Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K ("Form 10-K") and the "Risk Factors" contained in Part I, Item 1A of this Form 10-K.
• The consolidated effective tax rate was flat in 2017 compared with 2016. The unfavorable impact of additional tax expense associated with the recently enacted U.S. tax reform legislation was offset by the favorable effects of a moratorium on the health insurance industry tax in 2017 and an incremental tax benefit associated with previously non-deductible transaction-related costs. See Note 20 to our Consolidated Financial Statements for additional information. The increase in our effective tax rate in 2016 compared with 2015 was largely driven by an increase in non-tax deductible transaction-related costs reported in 2016, partially offset by the tax benefits on stock compensation recognized in net income as a result of our early adoption of Accounting Standard Update ("ASU") 2016-09. We expect our effective tax rate in 2018 to decrease significantly from 2017 as a result of enactment of the U.S. tax reform legislation. This favorable effect will be partially offset by the resumption of the health insurance industry tax.
(2) Risk adjustment payables are reported in accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Risk adjustment payables totaled $250 million as of December 31, 2017 and $51 million as of December 31, 2016.
Purchase obligations. As of December 31, 2017, purchase obligations consisted of estimated payments required under contractual arrangements for future services and investment commitments as follows:
If we do not achieve our earnings objectives or the cost of capital rises significantly, the assumptions and estimates underlying these impairment evaluations could be adversely affected and result in future impairment charges that would negatively impact our operating results. Based on our most recent evaluations, the fair value estimates of our reporting units exceed their carrying values by adequate margins.
The acquisition cost ratio decreased due to a shift toward higher premium products with lower acquisition costs primarily in South Korea and the United States.
We completed the annual in-depth review of our commercial mortgage loan portfolio during the second quarter of 2017. The results of the 2017 review were in line with the prior year and confirmed the strength of the overall portfolio. For further discussion of the results of this review and changes in key loan metrics, see Note 11 to our Consolidated Financial Statements.
Although financial markets in the United States remained stable during 2017, we continue to closely monitor global macroeconomic trends and their potential impact to our investment portfolio. Certain sectors, such as retail, energy and natural gas have experienced stress and volatility and we expect that to continue. See the fixed maturities and commercial mortgage loan sections of this MD&A for further information on our investments in these sectors. Future realized and unrealized investment results will be driven largely by market conditions that exist when a transaction occurs or at the reporting date. These future conditions are not reasonably predictable; however, we believe that the vast majority of our investments will continue to perform under their contractual terms. Based on our strategy to match the duration of invested assets to the duration of insurance and contractholder liabilities, we expect to hold a significant portion of these assets for the long term. Although future impairment losses resulting from interest rate movements and credit deterioration due to both investment-specific and the global economic uncertainties discussed above remain possible, we do not expect these losses to have a material adverse effect on our financial condition or liquidity.
• a hypothetical increase in market interest rates, primarily for fixed maturities and commercial mortgage loans, partially offset by liabilities for long-term, largely fixed-rate debt; and
The Consolidated Financial Statements include the accounts of Cigna Corporation and its subsidiaries. Intercompany transactions and accounts have been eliminated in consolidation. These Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Amounts recorded in the Consolidated Financial Statements necessarily reflect management's estimates and assumptions about medical costs, investment valuation, interest rates and other factors. Significant estimates are discussed throughout these Notes; however, actual results could differ from those estimates. The impact of a change in estimate is generally included in earnings in the period of adjustment. Certain reclassifications have been made to prior year amounts to conform to the current presentation.
The following tables provide information about recently adopted accounting guidance and accounting guidance not yet adopted that is applicable to Cigna.
Other assets, including other intangibles consist primarily of GMIB assets, accrued net investment income, other intangible assets and various other insurance-related assets. See Note 9 for the Company's accounting policy for GMIB assets and see Note 17 for the Company's accounting policy for other intangibles. Additionally, these other assets include the carrying value of our equity-method investments in joint ventures in China, India (as of 2017) and other foreign jurisdictions.
(2) Percentage of current year incurred costs as reported for 2015.
The majority of the Company's reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired. Components of the Company's reinsurance recoverables are presented in the following table:
The Company classifies certain newly issued, privately-placed, complex or illiquid securities, as well as assets and liabilities relating to GMIB, in Level 3. Approximately 3% of fixed maturities and equity securities are priced using significant unobservable inputs and classified in this category.
Private equity securities. The significant unobservable input used to value the following private equity securities is a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA"). These securities are comprised of private equity investments with limited trading activity and therefore a ratio of EBITDA is used to estimate value based on company circumstances and relative risk characteristics.
Significant increases in liquidity or credit spreads would result in lower fair value measurements while decreases in these inputs would result in higher fair value measurements. Significant decreases in equity price-to-EBITDA multiples would result in lower fair value measurements while increases in these inputs would result in higher fair value measurements. Generally, the unobservable inputs are not interrelated and a change in the assumption used for one unobservable input is not accompanied by a change in the other unobservable input.
Changes in Level 3 Financial Assets and Financial Liabilities Carried at Fair Value
The following table summarizes the changes in financial assets and financial liabilities classified in Level 3 for the years ended December 31, 2017 and 2016. Separate account asset changes are reported in the Separate Accounts section as the changes in fair values of these assets generally accrue directly to the 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) Loss in each year reflects a decrease in the discount rate, partially offset by a favorable change in the mortality assumption.
• Net amortization of other intangible assets is excluded because it relates to costs incurred for acquisitions and, as a result, it does not relate to the core performance of the Company's business operations. In 2015, the amortization amount was net of a bargain purchase gain on an acquisition.