PART II ITEM 8 Financial Statements and Supplementary Data TOTAL FINANCIAL LIABILITIES AT FAIR VALUE $ - $ 30 $ 1,333 $ 1,363 (1) Fixed maturities included $826 million of net appreciation required to adjust future policy benefits for the run-off settlement annuity business including $115 million of appreciation for securities classified in Level 3. (2) The GMIB assets represent retrocessional contracts in place from two external reinsurers which cover 55% of the exposures on these contracts. (3) Other derivative assets included $10 million of interest rate and foreign currency swaps qualifying as cash flow hedges and $35 million of interest rate swaps not designated as accounting hedges. Other derivative liabilities reflected foreign currency and interest rate swaps qualifying as cash flow hedges. See Note 13 for additional information. Inputs for instruments classified in Level 1 include unadjusted quoted prices for identical assets in active markets accessible at the measurement date. Active markets provide pricing data for trades occurring at least weekly and include exchanges and dealer markets. Assets in Level 1 include actively-traded U.S. government bonds and exchange-listed equity securities. Given the narrow definition of Level 1 and the Company’s investment asset strategy to maximize investment returns, a relatively small portion of the Company’s investment assets are classified in this category. Level 1 Financial Assets Level 2 Financial Assets and Financial Liabilities Inputs for instruments classified in Level 2 include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are market observable or can be corroborated by market data for the term of the instrument. Such other inputs include market interest rates and volatilities, spreads and yield curves. An instrument is classified in Level 2 if the Company determines that unobservable inputs are insignificant. Fixed maturities and equity securities. Approximately 91% of the Company’s investments in fixed maturities and equity securities are classified in Level 2 including most public and private corporate debt and equity securities, federal agency and municipal bonds, non-government mortgage-backed securities and preferred stocks. Short-term investments  are carried at fair value, that approximates cost. On a regular basis the Company compares market prices for these securities to recorded amounts to validate that current carrying amounts approximate exit prices. The short-term nature of the investments and corroboration of the reported amounts over the holding period support their classification in Level 2. Nearly all of these instruments are valued using recent trades or pricing models. Less than 1% of the fair value of investments classified in Level 2 represents foreign bonds that are valued, consistent with local market practice, using a single unadjusted market-observable input derived by averaging multiple broker-dealer quotes. Because many fixed maturities do not trade daily, third-party pricing services and internal methods often use recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data, and industry and economic events. For mortgage- backed securities, inputs and assumptions may also include characteristics of the issuer, collateral attributes, prepayment speeds and credit rating. 94 CIGNA CORPORATION -  2012 Form  10-K Quoted Prices in Significant Active Markets for Significant Other Unobservable Identical Assets Observable Inputs Inputs December 31, 2011 (In millions) (Level 1) (Level 2) (Level 3) Total Financial assets at fair value: Fixed maturities: Federal government and agency $ 217 $ 738 $ 3 $ 958 State and local government - 2,456 - 2,456 Foreign government - 1,251 23 1,274 Corporate - 10,132 381 10,513 Federal agency mortgage-backed - 9 - 9 Other mortgage-backed - 79 1 80 Other asset-backed - 363 564 927 Total fixed maturities  (1) 217 15,028 972 16,217 Equity securities 3 67 30 100 Subtotal 220 15,095 1,002 16,317 Short-term investments - 225 - 225 GMIB assets  (2) - - 712 712 Other derivative assets  (3) - 45 - 45 TOTAL FINANCIAL ASSETS AT FAIR VALUE, EXCLUDING SEPARATE ACCOUNTS $ 220 $ 15,365 $ 1,714 $ 17,299 Financial liabilities at fair value: GMIB liabilities $ - $ - $ 1,333 $ 1,333 Other derivative liabilities  (3) - 30 - 30