PART II ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Benefits and Expenses Benefits and expenses were comprised of the following: GMIB fair value (gain) loss.  Under the GAAP guidance for fair value measurements, the Company’s results of operations have been volatile because capital market assumptions needed to estimate the assets and liabilities for the GMIB business are based largely on market observable inputs at the close of each reporting period including interest rates (LIBOR swap curve) and market implied volatilities. See Note 11 to the Consolidated Financial Statements for additional information about assumptions and asset and liability balances related to GMIB and Note 13 for additional information regarding the hedge programs to hedge a portion of equity and interest rate risks in GMIB contracts. GMIB fair value losses of $234 million for 2011, were primarily due to a decline in both the interest rate used for projecting claim exposure (7-year Treasury rates) and the rate used for projecting market returns and discounting (LIBOR swap curve). GMIB fair value losses of $55 million for 2010, were primarily due to declining interest rates, partially offset by increases in underlying account values resulting from favorable equity and bond fund returns. The GMIB liabilities and related assets are calculated using an internal model and assumptions from the viewpoint of a hypothetical market participant. Payments for GMIB claims are expected to occur over the next 15 to 20 years and will be based on actual values of the underlying mutual funds and the 7-year Treasury rate at the dates benefits are elected. As explained above, on February 4, 2013, the Company reinsured 100% of the future exposures under these GMIB contracts, net of retrocessional arrangements in place prior to February 4, 2013. GMIB fair value gains of $41 million for 2012, were primarily due to the effect of increases in underlying account values, updates in the claim exposure calculation, and a reduction in annuitization rates, partially offset by a reduction in lapse rates and general declines in interest rates. Other Benefits and Expenses  are comprised of the following: (In millions) 2012 2011 2010 GMIB fair value (gain) loss $ (41) $ 234 $ 55 Other benefits and expenses 45 171 36 BENEFITS AND EXPENSES $ 4 $ 405 $ 91 (In millions) 2012 2011 2010 Results of GMDB equity and growth interest rate hedging programs $ (105) $ (14) $ (157) GMDB reserve strengthening 43 70 52 Other GMDB, primarily accretion of discount 79 82 85 GMDB benefit expense (income) 17 138 (20) Loss on reinsurance of workers’ compensation and personal accident business - - 31 Other, including operating expenses 28 33 25 OTHER BENEFITS AND EXPENSES $ 45 $ 171 $ 36 update to management’s consideration of the anticipated impact of the continued low level of short-term interest rates, and the adverse impacts of overall market declines, including an increase in the provision for future partial surrenders and declines in the value of contract holders’ non-equity investments such as bond funds, neither of which are included in the hedge program. Capital market movements.  Benefits expense related to capital market movements as represented by the results of the hedging programs decreased in 2012 compared with 2011 due to more favorable equity market performance. The increase in benefits expense in 2011 compared with 2010 was due to turbulent conditions in an overall declining equity market. As explained in Other revenues above, these changes do not affect shareholders’ net income because they are offset by gains or losses on futures contracts used to hedge equity market and interest rate performance. The 2010 reserve strengthening was driven primarily by management’s consideration of the anticipated impact of the continued low level of current short-term interest rates, and to a lesser extent, a reduction in assumed lapse rates for policies that have taken or are assumed to take significant partial withdrawals. Reserve strengthening.  The following highlights the impacts of GMDB reserve strengthening: See Note 7 to the Consolidated Financial Statements for additional information about assumptions and reserve balances related to GMDB. The 2012 reserve strengthening was driven primarily by reductions to the lapse rate assumptions, an update to management’s consideration of the anticipated impact of continued low short-term interest rates, and to a lesser extent, an increase to the volatility and correlation assumptions, partially offset by favorable equity market conditions. Other, including operating expenses.  The decrease in 2012 compared with 2011 was due to the favorable impact of reserve studies and lower operating expenses. The increase in 2011 compared with 2010 was due to the reduced favorable impacts of reserve studies. The 2011 reserve strengthening was driven primarily by volatility- related impacts due to the turbulent equity market conditions, an Other Benefits and Expenses CIGNA CORPORATION -  2012 Form  10-K 49