PART II ITEM 8 Financial Statements and Supplementary Data The nonperformance risk adjustment is incorporated by adding spread to the discount rate in the calculation of both (1) the GMIB liability to reflect a hypothetical market participant’s view of the risk of the Company not fulfilling its GMIB obligations, and (2) the GMIB asset to reflect a hypothetical market participant’s view of the reinsurers’ credit risk, after considering collateral. The estimated market-implied spread is company-specific for each party involved to the extent that company-specific market data is available and is based on industry averages for similarly-rated companies when company-specific data is not available. The spread is impacted by the credit default swap spreads of the specific parent companies, adjusted to reflect subsidiaries’ credit ratings relative to their parent company and any available collateral. The additional spread over LIBOR incorporated into the discount rate ranged from 5 to 140 basis points for the GMIB liability with a weighted average of 55 basis points and ranged from 15 to 100 basis points for the GMIB reinsurance asset with a weighted average of 65 basis points for that portion of the interest rate curve most relevant to these policies. GLYPH<127> The risk and profit charge assumption is based on the Company’s estimate of the capital and return on capital that would be required by a hypothetical market participant. The assumed return on capital is 10% after-tax. GLYPH<127> The Company regularly evaluates each of the assumptions used in establishing these assets and liabilities by considering how a hypothetical market participant would set assumptions at each valuation date. Capital markets assumptions are expected to change at each valuation date reflecting currently observable market conditions. Other assumptions may also change based on a hypothetical market participant’s view of actual experience as it emerges over time or other factors that impact the net liability. The significant unobservable inputs used in the fair value measurement of the GMIB assets and liabilities are lapse rates, annuity election rates, and spreads used to calculate nonperformance risk. Significant decreases in assumed lapse rates or spreads used to calculate nonperformance risk, or increases in assumed annuity election rates would result in higher fair value measurements. Generally, a change in one of these assumptions is not necessarily accompanied by a change in another assumption. GMIB liabilities are reported in the Company’s Consolidated Balance Sheets in Accounts payable, accrued expenses and other liabilities. GMIB assets associated with these contracts represent net receivables in connection with reinsurance that the Company has purchased from two external reinsurers and are reported in the Company’s Consolidated Balance Sheets in Other assets, including other intangibles. The following tables summarize the changes in financial assets and financial liabilities classified in Level 3 for the years ended December 31, 2012 and 2011. These tables exclude separate account assets as changes in fair values of these assets accrue directly to policyholders. Gains and losses reported in this table may include net changes in fair value that are attributable to both observable and unobservable inputs. (1) Amounts do not accrue to shareholders. Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value Fixed Maturities & (In millions) Equity Securities GMIB Assets GMIB Liabilities GMIB Net Balance at January 1, 2012 $ 1,002 $ 712 $ (1,333) $ (621) Gains (losses) included in shareholders’ net income: GMIB fair value gain/(loss) - (55) 96 41 Other 13 - - - Total gains (losses) included in shareholders’ net income 13 (55) 96 41 Gains included in other comprehensive income 8 - - - Losses required to adjust future policy benefits for settlement annuities  (1) (10) - - - Purchases, issuances, settlements: Purchases 188 - - - Sales (1) - - - Settlements (88) (35) 67 32 Total purchases, sales and settlements 99 (35) 67 32 Transfers into/(out of) Level 3: Transfers into Level 3 283 - - - Transfers out of Level 3 (44) - - - Total transfers into/(out of) Level 3 239 - - - Balance at December 31, 2012 $ 1,351 $ 622 $ (1,170) $ (548) Total gains (losses) included in shareholders’ net income attributable to instruments held at the reporting date $ (1) $ (55) $ 96 $ 41 CIGNA CORPORATION -  2012 Form  10-K 97