PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Market Risk Financial Instruments The Company’s Management of Market Risks Effect of Market Fluctuations on the Company The Company’s assets and liabilities include financial instruments subject to the risk of potential losses from adverse changes in market rates and prices. Subsequent to the reinsurance transaction entered into on February 4, 2013 as further discussed in Note 25 to the Consolidated Financial Statements, the Company’s primary market risk exposures are: The Company predominantly relies on three techniques to manage its exposure to market risk: The effects of hypothetical changes in market rates or prices on the fair values of certain of the Company’s financial instruments, subject to the exclusions noted above (particularly insurance liabilities), would have been as follows as of December 31(the effects of the GMIB business are presented as though the Company’s 2013 reinsurance agreement was effective as of December 31, 2012): The effect of a hypothetical increase in interest rates was determined by estimating the present value of future cash flows using various models, primarily duration modeling. The impact of a hypothetical increase to interest rates at December 31, 2012 was greater than that See Notes 2(C) and 13 to the Consolidated Financial Statements for additional information about financial instruments, including derivative financial instruments. The examples that follow illustrate the adverse effect of hypothetical changes in market rates or prices on the fair value of certain financial instruments including: Management believes that actual results could differ materially from these examples because: Interest-rate risk  on fixed-rate, medium-term instruments. Changes in market interest rates affect the value of instruments that promise a fixed return and the Company’s employee pension liabilities. GLYPH<127> Foreign currency exchange rate risk  of the U.S. dollar primarily to the South Korean won, Euro, British pound, Taiwan dollar, and Turkish lira. An unfavorable change in exchange rates reduces the carrying value of net assets denominated in foreign currencies. GLYPH<127> Equity price risk  for domestic equity securities and the plan assets of the Company’s employee pension plans. GLYPH<127> a hypothetical increase in market interest rates, primarily for fixed maturities and commercial mortgage loans, partially offset by liabilities for long-term debt and, in 2011, GMIB contracts; GLYPH<127> a hypothetical strengthening of the U.S. dollar to foreign currencies, primarily for the net assets of foreign subsidiaries denominated in a foreign currency; and GLYPH<127> a hypothetical decrease in market prices for equity exposures, primarily for equity securities and, in 2011, GMIB contracts. GLYPH<127> Investment/liability matching. The Company generally selects investment assets with characteristics (such as duration, yield, currency and liquidity) that correspond to the underlying characteristics of its related insurance and contractholder liabilities so that the Company can match the investments to its obligations. Shorter-term investments support generally shorter-term life and health liabilities. Medium-term, fixed-rate investments support interest-sensitive and health liabilities. Longer-term investments generally support products with longer pay out periods such as annuities and long-term disability liabilities. GLYPH<127> these examples were developed using estimates and assumptions; GLYPH<127> changes in the fair values of all insurance-related assets and liabilities have been excluded because their primary risks are insurance rather than market risk; GLYPH<127> changes in the fair values of investments recorded using the equity method of accounting and liabilities for pension and other postretirement and postemployment benefit plans (and related assets) have been excluded, consistent with the disclosure guidance; and GLYPH<127> changes in the fair values of other significant assets and liabilities such as goodwill, deferred policy acquisition costs, taxes, and various accrued liabilities have been excluded; because they are not financial instruments, their primary risks are other than market risk. GLYPH<127> Use of local currencies for foreign operations. The Company generally conducts its international business through foreign operating entities that maintain assets and liabilities in local currencies. While this technique does not reduce the Company’s foreign currency exposure of its net assets, it substantially limits exchange rate risk to those net assets. GLYPH<127> 60 CIGNA CORPORATION -  2012 Form  10-K Loss in fair value Market scenario for certain non-insurance financial instruments  (in millions) 2012 2011 100 basis point increase in interest rates $ 685 $ 575 10% strengthening in U.S. dollar to foreign currencies $ 275 $ 220 10% decrease in market prices for equity exposures $ 10 $ 30 Use of derivatives. The Company generally uses derivative financial instruments to minimize certain market risks. GLYPH<127>