Amortization of acquired intangible assets because these relate to costs incurred for acquisitions.
Realized investment gains (losses). We reported realized investment gains in 2019, compared with losses in 2018. The improvement primarily resulted from gains on sales of real estate joint ventures, higher gains on sales of debt securities and favorable market value adjustments on equity securities.
The following table presents our balances associated with the risk adjustment program as of December 31, 2019 and December 31, 2018, inclusive of the RADV adjustments recorded in 2019.
At December 31, 2019, our debt-to-capitalization ratio was 45.2%, a decline from 50.9% at December 31, 2018. We have a near-term focus on accelerated debt repayment and expect to continue to deleverage into the upper 30%s by the end of 2020 using cash flows from operating activities.
We are contingently liable for various financial and other guarantees provided in the ordinary course of business. See Note 22 to the Consolidated Financial Statements for additional information on guarantees.
changes in the estimate or different estimates that could have been selected could have a material effect on our consolidated results of operations or financial condition.
See Note 21 to the Consolidated Financial Statements for additional discussion around uncertain tax positions and the Liquidity and Capital Resources section of this MD&A for a discussion of their potential impact on liquidity.
The business section of this Form 10-K (see the “Integrated Medical” section) describes the various products and funding solutions offered by this segment, including the various revenue sources. As described in the introduction to Segment Reporting, performance of the Integrated Medical segment is measured using pre-tax adjusted income from operations. Key factors affecting profitability for this segment include:
revenues from integrated specialty products, including pharmacy services sold to clients and customers across all funding solutions;
has access to our provider network for covered services under their medical plan; or
The increase in the expense ratio (excluding acquisition costs) was driven primarily by strategic investments for long-term growth and integration of OnePath Life.
The following table reflects our portfolio of debt securities by type of issuer as of December 31, 2019 and 2018. The table below includes investments held for sale as of December 31, 2019.
changes in the fair values of insurance-related assets and liabilities because their primary risks are insurance rather than market risk;
Individual Life Insurance and Annuity and Retirement Benefits Businesses: deferred gains from the sales of these businesses.
Other current assets consist primarily of prepaid expenses, accrued investment income and the current portion of reinsurance recoverables. Other non-current assets consist primarily of GMIB assets and various other insurance-related assets. See Note 10 for the Company’s accounting policy for GMIB assets. Additionally, other non-current assets include the carrying value of our equity-method investments in joint ventures in China, India, the U.S. and other foreign jurisdictions.
Home delivery and specialty pharmacy revenues are due and recognized as each prescription is shipped, net of reserves for discounts and contractual allowances estimated based on historical experience. Any differences between estimates and actual collections are reflected in operations when payments are received. Historically, adjustments to original estimates and returns have not been material. The Company has elected the practical expedient to account for shipping and handling as a fulfillment activity.
The fair value of the customer relationships and their amortization periods and method were determined using an income approach that relied heavily on projected future net cash flows including key assumptions for customer attrition, margins, and discount rates. The estimated useful lives reflect the time periods and pattern that Cigna expects to receive the benefits of the related cash flows.
The business did not meet the criteria to be classified as a discontinued operation as the sale of the business will not have a major effect on the Company’s operations and financial results.
The Company discounts certain liabilities, predominantly long-term disability liabilities, because benefits payments are made over extended periods. Discount rate assumptions for these liabilities are based on projected investment returns for the supporting asset portfolios. Details of the Company’s Group Disability and Life unpaid claim discounted liability balance as of December 31 were as follows:
The claims frequency metric used for the Company’s long-term disability line of business represents the number of unique claim events for which benefits have been approved and payments made. Claim events are assigned a unique claimant identifier and incurral date. Thus, if an individual has multiple claims for different disabling events (and therefore different incurral dates), each will be determined to be a unique claim event. However, if an individual receives multiple benefits under more than one policy (for example for supplemental disability benefits such as pension contribution benefits or survivor benefits), the Company treats this as a single claim occurrence because they related to the same claim event. Claims frequency metrics for the most recent year are expected to be low reflecting the long-term disability product features including waiting and elimination periods that result in delayed eligibility for contract benefits. Claims that did not result in a liability are not included in the frequency metric.
The following table summarizes the credit risk profile of the Company’s commercial mortgage loan portfolio based on loan-to-value and debt service coverage ratios as of December 31, 2019 and 2018:
Accounting policy. Other long-term investments include investments in unconsolidated entities. These entities include certain limited partnerships and limited liability companies holding real estate, securities or loans. These investments are carried at cost plus the Company’s ownership percentage of reported income or loss, based on the financial statements of the underlying investments that are generally reported at fair value. Income from these investments is reported on a one quarter lag due to the timing of when financial information is received from the general partner or manager of the investments.
Accounting policy. Derivatives are recorded on our balance sheet at fair value and are classified as current or non-current according to their contractual maturities. Further information on our policies for determining fair value are discussed in Note 12. The Company applies hedge accounting when derivatives are designated, qualified and highly effective as hedges. Under hedge accounting, the changes in fair value of the derivative and the hedged risk are generally recognized together and offset each other when reported in shareholders’ net income. Various qualitative or quantitative methods appropriate for each hedge are used to formally assess and document hedge effectiveness at inception and each period throughout the life of a hedge.
The following realized gains and losses on investments exclude amounts required to adjust future policy benefits for the run-off settlement annuity business (consistent with accounting for a premium deficiency), as well as realized gains and losses attributed to the Company’s separate accounts because those gains and losses generally accrue directly to separate account policyholders.
The following table summarizes the changes in financial assets and financial liabilities classified in Level 3 in 2019 and 2018. Gains and losses reported in these tables may include net changes in fair value that are attributable to both observable and unobservable inputs.
The Company sets discount rates by applying actual annualized yields for high quality bonds at various durations to the expected cash flows of the pension liabilities. A discount rate curve is constructed using an array of bonds in various industries throughout the domestic market, but only selects those for the curve that have an above average return at each duration. Management believes that this curve is representative of the yields that the Company is able to achieve through its plan asset investment strategy.
State insurance departments and foreign jurisdictions that regulate certain of the Company’s subsidiaries prescribe accounting practices (differing in some respects from GAAP) to determine statutory net income and surplus. The Company’s life, accident and health insurance and Health Maintenance Organization (“HMO”) subsidiaries are regulated by such statutory requirements. The statutory net income of the Company’s life, accident and health insurance and HMO subsidiaries for the years ended, and their statutory surplus as of December 31, were as follows: