduction ("DRD") and other items; and

· Higher net investment income net of interest credited driven primarily by:

      § Actions implemented to reduce interest crediting rates;  

§ The effect of unlocking in 2011 as compared to 2010 (see "Critical Accounting

    Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more     information);  

§ Positive net flows and interest credited to contract holders driving higher

    average fixed account values; and     § An increase in surplus investments;  

partially offset by:

§ New money rates averaging below our portfolio yields; and

§ Transfers from fixed to variable reducing average fixed account values; and

· Higher insurance premiums due to growth in our SPIA business.

The increase in income from operations was partially offset primarily by the following:

· Higher underwriting, acquisition, insurance and other expenses due to:

    § Higher account values driving higher trail commissions; and     § Investments in strategic initiatives related to updating information     technology and expanding distribution and support during 2011;  

partially offset by:

  § Higher EGPs on rider fees related to our products with living benefit     guarantees resulting in a lower amortization rate; and  

§ The effect of unlocking in 2011 as compared to 2010 (see "Critical Accounting

    Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more     information); and                                            57

--------------------------------------------------------------------------------

· Higher benefits attributable to:

§ The effect of unlocking in 2011 as compared to 2010 (see "Critical Accounting

    Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more     information); and     § Growth in our SPIA business;  

partially offset by:

§ More favorable average equity markets that reduced our expected GDB benefit

    payments; and     § Favorable mortality experience on SPIA.   

Comparison of 2010 to 2009

Income from operations for this segment increased due primarily to the following:

· Higher insurance fees attributable to more favorable average equity markets

driving higher average daily variable account values;

· Higher net investment income, partially offset by higher interest credited,

driven by:

§ Positive net flows and interest credited to contract holders, partially

offset by transfers from fixed to variable, driving higher average fixed

    account values;     § More favorable investment income on alternative investments within our

surplus portfolio, and higher prepayment and bond makewhole premiums (see

    "Consolidated Investments - Alternative Investments" and "Consolidated     Investments - Commercial Mortgage Loan Prepayment and Bond Makewhole     Premiums" below for more information); and  

§ Holding less cash during 2010, and actions implemented to reduce interest

crediting rates; and

· Lower benefits attributable primarily to more favorable average equity markets

that reduced our expected GDB benefit payments.

The increase in income from operations was partially offset primarily by the following:

· Higher underwriting, acquisition, insurance and other expenses due to:

§ Negative gross profits in total for certain cohorts during 2009 resulting in

a higher DAC and VOBA amortization rate during 2010 (see "Critical Accounting

Policies and Estimates - DAC, VOBA, DSI and DFEL - Amortization" for more

    information); and     § Higher account values driving higher trail commissions;  

partially offset by:

§ The effect of unlocking in 2010 as compared to 2009 (see "Critical Accounting

Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more

information); and

· More favorable tax return true-ups recorded in 2009 than in 2010.

Additional Information

We are in the process of completing the planned conversion of our actuarial valuation systems to a uniform platform for certain blocks of business. See "Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more information.

We expect to continue making strategic investments during 2012 that will result in higher expenses.

  New deposits are an important component of net flows and key to our efforts to grow our business. Although deposits do not significantly affect current period income from operations, they are an important indicator of future profitability.  The other component of net flows relates to the retention of the business. An important measure of retention is the lapse rate, which compares the amount of withdrawals to the average account values. The overall lapse rate for our annuity products was 8%, 7% and 8% for 2011, 2010 and 2009, respectively.  Our fixed annuity business includes products with discretionary crediting rates that are reset on an annual basis and are not subject to surrender charges. Our ability to retain annual reset annuities will be subject to current competitive conditions at the time interest rates for these products reset. We expect to manage the effects of spreads on near-term income from operations through portfolio management and, to a lesser extent, crediting rate actions, which assumes no significant changes in net flows into or out of our fixed accounts or other changes that may cause interest rate spreads to differ from our expectations. For information on interest rate spreads and the interest rate risk due to falling interest rates, see "Part I - Item 1A. Risk Factors - Market Conditions - Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease and changes in interest rates may also result in increased contract withdrawals" and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - Interest Rate Risk on Fixed Insurance Businesses - Falling Rates."                                          58 --------------------------------------------------------------------------------  We provide information about this segment's operating revenue and operating expense line items, the period in which amounts are recognized, key drivers of changes and historical details underlying the line items and their associated drivers below. For detail on the operating realized gain (loss), see "Realized Gain (Loss) and Benefit Ratio Unlocking" below.  For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.  

Insurance Fees

  Details underlying insurance fees, account values and net flows (in millions) were as follows:                                                                      For the Years Ended December 31,        Change Over Prior Year                                                                     2011   

2010 2009 2011 2010 Insurance Fees Mortality, expense and other assessments

                        $      1,258    $      1,113    $     860           13 %        29 % Surrender charges                                                         34              37           36           -8 %         3 % DFEL:    Deferrals                                                             (61 )           (75 )        (56 )         19 %       -34 %

Amortization, net of interest:

      Prospective unlocking - assumption changes                           6               1            3           NM         -67 %       Retrospective unlocking                                            (11 )            (1 )          2           NM          NM       Amortization, net of interest, excluding unlocking                  21              23           (4 )         -9 %        NM            Total insurance fees                                 $      1,247    $      1,098    $     841           14 %        31 %                                                               As of or for the Years Ended December 31,          Change Over Prior Year                                                               2011                2010            2009         2011             2010

Account Value Information Variable annuity deposits, excluding the fixed portion of variable

                                             $          5,871    $          5,099    $  4,007             15 %             27 % 

Net flows for variable annuities, excluding the fixed portion of variable

                                                 (396 )                 7         (27 )           NM              126 % 

Change in market value on variable, excluding the fixed portion of variable

                                               (2,296 )             6,087      11,995             NM              -49 % 

Transfers to the variable portion of variable annuity products from the fixed portion of variable annuity products

                                                           2,844               3,396       2,475            -16 %             37 % Average daily variable annuity account values, excluding the fixed portion of variable                           66,007              58,188      46,551             13 %             25 % Average daily S&P 500                                           1,268.03            1,138.78      947.53             11 %             20 % Variable annuity account values, excluding the fixed portion of variable                                               65,010              64,858      55,368              0 %             17 %    We charge contract holders mortality and expense assessments on variable annuity accounts to cover insurance and administrative expenses. These assessments are a function of the rates priced into the product and the average daily variable account values. Average daily account values are driven by net flows and the equity markets. In addition, for our fixed annuity contracts and for some variable contracts, we collect surrender charges when contract holders surrender their contracts during their surrender charge periods to protect us from premature withdrawals. Insurance fees include charges on both our variable and fixed annuity products, but exclude the attributed fees on our GLB products; see "Realized Gain (Loss) and Benefit Ratio Unlocking - Operating Realized Gain (Loss)" below for discussion of these attributed fees.                                          59 --------------------------------------------------------------------------------

Net Investment Income and Interest Credited

Details underlying net investment income, interest credited (in millions) and our interest rate spread were as follows:

                                                                     For the Years Ended December 31,           Change Over Prior Year                                                                    2011           2010           2009           2011             2010

Net Investment Income Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses

                               $       975    $     1,002    $       955             -3 %              5 % Commercial mortgage loan prepayment and bond makewhole premiums (1)                                                                      27             23              5             17 %             NM Alternative investments (2)                                               1              1              -              0 %             NM Surplus investments (3)                                                 103             93             77             11 %             21 %

     Total net investment income                                $     1,106    $     1,119    $     1,037             -1 %              8 %  Interest Credited Amount provided to contract holders                             $       697    $       738    $       730             -6 %              1 % DSI deferrals                                                           (39 )          (65 )          (75 )           40 %             13 %      Interest credited before DSI amortization                          658            673            655             -2 %              3 % 

DSI amortization:

     Prospective unlocking - assumption changes                           2              3              -            -33 %             NM      Retrospective unlocking                                            (17 )           (7 )           (5 )           NM              -40 %      Amortization, excluding unlocking                                   55             57             32             -4 %             78 %           Total interest credited                               $       698    $       726    $       682             -4 %              6 %   

(1) See "Consolidated Investments - Commercial Mortgage Loan Prepayment and Bond

Makewhole Premiums" below for additional information.

(2) See "Consolidated Investments - Alternative Investments" below for

additional information.

(3) Represents net investment income on the required statutory surplus for this

segment and includes the effect of investment income on alternative

investments for such assets that are held in the portfolios supporting

      statutory surplus versus the portfolios supporting product liabilities.                                                                                                                    Basis Point Change                                                                       For the Years Ended December 31,           Over Prior Year                                                                      2011           2010           2009         2011         2010 

Interest Rate Spread Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses

5.13 % 5.50 % 5.50 % (37 ) (0 ) Commercial mortgage loan prepayment and bond makewhole premiums 0.14 % 0.13 % 0.03 % 1

           10 Alternative investments                                                  

0.00 % 0.01 % 0.00 % (1 ) 1

       Net investment income yield on reserves                            

5.27 % 5.64 % 5.53 % (37 ) 11

       Interest rate credited to contract holders                         3.33 %         3.52 %         3.77 %       (19 )        (25 )             Interest rate spread                                         1.94 %         2.12 %         1.76 %       (18 )         36                                             60

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                                                               As of or for the Years Ended December 31,           Change Over Prior Year                                                              2011              2010              2009            2011             2010

Other Information Fixed annuity deposits, including the fixed portion of variable

                                                $        4,779    $        5,568    $        6,355            -14 %            -12 % 

Net flows for fixed annuities, including the fixed portion of variable

                                              2,587             3,548             3,920            -27 %             -9 % 

Transfers from the fixed portion of variable annuity products to the variable portion of variable annuity products

                                                        (2,844 )          (3,396 )          (2,475 )           16 %            -37 % Average invested assets on reserves                             19,071            18,248            17,363              5 %              5 % Average fixed account values, including the fixed portion of variable                                             20,728            20,029            18,249              3 %             10 % Fixed annuity account values, including the fixed portion of variable                                             20,524            19,990            18,913              3 %              6 %    A portion of our investment income earned is credited to the contract holders of our fixed annuity products, including the fixed portion of variable annuity contracts. We expect to earn a spread between what we earn on the underlying general account investments supporting the fixed annuity product line, including the fixed portion of variable annuity contracts, and what we credit to our fixed annuity contract holders' accounts, including the fixed portion of variable annuity contracts. Changes in commercial mortgage loan prepayments and bond makewhole premiums, investment income on alternative investments and surplus investment income can vary significantly from period to period due to a number of factors and, therefore, may contribute to investment income results that are not indicative of the underlying trends.  

Benefits

Details underlying benefits (dollars in millions) were as follows:

                                                                For the Years Ended December 31,       Change Over Prior Year                                                                2011            2010          2009        2011         2010 Benefits Prospective unlocking - assumption changes                  $        43     $        (3 )   $     7           NM          NM Net death and other benefits, excluding unlocking                   170             177         235           -4 %       -25 %      Total benefits                                         $       213     $       174     $   242           22 %       -28 %    Benefits for this segment include changes in reserves of immediate annuity account values driven by premiums, changes in benefit reserves and our expected costs associated with purchases of derivatives used to hedge our benefit ratio unlocking.                                          61

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Underwriting, Acquisition, Insurance and Other Expenses

  Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:                                                                      For the Years Ended December 31,       Change Over Prior Year                                                                      2011            2010         2009       2011         2010 Underwriting, Acquisition, Insurance and Other Expenses Commissions:    Deferrable                                                    $        466    $        474    $   463         -2 %           2 %    Non-deferrable                                                         260             223        165         17 %          35 % General and administrative expenses                                       360             337        317          7 %           6 % 

Inter-segment reimbursement associated with reserve financing and LOC expenses (1)

                                                       (2 )            (1 )        1       -100 %          NM Taxes, licenses and fees                                                   21              20         20          5 %           0 %       Total expenses incurred, excluding broker-dealer                  1,105           1,053        966          5 %           9 % DAC deferrals                                                            (618 )          (624 )     (624 )        1 %           0 % 

Total pre-broker-dealer expenses incurred, excluding

          amortization, net of interest                                    487             429        342         14 %          25 % 

DAC and VOBA amortization, net of interest

      Prospective unlocking - assumption changes                          (13 )           (41 )       10         68 %          NM       Prospective unlocking - model refinements                             -               9          -       -100 %          NM       Retrospective unlocking                                            (114 )           (84 )      (19 )      -36 %          NM       Amortization, net of interest, excluding unlocking                  535             535        360          0 %          49 % Broker-dealer expenses incurred                                           353             320        290         10 %          10 %              Total underwriting, acquisition, insurance and              other expenses                                      $      1,248    $      1,168    $   983          7 %          19 %  DAC Deferrals As a percentage of sales/deposits                                         5.8 %           5.8 %      6.0 %    

(1) Represents reimbursements to the Annuities segment from the Life Insurance

segment for reserve financing, net of expenses incurred for this segment's

use of letters of credit ("LOCs").

    Commissions and other costs that vary with and are related primarily to the production of new business are deferred to the extent recoverable and are amortized over the lives of the contracts in relation to EGPs. Certain of our commissions, such as trail commissions that are based on account values, are expensed as incurred rather than deferred and amortized.  

Broker-dealer expenses that vary with and are related to sales are expensed as incurred and not deferred and amortized. Fluctuations in these expenses correspond with fluctuations in other revenues and fees.

                                       62 --------------------------------------------------------------------------------                        RESULTS OF RETIREMENT PLAN SERVICES

Income (Loss) from Operations

  Details underlying the results for Retirement Plan Services (in millions) were as follows:                                                                 For the Years Ended December 31,          Change Over Prior Year                                                                 2011           2010         2009          2011             2010 Operating Revenues Insurance fees                                              $         210    $     201    $     183              4 %             10 % Net investment income                                                 793          769          732              3 %              5 % Other revenues and fees (1)                                            14           18           11            -22 %             64 %    Total operating revenues                                         1,017          988          926              3 %              7 % Operating Expenses Interest credited                                                     437          440          445             -1 %             -1 % Benefits                                                                2            2           (3 )            0 %            167 % Underwriting, acquisition, insurance and other expenses               344          332          301              4 %             10 %    Total operating expenses                                           783          774          743              1 %              4 % Income (loss) from operations before taxes                            234          214          183              9 %             17 % Federal income tax expense (benefit)                                   67           60           50             12 %             20 %       Income (loss) from operations                         $         167    $     154    $     133              8 %             16 %   

(1) Consists primarily of mutual fund account program fees for mid to large

      employers.    Comparison of 2011 to 2010  

Income from operations for this segment increased due primarily to the following:

· Higher net investment income and relatively flat interest credited driven by:

§ Transfers from variable to fixed and interest credited to contract holders

driving higher average fixed account values;

§ Higher prepayment and bond makewhole premiums (see "Consolidated Investments -

Commercial Mortgage Loan Prepayment and Bond Makewhole Premiums" below for

     more information); and     §  Actions implemented to reduce interest crediting rates;  

partially offset by:

  §  Negative net flows reducing average fixed account values; and     §  New money rates averaging below our portfolio yields; and  

· Higher insurance fees attributable to more favorable average equity markets

driving higher average daily variable account values, partially offset by an

overall shift in business mix toward products with lower expense assessment

rates and negative variable net flows.

The increase in income from operations was partially offset primarily by higher underwriting, acquisition, insurance and other expenses attributable to the following:

· Investments in strategic initiatives related to updating information

technology and expanding distribution and support during 2011; and

· Higher account values driving higher trail commissions;

partially offset by: · A lower amortization rate during 2011 due primarily to no VOBA amortization as

our VOBA balance became fully amortized during the fourth quarter of 2010; and

· The effect of unlocking in 2011 as compared to 2010 (see "Critical Accounting

   Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more    information).                                             63

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Comparison of 2010 to 2009

Income from operations for this segment increased due primarily to the following:

· Higher net investment income and relatively flat interest credited driven by:

§ Transfers from variable to fixed and interest credited to contract holders,

partially offset by negative net flows, driving higher average fixed account

     values;     § Actions implemented to reduce interest crediting rates;  

§ More favorable investment income on alternative investments within our surplus

portfolio and higher prepayment and bond makewhole premiums (see "Consolidated

Investments - Alternative Investments" and "Consolidated Investments -

Commercial Mortgage Loan Prepayment and Bond Makewhole Premiums" below for

     more information); and     § Holding less cash during 2010; and  

· Higher insurance fees attributable to more favorable average equity markets

driving higher average daily variable account values, partially offset by an

overall shift in business mix toward products with lower expense assessment

    rates.    

The increase in income from operations was partially offset primarily by higher underwriting, acquisition, insurance and other expenses attributable to the following:

· Investments in strategic initiatives related to updating information

technology and expanding distribution during 2010; and

· Higher account values driving higher trail commissions;

partially offset by: · An overall shift in business mix toward products with lower deferrable expense

rates resulting in a lower amortization rate during 2010.

Additional Information

We expect to continue making strategic investments during 2012 to improve our infrastructure and product offerings that will result in higher expenses.

  Net flows in this business fluctuate based on the timing of larger plans rolling onto our platform and rolling off over the course of the year, and we expect this trend will continue during 2012.  New deposits are an important component of net flows and key to our efforts to grow our business. Although deposits do not significantly affect current period income from operations, they are an important indicator of future profitability. The other component of net flows relates to the retention of the business.  An important measure of retention is the lapse rate, which compares the amount of withdrawals to the average account values. The overall lapse rate for our annuity and mutual fund products was 13%, 15% and 13% for 2011, 2010 and 2009, respectively.  Our lapse rate is negatively affected by the continued net outflows from our oldest blocks of annuities business (as presented on our Account Value Roll Forward table below as "Total Multi-Fund® and Other Variable Annuities"), which are also our higher margin product lines in this segment, due to the fact that they are mature blocks with much of the account values out of their surrender charge period. The proportion of these products to our total account values was 40%, 42% and 45% for 2011, 2010 and 2009, respectively. Due to this expected overall shift in business mix toward products with lower returns, a significant increase in new deposit production will be necessary to maintain earnings at current levels.  Our fixed annuity business includes products with discretionary and index-based crediting rates that are reset on a quarterly basis. Our ability to retain quarterly reset annuities will be subject to current competitive conditions at the time interest rates for these products reset. We expect to manage the effects of spreads on near-term income from operations through portfolio management and, to a lesser extent, crediting rate actions, which assumes no significant changes in net flows into or out of our fixed accounts or other changes that may cause interest rate spreads to differ from our expectations. For information on interest rate spreads and the interest rate risk due to falling interest rates, see "Part I - Item 1A. Risk Factors - Market Conditions - Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease and changes in interest rates may also result in increased contract withdrawals" and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - Interest Rate Risk on Fixed Insurance Businesses - Falling Rates."  We provide information about this segment's operating revenue and operating expense line items, the period in which amounts are recognized, key drivers of changes and historical details underlying the line items and their associated drivers below.  For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.                                           64 --------------------------------------------------------------------------------

Insurance Fees

  Details underlying insurance fees, account values and net flows (in millions) were as follows:                                                                 For the Years Ended December 31,          Change Over Prior Year                                                                2011            2010          2009         2011             2010 Insurance Fees Annuity expense assessments                                 $       178     $       172     $   157              3 %             10 % Mutual fund fees                                                     30              26          22             15 %             18 %    Total expense assessments                                        208             198         179              5 %             11 % Surrender charges                                                     2               3           4            -33 %            -25 %       Total insurance fees                                  $       210     $       201     $   183              4 %             10 %                                             65

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                                                                   For the Years Ended December 31,          Change Over Prior Year                                                                   2011            2010         2009         2011             2010 Account Value Roll Forward - By Product Total Micro - Small Segment: Balance as of beginning-of-year                               $      6,396    $      5,863   $  4,888               9 %            20 % Gross deposits                                                       1,301           1,242      1,157               5 %             7 % Withdrawals and deaths                                              (1,402 )        (1,377 )   (1,273 )            -2 %            -8 %     Net flows                                                         (101 )          (135 )     (116 )            25 %           -16 % Transfers between fixed and variable accounts                            5               4         (2 )            25 %           300 % Investment increase and change in market value                        (139 )           664      1,093              NM             -39 %         Balance as of end-of-year                             $      6,161    $      6,396   $  5,863              -4 %             9 %  Total Mid - Large Segment: Balance as of beginning-of-year                               $     16,207    $     13,653   $  9,540              19 %            43 % Gross deposits                                                       3,563           3,308      2,954               8 %            12 % Withdrawals and deaths                                              (2,095 )        (2,558 )   (1,110 )            18 %            NM     Net flows                                                        1,468             750      1,844              96 %           -59 % Transfers between fixed and variable accounts                          (68 )            16         12              NM              33 % Other (1)                                                                -             186          -            -100 %            NM Investment increase and change in market value                        (166 )         1,602      2,257              NM             -29 %         Balance as of end-of-year                             $     17,441    $     16,207   $ 13,653               8 %            19 %  Total Multi-Fund® and Other Variable Annuities: Balance as of beginning-of-year                               $     16,221    $     15,786   $ 14,450               3 %             9 % Gross deposits                                                         702             751        841              -7 %           -11 % Withdrawals and deaths                                              (1,565 )        (1,657 )   (1,574 )             6 %            -5 %     Net flows                                                         (863 )          (906 )     (733 )             5 %           -24 % Transfers between fixed and variable accounts                            -               -         (1 )            NM             100 % Investment increase and change in market value                         173           1,341      2,070             -87 %           -35 %         Balance as of end-of-year                             $     15,531    $     16,221   $ 15,786              -4 %             3 %  Total Annuities and Mutual Funds: Balance as of beginning-of-year                               $     38,824    $     35,302   $ 28,878              10 %            22 % Gross deposits                                                       5,566           5,301      4,952               5 %             7 % Withdrawals and deaths                                              (5,062 )        (5,592 )   (3,957 )             9 %           -41 %     Net flows                                                          504            (291 )      995             273 %            NM Transfers between fixed and variable accounts                          (63 )            20          9              NM             122 % Other (1)                                                                -             186          -            -100 %            NM Investment increase and change in market value                        (132 )         3,607      5,420              NM             -33 %         Balance as of end-of-year (2)                         $     39,133    $     38,824   $ 35,302               1 %            10 %   

(1) Represents LINCOLN ALLIANCE® program assets held by a third-party trustee

that were not previously included in the account value roll

forward. Effective January 1, 2010, all such LINCOLN ALLIANCE® program

     activity was included in the account value roll forward.   (2)  Includes mutual fund account values and other third-party trustee-held      assets. These items are not included in the separate accounts reported on

our Consolidated Balance Sheets as we do not have any ownership interest in

     them.                                            66

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                                                              As of or for the Years Ended                                                                    December 31,                  Change Over Prior Year                                                            2011          2010        2009         2011             2010

Account Value Information Variable annuity deposits, excluding the fixed portion of variable

                                             $     1,615   $    1,614   $  1,586              0 %              2 % 

Net flows for variable annuities, excluding the fixed portion of variable

                                            (497 )       (544 )     (302 )            9 %            -80 % 

Change in market value on variable, excluding the fixed portion of variable

                                            (280 )      1,687      2,843             NM              -41 % 

Transfers from the variable portion of variable annuity products to the fixed portion of variable annuity products

                                                       (283 )       (169 )     (176 )          -67 %              4 % Average daily variable annuity account values, excluding the fixed portion of variable                      13,611       12,930     11,315              5 %             14 % Average daily S&P 500                                      1,268.03     1,138.78     947.53             11 %             20 % Variable annuity account values, excluding the fixed portion of variable                                          12,867       13,927     12,953             -8 %              8 %    We charge expense assessments to cover insurance and administrative expenses. Expense assessments are generally equal to a percentage of the daily variable account values. Average daily account values are driven by net flows and the equity markets. Our expense assessments include fees we earn for the services that we provide to our mutual fund programs. In addition, for both our fixed and variable annuity contracts, we collect surrender charges when contract holders surrender their contracts during the surrender charge periods to protect us from premature withdrawals.  

Net Investment Income and Interest Credited

Details underlying net investment income, interest credited (in millions) and our interest rate spread were as follows:

                                                                For the Years Ended December 31,          Change Over Prior Year                                                                2011            2010          2009         2011             2010

Net Investment Income Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses

                       $       719     $       705     $   681              2 %              4 % Commercial mortgage loan prepayment and bond makewhole premiums (1)                                                         21               9           5            133 %             80 % Alternative investments (2)                                           1               3           1            -67 %            200 % Surplus investments (3)                                              52              52          45              0 %             16 %

     Total net investment income                            $       793    

$       769     $   732              3 %              5 %  Interest Credited                                           $       437     $       440     $   445             -1 %             -1 %   

(1) See "Consolidated Investments - Commercial Mortgage Loan Prepayment and Bond

Makewhole Premiums" below for additional information.

(2) See "Consolidated Investments - Alternative Investments" below for

additional information.

(3) Represents net investment income on the required statutory surplus for this

segment and includes the effect of investment income on alternative

investments for such assets that are held in the portfolios supporting

statutory surplus versus the portfolios supporting product liabilities.

                                            67 --------------------------------------------------------------------------------

                                                                                                               Basis Point Change                                                                   For the Years Ended December 31,           Over Prior Year                                                                  2011           2010           2009         2011         2010 Interest Rate Spread Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses                         5.53 % 

5.70 % 5.76 % (17 ) (6 ) Commercial mortgage loan prepayment and bond makewhole premiums

                                                   0.16 %         0.08 %         0.04 %         8            4 Alternative investments                                              0.01 %         0.02 %         0.01 %        (1 )          1     Net investment income yield on reserves                          5.70 %         5.80 %         5.81 %       (10 )         (1 )     Interest rate credited to contract holders                       3.32 %         3.49 %         3.70 %       (17 )        (21 )         Interest rate spread                                         2.38 %         2.31 %         2.11 %         7           20                                                               As of or for the Years Ended                                                                    December 31,                   Change Over Prior Year                                                            2011          2010        2009         2011              2010 

Other Information Fixed annuity deposits, including the fixed portion of variable

                                                $     1,436    $   1,332   $  1,342              8 %              -1 % 

Net flows for fixed annuities, including the fixed portion of variable

                                            (106 )       (347 )      (62 )           69 %              NM 

Transfers to the fixed portion of variable annuity products from the variable portion of variable annuity products

                                                        283          169        176             67 %              -4 % Average invested assets on reserves                          12,988       12,360     11,815              5 %               5 % Average fixed account values, including the fixed portion of variable                                          13,168       12,580     12,024              5 %               5 % Fixed annuity account values, including the fixed portion of variable                                          13,630       12,779     12,246              7 %               4 %    A portion of our investment income earned is credited to the contract holders of our fixed annuity products, including the fixed portion of variable annuity contracts. We expect to earn a spread between what we earn on the underlying general account investments supporting the fixed annuity product line, including the fixed portion of variable annuity contracts, and what we credit to our fixed annuity contract holders' accounts, including the fixed portion of variable annuity contracts. Commercial mortgage loan prepayments and bond makewhole premiums, investment income on alternative investments and surplus investment income can vary significantly from period to period due to a number of factors and, therefore, may contribute to investment income results that are not indicative of the underlying trends.  

Benefits

  Benefits for this segment include changes in benefit reserves and our expected costs associated with purchases of derivatives used to hedge our benefit ratio unlocking.                                           68

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Underwriting, Acquisition, Insurance and Other Expenses

  Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:                                                                 For the Years Ended December 31,          Change Over Prior Year                                                                2011            2010          2009        2011             2010 Underwriting, Acquisition, Insurance and Other Expenses Commissions:   Deferrable                                                $        22     $        27     $    28           -19 %              -4 %   Non-deferrable                                                     45              38          36            18 %               6 % General and administrative expenses                                 273             242         221            13 %              10 % Taxes, licenses and fees                                             13              13          12             0 %               8 %     Total expenses incurred                                         353             320         297            10 %               8 % DAC deferrals                                                       (69 )           (67 )       (69 )          -3 %               3 %

      Total expenses recognized before amortization                 284             253         228            12 %              11 % 

DAC and VOBA amortization, net of interest:

    Prospective unlocking - assumption changes                        -             (16 )        (8 )         100 %            -100 %     Prospective unlocking - model refinements                         3               8           -           -63 %              NM     Retrospective unlocking                                         (15 )             4           2            NM               100 %     Amortization, net of interest, excluding unlocking               72              83          79           -13 %               5 %         Total underwriting, acquisition, insurance and         other expenses                                      $       344     $       332     $   301             4 %              10 %  DAC Deferrals As a percentage of annuity sales/deposits                           2.3 %   

2.3 % 2.4 %

    Commissions and other costs that vary with and are related primarily to the sale of annuity contracts are deferred to the extent recoverable and are amortized over the lives of the contracts in relation to EGPs. Certain of our commissions, such as trail commissions that are based on account values, are expensed as incurred rather than deferred and amortized. We do not pay commissions on sales of our mutual fund products, and distribution expenses associated with the sale of these mutual fund products are expensed as incurred.                                          69 --------------------------------------------------------------------------------                              RESULTS OF LIFE INSURANCE

Income (Loss) from Operations

  Details underlying the results for Life Insurance (in millions) were as follows:                                                                  For the Years Ended December 31,           Change Over Prior Year                                                                2011           2010           2009           2011             2010 Operating Revenues Insurance premiums                                          $       441    $       439    $       392              0 %             12 % Insurance fees                                                    1,979          1,934          1,901              2 %              2 % Net investment income                                             2,294          2,186          1,975              5 %             11 % Other revenues and fees                                              25             31             27            -19 %             15 %    Total operating revenues                                       4,739          4,590          4,295              3 %              7 % Operating Expenses Interest credited                                                 1,235          1,199          1,185              3 %              1 % Benefits                                                          1,669          1,734          1,373             -4 %             26 % Underwriting, acquisition, insurance and other expenses             948            908            923              4 %             -2 %    Total operating expenses                                       3,852          3,841          3,481              0 %             10 % Income (loss) from operations before taxes                          887            749            814             18 %             -8 % Federal income tax expense (benefit)                                283            236            245             20 %             -4 %       Income (loss) from operations                         $       604    $       513    $       569             18 %            -10 %    Comparison of 2011 to 2010  

Income from operations for this segment increased due primarily to the following:

· Higher net investment income, only partially offset by higher interest

   credited attributable to:     § Growth in business in force; and     § Actions implemented to reduce interest crediting rates;  

partially offset by:

§ New money rates averaging below our portfolio yields;

· Lower benefits attributable primarily to:

§ The effect of unlocking in 2011 as compared to 2010 (see "Critical Accounting

Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more

     information);   partially offset by:   § Higher death claims; and     § Model refinements and continued growth in our secondary guarantee life     insurance business; and  

· Higher insurance fees due to growth in insurance in force, partially offset by

the effect of unlocking in 2011 as compared to 2010 (see "Critical Accounting

   Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more    information).   

The increase in income from operations was partially offset primarily by an increase in underwriting, acquisition, insurance and other underwriting expenses attributable to:

· The effect of unlocking in 2011 as compared to 2010 (see "Critical Accounting

Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more

information);

· Higher pricing of reserve financing transactions supporting our secondary

guarantee UL and term business in reaction to the unfavorable market

conditions experienced during the recession and our continued efforts to

reduce the strain of these statutory reserves (see "Strategies to Address

Statutory Reserve Strain" below for more information); and

· The effect of the inter-company reinsurance agreement effective December 31,

   2010.                                             70

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Comparison of 2010 to 2009

Income from operations for this segment decreased due primarily to the following:

· Higher benefits attributable to:

§ The effect of unlocking in 2010 as compared to 2009 (see "Critical Accounting

    Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more     information);     § Higher death claims;  

§ Harmonizing certain processes resulting in an increase in traditional product

reserves; and

§ Continued growth in our secondary guarantee life insurance business; and

· More favorable tax return true-ups recorded in 2009 than in 2010.

The decrease in income from operations was partially offset primarily by the following:

· Higher net investment income and relatively flat interest credited

   attributable to:     § More favorable investment income on alternative investments and higher     prepayment and bond makewhole premiums (see "Consolidated Investments -

Alternative Investments" and "Consolidated Investments - Commercial Mortgage

    Loan Prepayment and Bond Makewhole Premiums" below);     § Growth in business in force; and     § Actions implemented to reduce interest crediting rates; and  

· Lower underwriting, acquisition, insurance and other expenses attributable to:

§ The effect of unlocking in 2010 as compared to 2009 (see "Critical Accounting

Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more

information);

partially offset by:

  § Reducing projected EGPs for this segment (discussed in "Additional     Information" below) resulting in a higher amortization rate; and  

§ Higher pricing of reserve financing transactions supporting our secondary

guarantee UL and term business in reaction to the unfavorable market

conditions experienced during the recession and our continued efforts to

reduce the strain of these statutory reserves (see "Strategies to Address

Statutory Reserve Strain" below for more information).

Strategies to Address Statutory Reserve Strain

  Our insurance subsidiaries have statutory surplus and RBC levels above current regulatory required levels.  Products containing secondary guarantees require reserves calculated under AG38.  Our insurance subsidiaries are employing strategies to reduce the strain of increasing AG38 and Valuation of Life Insurance Policies Model Regulation ("XXX") statutory reserves associated with secondary guarantee UL and term products.  As discussed below, we have been successful in executing reinsurance solutions to release capital to Other Operations.  We expect to regularly execute transactions designed to release capital as we continue to sell products that are subject to these reserving requirements.  We also plan to refinance prior transactions with long-term structured solutions.  Included in the LOCs issued as of December 31, 2011, and reported in the credit facilities table in Note 12, was approximately $2.0 billion of long-dated LOCs issued to support inter-company reinsurance arrangements, of which approximately $200 million and $1.0 billion was issued for UL business with secondary guarantees through 2015 and 2031, respectively, and approximately $800 million was issued for term business through 2023.  We have also used the proceeds from senior note issuances of approximately $1.1 billion to execute long-term structured solutions supporting secondary guarantee UL and term business. LOCs and related capital market alternatives lower the capital effect of secondary guarantee UL products.  An inability to obtain the necessary LOC capacity or other capital market alternatives could affect our returns on our in-force secondary guarantee UL business.  However, we believe that our insurance subsidiaries have sufficient capital to support the increase in statutory reserves, based on our current reserve projections, if such structures are not available.  See "Part I - Item 1A. Risk Factors - Legislative, Regulatory and Tax - Changes to the calculation of reserves and attempts to mitigate the impact of Regulation XXX and Actuarial Guideline 38 may fail in whole or in part resulting in an adverse effect on our financial condition and results of operations" for further information on XXX and AG38 reserves.  See the table in "Underwriting, Acquisition, Insurance and Other Expenses" below for the presentation of our expenses associated with reserve financing.  

Additional Information

We are in the process of completing the planned conversion of our actuarial valuation systems to a uniform platform for certain blocks of business. See "Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more information.

We expect to continue making strategic investments during 2012 that will result in higher expenses.

                                          71 --------------------------------------------------------------------------------   We expect to manage the effects of spreads on near-term income from operations through portfolio management and, to a lesser extent, crediting rate actions, which assumes no significant changes in net flows into or out of our fixed accounts or other changes that may cause interest rate spreads to differ from our expectations. During the third quarter of 2010, we lowered our new money investment yield assumption. This assumption revision had the effect of lowering the projected EGPs for this segment, thereby increasing our rate of amortization, which results in higher DAC, VOBA and DFEL amortization and lower earnings for this segment.  For information on interest rate spreads and the interest rate risk due to falling interest rates, see "Part I - Item 1A. Risk Factors - Market Conditions - Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease and changes in interest rates may also result in increased contract withdrawals" and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - Interest Rate Risk on Fixed Insurance Businesses - Falling Rates."  Sales are not recorded as a component of revenues (other than for traditional products) and do not have a significant effect on current quarter income from operations but are indicators of future profitability. Generally, we have higher sales during the second half of the year with the fourth quarter being our strongest. However, we face conditions in the marketplace as discussed in "Introduction - Executive Summary - Current Market Conditions" above that may challenge our sales volume in 2012. For example, we are implementing pricing changes to our products that reflect the current low interest rate environment that we believe will lower our sales volumes and could potentially reduce our market share until competitive conditions change.  We provide information about this segment's operating revenue and operating expense line items, the period in which amounts are recognized, key drivers of changes and historical details underlying the line items and their associated drivers below.  For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.  

Insurance Premiums

Insurance premiums relate to traditional products and are a function of the rates priced into the product and the level of insurance in force. Insurance in force, in turn, is driven by sales, persistency and mortality experience.

Insurance Fees

Details underlying insurance fees, sales, net flows, account values and in-force face amount (in millions) were as follows:

                                                                    For the Years Ended December 31,        Change Over Prior Year                                                                   2011           2010           2009          2011         2010 Insurance Fees Mortality assessments                                          $     1,312    $     1,287    $     1,299            2 %        -1 % Expense assessments                                                    935            844            759           11 %        11 % Surrender charges                                                       96            100            112           -4 %       -11 % DFEL:   Deferrals                                                           (483 )         (472 )         (439 )         -2 %        -8 %

Amortization, net of interest:

     Prospective unlocking - assumption changes                        (11 )           56             20           NM         180 %      Prospective unlocking - model refinements                         (26 )          (56 )            -           54 %        NM      Retrospective unlocking                                            (4 )           24             15           NM          60 %      Amortization, net of interest, excluding unlocking                160            151            135            6 %        12 %           Total insurance fees                                 $     1,979    $     1,934    $     1,901            2 %         2 %                                             72

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                                                                        For the Years Ended December 31,          Change Over Prior Year                                                                       2011            2010         2009         2011             2010 Sales by Product UL:     Excluding MoneyGuard®                                         $       

317    $        353   $    397            -10 %            -11 %     MoneyGuard®                                                            186             108         67             72 %             61 %          Total UL                                                          503             461        464              9 %             -1 % VUL                                                                         50              43         36             16 %             19 % COLI and BOLI                                                               92              63         51             46 %             24 % Term                                                                        55              70         59            -21 %             19 %              Total sales                                          $        700    $        637   $    610             10 %              4 %  Net Flows Deposits                                                          $      5,393    $      4,934   $  4,451              9 %             11 % Withdrawals and deaths                                                  (1,710 )        (1,877 )   (2,030 )            9 %              8 %     Net flows                                                     $      3,683    $      3,057   $  2,421             20 %             26 %  Contract holder assessments                                       $      3,286    $      3,119   $  2,996              5 %              4 %                                                                     As of December 31,               Change Over Prior Year                                                             2011        2010        2009          2011              2010 Account Values UL (1)                                                    $  28,052   $  26,199   $  24,994              7 %               5 % VUL (1)                                                       4,929       5,108       4,468             -4 %              14 % Interest-sensitive whole life                                 2,297       2,278       2,282              1 %               0 %    Total account values                                   $  35,278   $  33,585   $  31,744              5 %               6 %  In-Force Face Amount UL and other (1)                                          $ 307,900   $ 297,837   $ 291,879              3 %               2 % Term insurance (2)                                          271,931     265,154     248,726              3 %               7 %    Total in-force face amount                             $ 579,831   $ 562,991   $ 540,605              3 %               4 %    

(1) Effective with the March 31, 2009, transfer of certain life insurance

policies to a third party, UL and VUL account values were reduced by $938

million and $640 million, respectively, and UL and other face amount in

force was reduced by $20.9 billion.

(2) Excludes $19.8 billion of face amount in force associated with our

assumption of the mortality risk effective October 1, 2009, on the block of

business mentioned in footnote one above.

    Insurance fees relate only to interest-sensitive products and include mortality assessments, expense assessments (net of deferrals and amortization related to DFEL) and surrender charges. Mortality and expense assessments are deducted from our contract holders' account values. These amounts are a function of the rates priced into the product and premiums received, face amount in force and account values. Insurance in force, in turn, is driven by sales, persistency and mortality experience. In-force growth should be considered independently with respect to term products versus UL and other products, as term products have a lower profitability relative to face amount compared to interest-sensitive and other products.  

Sales in the table above and as discussed above were reported as follows:

· UL (excluding linked-benefit products) and VUL (including COLI and BOLI) -

first year commissionable premiums plus 5% of excess premiums received,

including an adjustment for internal replacements of approximately 50% of

commissionable premiums;

· MoneyGuard® (our linked-benefit product) - 15% of premium deposits; and

· Term - 100% of first year paid premiums.

    UL and VUL products with secondary guarantees represented approximately 38% of interest-sensitive life insurance in force as of December 31, 2011, and approximately 43% of sales for 2011. Changes in the marketplace and product focuses are resulting in a shift in our business mix away from products with secondary guarantees to accumulation products like Indexed UL, VUL, and                                          73 --------------------------------------------------------------------------------   COLI.  For example, during the fourth quarter of 2011, UL and VUL products with secondary guarantees represented only 29% of sales. Actuarial Guideline 37, or Variable Life Reserves for Guaranteed Minimum Death Benefits, and AG38 impose additional statutory reserve requirements for these products.  

Net Investment Income and Interest Credited

Details underlying net investment income, interest credited (in millions) and our interest rate spread were as follows:

                                                                 For the Years Ended December 31,           Change Over Prior Year                                                                2011           2010           2009           2011             2010

Net Investment Income Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses

                       $     2,092    $     2,000    $     1,942              5 %              3 % Commercial mortgage loan prepayment and bond makewhole premiums (1)                                                         23             30             12            -23 %            150 % Alternative investments (2)                                          62             49            (69 )           27 %            171 % Surplus investments (3)                                             117            107             90              9 %             19 %

     Total net investment income                            $     2,294   

$     2,186    $     1,975              5 %             11 %  Interest Credited                                           $     1,235    $     1,199    $     1,185              3 %              1 %   

(1) See "Consolidated Investments - Commercial Mortgage Loan Prepayment and Bond

Makewhole Premiums" below for additional information.

(2) See "Consolidated Investments - Alternative Investments" below for

additional information.

(3) Represents net investment income on the required statutory surplus for this

segment and includes the effect of investment income on alternative

investments for such assets that are held in the portfolios supporting

      statutory surplus versus the portfolios supporting product liabilities.                                                                                                                         Basis Point Change                                                                            For the Years Ended December 31,            Over Prior Year                                                                          2011           2010            2009          2011          2010 Interest Rate Yields and Spread Attributable to interest-sensitive products: Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses                                                  

5.79 % 5.87 % 5.93 % (8 ) (6 ) Commercial mortgage loan prepayment and bond makewhole premiums

0.07 % 0.09 % 0.04 % (2 ) 5 Alternative investments

                                                      0.19 %         0.17 %         -0.25 %           2          42         Net investment income yield on reserves                             

6.05 % 6.13 % 5.72 % (8 ) 41 Interest rate credited to contract holders

4.08 % 4.16 % 4.23 % (8 ) (7 )

                 Interest rate spread                                        

1.97 % 1.97 % 1.49 % (0 ) 48

Attributable to traditional products: Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses

5.90 % 6.12 % 5.99 % (22 ) 13 Commercial mortgage loan prepayment and bond makewhole premiums

0.03 % 0.07 % 0.01 % (4 ) 6 Alternative investments

0.01 % 0.02 % 0.00 % (1 ) 2

         Net investment income yield on reserves                              5.94 %         6.21 %          6.00 %         (27 )        21                                             74

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                                                             For the Years Ended December 31,           Change Over Prior Year                                                             2011            2010         2009         2011              2010 Averages Attributable to interest-sensitive products: Invested assets on reserves (1)                         $     31,752    $     29,391   $ 27,824              8 %               6 % Account values - universal and whole life (1)                 30,066          28,465     27,674              6 %               3 %  Attributable to traditional products: Invested assets on reserves                                    4,297           4,465      4,896             -4 %              -9 %   

(1) We experienced declines in our average invested assets on reserves and

account values attributable to interest-sensitive products subsequent to the

transfer of certain life insurance policies to a third party, which reduced

these balances by $927 million and $938 million, respectively, on March 31,

      2009.    A portion of the investment income earned for this segment is credited to contract holder accounts. Invested assets will typically grow at a faster rate than account values because of the AG38 reserve requirements, which cause statutory reserves to grow at a faster rate than account values. Invested assets are based upon the statutory reserve liabilities and are therefore affected by various reserve adjustments, including capital transactions providing relief from AG38 reserve requirements, which leads to a transfer of invested assets from this segment to Other Operations for use in other corporate purposes. We expect to earn a spread between what we earn on the underlying general account investments and what we credit to our contract holders' accounts. We use our investment income to offset the earnings effect of the associated build of our policy reserves for traditional products. Commercial mortgage loan prepayments and bond makewhole premiums and investment income on alternative investments can vary significantly from period to period due to a number of factors, and, therefore, may contribute to investment income results that are not indicative of the underlying trends.  Benefits 

Details underlying benefits (dollars in millions) were as follows:

                                                                      For the Years Ended December 31,          Change Over Prior Year                                                                       2011            2010         2009         2011             2010 Benefits Death claims direct and assumed                                   $      2,847    $      2,538    $ 2,260             12 %             12 % Death claims ceded                                                      (1,368 )        (1,154 )     (993 )          -19 %            -16 % Reserves released on death                                                (452 )          (433 )     (394 )           -4 %            -10 %      Net death benefits                                                  1,027             951        873              8 %              9 % 

Change in secondary guarantee life insurance product reserves:

      Prospective unlocking - assumption changes                           (297 )            84         (3 )           NM               NM      Prospective unlocking - model refinements                             155              71          -            118 %             NM      Change in reserves, excluding unlocking                               467             306        249             53 %             23 % 

Other benefits:

     Prospective unlocking - assumption changes                             33               -          -             NM               NM      Other benefits, excluding unlocking (1)                               284             322        254            -12 %             27 %           Total benefits                                          $      1,669    $      1,734    $ 1,373             -4 %             26 %  Death claims per $1,000 of in-force                                       1.80            1.72       1.63              5 %              6 %    

(1) Includes primarily traditional product changes in reserves and dividends.

    Benefits for this segment includes claims incurred during the period in excess of the associated reserves for its interest-sensitive and traditional products. In addition, benefits includes the change in secondary guarantee life insurance product reserves. The reserve for secondary guarantees is affected by changes in expected future trends of expense assessments causing unlocking adjustments to this liability similar to DAC, VOBA and DFEL.                                          75 --------------------------------------------------------------------------------

Underwriting, Acquisition, Insurance and Other Expenses

  Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:                                                                 For the Years Ended December 31,           Change Over Prior Year                                                               2011           2010           2009           2011             2010

Underwriting, Acquisition, Insurance and Other Expenses Commissions

                                                $       678    $       664    $       676              2 %             -2 % General and administrative expenses                                473            451            451              5 %              0 % Expenses associated with reserve financing                          57             37              6             54 %             NM Taxes, licenses and fees                                           145            129            115             12 %             12 %   Total expenses incurred                                        1,353          1,281          1,248              6 %              3 % DAC and VOBA deferrals                                            (948 )         (915 )         (900 )           -4 %             -2 %

    Total expenses recognized before amortization                  405            366            348             11 %              5 % 

DAC and VOBA amortization, net of interest

  Prospective unlocking - assumption changes                       215            129             33             67 %            291 %   Prospective unlocking - model refinements                       (219 )         (155 )            -            -41 %             NM   Retrospective unlocking                                           12             28             42            -57 %            -33 %   Amortization, net of interest, excluding unlocking               531            536            496             -1 %              8 % Other intangible amortization                                        4              4              4              0 %              0 %       Total underwriting, acquisition, insurance and other       expenses                                             $       948    $       908    $       923              4 %             -2 %  DAC and VOBA Deferrals As a percentage of sales                                         135.4 %        143.6 %        147.5 %    Commissions and other general and administrative expenses that vary with and are related primarily to the production of new business are deferred to the extent recoverable and for our interest-sensitive products are generally amortized over the lives of the contracts in relation to EGPs. For our traditional products, DAC and VOBA are amortized on either a straight-line basis or as a level percent of premium of the related contracts, depending on the block of business.  When comparing DAC and VOBA deferrals as a percentage of sales for 2011 to 2010 and for 2010 to 2009, the decrease is primarily a result of incurred deferrable commissions declining at a rate higher than sales attributable primarily to changes in sales mix to products with lower commission rates.                                          76 --------------------------------------------------------------------------------                             RESULTS OF GROUP PROTECTION

Income (Loss) from Operations

  Details underlying the results for Group Protection (in millions) were as follows:                                                                  For the Years Ended December 31,        Change Over Prior Year                                                                2011           2010           2009          2011         2010 Operating Revenues Insurance premiums                                          $     1,778    $     1,682    $     1,579            6 %         7 % Net investment income                                               152            141            127            8 %        11 % Other revenues and fees                                               9              8              7           13 %        14 %    Total operating revenues                                       1,939          1,831          1,713            6 %         7 % Operating Expenses Interest credited                                                     3              3              3            0 %         0 % Benefits                                                          1,314          1,296          1,116            1 %        16 % Underwriting, acquisition, insurance and other expenses             467            422            403           11 %         5 %    Total operating expenses                                       1,784          1,721          1,522            4 %        13 % Income (loss) from operations before taxes                          155            110            191           41 %       -42 % Federal income tax expense (benefit)                                 54             38             67           42 %       -43 %       Income (loss) from operations                         $       101    $        72    $       124           40 %       -42 %                                                                     For the Years Ended December 31,         Change Over Prior Year                                                                 2011           2010            2009         2011          2010 Income (Loss) from Operations by Product Line Life                                                        $         34     $      37     $         42          -8 %        -12 % Disability                                                            64            34               79          88 %        -57 % Dental                                                                (2 )          (4 )             (2 )        50 %       -100 %    Total non-medical                                                  96            67              119          43 %        -44 % Medical                                                                5             5                5           0 %          0 %       Income (loss) from operations                         $        101     $      72     $        124          40 %        -42 %    Comparison of 2011 to 2010 

Income from operations for this segment increased due primarily to the following:

· More favorable non-medical loss ratio experience;

· Growth in insurance premiums driven by normal, organic business growth in our

non-medical products; and

· Higher net investment income driven by an increase in business.

<pre> The increase in income from operations was partially offset primarily by higher underwriting, acquisition, insurance and other expenses attributable to an increase in business and investments in strategic initiatives associated with enhancements to sales and distribution processes and improvements to technology platforms during 2011. Comparison of 2010 to 2009 Income from operations for this segment decreased due to unfavorable claims incidence and, to a lesser extent, termination experience on our long-term disability business and adverse mortality and morbidity experience on our life business resulting in a non-medical loss ratio of 76.2% during 2010 that was above the high end of our historical expected range of 71% to 74%. 77 --------------------------------------------------------------------------------

The decrease in income from operations was partially offset primarily by the following:

· Growth in insurance premiums driven by normal, organic business growth in our

non-medical products and strong case persistency; and

· Higher net investment income driven by an increase in business and more

favorable investment income on alternative investments within our surplus

portfolio (see "Consolidated Investments - Alternative Investments" below for

    more information).    Additional Information  During 2011, our non-medical loss ratio was 72.9%, below the 76.2% we experienced during 2010, attributable primarily to improvement in disability claim incidence rates. Non-medical loss ratios in general are likely to remain within our long-term expectation of 71% to 74% during 2012. For every one percent increase in the loss ratio above our expectation, we would expect an approximate annual $10 million to $12 million decrease to income from operations.  Management compares trends in actual loss ratios to pricing expectations because group-underwriting risks change over time. We expect normal fluctuations in our composite non-medical loss ratios of this segment, as claims experience is inherently uncertain. We have taken actions to manage the effects of our loss ratio results, such as implementing price adjustments on our product lines upon renewal to better reflect our experience going forward. In addition, we have been focusing on managing the higher volume of incidence through claims risk management, including contracting additional resources to help reduce caseloads and improve claim recovery experience so that incidence volumes do not detract from our claim recovery efforts. We have also been employing tools to identify and support claimants who will return to work.  

We expect to continue making strategic investments during 2012 that will result in higher expenses.

  We are evaluating the potential effects that health care reform may have on the value and profitability of this segment's products and income from operations, including, but not limited to, potential changes to traditional sources of income for our brokers who may seek additional portfolio options and/or modification to compensation structures.  During the second quarter of 2011, we reviewed the discount rate assumptions associated with reserves for long-term disability and life waiver claim incurrals.  Due to the persistent decline in new money investment yields, we lowered the discount rate by 50 basis points to 4.25% on new incurrals, which decreased income from operations by $3 million during the second quarter of 2011. For information on the effects of current interest rates on our long-term disability claim reserves, see "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - Interest Rate Risk on Fixed Insurance Businesses - Falling Rates."  Sales relate to long-duration contracts sold to new contract holders and new programs sold to existing contract holders. We believe that the trend in sales is an important indicator of development of business in force over time.  We provide information about this segment's operating revenue and operating expense line items, the period in which amounts are recognized, key drivers of changes and historical details underlying the line items and their associated drivers below.  For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.                                          78 --------------------------------------------------------------------------------

Insurance Premiums

Details underlying insurance premiums (in millions) were as follows:

                                                                  For the Years Ended December 31,            Change Over Prior Year                                                                2011           2010           2009           2011              2010 Insurance Premiums by Product Line Life                                                        $       693    $       639    $       584              8 %               9 % Disability                                                          757            727            692              4 %               5 % Dental                                                              183            167            149             10 %              12 %    Total non-medical                                              1,633          1,533          1,425              7 %               8 % Medical                                                             145            149            154             -3 %              -3 %

      Total insurance premiums                              $     1,778   

$     1,682    $     1,579              6 %               7 %  Sales                                                       $       395    $       353    $       361             12 %              -2 %    Our cost of insurance and policy administration charges are embedded in the premiums charged to our customers. The premiums are a function of the rates priced into the product and our business in force. Business in force, in turn, is driven by sales and persistency experience. Sales in the table above are the combined annualized premiums for our life, disability and dental products.  

Net Investment Income

  We use our investment income to offset the earnings effect of the associated build of our policy reserves, which are a function of our insurance premiums and the yields on our invested assets.  

Benefits and Interest Credited

Details underlying benefits and interest credited (in millions) and loss ratios by product line were as follows:

                                                                  For the Years Ended December 31,            Change Over Prior Year                                                                2011           2010           2009           2011              2010 Benefits and Interest Credited by Product Line Life                                                        $       518    $       484    $       420              7 %              15 % Disability                                                          529            548            443             -3 %              24 % Dental                                                              143            136            121              5 %              12 %    Total non-medical                                              1,190          1,168            984              2 %              19 % Medical                                                             127            131            135             -3 %              -3 %

      Total benefits and interest credited                  $     1,317   

$     1,299    $     1,119              1 %              16 %  Loss Ratios by Product Line Life                                                               74.8 %         75.8 %         72.0 % Disability                                                         69.9 %         75.4 %         64.0 % Dental                                                             77.9 %         81.5 %         81.7 %    Total non-medical                                               72.9 %         76.2 %         69.1 % Medical                                                            87.9 %         87.6 %         87.9 %                                            79

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Underwriting, Acquisition, Insurance and Other Expenses

  Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:                                                                For the Years Ended December 31,           Change Over Prior Year                                                               2011            2010          2009         2011              2010

Underwriting, Acquisition, Insurance and Other Expenses Commissions

                                                $       201     $       190     $   176              6 %               8 % General and administrative expenses                                244             208         204             17 %               2 % Taxes, licenses and fees                                            41              39          36              5 %               8 %   Total expenses incurred                                          486             437         416             11 %               5 % DAC deferrals                                                      (65 )           (61 )       (59 )           -7 %              -3 %

    Total expenses recognized before amortization                  421             376         357             12 %               5 % DAC and VOBA amortization, net of interest                          46              46          46              0 %               0 %       Total underwriting, acquisition, insurance and other       expenses                                             $       467     $       422     $   403             11 %               5 %  DAC Deferrals As a percentage of insurance premiums                              3.7 %    

3.6 % 3.7 %

    Expenses, excluding broker commissions, that vary with and are related primarily to the production of new business are deferred to the extent recoverable and are amortized on either a straight-line basis or as a level percent of premium of the related contracts depending on the block of business. Broker commissions, which vary with and are related to paid premiums, are expensed as incurred. The level of expenses is an important driver of profitability for this segment as group insurance contracts are offered within an environment that competes on the basis of price and service.                                           80

--------------------------------------------------------------------------------                             RESULTS OF OTHER OPERATIONS

Income (Loss) from Operations

Details underlying the results for Other Operations (in millions) were as follows:

                                                                       For the Years Ended December 31,           Change Over Prior Year                                                                     2011           2010           2009           2011             2010 Operating Revenues Insurance premiums                                               $         1    $         2    $         4            -50 %            -50 % Net investment income                                                    307            326            307             -6 %              6 % Amortization of deferred gain on business sold through reinsurance                                                               72             72             73              0 %             -1 % Media revenues (net)                                                      77             75             68              3 %             10 % Other revenues and fees                                                    4             12             13            -67 %             -8 %     Total operating revenues                                             461            487            465             -5 %              5 % Operating Expenses Interest credited                                                        113            120            148             -6 %            -19 % Benefits                                                                 126            139            258             -9 %            -46 % Media expenses                                                            69             59             53             17 %             11 % Other expenses                                                            90            176            125            -49 %             41 % Interest and debt expense                                                285            286            261              0 %             10 %

        Total operating expenses                                         683            780            845            -12 %             -8 % Income (loss) from operations before taxes                              (222 )         (293 )         (380 )           24 %             23 % Federal income tax expense (benefit)                                     (76 )         (107 )         (143 )           29 %             25 %             Income (loss) from operations                        $      (146 )  $      (186 )  $      (237 )           22 %             22 %    Comparison of 2011 to 2010  Loss from operations for Other Operations decreased due primarily to lower other expenses attributable to higher legal and merger-related expenses in 2010, partially offset by an assessment associated with the New York State Department of Financial Services' liquidation plan for Executive Life Insurance Company of New York during 2011. State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies.  

The decrease in loss from operations was partially offset primarily by lower net investment income, net of interest credited, attributable to the following:

· Repurchases of common stock, net cash used in operating activities due

   primarily to interest payments and transfers to other segments for OTTI,    partially offset by distributable earnings received from our insurance    segments, resulting in lower average invested assets; and  

· New money rates averaging below our portfolio yields.

Comparison of 2010 to 2009

Loss from operations for Other Operations decreased due primarily to the following:

· The unfavorable effect during 2009 related to rescinding the reinsurance

agreement on certain disability income business sold to Swiss Re (discussed in

"Reinsurance" below), which resulted in pre-tax increases in benefits of $78

million, interest credited of $15 million and other expenses of $5 million,

partially offset by a $34 million tax benefit;

· Higher benefits during 2009 associated with our run-off disability income

business due to increasing reserves supporting this business and writing off

certain receivables upon rescinding the reinsurance agreement; and

· Higher net investment income due to distributable earnings received from our

insurance segments, issuances of common stock and preferred stock and proceeds

from the sale of Lincoln UK and Delaware, partially offset by redemption of

our Series B preferred stock and repurchase and cancellation of associated

   common stock warrants, resulting in higher average invested assets.                                            81

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The decrease in loss from operations was partially offset primarily by the following:

· Higher other expenses due to:

§ Settlement of the Transamerica litigation matter during 2010 (see Note 13 for

     more information);     § More favorable state income tax true-ups in 2009; and     § Higher branding expenses in 2010;  

partially offset by:

  § Restructuring charges for expense initiatives in 2009; and     § Higher merger-related expenses in 2009; and  

· Higher interest and debt expense attributable to higher average balances of

outstanding debt during 2010.

Additional Information

The deferred gain on business sold through reinsurance will be fully amortized during the first half of 2017.

The results of Other Operations include our thrift business. We completed the liquidation of this business on November 30, 2011, which did not have a significant effect on the results of Other Operations.

  We provide information about Other Operations' operating revenue and operating expense line items, the period in which amounts are recognized, key drivers of changes and historical details underlying the line items and their associated drivers below.  For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.  

Net Investment Income and Interest Credited

  We utilize an internal formula to determine the amount of capital that is allocated to our business segments. Investment income on capital in excess of the calculated amounts is reported in Other Operations. If regulations require increases in our insurance segments' statutory reserves and surplus, the amount of capital retained by Other Operations would decrease and net investment income would be negatively affected.  Write-downs for OTTI decrease the recorded value of our invested assets owned by our business segments. These write-downs are not included in the income from operations of our operating segments. When impairment occurs, assets are transferred to the business segments' portfolios and will reduce the future net investment income for Other Operations, but should not have an effect on a consolidated basis unless the impairments are related to defaulted securities. Statutory reserve adjustments for our business segments can also cause allocations of invested assets between the affected segments and Other Operations.  The majority of our interest credited relates to our reinsurance operations sold to Swiss Re in 2001. A substantial amount of the business was sold through indemnity reinsurance transactions, which is still recorded in our consolidated financial statements. The interest credited corresponds to investment income earnings on the assets we continue to hold for this business. There is no effect to income or loss in Other Operations or on a consolidated basis for these amounts because interest earned on the blocks that continue to be reinsured is passed through to Swiss Re in the form of interest credited.  

Benefits

Benefits are recognized when incurred for Institutional Pension products and disability income business.

                                          82 --------------------------------------------------------------------------------

Other Expenses

Details underlying other expenses (in millions) were as follows:

                                                                              For the Years Ended December 31,            Change Over Prior Year                                                                          2011            2010             2009           2011             2010 Other Expenses General and administrative expenses:      Legal                                                             $       1     $         77     $         14             -99 %            NM      Branding                                                                 29               27               18               7 %            50 %      Non-brand marketing                                                       4               11                9             -64 %            22 %      Other (1)                                                                38               59               52             -36 %            13 %           Total general and administrative expenses                           72              174               93             -59 %            87 % Merger-related expenses (2)                                                    -                9               17            -100 %           -47 % Restructuring charges (recoveries) for expense initiatives (3)                 -               (1 )             34             100 %            NM Taxes, licenses and fees                                                      27               (4 )            (19 )            NM              79 % Inter-segment reimbursement associated with reserve financing and LOC expenses (4)                                                                  (9 )             (2 )              -              NM              NM                   Total other expenses                                 $      90     $        176     $        125             -49 %            41 %   

(1) Includes expenses that are corporate in nature including charitable

contributions, amortization of media intangible assets with a definite life,

other expenses not allocated to our business segments and inter-segment

expense eliminations.

(2) Includes the result of actions undertaken by us to eliminate duplicate

operations and functions as a result of the Jefferson-Pilot merger along with

costs related to the implementation of our unified product portfolio and

other initiatives. These actions were completed during 2010. Our cumulative

integration expense was approximately $225 million, pre-tax, which excluded

amounts capitalized or recorded as goodwill.

(3) Includes expenses associated with a restructuring plan implemented starting

in December 2008 in response to the economic downturn and sustained market

volatility, which focused on reducing expenses. These actions were completed

during 2009. Our cumulative pre-tax charges amounted to $41 million for

severance, benefits and related costs associated with the plan for workforce

reduction and other restructuring actions.

(4) Consists of reimbursements to Other Operations from the Life Insurance

segment for the use of proceeds from certain issuances of senior notes that

    were used as long-term structured solutions, net of expenses incurred by     Other Operations for its use of LOCs.   

Interest and Debt Expense

  Our current level of interest expense may not be indicative of the future due to, among other things, the timing of the use of cash, the availability of funds from our inter-company cash management program and the future cost of capital. For additional information on our financing activities, see "Review of Consolidated Financial Condition - Liquidity and Capital Resources - Sources of Liquidity and Cash Flow - Financing Activities" below.                                           83 --------------------------------------------------------------------------------                   REALIZED GAIN (LOSS) AND BENEFIT RATIO UNLOCKING

Details underlying realized gain (loss), after-DAC (1) and benefit ratio unlocking (in millions) were as follows:

                                                     For the Years Ended December 31,          Change Over Prior Year                                                   2011          2010            2009           2011           2010  Components of Realized Gain (Loss), Pre-Tax Total operating realized gain (loss)           $       89    $       69    $           54            29 %           28 % Total excluded realized gain (loss)                  (388 )        (146 )          (1,200 )          NM             88 % 

Total realized gain (loss), pre-tax $ (299 ) $ (77 ) $ (1,146 ) NM

             93 %  Reconciliation of Excluded Realized Gain (Loss) Net of Benefit Ratio Unlocking, After-Tax Total excluded realized gain (loss)            $     (252 )  $      (95 )  $         (780 )          NM             88 % Benefit ratio unlocking                               (14 )          10                89            NM            -89 %       Excluded realized gain (loss) net of       benefit ratio unlocking, after-tax       $     (266 )  $      (85 )  $         (691 )          NM             88 %  Components of Excluded Realized Gain (Loss) Net of Benefit Ratio Unlocking, After-Tax Realized gain (loss) related to certain investments                                    $      (99 )  $     (118 )  $         (350 )          16 %           66 % Gain (loss) on the mark-to-market on certain instruments                                           (54 )          49                23            NM            113 % 

Variable annuity net derivatives results:

      Hedge program performance                      (106 )         (27 )             103            NM             NM       Unlocking for GLB reserves hedged               (72 )          18              (157 )          NM            111 %       GLB NPR component                                65           (19 )            (313 )          NM             94 %           Total variable annuity net           derivatives results                        (113 )         (28 )            (367 )          NM             92 % Indexed annuity forward-starting option                 -            12                 2          -100 %           NM Realized gain (loss) on sale of subsidiaries/businesses                                 -             -                 1            NM           -100 %              Excluded realized gain (loss) net              of benefit ratio unlocking,              after-tax                         $     (266 )  $      (85 )  $         (691 )          NM             88 %   

(1) DAC refers to the associated amortization of DAC, VOBA, DSI and DFEL and

     changes in other contract holder funds and funds withheld reinsurance      liabilities.    For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.  

For information on our counterparty exposure, see "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk."

                                       84 --------------------------------------------------------------------------------

Comparison of 2011 to 2010

We had higher realized losses in 2011 as compared to 2010 due primarily to the following:

· Losses on the mark-to-market on certain instruments during 2011 as compared to

gains in 2010 attributable to spreads widening on corporate credit default

swaps, partially offset by declines in interest rates leading to an increase

in the value of our trading securities; and

· Higher losses on variable annuity net derivatives results attributable to:

§ Volatile capital markets during 2011 resulting in higher losses in our hedge

program; and

§ The effect of unlocking in 2011 as compared to 2010 (see "Critical Accounting

Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more

information);

partially offset by:

§ Widening of our credit spreads during 2011 resulting in a favorable GLB NPR

    component (see "Variable Annuity Net Derivatives Results" below for a     discussion of how our NPR adjustment is determined).   

Comparison of 2010 to 2009

We had lower realized losses in 2010 as compared to 2009 due primarily to the following:

· More favorable variable annuity net derivatives results attributable to:

§ Narrowing of our credit spreads during 2009 resulting in an unfavorable GLB

NPR component (see "Variable Annuity Net Derivatives Results" below for a     discussion of how our NPR adjustment is determined); and  

§ The effect of unlocking in 2010 as compared to 2009 (see "Critical Accounting

Policies and Estimates - DAC, VOBA, DSI and DFEL - Unlocking" for more

information);

partially offset by:

§ Less favorable hedge program performance;

· General improvement in the credit markets leading to a decline in OTTI (see

"Consolidated Investments - Realized Gain (Loss) Related to Certain

Investments" below for more information); and

· Higher gains on the mark-to-market on certain instruments attributable to

spreads narrowing on corporate credit default swaps and declines in interest

rates leading to an increase in the value of our trading securities.

Operating Realized Gain (Loss)

  Operating realized gain (loss) includes indexed annuity net derivatives results representing the net difference between the change in the fair value of the S&P 500 call options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity products. The change in the fair value of the liability for the embedded derivative represents the amount that is credited to the indexed annuity contract.  Our GWB, GIB and 4LATER® features have elements of both benefit reserves and embedded derivative reserves. We calculate the value of the embedded derivative reserves and the benefit reserves based on the specific characteristics of each GLB feature. For our GLBs that meet the definition of an embedded derivative under the Derivatives and Hedging Topic of the FASB ASC, we record them at fair value on our Consolidated Balance Sheets with changes in fair value recorded in realized gain (loss) on our Consolidated Statements of Income (Loss). In bifurcating the embedded derivative, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relates to the GLB riders (the "attributed fees"). These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract (the "net valuation premium") plus a margin that a theoretical market participant would include for risk/profit (the "risk/profit margin").  We also include the risk/profit margin portion of the GLB attributed rider fees in operating realized gain (loss) and include the net valuation premium of the GLB attributed rider fees in excluded realized gain (loss). For our Annuities and Retirement Plan Services segments, the excess of total fees collected from the contract holders over the GLB attributed rider fees is reported in insurance fees.  

Details underlying the effect to operating realized gain (loss) from unlocking (in millions) were as follows:

                                                             For the Years Ended December 31,           Change Over Prior Year                                                            2011           2010           2009          2011              2010 Retrospective unlocking                                 $       39     $       34     $       20             15 %              70 %                                             85

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Realized Gain (Loss) Related to Certain Investments

See "Consolidated Investments - Realized Gain (Loss) Related to Certain Investments" below.

Gain (Loss) on the Mark-to-Market on Certain Instruments

  Gain (loss) on the mark-to-market on certain instruments, including those associated with our consolidated variable interest entities ("VIEs") and trading securities represents changes in the fair values of certain derivative instruments (including the credit default swaps and contingent forwards associated with consolidated VIEs), total return swaps (embedded derivatives that are theoretically included in our various modified coinsurance and coinsurance with funds withheld reinsurance arrangements that have contractual returns related to various assets and liabilities associated with these arrangements) and trading securities.  

See Note 4 for information about our consolidated VIEs.

Variable Annuity Net Derivatives Results

  Our variable annuity net derivatives results include the net valuation premium, the change in the GLB embedded derivative reserves and the change in the fair value of the derivative instruments we own to hedge them, including the cost of purchasing the hedging instruments. In addition, these results include the changes in reserves not accounted for at fair value and resulting benefit ratio unlocking on our GDB and GLB riders and the change in the fair value of the derivative instruments we own to hedge them.  We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from changes in the GLB embedded derivative reserves. The change in fair value of these derivative instruments is designed to generally offset the change in embedded derivative reserves. Our variable annuity net derivatives results can be volatile especially when sudden and significant changes in equity markets and/or interest rates occur. We do not attempt to hedge the change in the NPR component of the liability. As of December 31, 2011, the net effect of the NPR resulted in a $211 million decrease in the liability for our GLB embedded derivative reserves. The NPR factors affect the discount rate used in the calculation of the GLB embedded derivative reserve. Our methodology for calculating the NPR component of the embedded derivative reserve utilizes an extrapolated 30-year NPR spread curve applied to a series of expected cash flows over the expected life of the embedded derivative. Our cash flows consist of both expected fees to be received from contract holders and benefits to be paid, and these cash flows are different on a pre- and post- NPR basis. We utilize a model based on our holding company's credit default swap ("CDS") spreads adjusted for items, such as the liquidity of our holding company CDS. Because the guaranteed benefit liabilities are contained within our insurance subsidiaries, we apply items, such as the effect of our insurance subsidiaries' claims-paying ratings compared to holding company credit risk and the over-collateralization of insurance liabilities, in order to determine factors that are representative of a theoretical market participant's view of the NPR of the specific liability within our insurance subsidiaries.  

Details underlying the NPR component and associated effect to our GLB embedded derivative reserves (dollars in millions) were as follows:

                                                            As of           As of         As of       As of        As of                                                          December 31,   September 30,   June 30,    March 31,   December 31,                                                             2011           2011          2011        2011         2010 10-year CDS spread                                              3.65 %          4.42 %      2.02 %      1.78 %        1.98 % NPR factor related to 10-year CDS spread                        0.43 %          0.51 %      0.24 %      0.17 %        0.17 % Unadjusted embedded derivative liability                $      2,418   $    

2,642 $ 306$ 112 $ 389

    Estimating what the absolute amount of the NPR effect will be period to period is difficult due to the utilization of all cash flows and the shape of the spread curve. Currently, we estimate that if the NPR factors as of December 31, 2011, were to have been zero along all points on the spread curve, then the NPR offset to the unadjusted liability would have resulted in an unfavorable effect to net income of approximately $315 million, pre-DAC and pre-tax. Alternatively, if the NPR factors were 20 basis points higher along all points on the spread curve as of December 31, 2011, then there would have been a favorable effect to net income of approximately $120 million, pre-DAC and pre-tax. In the preceding two sentences, "DAC" refers to the associated amortization of DAC, VOBA, DSI and DFEL. Changing market conditions could cause this relationship to deviate significantly in future periods. Sensitivity within this range is primarily a result of volatility in our CDS spreads and the slope of the CDS spread term structure.  

For additional information on our guaranteed benefits, see "Critical Accounting Policies and Estimates - Derivatives - Guaranteed Living Benefits" above.

                                       86 --------------------------------------------------------------------------------

Indexed Annuity Forward-Starting Option

  The liability for the forward-starting option reflects changes in the fair value of embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC. These fair values represent an estimate of the cost of the options we will purchase in the future, discounted back to the date of the balance sheet, using current market indications of volatility and interest rates, which can vary significantly from period to period due to a number of factors and therefore can provide results that are not indicative of the underlying trends.                              CONSOLIDATED INVESTMENTS  Details underlying our consolidated investment balances (in millions) were as follows:                                                                  Percentage of                                                               Total Investments                                      As of December 31,       As of December 31,                                       2011         2010        2011         2010 Investments AFS securities:    Fixed maturity                  $    75,433   $ 68,030          81.0 %     81.6 %    VIEs' fixed maturity                    700        584           0.8 %      0.7 %        Total fixed maturity             76,133     68,614          81.8 %     82.3 %    Equity                                  139        197           0.1 %      0.2 % Trading securities                       2,675      2,596           2.9 %      3.1 % Mortgage loans on real estate            6,942      6,752           7.4 %      8.1 % Real estate                                137        202           0.1 %      0.3 % Policy loans                             2,884      2,865           3.1 %      3.5 % Derivative investments                   3,151      1,076           3.4 %      1.3 % Alternative investments                    807        750           0.9 %      0.9 % Other investments                          262        288           0.3 %      0.3 %            Total investments       $    93,130   $ 83,340         100.0 %    100.0 %    Investment Objective  Invested assets are an integral part of our operations. We follow a balanced approach to investing for both current income and prudent risk management, with an emphasis on generating sufficient current income, net of income tax, to meet our obligations to customers, as well as other general liabilities. This balanced approach requires the evaluation of expected return and risk of each asset class utilized, while still meeting our income objectives. This approach is important to our asset-liability management because decisions can be made based upon both the economic and current investment income considerations affecting assets and liabilities. For a discussion on our risk management process, see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."  

Investment Portfolio Composition and Diversification

  Fundamental to our investment policy is diversification across asset classes. Our investment portfolio, excluding cash and invested cash, is composed of fixed maturity securities, mortgage loans on real estate, real estate (either wholly-owned or in joint ventures) and other long-term investments. We purchase investments for our segmented portfolios that have yield, duration and other characteristics that take into account the liabilities of the products being supported.  We have the ability to maintain our investment holdings throughout credit cycles because of our capital position, the long-term nature of our liabilities and the matching of our portfolios of investment assets with the liabilities of our various products.  

Fixed Maturity and Equity Securities Portfolios

  Fixed maturity securities and equity securities consist of portfolios classified as AFS and trading. Mortgage-backed and private securities are included in both of the AFS and trading portfolios.                                          87 --------------------------------------------------------------------------------    Details underlying our fixed maturity and equity securities portfolios by industry classification (in millions) are presented in the tables below. These tables agree in total with the presentation of AFS securities in Note 5; however, the categories below represent a more detailed breakout of the AFS portfolio; therefore, the investment classifications listed below do not agree to the investment categories provided in Note 5.                                                                                     As of December 31, 2011                                                                                               Unrealized                  %                                                                  Amortized     Unrealized       Losses        Fair      Fair                                                                    Cost          Gains         and OTTI      Value      Value Fixed Maturity AFS Securities Industry corporate bonds:    Financial services                                           $     8,926   $        607   $        158   $  9,375      12.3 %    Basic industry                                                     3,394            323             27      3,690       4.8 %    Capital goods                                                      3,933            455              9      4,379       5.8 %    Communications                                                     3,247            364             37      3,574       4.7 %    Consumer cyclical                                                  3,226            345             36      3,535       4.6 %    Consumer non-cyclical                                              7,956          1,190              1      9,145      12.0 %    Energy                                                             5,026            690              6      5,710       7.5 %    Technology                                                         1,682            192              3      1,871       2.5 %    Transportation                                                     1,360            166              1      1,525       2.0 %    Industrial other                                                     755             74              3        826       1.1 %    Utilities                                                         10,644          1,457             27     12,074      15.8 %

Collateralized mortgage and other obligations ("CMOs"):

    Agency backed                                                      3,226            357              -      3,583       4.7 %    Non-agency backed                                                  1,481             12            199      1,294       1.7 % 

Mortgage pass through securities ("MPTS"):

    Agency backed                                                      2,982            179              -      3,161       4.2 %    Non-agency backed                                                      1              -              -          1       0.0 % 

Commercial mortgage-backed securities ("CMBS"):

    Non-agency backed                                                  1,642             73            115      1,600       2.1 % 

Corporate asset-backed securities ("ABS"):

    CDOs                                                                  88              -              6         82       0.1 %    Commercial real estate ("CRE") CDOs                                   33              -             13         20       0.0 %    Credit card                                                          790             47              -        837       1.1 %    Home equity                                                          905              3            271        637       0.8 %    Manufactured housing                                                  85              5              1         89       0.1 %    Auto loan                                                             52              1              -         53       0.1 %    Other                                                                246             29              1        274       0.4 % Municipals:    Taxable                                                            3,452            565              9      4,008       5.3 %    Tax-exempt                                                            38              1              -         39       0.1 %

Government and government agencies:

    United States                                                      1,468            232              -      1,700       2.2 %    Foreign                                                            1,746            152              4      1,894       2.5 % Hybrid and redeemable preferred securities                            1,277             50            170      1,157       1.5 %       Total fixed maturity AFS securities                            69,661

7,569 1,097 76,133 100.0 % Equity AFS Securities

                                                   135             16             12        139          Total AFS securities                                        69,796          7,585          1,109     76,272 Trading Securities (1)                                                2,301            408             34      2,675             Total AFS and trading securities                    $    72,097   $      7,993   $      1,143   $ 78,947                                            88

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                                                                                     As of December 31, 2010                                                                                               Unrealized                  %                                                                  Amortized     Unrealized       Losses        Fair      Fair                                                                    Cost          Gains         and OTTI      Value      Value Fixed Maturity AFS Securities Industry corporate bonds:    Financial services                                           $     8,377   $        438   $        148   $  8,667      12.7 %    Basic industry                                                     2,478            203             20      2,661       3.9 %    Capital goods                                                      3,425            243             45      3,623       5.3 %    Communications                                                     3,050            251             32      3,269       4.8 %    Consumer cyclical                                                  2,772            185             47      2,910       4.2 %    Consumer non-cyclical                                              7,259            628             20      7,867      11.5 %    Energy                                                             4,533            428             17      4,944       7.2 %    Technology                                                         1,414            108              9      1,513       2.2 %    Transportation                                                     1,379            116              3      1,492       2.2 %    Industrial other                                                     884             53             10        927       1.4 %    Utilities                                                          9,800            708             62     10,446      15.2 % CMOs:    Agency backed                                                      3,975            308              1      4,282       6.2 %    Non-agency backed                                                  1,718             16            259      1,475       2.1 % MPTS:    Agency backed                                                      2,978            106              5      3,079       4.5 %    Non-agency backed                                                      2              -              -          2       0.0 % CMBS:    Non-agency backed                                                  2,144             95            186      2,053       3.0 % ABS:    CDOs                                                                 128             22              8        142       0.2 %    CRE CDOs                                                              46              -             14         32       0.0 %    Credit card                                                          831             33              4        860       1.3 %    Home equity                                                        1,002              6            268        740       1.1 %    Manufactured housing                                                 110              3              4        109       0.2 %    Auto loan                                                            162              2              -        164       0.2 %    Other                                                                211             21              1        231       0.3 % Municipals:    Taxable                                                            3,219             27             94      3,152       4.6 %    Tax-exempt                                                             3              -              -          3       0.0 %

Government and government agencies:

    United States                                                        931            120              2      1,049       1.5 %    Foreign                                                            1,438             94              7      1,525       2.2 % Hybrid and redeemable preferred securities                            1,476             56            135      1,397       2.0 %       Total fixed maturity AFS securities                            65,745

4,270 1,401 68,614 100.0 % Equity AFS Securities

                                                   179             25              7        197          Total AFS securities                                        65,924          4,295          1,408     68,811 Trading Securities (1)                                                2,340            297             41      2,596             Total AFS and trading securities                    $    68,264   $      4,592   $      1,449   $ 71,407    (1)  Certain of our trading securities support our modified coinsurance

arrangements ("Modco") and the investment results are passed directly to the

reinsurers. Refer to the "Trading Securities" section for further details.

                                            89 --------------------------------------------------------------------------------

AFS Securities

  In accordance with the AFS accounting guidance, we reflect stockholders' equity as if unrealized gains and losses were actually recognized, and consider all related accounting adjustments that would occur upon such a hypothetical recognition of unrealized gains and losses. Such related balance sheet effects include adjustments to the balances of DAC, VOBA, DFEL, other contract holder funds and deferred income taxes. Adjustments to each of these balances are charged or credited to accumulated OCI. For instance, DAC is adjusted upon the recognition of unrealized gains or losses because the amortization of DAC is based upon an assumed emergence of gross profits on certain insurance business. Deferred income tax balances are also adjusted because unrealized gains or losses do not affect actual taxes currently paid.  

The quality of our AFS fixed maturity securities portfolio, as measured at estimated fair value and by the percentage of fixed maturity securities invested in various ratings categories, relative to the entire fixed maturity AFS security portfolio (in millions) was as follows:

                                 Rating                                Agency          As of December 31, 2011            As of December 31, 2010           NAIC               Equivalent    Amortized      Fair        % of    Amortized      Fair        % of                              Designation      Designation (1)             (1)          Cost        Value       Total      Cost        Value       Total Investment Grade Securities                              Aaa / Aa /            1                 A             $   42,436   $  47,490      62.4 % $   40,573   $  42,769      62.3 %            2                 Baa               23,323      25,237      33.1 %     21,032      22,286      32.5 %

Total investment grade securities 65,759 72,727 95.5 % 61,605 65,055 94.8 %

Below Investment Grade Securities

           3                 Ba                 2,466       2,350       3.1 %      2,620       2,403       3.5 %            4                 B                    960         750       1.0 %        796         665       1.0 %                              Caa and            5                 lower                318         218       0.3 %        476         325       0.5 %                              In or near            6                 default              158          88       0.1 %        248         166       0.2 %

Total below investment grade

    securities                                  3,902       3,406       4.5

% 4,140 3,559 5.2 %

Total fixed maturity AFS

           securities                       $   69,661   $  76,133     100.0 

% $ 65,745$ 68,614 100.0 %

Total securities below investment

    grade as a percentage of total     fixed maturity AFS securities                 5.6 %       4.5 %                  6.3 %       5.2 %   

(1) Based upon the rating designations determined and provided by the National

Association of Insurance Commissioners ("NAIC") or the major credit rating

agencies (Fitch Ratings ("Fitch"), Moody's Investors Service ("Moody's") and

S&P). For securities where the ratings assigned by the major credit

agencies are not equivalent, the second highest rating assigned is used.

For those securities where ratings by the major credit rating agencies are

not available, which does not represent a significant amount of our total

fixed maturity AFS securities, we base the ratings disclosed upon internal

      ratings.    Comparisons between the NAIC ratings and rating agency designations are published by the NAIC. The NAIC assigns securities quality ratings and uniform valuations, which are used by insurers when preparing their annual statements. The NAIC ratings are similar to the rating agency designations of the Nationally Recognized Statistical Rating Organizations for marketable bonds. NAIC ratings 1 and 2 include bonds generally considered investment grade (rated Baa3 or higher by Moody's, or rated BBB- or higher by S&P and Fitch), by such ratings organizations. However, securities rated NAIC 1 and NAIC 2 could be deemed below investment grade by the rating agencies as a result of the current RBC rules for residential mortgage-backed securities ("RMBS") and CMBS for statutory reporting. NAIC ratings 3 through 6 include bonds generally considered below investment grade (rated Ba1 or lower by Moody's, or rated BB+ or lower by S&P and Fitch).  We have identified direct and indirect exposure to select countries in Europe that are currently experiencing stress in the credit markets, notably Greece, Ireland, Italy, Portugal, Spain, Hungary and Cyprus. These countries were identified due to high credit spreads and political and economic uncertainty in these countries. The exposure was determined by country of domicile, provided that a meaningful portion of revenues is generated from the country of domicile. As of December 31, 2011, we had direct sovereign exposure only to Italy with an amortized cost of $3 million and fair value of $2 million.  We had no exposure to any issuers, sovereign or non-sovereign, located in Greece, Hungary or Cyprus. Our non-sovereign exposure in Ireland, Italy, Portugal and Spain was limited to two large banks in which we had investments with an amortized cost and fair value of $77 million as of December 31, 2011.                                          90 --------------------------------------------------------------------------------   Our total non-banking and non-sovereign AFS securities exposure to Ireland, Italy, Portugal and Spain had an amortized cost of $770 million and a fair value of $798 million as of December 31, 2011, of which approximately 50% was related to large multinational companies domiciled in those countries. The detailed breakout by country was as follows (in millions):             Amortized     Fair              Cost       Value Spain     $       367   $  386 Ireland           215      227 Italy             148      154 Portugal           40       31     Total $       770   $  798    We purchased a European subordinated investment grade financial index hedge in the amount of €35 million with a maturity of December 20, 2016, to provide some protection on possible defaults on our European investments.  We manage European and other investment risks through our internal investment department and outside asset managers. The risk management is focused on monitoring spreads, pricing and monitoring of global economic developments. We have incorporated these risks into our stress testing.  As of December 31, 2011 and 2010, 67.4% and 79.8%, respectively, of the total publicly traded and private securities in an unrealized loss status were rated as investment grade. See Note 5 for maturity date information for our fixed maturity investment portfolio. Our gross unrealized losses on AFS securities as of December 31, 2011, decreased $299 million. This change was attributable to a decline in overall market yields, which was driven by market uncertainty and weakening economic activity. As more fully described in Note 1, we regularly review our investment holdings for OTTI. We believe the unrealized loss position as of December 31, 2011, does not represent OTTI as we do not intend to sell these debt securities, it is not more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, the estimated future cash flows are equal to or greater than the amortized cost basis of the debt securities, or we have the ability and intent to hold the equity securities for a period of time sufficient for recovery. For further information on our unrealized losses on AFS securities see "Composition by Industry Categories of our Unrealized Losses on AFS Securities" below.  

Selected information for certain AFS securities in a gross unrealized loss position (dollars in millions) was as follows:

                                              As of December 31, 2011                               Gross      Estimated    Estimated                            Unrealized      Years       Average                              Losses      until Call     Years                    Fair        and           or         until          Subordination Level                   Value       OTTI        Maturity     Recovery     Current        Origination CMBS              $  324   $       115    1 to 41             27         22.1 %            15.3 % Hybrid and redeemable preferred securities           677           170    1 to 55             31          N/A               N/A    As provided in the table above, many of the securities in these categories are long-dated with some of the preferred securities being perpetual. This is purposeful as it matches the long-term nature of our liabilities associated with our life insurance and annuity products. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" where we present information related to maturities of securities and the expected cash flows for rate sensitive liabilities and maturities of our holding company debt, which also demonstrates the long-term nature of the cash flows associated with these items. Because of this relationship, we do not believe it will be necessary to sell these securities before they recover or mature. For these securities, the estimated range and average period until recovery is the call or maturity period. It is difficult to predict or project when the securities will recover as it is dependent upon a number of factors including the overall economic climate. We do not believe it is necessary to impair these securities as long as the expected future cash flows are projected to be sufficient to recover the amortized cost of these securities.  The actual range and period until recovery could vary significantly depending on a variety of factors, many of which are out of our control. There are several items that could affect the length of the period until recovery, such as the pace of economic recovery, level of delinquencies, performance of the underlying collateral, changes in market interest rates, exposures to various industry or geographic conditions, market behavior and other market conditions.                                          91 --------------------------------------------------------------------------------   We concluded that 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, that the estimated future cash flows are equal to or greater than the amortized cost basis of the debt securities and that we have the ability to hold the equity AFS securities for a period of time sufficient for recovery. This conclusion is consistent with our asset-liability management process. Management considers the following as part of the evaluation:  ·  The current economic environment and market conditions;   ·  Our business strategy and current business plans;  

· The nature and type of security, including expected maturities and exposure to

general credit, liquidity, market and interest rate risk;

· Our analysis of data from financial models and other internal and industry

sources to evaluate the current effectiveness of our hedging and overall risk

management strategies;

· The current and expected timing of contractual maturities of our assets and

liabilities, expectations of prepayments on investments and expectations for

surrenders and withdrawals of life insurance policies and annuity contracts;

· The capital risk limits approved by management; and

· Our current financial condition and liquidity demands.

    To determine the recoverability of a debt security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following:  

· Historic and implied volatility of the security;

· Length of time and extent to which the fair value has been less than amortized

cost;

· Adverse conditions specifically related to the security or to specific

conditions in an industry or geographic area;

· Failure, if any, of the issuer of the security to make scheduled payments; and

· Recoveries or additional declines in fair value subsequent to the balance

    sheet date.    As reported on our Consolidated Balance Sheets, we had $97.6 billion of investments and cash, which exceeded the liabilities for our future obligations under insurance policies and contracts, net of amounts recoverable from reinsurers, which totaled $82.8 billion as of December 31, 2011. If it were necessary to liquidate securities prior to maturity or call to meet cash flow needs, we would first look to those securities that are in an unrealized gain position, which had a fair value of $69.1 billion, excluding consolidated VIEs in the amount of $700 million, as of December 31, 2011, rather than selling securities in an unrealized loss position. The amount of cash that we have on hand at any point of time takes into account our liquidity needs in the future, other sources of cash, such as the maturities of investments, interest and dividends we earn on our investments and the on-going cash flows from new and existing business.  

See "AFS Securities - Evaluation for Recovery of Amortized Cost" in Note 1 and Note 5 for additional discussion.

As of December 31, 2011 and 2010, the estimated fair value for all private securities was $9.3 billion and $8.4 billion, respectively, representing approximately 10% of total invested assets.

For information regarding our VIEs' fixed maturity securities, see Note 1 and Note 4.

  Trading Securities  Trading securities, which in certain cases support reinsurance funds withheld and our Modco reinsurance agreements, are carried at estimated fair value and changes in estimated fair value are recorded in net income as they occur. Investment results for these certain portfolios, including gains and losses from sales, are passed directly to the reinsurers through the contractual terms of the reinsurance arrangements. Offsetting these amounts in certain cases are corresponding changes in fair value of the embedded derivative liability associated with the underlying reinsurance arrangement. See Notes 1 and 9 for more information regarding our accounting for Modco.  

Mortgage-Backed Securities ("MBS") (Included in AFS and Trading Securities)

  Our fixed maturity securities include MBS. These securities are subject to risks associated with variable prepayments. This may result in differences between the actual cash flow and maturity of these securities than that expected at the time of purchase. Securities that have an amortized cost greater than par and are backed by mortgages that prepay faster than expected will incur a reduction in yield or a loss. Those securities with an amortized cost lower than par that prepay faster than expected will generate an increase in yield or a gain. In addition, we may incur reinvestment risks if market yields are lower than the book yields earned on the securities. Prepayments occurring slower than expected have the opposite effect. We may incur reinvestment risks if market yields are higher than the book yields earned on the securities and we are forced to sell the securities. The degree to which a security is susceptible to either gains or losses is influenced by: the difference between its amortized cost and par; the relative                                          92

--------------------------------------------------------------------------------   sensitivity of the underlying mortgages backing the assets to prepayment in a changing interest rate environment; and the repayment priority of the securities in the overall securitization structure.  We limit the extent of our risk on MBS by prudently limiting exposure to the asset class, by generally avoiding the purchase of securities with a cost that significantly exceeds par, by purchasing securities backed by stable collateral and by concentrating on securities with enhanced priority in their trust structure. Such securities with reduced risk typically have a lower yield (but higher liquidity) than higher-risk MBS. A significant amount of assets in our MBS portfolio are either guaranteed by U.S. government-sponsored enterprises or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status.  Our exposure to subprime mortgage lending is limited to investments in banks and other financial institutions that may be affected by subprime lending and direct investments in CDOs, ABS and RMBS. Mortgage-related ABS are backed by home equity loans and RMBS are backed by residential mortgages. These securities are backed by loans that are characterized by borrowers of differing levels of creditworthiness: prime; Alt-A; and subprime. Prime lending is the origination of residential mortgage loans to customers with excellent credit profiles. Alt-A lending is the origination of residential mortgage loans to customers who have prime credit profiles but lack documentation to substantiate income. Subprime lending is the origination of loans to customers with weak or impaired credit profiles.  Delinquency and loss rates on residential mortgages and home equity loans have been showing positive trends, and as long as the unemployment rate remains stable to improving, we expect these trends to continue. We continue to expect to receive payments in accordance with contractual terms for a significant amount of our securities, largely due to the seniority of the claims on the collateral of the securities that we own. The tranches of the securities will experience losses according to their seniority level with the least senior (or most junior), typically the unrated residual tranche, taking the initial loss. The credit ratings of our securities reflect the seniority of the securities that we own. Our RMBS had a market value of $8.3 billion and an unrealized gain of $365 million, or 4%, as of December 31, 2011.                                          93 --------------------------------------------------------------------------------   The market value of AFS securities and trading securities backed by subprime loans was $442 million and represented less than 1% of our total investment portfolio as of December 31, 2011. AFS securities represented $428 million, or 97%, and trading securities represented $14 million, or 3%, of the subprime exposure as of December 31, 2011. AFS securities and trading securities rated A or above represented 45% of the subprime investments and $223 million in market value of our subprime investments was backed by loans originating in 2005 and forward. The table below summarizes our investments in AFS securities backed by pools of residential mortgages (in millions):                                                                                 As of December 31, 2011                                          Prime Agency         Prime/ Non-Agency           Alt-A             Subprime               Total                                          Fair    Amortized      Fair     Amortized    Fair   Amortized    Fair   Amortized     Fair    Amortized                                        Value       Cost       Value        Cost     Value      Cost     Value      Cost      Value       Cost Type RMBS                                  $  6,743   $  6,207   $      835    $   911   $  461    $   567   $    -    $     4   $  8,039   $  7,689 ABS home equity                              4          4            -          -      205        280      428        621        637        905     Total by type (1)(2)              $  6,747   $  6,211   $      835    $   911   $  666    $   847   $  428    $   625   $  8,676   $  8,594  Rating AAA                                   $  6,672   $  6,142   $       62    $    60   $   32    $    31   $   79    $    82   $  6,845   $  6,315 AA                                          60         56           52         51        6          6       44         50        162        163 A                                           15         13           54         56       33         36       64         68        166        173 BBB                                          -          -           52         55       63         64       23         24        138        143 BB and below                                 -          -          615        689      532        710      218        401      1,365      1,800

Total by rating (1)(2)(3) $ 6,747$ 6,211 $ 835 $

  911   $  666    $   847   $  428    $   625   $  8,676   $  8,594  Origination Year 2004 and prior                        $  1,562   $  1,445   $      215    $   221   $  228    $   255   $  209    $   265   $  2,214   $  2,186 2005                                       842        754          119        141      245        300      158        230      1,364      1,425 2006                                       246        217          162        175      158        237       60        128        626        757 2007                                     1,097        963          339        374       35         55        -          -      1,471      1,392 2008                                       240        217            -          -        -          -        -          -        240        217 2009                                     1,197      1,121            -          -        -          -        1          2      1,198      1,123 2010                                     1,074      1,020            -          -        -          -        -          -      1,074      1,020 2011                                       489        474            -          -        -          -        -          -        489        474

Total by origination year (1)(2) $ 6,747$ 6,211 $ 835 $

911 $ 666$ 847$ 428$ 625$ 8,676$ 8,594

  Total AFS RMBS as a percentage of total AFS securities                                                                                                            11.4 %     12.3 %  Total prime/non-agency, Alt-A and subprime as a percentage of total AFS securities                                                                                                                       2.5 %      3.4 %   

(1) Does not include the fair value of trading securities totaling $265 million,

which support our Modco reinsurance agreements because investment results for

these agreements are passed directly to the reinsurers. The $265 million in

trading securities consisted of $241 million prime, $10 million Alt-A and $14

million subprime.

(2) Does not include the amortized cost of trading securities totaling $255

million, which support our Modco reinsurance agreements because investment

results for these agreements are passed directly to the reinsurers. The $255

million in trading securities consisted of $225 million prime, $13 million

Alt-A and $17 million subprime.

(3) Based upon the rating designations determined and provided by the major credit

rating agencies (Fitch, Moody's and S&P). For securities where the ratings

assigned by the major credit agencies are not equivalent, the second highest

rating assigned is used. For those securities where ratings by the major

credit rating agencies are not available, which does not represent a

significant amount of our total fixed maturity AFS securities, we base the

ratings disclosed upon internal ratings.

None of these investments included any direct investments in subprime lenders or mortgages. We are not aware of material exposure to subprime loans in our alternative asset portfolio.

                                       94 --------------------------------------------------------------------------------

The following summarizes our investments in AFS securities backed by pools of commercial mortgages (in millions):

                                                                             As of December 31, 2011                                           Multiple Property           Single Property             CRE CDOs                 Total                                           Fair       Amortized      Fair   

Amortized Fair Amortized Fair Amortized

                                         Value         Cost        Value         Cost       Value       Cost        Value        Cost Type CMBS                                   $    1,553   $     1,551   $     47    $        91   $    -   $         -   $  1,600   $     1,642 CRE CDOs                                        -             -          -              -       20            33         20            33      Total by type (1)(2)              $    1,553   $     1,551   $     47    $        91   $   20   $        33   $  1,620   $     1,675  Rating AAA                                    $    1,028   $       967   $     14    $        13   $    -   $         -   $  1,042   $       980 AA                                            215           213         10             10        -             -        225           223 A                                             134           138          5              6        1             1        140           145 BBB                                           108           114          5              6        7             8        120           128 BB and below                                   68           119         13             56       12            24         93           199

Total by rating (1)(2)(3) $ 1,553$ 1,551$ 47

  $        91   $   20   $        33   $  1,620   $     1,675  Origination Year 2004 and prior                         $      901   $       893   $     23    $        23   $    4   $         5   $    928   $       921 2005                                          325           309         23             60        7             8        355           377 2006                                          136           149          1              8        9            20        146           177 2007                                          136           146          -              -        -             -        136           146 2010                                           55            54          -              -        -             -         55            54

Total by origination year (1)(2) $ 1,553$ 1,551$ 47

$ 91 $ 20 $ 33 $ 1,620$ 1,675

  Total AFS securities backed by pools of commercial mortgages as a percentage of total AFS securities                                                                                      2.1 %         2.4 %   

(1) Does not include the fair value of trading securities totaling $34 million,

which support our Modco reinsurance agreements because investment results

for these agreements are passed directly to the reinsurers. The $34 million

in trading securities consisted of $31 million CMBS and $3 million CRE CDOs.

(2) Does not include the amortized cost of trading securities totaling $39

million, which support our Modco reinsurance agreements because investment

results for these agreements are passed directly to the reinsurers. The $39

million in trading securities consisted of $35 million CMBS and $4 million

CRE CDOs.

(3) Based upon the rating designations determined and provided by the major

credit rating agencies (Fitch, Moody's and S&P). For securities where the

ratings assigned by the major credit agencies are not equivalent, the second

highest rating assigned is used. For those securities where ratings by the

major credit rating agencies are not available, which does not represent a

     significant amount of our total fixed maturity AFS securities, we base the      ratings disclosed upon internal ratings.   

As of December 31, 2011, the amortized cost and fair value of our exposure to Monoline insurers was $593 million and $537 million, respectively.

Composition by Industry Categories of our Unrealized Losses on AFS Securities

  When considering unrealized gain and loss information, it is important to recognize that the information relates to the status of securities at a particular point in time and may not be indicative of the status of our investment portfolios subsequent to the balance sheet date. Further, because the timing of the recognition of realized investment gains and losses through the selection of which securities are sold is largely at management's discretion, it is important to consider the information provided below within the context of the overall unrealized gain or loss position of our investment portfolios. These are important considerations that should be included in any evaluation of the potential effect of unrealized loss securities on our future earnings.                                           95 --------------------------------------------------------------------------------

The composition by industry categories of all securities in unrealized loss status (in millions), was as follows:

                                                    As of December 31, 2011                                                                                             %                                          %                       %        Unrealized    Unrealized                               Fair     Fair     Amortized    Amortized       Loss          Loss                              Value     Value      Cost         Cost        and OTTI      and OTTI ABS                         $    680    10.5 % $       972        12.7 % $        292         26.3 % Banking                        1,507    23.2 %       1,769        23.2 %          262         23.6 % CMOs                             946    14.5 %       1,142        15.0 %          196         17.7 % CMBS                             324     5.0 %         439         5.8 %          115         10.4 % Property and casualty insurers                         108     1.7 %         136         1.8 %           28          2.5 % Media - non-cable                155     2.4 %         182         2.4 %           27          2.4 % Electric                         217     3.3 %         240         3.2 %           23          2.1 % Retailers                         67     1.0 %          88         1.2 %           21          1.9 % Paper                            102     1.6 %         122         1.6 %           20          1.8 % Life                             117     1.8 %         129         1.7 %           12          1.1 % Local authorities                 40     0.6 %          51         0.7 %           11          1.0 % Wirelines                        159     2.4 %         170         2.2 %           11          1.0 % Brokerage                         87     1.3 %          97         1.3 %           10          0.9 % Industries with unrealized losses less than $10 million                        1,994    30.7 %       2,075        27.2 %           81          7.3 %       Total by industry     $  6,503   100.0 % $     7,612       100.0 % $      1,109        100.0 %  Total by industry as a percentage of total AFS securities                       8.5 %                10.9 %                    100.0 %    As of December 31, 2011, the amortized cost and fair value of securities subject to enhanced analysis and monitoring for potential changes in unrealized loss status was $1,015 million and $701 million, respectively.  

Mortgage Loans on Real Estate

  The following tables summarize key information on mortgage loans on real estate (in millions):                             As of December 31, 2011        As of December 31, 2010                            Carrying                       Carrying                             Value             %            Value             % Credit Quality Indicator Current                  $      6,854            98.7 % $      6,699            99.2 % Delinquent and in foreclosure (1)                    88             1.3 %           53             0.8 %    Total mortgage loans    on real estate        $      6,942           100.0 % $      6,752           100.0 %    (1)  As of December 31, 2011 and 2010, there were 16 and 10 mortgage loans on      real estate that were delinquent and in foreclosure, respectively.                                            96

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                                           As of December 31,                                          2011        2010 By Segment Annuities                             $     1,341   $  1,172 Retirement Plan Services                    1,080        920 Life Insurance                              3,731      3,856 Group Protection                              278        285 Other Operations                              512        519

  Total mortgage loans on real estate $     6,942   $  6,752                                              As of                                       December 31,                                           2011 Allowance for Losses Balance as of beginning-of-year        $        13    Additions                                    24    Charge-offs, net of recoveries               (6 )       Balance as of end-of-year        $        31                               As of December 31, 2011                                  As of December 31, 2011                            Carrying                                                 Carrying                             Value             %                                      Value             % Property Type                                             State Exposure Office building          $      2,207            31.8 %   CA                      $      1,579            22.7 % Industrial                      1,775            25.6 %   TX                               636             9.2 % Retail                          1,557            22.4 %   MD                               420             6.1 % Apartment                       1,022            14.7 %   VA                               350             5.0 % Mixed use                         152             2.2 %   NC                               285             4.1 % Hotel/Motel                       132             1.9 %   TN                               279             4.0 % Other commercial                   97             1.4 %   FL                               272             3.9 %         Total            $      6,942           100.0 %   WA                               264             3.8 %                                                           GA                               233             3.4 % Geographic Region                                         AZ                               216             3.1 % Pacific                  $      1,965            28.3 %   IN                               208             3.0 % South Atlantic                  1,689            24.3 %   IL                               189             2.7 % East North Central                671             9.7 %   NV                               184             2.7 % West South Central                656             9.5 %   OH                               177             2.5 % Mountain                          553             8.0 %   PA                               174             2.5 % East South Central                475             6.8 %   NY                               150             2.2 % Middle Atlantic                   442             6.4 %   MN                               149             2.1 % West North Central                349             5.0 %   Other states under 2%          1,177            17.0 % New England                       142             2.0 %         Total             $      6,942           100.0 %         Total            $      6,942           100.0 %                                            97

--------------------------------------------------------------------------------                          As of December 31, 2011                                 As of December 31, 2011                       Principal                                               Principal                         Amount            %                                    Amount             % Origination Year                                      Future Principal Payments 2004 and prior       $      2,486            35.7 %   2012                  $         309             4.4 % 2005                          783            11.3 %   2013                            379             5.4 % 2006                          647             9.3 %   2014                            402             5.8 % 2007                          911            13.1 %   2015                            622             8.9 % 2008                          796            11.4 %   2016                            518             7.5 % 2009                          148             2.1 %   2017 and thereafter           4,730            68.0 % 2010                          280             4.0 %        Total             $      6,960           100.0 % 2011                          909            13.1 %     Total            $      6,960           100.0 %    The global financial markets and credit market conditions experienced a period of extreme volatility and disruption that began in the second half of 2007 and continued and substantially increased throughout 2008 that led to a decrease in the overall liquidity and availability of capital in the mortgage loan market, and in particular a decrease in activity by securitization lenders. These conditions and the overall economic downturn put pressure on the fundamentals of mortgage loans through rising vacancies, falling rents and falling property values.  

See Note 5 for information regarding our loan-to-value and debt-service coverage ratios.

  There were 12 and 9 impaired mortgage loans on real estate, or 1% and less than 1% of the total dollar amount of mortgage loans on real estate as of December 31, 2011 and 2010, respectively. The carrying value on the mortgage loans on real estate that were two or more payments delinquent as of December 31, 2011, was $76 million, or 1% of total mortgage loans on real estate. The total principal and interest past due on the mortgage loans on real estate that were two or more payments delinquent as of December 31, 2011, was $41 million. The carrying value on the mortgage loans on real estate that were two or more payments delinquent as of December 31, 2010, was $48 million, or less than 1% of total mortgage loans on real estate. The total principal and interest past due on the mortgage loans on real estate that were two or more payments delinquent as of December 31, 2010, was $5 million. See Note 1 for more information regarding our accounting policy relating to the impairment of mortgage loans on real estate.  Alternative Investments 

Investment income (loss) on alternative investments by business segment (in millions) was as follows:

                           For the Years Ended December 31,           Change Over Prior Year                         2011           2010            2009           2011             2010 Annuities            $       10     $       14     $          3             -29 %            NM Retirement Plan Services                      6             10                2             -40 %            NM Life Insurance               71             63              (66 )            13 %           195 % Group Protection              3              5                1             -40 %            NM Other Operations              -              1                5            -100 %           -80 %     Total (1)        $       90     $       93     $        (55 )            -3 %           269 %   

(1) Represents net investment income on the alternative investments supporting

the required statutory surplus of our insurance businesses.

    As of December 31, 2011 and 2010, alternative investments included investments in approximately 96 and 95 different partnerships, respectively, and the portfolio represented less than 1% of our overall invested assets. The partnerships do not represent off-balance sheet financing and generally involve several third-party partners. Some of our partnerships contain capital calls, which require us to contribute capital upon notification by the general partner. These capital calls are contemplated during the initial investment decision and are planned for well in advance of the call date. The capital calls are not material in size and are not material to our liquidity. Alternative investments are accounted for using the equity method of accounting and are included in other investments on our Consolidated Balance Sheets.                                          98 --------------------------------------------------------------------------------   As discussed in "Critical Accounting Policies and Estimates - Investments - Valuation of Alternative Investments," we update the carrying value of our alternative investment portfolio whenever audited financial statements of the investees for the preceding year become available.  Net investment income (loss) derived from our consolidated alternative investments by segment (in millions) related to the effect of preceding year audit adjustments recorded during the indicated year at the investee was as follows:                                        For the Years Ended December 31,           Change Over Prior Year                                     2011           2010            2009           2011             2010 Annuities                        $        4     $        2     $         (3 )          100 %            167 % Retirement Plan Services                  2              1               (3 )          100 %            133 % Life Insurance                           30             14              (65 )          114 %            122 % Group Protection                          2              1               (1 )          100 %            200 %       Total                      $       38     $       18     $        (72 )          111 %            125 %   

Non-Income Producing Investments

As of December 31, 2011 and 2010, the carrying amount of fixed maturity securities, mortgage loans on real estate and real estate that were non-income producing was $14 million and $17 million, respectively.

Net Investment Income

Details underlying net investment income (in millions) and our investment yield were as follows:

                                         For the Years Ended December 31,     

Change Over Prior Year

                                       2011           2010           2009           2011             2010 Net Investment Income Fixed maturity AFS securities      $     3,842    $     3,694    $     3,474              4 %              6 % VIEs' fixed maturity AFS securities                                  14             14              -              0 %             NM Equity AFS securities                        5              6              8            -17 %            -25 % Trading securities                         154            157            159             -2 %             -1 % Mortgage loans on real estate              408            424            462             -4 %             -8 % Real estate                                 22             24             18             -8 %             33 % Standby real estate equity commitments                                  1              1              1              0 %              0 % Policy loans                               165            169            172             -2 %             -2 % Invested cash                                4              7             15            -43 %            -53 % Commercial mortgage loan prepayment and bond makewhole premiums (1)                                82             67             24             22 %            179 % Alternative investments (2)                 90             93            (55 )           -3 %            269 % Consent fees                                 3              8              5            -63 %             60 % Other investments                          (27 )           (3 )            9             NM               NM   Investment income                      4,763          4,661          4,292              2 %              9 % Investment expense                        (111 )         (120 )         (114 )            8 %             -5 %

         Net investment income     $     4,652    $     4,541    $     4,178              2 %              9 %    

(1) See "Commercial Mortgage Loan Prepayment and Bond Makewhole Premiums" below

     for additional information.   (2)  See "Alternative Investments" above for additional information.                                            99

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                                                                                     Basis Point Change                                         For the Years Ended December 31,           Over Prior Year                                       2011           2010            2009         2011         2010 Interest Rate Yield Fixed maturity securities, mortgage loans on real estate and other, net of investment expenses         5.49 %         5.63 %          5.81 %       (14 )        (18 ) Commercial mortgage loan prepayment and bond makewhole premiums                        0.10 %         0.09 %          0.03 %         1            6 Alternative investments                   0.11 %         0.12 %         -0.08 %        (1 )         20 Consent fees                              0.00 %         0.01 %          0.01 %        (1 )          -

Net investment income yield on

    invested assets                        5.70 %         5.85 %          5.77 %       (15 )          8                                        For the Years Ended December 31,          Change Over Prior Year                                      2011            2010         2009        2011              2010 Average invested assets at amortized cost                   $     81,640    $     77,558   $ 72,359             5 %               7 %    We earn investment income on our general account assets supporting fixed annuity, term life, whole life, UL, interest-sensitive whole life and fixed portion of retirement plan and VUL products. The profitability of our fixed annuity and life insurance products is affected by our ability to achieve target spreads, or margins, between the interest income earned on the general account assets and the interest credited to the contract holder on our average fixed account values, including the fixed portion of variable. Net investment income and the interest rate yield table each include commercial mortgage loan prepayments and bond makewhole premiums, alternative investments and contingent interest and standby real estate equity commitments. These items can vary significantly from period to period due to a number of factors and therefore can provide results that are not indicative of the underlying trends.  The increase in net investment income when comparing 2011 to 2010 was attributable to higher prepayment and bond makewhole premiums (see "Commercial Mortgage Loan Prepayment and Bond Makewhole Premiums" below for more information) and higher invested assets driven primarily by favorable net flows on fixed account values, including the fixed portion of variable, partially offset by new money rates averaging below our portfolio yields.  

Standby Real Estate Equity Commitments

  Historically, we have entered into standby commitments, which obligated us to purchase real estate at a specified cost if a third-party sale does not occur within approximately one year after construction is completed. These commitments were used by a developer to obtain a construction loan from an outside lender on favorable terms. In return for issuing the commitment, we received an annual fee and a percentage of the profit when the property is sold. During 2009, we suspended the practice of entering into new standby real estate commitments.  As of December 31, 2011, we did not have any standby real estate equity commitments. During 2011, we funded commitments of $19 million and recorded a gain of $6 million due to our funding being less than our estimated allowance for loss related to these commitments. As of December 31, 2010, we had standby real estate equity commitments totaling $53 million. During 2010, we funded commitments of $142 million and recorded a loss of $8 million. During 2009, we recorded a $69 million estimated allowance for loss related to the probable funding of our outstanding commitments. As a result of the 2011 and 2010 funding, the allowance for loss related to these commitments was $0 and $13 million as of December 31, 2011 and 2010, respectively.  

Commercial Mortgage Loan Prepayment and Bond Makewhole Premiums

  Prepayment and makewhole premiums are collected when borrowers elect to call or prepay their debt prior to the stated maturity. A prepayment or makewhole premium allows investors to attain the same yield as if the borrower made all scheduled interest payments until maturity. These premiums are designed to make investors indifferent to prepayment.                                         100 --------------------------------------------------------------------------------   The increase in prepayment and makewhole premiums when comparing 2011 to 2010 was attributable primarily to a decline in interest rates coupled with improvements in the capital markets and real estate financing environment, which resulted in more refinancing activity and more prepayment income.  

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 Years Ended December 31,   

Change Over Prior Year

                                         2011           2010           2009           2011             2010 

Fixed maturity AFS securities:

   Gross gains                       $        86    $       107    $       161            -20 %            -34 %    Gross losses                             (227 )         (248 )         (709 )            8 %             65 % Equity AFS securities:    Gross gains                                12              9              6             33 %             50 %    Gross losses                                -             (3 )          (27 )          100 %             89 % Gain (loss) on other investments              (9 )          (53 )         (130 )           83 %             59 % Associated amortization of DAC, VOBA, DSI, and DFEL and changes in other contract holder funds                  (13 )            8            161             NM              -95 % 

Total realized gain (loss)

      related to certain       investments, pre-tax           $      (151 )  $      (180 )  $      (538 )           16 %             67 %    Amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds reflect an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization and changes in other contract holder funds within realized loss reflecting the incremental effect of actual versus expected credit-related investment losses. These actual to expected amortization adjustments could create volatility in net realized gains and losses. The write-down for impairments includes both credit-related and interest-rate related impairments.  Realized gains and losses generally originate from asset sales to reposition the portfolio or to respond to product experience. During 2011 and 2010, we sold securities for gains and losses. In the process of evaluating whether a security with an unrealized loss reflects declines that are other-than-temporary, we consider our ability and intent to sell the security prior to a recovery of value. However, subsequent decisions on securities sales are made within the context of overall risk monitoring, assessing value relative to other comparable securities and overall portfolio maintenance. Although our portfolio managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses that are considered temporary until such losses are recovered, the dynamic nature of portfolio management may result in a subsequent decision to sell. These subsequent decisions are consistent with the classification of our investment portfolio as AFS. We expect to continue to manage all non-trading invested assets within our portfolios in a manner that is consistent with the AFS classification.  We consider economic factors and circumstances within countries and industries where recent write-downs have occurred in our assessment of the status of securities we own of similarly situated issuers. While it is possible for realized or unrealized losses on a particular investment to affect other investments, our risk management has been designed to identify correlation risks and other risks inherent in managing an investment portfolio. Once identified, strategies and procedures are developed to effectively monitor and manage these risks. The areas of risk correlation that we pay particular attention to are risks that may be correlated within specific financial and business markets, risks within specific industries and risks associated with related parties.  When the detailed analysis by our credit analysts and investment portfolio managers leads us to the conclusion that a security's decline in fair value is other-than-temporary, the security is written down to estimated recovery value. In instances where declines are considered temporary, the security will continue to be carefully monitored. See "Critical Accounting Policies and Estimates" for additional information on our portfolio management strategy.                                         101 --------------------------------------------------------------------------------

Details underlying write-downs taken as a result of OTTI (in millions) were as follows:

                                            For the Years Ended December 31,  

Change Over Prior Year

                                          2011           2010           2009           2011             2010 Fixed maturity securities:   Corporate bonds                     $       (14 )  $       (90 )  $      (214 )           84 %             58 %   RMBS                                        (79 )          (65 )         (250 )          -22 %             74 %   CMBS                                        (57 )          (41 )            -            -39 %             NM   CDOs                                         (1 )           (1 )          (39 )            0 %             97 %

Hybrid and redeemable preferred

   securities                                   (2 )           (5 )          (67 )           60 %             93 % 

Total fixed maturity securities (153 ) (202 ) (570 )

           24 %             65 % Equity securities                               -             (3 )          (27 )          100 %             89 % 

Gross OTTI recognized in net

      income (loss)                          (153 )         (205 )         (597 )           25 %             66 % 

Associated amortization of DAC,

      VOBA, DSI and DFEL                       35             53            205            -34 %            -74 % 

Net OTTI recognized in net

income (loss), pre-tax $ (118 ) $ (152 ) $ (392 )

           22 %             61 %  

Portion of OTTI Recognized in OCI Gross OTTI recognized in OCI $ 58 $ 98 $ 357

            -41 %            -73 % Change in DAC, VOBA, DSI and DFEL             (11 )          (10 )          (82 )          -10 %             88 % 

Net portion of OTTI recognized in

  OCI, pre-tax                        $        47    $        88    $       275            -47 %            -68 %    The decrease in write-downs for OTTI when comparing 2011 to 2010 was primarily due to a decline in write-downs for OTTI on our corporate bonds attributable to continued strengthening of the associated market, partially offset by an increase in write-downs for OTTI on our AFS MBS attributable primarily to continued weakness within the commercial and residential real estate market that affected select RMBS and CMBS holdings.  The $211 million of impairments taken during 2011 were split between $153 million of credit-related impairments and $58 million of noncredit-related impairments. The credit-related impairments were largely attributable to our RMBS and CMBS holdings primarily as a result of continued weakness within the commercial and residential real estate market that affected select RMBS and CMBS holdings. The noncredit-related impairments were incurred due to declines in values of securities for which we do not have an intent to sell or it is not more likely than not that we will be required to sell the securities before recovery.                                    REINSURANCE  Our insurance companies cede insurance to other companies. The portion of risks exceeding each of our insurance companies' retention limits is reinsured with other insurers. We seek reinsurance coverage within the businesses that sell life insurance to limit our exposure to mortality losses and enhance our capital management. We utilize inter-company reinsurance agreements to manage our statutory capital position as well as our hedge program for variable annuity guarantees. These inter-company agreements do not have an effect on our consolidated financial statements.  Portions of our deferred annuity business have been reinsured on a modified coinsurance basis with other companies to limit our exposure to interest rate risks. As of December 31, 2011, the reserves associated with these reinsurance arrangements totaled $878 million. To cover products other than life insurance, we acquire other insurance coverage with retentions and limits that management believes are appropriate for the circumstances. The consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" reflect insurance premiums, insurance fees, benefits and DAC, net of insurance ceded. Our insurance companies remain liable if their reinsurers are unable to meet contractual obligations under applicable reinsurance agreements.  Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. The amounts recoverable from reinsurers were $6.5 billion as of December 31, 2011 and 2010. We obtain reinsurance from a diverse group of reinsurers, and we monitor concentration and financial strength ratings of our principal reinsurers. Swiss Re represents our largest exposure. In 2001, we sold our reinsurance business to Swiss Re primarily through indemnity reinsurance arrangements. Because we are not relieved of our liability to the ceding companies for this business, the liabilities and obligations associated with the reinsured policies remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from Swiss Re, which totaled $2.8 billion and $3.0 billion as of December 31, 2011 and 2010, respectively. Swiss Re has funded a trust with a balance of $2.2 billion                                         102 --------------------------------------------------------------------------------   as of December 31, 2011, to support this business. In addition to various remedies that we would have in the event of a default by Swiss Re, we continue to hold assets in support of certain of the transferred reserves. These assets consist of those reported as trading securities and certain mortgage loans. Our liabilities for funds withheld and embedded derivatives included $1.0 billion and $142 million, respectively, as of December 31, 2011, related to the business sold to Swiss Re.  We sold a block of disability income business to Swiss Re as part of several indemnity reinsurance transactions executed in 2001, as discussed above. On January 24, 2009, an award of rescission was declared related to an ongoing dispute between us and Swiss Re for this treaty, which requires us to be fully responsible for all claims incurred and liabilities supporting this block as if the reinsurance treaty never existed. We completed a review of the adequacy of the reserves supporting the liabilities during the fourth quarter of 2009.  See Note 13 for a discussion of the effects of the rescission.  

See Note 9 for further information regarding reinsurance transactions.

  For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.                     REVIEW OF CONSOLIDATED FINANCIAL CONDITION                          Liquidity and Capital Resources

Sources of Liquidity and Cash Flow

  Liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations to meet cash requirements with a prudent margin of safety. Our principal sources of cash flow from operating activities are insurance premiums and fees and investment income, while sources of cash flows from investing activities result from maturities and sales of invested assets. Our operating activities provided cash of $1.3 billion, $1.7 billion and $937 million in 2011, 2010 and 2009, respectively. When considering our liquidity and cash flow, it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding company, LNC. As a holding company with no operations of its own, LNC derives its cash primarily from its operating subsidiaries.  The sources of liquidity of the holding company are principally comprised of dividends and interest payments from subsidiaries, augmented by holding company short-term investments, bank lines of credit and the ongoing availability of long-term public financing under an SEC-filed shelf registration statement. These sources of liquidity and cash flow support the general corporate needs of the holding company, including its common and preferred stock dividends, interest and debt service, funding of callable securities, securities repurchases, acquisitions and investment in core businesses. Our cash flows associated with collateral received from and posted with counterparties change as the market value of the underlying derivative contract changes. As the value of a derivative asset declines (or increases), the collateral required to be posted by our counterparties would also decline (or increase). Likewise, when the value of a derivative liability declines (or increases), the collateral we are required to post for our counterparties' benefit would also decline (or increase). During 2011, our payables for collateral on derivative investments increased by $2.2 billion as declines in the equity and credit markets and interest rates increased the fair values of the associated derivative investments. For additional information, see "Credit Risk" in Note 6.                                          103 --------------------------------------------------------------------------------   Details underlying the primary sources of our holding company cash flows (in millions) were as follows:                                        For the Years Ended December 31,          Change Over Prior Year                                     2011            2010           2009          2011           2010  The Lincoln National Life Insurance Company ("LNL")        $       836    $        712    $       405            17 %           76 % Lincoln Financial Media (1)                -               -              2            NM           -100 % First Penn-Pacific                        18               -             50            NM           -100 % Delaware Investments (2)                   -             390             10          -100 %           NM Lincoln Barbados                           -               -            300            NM           -100 % Newton County Loan & Savings, FSB ("NCLS")                              21               -              -            NM             NM Loan Repayments and Interest from Subsidiaries Interest on inter-company notes          105              93             94            13 %           -1 %                                  $       980    $      1,195    $       861           -18 %           39 % Other Cash Flow and Liquidity Items Net proceeds on common stock issuance                         $         -    $        368    $       652          -100 %          -44 % Lincoln UK sale proceeds                   -              18            307          -100 %          -94 % Increase (decrease) in commercial paper, net                   (100 )             1           (216 )          NM            100 % Net capital received from (paid for taxes on) stock option exercises and restricted stock            (1 )             -             (1 )          NM            100 %                                  $      (101 )  $        387    $       742            NM            -48 %   

(1) During May of 2009, Lincoln Financial Media became a subsidiary of LNL.

(2) For 2010, amount includes proceeds on the sale of Delaware. For more

information, see Note 3.

    The table above focuses on significant and recurring cash flow items and excludes the effects of certain financing activities, namely the periodic issuance and retirement of debt and cash flows related to our inter-company cash management program (discussed below). Taxes have been eliminated from the analysis due to a tax sharing agreement among our primary subsidiaries resulting in a modest effect on net cash flows at the holding company. Also excluded from this analysis is the modest amount of investment income on short-term investments of the holding company. See "Part IV - Item 15(a)(2) Financial Statement Schedules - Schedule II - Condensed Financial Information of Registrant" for the parent company cash flow statement.  

Dividends from Subsidiaries

  Our insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including our primary insurance subsidiary, LNL, may pay dividends to LNC without prior approval of the Indiana Insurance Commissioner (the "Commissioner") only from unassigned surplus or must receive prior approval of the Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding 12 consecutive months, would exceed the statutory limitation.  The current statutory limitation is the greater of 10% of the insurer's contract holders' surplus, as shown on its last annual statement on file with the Commissioner or the insurer's statutory net gain from operations for the previous 12 months, but in no event to exceed statutory unassigned surplus. As discussed in "Part I - Item 1. Business - Regulatory - Insurance Regulation" above, we may not consider the benefit from the statutory accounting principles relating to our insurance subsidiaries' deferred tax assets in calculating available dividends. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits. New York, the state of domicile of our other major insurance subsidiary, Lincoln Life & Annuity Company of New York, has similar restrictions, except that in New York it is the lesser of 10% of surplus to contract holders as of the immediately preceding calendar year or net gain from operations for the immediately preceding calendar year, not including realized capital gains.  We expect our domestic insurance subsidiaries could pay dividends of approximately $675 million in 2012 without prior approval from the respective state commissioners. The amount of surplus that our insurance subsidiaries could pay as dividends is                                         104

--------------------------------------------------------------------------------   constrained by the amount of surplus we hold to maintain our ratings, to provide an additional layer of margin for risk protection and for future investment in our businesses.  We maintain an investment portfolio of various holdings, types and maturities. These investments are subject to general credit, liquidity, market and interest rate risks. An extended disruption in the credit and capital markets could adversely affect LNC and its subsidiaries' ability to access sources of liquidity, and there can be no assurance that additional financing will be available to us on favorable terms, or at all, in the current market environment. In addition, further OTTI could reduce our statutory surplus, leading to lower RBC ratios and potentially reducing future dividend capacity from our insurance subsidiaries.  

Subsidiaries' Statutory Reserving and Surplus

  The RBC ratio is an important factor in the determination of the credit and financial strength ratings of LNC and its subsidiaries, as a reduction in our insurance subsidiaries' surplus may affect their RBC ratios and dividend-paying capacity.  For a discussion of RBC ratios, see "Part I - Item 1. Business - Regulatory - Insurance Regulation - Risk-Based Capital."  Statutory reserves established for variable annuity contracts and riders are sensitive to changes in the equity markets and are affected by the level of account values relative to the level of any guarantees, product design and reinsurance arrangements. As a result, the relationship between reserve changes and equity market performance is non-linear during any given reporting period. Market conditions greatly influence the ultimate capital required due to its effect on the valuation of reserves and derivative assets hedging these reserves.  For example, if the level of the S&P 500 had been 10% lower as of December 31, 2011, we estimate that our RBC ratios would have declined by approximately 5% to 15% of RBC. Likewise, if the level of the S&P 500 had been 10% higher as of December 31, 2011, we estimate that our RBC ratios would have increased by approximately 1% to 10% of RBC. However, the magnitude of such sensitivities could vary significantly depending on a variety of factors, including, but not limited to, contract holder activity, hedge positions, changes in interest rates and the rate or volatility of market movements.  Changes in equity markets may also affect the capital position of our captive reinsurance subsidiaries based on their hedge position at the time. We may decide to reallocate available capital between our insurance subsidiaries and captives, which would result in different RBC ratios for our insurance subsidiaries. In addition, changes in the equity markets can affect the value of our variable annuity separate accounts. When the market value of our separate account assets increases, the statutory surplus within our insurance subsidiaries also increases. Contrarily, when the market value of our separate account assets decreases, the statutory surplus within our insurance subsidiaries may also decrease, which may affect RBC ratios, and in the case of our separate account assets becoming less than the related product liabilities, we must allocate additional capital to fund the difference.  We continue to analyze the use of existing captive reinsurance structures, as well as additional third-party reinsurance arrangements, and our current hedging strategies relative to managing the effects of equity markets and interest rates on the statutory reserves, statutory capital and the dividend capacity of our life insurance subsidiaries.  For discussion of our strategies to lessen the burden of increased AG38 and XXX statutory reserves associated with certain UL products and other products with secondary guarantees on our insurance subsidiaries, see "Results of Life Insurance - Income (Loss) from Operations - Strategies to Address Statutory Reserve Strain."  

Financing Activities

Although our subsidiaries currently generate adequate cash flow to meet the needs of our normal operations, periodically we may issue debt or equity securities to maintain ratings and increase liquidity, as well as to fund internal growth, acquisitions and the retirement of our debt and equity securities.

  We currently have an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including debt securities, preferred stock, common stock, warrants, stock purchase contracts, stock purchase units, depository shares and trust preferred securities of our affiliated trusts.                                          105 --------------------------------------------------------------------------------   Details underlying debt and financing activities (in millions) were as follows:                                                          For the Year Ended December 31, 2011                                                                               Change                                                                Maturities    in Fair                                      Beginning                     and        Value         Other        Ending                                       Balance      Issuance    Repayments     Hedges     Changes (1)    Balance Short-Term Debt Commercial paper (2)                $        100   $       -   $         -   $      -   $        (100 ) $      - Current maturities of long-term debt (3)                                     250           -          (250 )        -             300        300 Other short-term debt (4)                      1           -            (1 )        -               -          -     Total short-term debt           $        351   $       -   $      (251 ) $      -   $         200   $    300  Long-Term Debt Senior notes                        $      3,464   $     300   $         -   $    264   $        (298 ) $  3,730 Bank borrowing                               200           -             -          -               -        200 Federal Home Loan Bank of Indianapolis ("FHLBI") advance               250           -             -          -               -        250 Capital securities                         1,485           -          (275 )        -               1      1,211     Total long-term debt            $      5,399   $     300   $      (275 

) $ 264 $ (297 ) $ 5,391

(1) Includes the net increase (decrease) in commercial paper, non-cash

reclassification of long-term debt to current maturities of long-term debt,

     accretion of discounts and (amortization) of premiums, as applicable.

(2) During 2011, we had an average of $35 million outstanding, a maximum amount

outstanding of $103 million at any time and a weighted average interest rate

     of 0.20%.   (3)  Consisted of a $300 million 5.65% fixed rate senior note that matures in      less than one year. As of December 31, 2010, we reported $250 million in

short-term debt that consisted of a fixed rate senior note that matured on

December 15, 2011.

(4) Consisted of advances from the FHLBI with a maturity of less than one year

      when made.    

For more information about our debt issuances, maturities and redemptions, see Note 12.

  Within the next two years, we have a $300 million 5.65% fixed rate senior note maturing on August 27, 2012, and a $200 million floating rate senior note maturing on July 18, 2013. The specific resources or combination of resources that we will use to meet these maturities will depend upon, among other things, the financial market conditions present at the time of maturity. As of December 31, 2011, the holding company had $622 million in cash and cash equivalents and $25 million invested in fixed maturity corporate bonds; however, as discussed below, it had a $58 million payable under the inter-company cash management program.  We have not accounted for repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets as sales and do have any other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets. For information about our collateralized financing transactions on our investments, see "Payables for Collateral on Investments" in Note 5.  

For information about our credit facilities and LOCs, see Note 12.

  If current credit ratings and claims-paying ratings were downgraded in the future, terms in our derivative agreements may be triggered, which could negatively affect overall liquidity. For the majority of our counterparties, there is a termination event should the long-term senior debt ratings of LNC drop below BBB-/Baa3 (S&P/Moody's). Our long-term senior debt held a rating of A-/Baa2 (S&P/Moody's) as of December 31, 2011. In addition, contractual selling agreements with intermediaries could be negatively affected, which could have an adverse effect on overall sales of annuities, life insurance and investment products. See "Part I - Item 1A. Risk Factors - Liquidity and Capital Position - A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings" and "Part I - Item 1A. Risk Factors - Covenants and Ratings - A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors" for more information. See "Part I - Item 1. Business - Financial Strength Ratings" for additional information on our current financial strength ratings.  Our indicative credit ratings published by the primary rating agencies are set forth below.  Securities are rated at the time of issuance so actual ratings may differ from the indicative ratings.  There may be other rating agencies that also provide credit ratings, which we do not disclose in our reports.                                         106 --------------------------------------------------------------------------------   The long-term credit rating scales of A.M. Best, Fitch, Moody's and S&P are characterized as follows:  ·  A.M. Best - aaa to d   ·  Fitch - AAA to D   ·  Moody's - Aaa to C   ·  S&P - AAA to D    As of February 21, 2012, our indicative long-term credit ratings, as published by the principal rating agencies that rate our long-term credit, were as follows:   A.M. Best       Fitch        Moody's         S&P     a-           BBB+          Baa2           A- (7th of 22)   (8th of 21)   (9th of 21)   (7th of 22)    The short-term credit rating scales of A.M. Best, Fitch, Moody's and S&P are characterized as follows:  ·  A.M. Best - AMB-1+ to d   ·  Fitch - F1+ to D   ·  Moody's - P-1 to NP   ·  S&P - A-1 to D    As of February 21, 2012, our indicative short-term credit ratings, as published by the principal rating agencies that rate our short-term credit, were as follows:  A.M. Best      Fitch       Moody's        S&P   AMB-1          F2          P-2          A-2 (2nd of 6)   (3rd of 8)   (2nd of 4)   (2nd of 9)    A downgrade of our debt ratings could affect our ability to raise additional debt with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital. In addition, a downgrade of these ratings could make it more difficult to raise capital to refinance any maturing debt obligations, to support business growth at our insurance subsidiaries and to maintain or improve the current financial strength ratings of our principal insurance subsidiaries described in "Part I - Item 1. Business - Financial Strength Ratings."  All ratings are on outlook stable, except Moody's ratings, which are on outlook positive. All of our ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that we can maintain these ratings. Each rating should be evaluated independently of any other rating.  

Management monitors the covenants associated with LNC's capital securities.

If

 we fail to meet capital adequacy or net income and stockholders' equity levels (also referred to as "trigger events"), terms in the agreements may be triggered, which would require us to make interest payments in accordance with an alternative coupon satisfaction mechanism ("ACSM").  This would require us to use commercially reasonable efforts to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price.  We would have to utilize the ACSM until the trigger events above no longer existed.  If we were required to utilize the ACSM and were successful in selling sufficient shares of common stock or warrants to satisfy the interest payment, we would dilute the current holders of our common stock. Furthermore, while a trigger event is occurring and if we do not pay accrued interest in full, we may not, among other things, pay dividends on or repurchase our capital stock.  We have not triggered either the net income test or the overall stockholders' equity test looking forward to the quarters ending March 31, 2012, and June 30, 2012.  For more information, see "Part I - Item 1A. Risk Factors - Covenants and Ratings - We will be required to pay interest on our capital securities with proceeds from the issuance of qualifying securities if we fail to achieve capital adequacy or net income and stockholders' equity levels."  

Alternative Sources of Liquidity

  In order to manage our capital more efficiently, we have an inter-company cash management program where certain subsidiaries can lend to or borrow from the holding company to meet short-term borrowing needs. The cash management program is essentially a series of demand loans, which are permitted under applicable insurance laws, among LNC and its affiliates that reduces overall borrowing costs by allowing LNC and its subsidiaries to access internal resources instead of incurring third-party transaction costs. For our Indiana-domiciled insurance subsidiaries, the borrowing and lending limit is currently the lesser of 3%                                         107 --------------------------------------------------------------------------------   of the insurance company's admitted assets and 25% of its surplus, in both cases, as of its most recent year end. The holding company did not borrow from the cash management program during 2011; however, it had an outstanding payable of $58 million to certain subsidiaries resulting from amounts placed by the subsidiaries in the inter-company cash management account in excess of funds borrowed by those subsidiaries as of December 31, 2011. Any increase (decrease) in either of these holding company cash management program payable balances results in an immediate and equal increase (decrease) to holding company cash and cash equivalents.  Our insurance subsidiaries, by virtue of their general account fixed income investment holdings, can access liquidity through securities lending programs and repurchase agreements. As of December 31, 2011, our insurance subsidiaries had securities with a carrying value of $200 million out on loan under the securities lending program and $280 million carrying value subject to reverse-repurchase agreements. The cash received in our securities lending program is typically invested in cash equivalents, short-term investments or fixed maturity securities.  For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.  

Divestitures

For a discussion of our divestitures, see Note 3.

Uses of Capital

Our principal uses of cash are to pay policy claims and benefits, operating expenses, commissions and taxes, to purchase new investments, to purchase reinsurance, to fund policy surrenders and withdrawals, to pay dividends to our stockholders and to repurchase our stock and debt securities.

Return of Capital to Common Stockholders

  One of the Company's primary goals is to provide a return to our common stockholders through share price accretion, dividends and stock repurchases. In determining dividends, the Board takes into consideration items such as current and expected earnings, capital needs, rating agency considerations and requirements for financial flexibility. The amount and timing of share repurchase depends on key capital ratios, rating agency expectations, the generation of free cash flow and an evaluation of the costs and benefits associated with alternative uses of capital.                                          108 --------------------------------------------------------------------------------   Details underlying this activity (in millions, except per share data), were as follows:                                       For the Years Ended December 31,          Change Over Prior Year                                       2011            2010         2009         2011             2010

Common dividends to stockholders $ 62 $ 12 $ 62

            NM             -81 % Repurchase and cancellation of common stock warrants                        -              48          -            -100 %            NM Repurchase of common stock                 576              25          -              NM              NM    Total cash returned to    stockholders                   $        638    $         85   $     62              NM              37 %  Number of shares issued                      -          14.138     46.000            -100 %           -70 % Average price per share           $          -    $      26.09   $  14.34            -100 %            86 %  Number of shares repurchased            24.661           1.048          -              NM              NM Average price per share           $      23.33    $      23.87   $      -              -4 %            NM    On November 10, 2011, our Board of Directors approved an increase of the dividend on our common stock from $0.05 to $0.08 per share. Additionally, we expect to repurchase additional shares of common stock during 2012 depending on market conditions and alternative uses of capital. For more information regarding share repurchases, see "Part II - Item 5(c)" above.  

Other Uses of Capital

  In addition to the amounts in the table above in "Return of Capital to Common Stockholders," other uses of holding company cash flow (in millions) were as follows:                                             For the Years Ended December 31, 

Change Over Prior Year

                                           2011         2010           2009            2011             2010 Debt service (interest paid)            $     303    $     280    $         238              8 %             18 % Capital contribution to subsidiaries           17          125            1,260            -86 %            -90 %         Total                           $     320    $     405    $       1,498            -21 %            -73 %    The above table focuses on significant and recurring cash flow items and excludes the effects of certain financing activities, namely the periodic retirement of debt and cash flows related to our inter-company cash management account. Taxes have been eliminated from the analysis due to a tax sharing agreement among our primary subsidiaries resulting in a modest effect on net cash flows at the holding company.  

Contractual Obligations

Details underlying our future estimated cash payments for our contractual obligations (in millions) as of December 31, 2011, were as follows:

                                       Less                             More                                      Than       1 - 3      3 - 5      Than                                     1 Year     Years      Years     5 Years 

Total

 Future contract benefits and other contract holder obligations (1)    $ 14,598   $ 26,257   $ 22,501   $ 68,543   $ 131,899 Short-term debt (2)                     300          -          -          -         300 Long-term debt (2)                        -        700        250      4,138       5,088 Payables for collateral on investments (3)                         517         37          -          -         554 Operating leases                         40         67         48         56         211 Football stadium naming rights (4)        7         14         14         46          81 Outsourcing arrangements (5)             13         21         17          -          51 Retirement and other plans (6)           94        184        185        466         929    Totals                          $ 15,569   $ 27,280   $ 23,015   $ 73,249   $ 139,113                                            109

--------------------------------------------------------------------------------

(1) We have made significant assumptions to determine the estimated undiscounted

cash flows of these policies and contracts, which include mortality,

morbidity, future lapse rates and interest crediting rates and assumed an 8%

rate to arrive at discounted cash flows. Due to the significance of the

assumptions used, the amounts presented could materially differ from actual

     results. See Note 1 for details of what these liabilities include and      represent.   (2)  Represents principal amounts of debt only. See Note 12 for additional      information.  

(3) Excludes collateral payable held for derivative investments. See Note 5 for

additional information.

(4) Includes a maximum annual increase related to the Consumer Price Index. See

Note 13 for additional information.

(5) Includes an information technology agreement and certain other outsourcing

     arrangements. See Note 13 for additional information.   (6)  Includes anticipated funding for benefit payments for our retirement and      postretirement plans through 2021 and known payments under deferred      compensation arrangements. See Note 17 for additional information.   

In addition to the contractual commitments outlined in the table above, we periodically fund the employees' defined benefit plans, discussed in "Defined Benefit Contributions" below.

  Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits as of December 31, 2011, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, $409 million of unrecognized tax benefits and its associated interest have been excluded from the contractual obligations table above. See Note 7 for additional information.  

Contingencies and Off-Balance Sheet Arrangements

  We do not have any off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity or capital resources. Details underlying our contingent commitments and off-balance sheet arrangements (in millions) as of December 31, 2011, were as follows:                                Amount of Commitment Expiring per Period            Total                          Less Than       1 - 3         3 - 5         After        Amount                            1 Year        Years         Years        5 Years      Committed Bank lines of credit     $        -    $       -    $      2,000    $  1,821   $      3,821 Investment commitments          345          124              72           -            541 Media commitments (1)            20           12               1           -             33          Total           $      365    $     136    $      2,073    $  1,821   $      4,395   

(1) Consists primarily of employment contracts, sports rights fees and rating

      service contracts.    Defined Benefit Contributions  We contributed $36 million, $31 million and $11 million in 2011, 2010 and 2009, respectively, to U.S. pension plans; $1 million, less than $1 million and $44 million in 2011, 2010 and 2009, respectively, to our U.K. pension plan; and $15 million, $15 million and $16 million in 2011, 2010 and 2009, respectively, to our postretirement plan that provides medical, dental and life insurance benefits. Our U.S. defined benefit pension plans were frozen as of December 31, 2007, or earlier; and our non-U.S. defined benefit pension plan was frozen as of September 30, 2009. For our frozen plans, there are no new participants and no future accruals of benefits from the date of the freeze.  Based on our calculations, we expect to be required to make a $1 million contribution related to administrative expenses to our qualified pension plans in 2012 under applicable pension law. In addition, we analyze and review opportunities to make contributions in excess of those required under applicable pension law. Such excess contributions will be made from time to time if, based on our analysis, we believe that the excess contributions serve the best interests of both the Company and of plan participants.  

We expect to fund approximately $10 million to our nonqualified U.S. defined benefit plan and $10 million to our postretirement benefit plans during 2012. These amounts include anticipated benefit payments for nonqualified plans.

The majority of contributions and benefit payments are made by our insurance subsidiaries with little holding company cash flow affects. See Note 17 for additional information.

                                      110 --------------------------------------------------------------------------------

Significant Trends in Sources and Uses of Cash Flow

  As stated above, LNC's cash flow, as a holding company, is largely dependent upon the dividend capacity of its insurance company subsidiaries as well as their ability to advance funds to it through inter-company borrowing arrangements, which may be affected by factors influencing the insurance subsidiaries' RBC and statutory earnings performance. We currently expect to be able to meet the holding company's ongoing cash needs and to have sufficient capital to offer downside protection in the event that the capital and credit markets experience another period of extreme volatility and disruption. A decline in capital market conditions, which reduces our insurance subsidiaries' statutory surplus and RBC, may require them to retain more capital and may pressure our subsidiaries' dividends to the holding company, which may lead us to take steps to preserve or raise additional capital. For factors that could affect our expectations for liquidity and capital, see "Part I - Item 1A. Risk Factors."                                   OTHER MATTERS 

Other Factors Affecting Our Business

  In general, our businesses are subject to a changing social, economic, legal, legislative and regulatory environment. Some of the changes include initiatives to require more reserves to be carried by our insurance subsidiaries. Although the eventual effect on us of the changing environment in which we operate remains uncertain, these factors and others could have a material effect on our results of operations, liquidity and capital resources. For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above.  

Recent Accounting Pronouncements

  See Note 2 for a discussion of recent accounting pronouncements that have been implemented during the periods presented or that have been issued and are to be implemented in the future. 

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