Excess investment income, is based on three major components: net investment income, required interest on net policy liabilities (interest applicable to insurance products), and financing costs. In 2017, net investment income rose 5%, compared with 4% in 2016. At the same time, our investment portfolio grew 6% in 2017 and 2016, on an amortized cost basis. In recent years, the percentage growth in net investment income has been less than the growth in the overall investment portfolio due primarily to new investments being made at yield rates lower than the yield rates on dispositions and the average yield on the portfolio. The growth rate of net investment income is impacted at times by a lag between the time when proceeds from maturities and dispositions are received and when the proceeds are reinvested, during which the funds are held in cash. In addition, Torchmark’s share repurchase program (described later under this caption) has diverted cash that could have otherwise been used to acquire investments and increase net investment income. The growth in the investment portfolio has been augmented in 2017 and 2016 due to the receipt of certain receivables that had accumulated under our Medicare Part D business.
The UA Independent Agency consists of independent agencies appointed with Torchmark who may also sell for other companies. The UA Independent Agency was Torchmark’s largest health agency in terms of health premium income. In 2017, premium income was $364 million, representing 37% of Torchmark’s total health premium. Net sales were $61 million, or 39% of Torchmark’s health sales. This agency is also Torchmark’s largest producer of Medicare Supplement insurance, with Medicare Supplement premium income of $353 million. The UA Independent Agency represents 74% of all Torchmark Medicare Supplement premium and 92% of Medicare Supplement net sales. Medicare Supplement premium in this agency rose 3% in 2017. Total health premium increased 3% in 2017 and 2016. Medicare Supplement net sales increased 9% in 2017 from the prior year due to increases in individual and group sales. Group Medicare Supplement sales have historically fluctuated from period to period.
Effective duration is a measure of the price sensitivity of a fixed-income security to a particular change in interest rates.
invested primarily in securities issued by the U.S. government and U.S. municipalities. The Company holds insignificant amounts in foreign government bonds, collateralized debt obligations, asset-backed securities, and agency mortgage-backed securities. Corporate securities are diversified over a variety of industry sectors and issuers. As shown in the chart above, financial, utility, and energy sectors represented approximately 50% of the portfolio. At December 31, 2017, the total fixed maturity portfolio consists of 596 issuers, with 220 issuers within the financial, utility, and energy sectors.
At yearend 2017, 4% of invested assets at fair value were represented by fixed maturities rated below investment grade. Par value of these investments was $790 million, amortized cost was $702 million, and fair value was $679 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in their fair value.
The sale resulted in a net gain of $1.8 million ($1.2 million net of tax) in 2016. The operating results from discontinued operations are reflected in income for the twelve months ended December 31, 2017. The remaining assets and liabilities reflected on the Torchmark balance sheet related to discontinued operations are receivables and payables associated with the 2016 and prior plan years that are expected to be settled in the ordinary course of business during 2018.
The following table illustrates the total incurred claims for short-duration products over the last five years for the year ended December 31, 2017. Claim frequency is determined by duration and incurred date.
On April 5, 2016, Torchmark completed the issuance and sale of $300 million in aggregate principal of Torchmark’s 6.125% Junior Subordinated Debentures due 2056. The debentures were sold pursuant to Torchmark’s shelf registration statement on Form S-3, filed September 25, 2015. The net proceeds from the sale of the debentures were $290 million, after giving effect to the underwriting discount and expenses of the offering of the debentures. Torchmark used the net proceeds from the offering of the debentures to repay the $250 million outstanding principal, plus accrued interest of $8 million, on the 6.375% Senior Notes that were due June 15, 2016. The remaining proceeds were used for general corporate purposes.
Acquisition of Common Shares: Torchmark shares are acquired from time to time through open market purchases under the Torchmark stock repurchase program when it is believed to be the best use of Torchmark’s excess cash flows. Share repurchases under this program were 4.1 million shares at a cost of $325 million in 2017, 5.2 million shares at a cost of $311 million in 2016, and 6.3 million shares at a cost of $359 million in 2015. When stock options are exercised, proceeds from the exercises are generally used to repurchase approximately the number of shares available with those funds in order to reduce dilution. Shares repurchased for dilution purposes were 1.1 million shares at a cost of $88 million in 2017, 1.5 million shares at a cost of $93 million in 2016, and 1.0 million shares at a cost of $60 million in 2015.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its insurance subsidiaries. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. Dividends from insurance subsidiaries of Torchmark are restricted based on regulations by their states of domicile. Additionally, insurance company distributions are generally not permitted in excess of statutory surplus. Subsidiaries are also subject to certain minimum capital requirements. Subsidiaries of Torchmark paid cash dividends to the Parent Company in the amount of $454 million in 2017, $438 million in 2016, and $466 million in 2015. As of December 31, 2017, dividends and transfers from insurance subsidiaries to parent available to be paid in 2018 are limited to the amount of $315 million without regulatory approval, such that $940 million was considered restricted net assets of the subsidiaries. Dividends exceeding these limitations may be available during the year pending regulatory approval. While there are no legal restrictions on the payment of dividends to shareholders from Torchmark’s retained earnings, retained earnings as of December 31, 2017 were restricted by lenders’ covenants which require the Company to maintain and not distribute $3.5 billion from its total consolidated retained earnings of $4.8 billion.
In 2016, Torchmark recorded $3.8 million in administrative settlements ($2.5 million after tax) related to benefits paid for deaths occurring in prior years where claims had not been filed. These administrative settlements were included in "Policyholder benefits" in the Consolidated Statements of Operations in 2016.