As of December 31, 2019, we owned approximately 2.3 million square feet of office space, comprised of five campuses located in Chattanooga, Tennessee; Portland, Maine; Columbia, South Carolina; Baton Rouge, Louisiana; and Dorking in the United Kingdom. In addition, as of December 31, 2019, we leased approximately 0.2 million square feet of office space in Worcester, Massachusetts and approximately 0.7 million square feet in various other locations throughout the United States, the United Kingdom, Ireland, and Poland. Substantially all of the properties owned or leased are used by one or more of all five reporting segments, depending on the location. We believe our properties and facilities are suitable and adequate for current operations.
1 Includes a reserve increase of $750.8 million in 2018 related to our long-term care closed block business. See Note 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the 2018 reserve increase.
For 2019, we reported net income of $1,100.3 million, or $5.24 per diluted common share, compared to net income of $523.4 million, or $2.38 per diluted common share, in 2018. Net income includes net realized investment gains and losses. Included in our results for 2019 are costs related to the early retirement of debt of $27.3 million before tax and $21.6 million after tax, or $0.11 per diluted common share. Included in our 2018 results is a reserve increase related to our long-term care block of business of $750.8 million before tax and $593.1 million after tax, or $2.70 per diluted common share. Adjusting for these items, after-tax adjusted operating income for 2019 was $1,140.6 million, or $5.44 per diluted common share compared to $1,145.0 million, or $5.20 per diluted common share for 2018. See "Long-term Care Reserve Increase, "Reconciliation of Non-GAAP and Other Financial Measures," and "Consolidated Operating Results" contained herein in this Item 7 for further discussion and a reconciliation of these items.
Our Unum US segment reported an increase in adjusted operating income of 1.6 percent in 2019 compared to 2018, with growth in premium income, partially offset by lower net investment income and higher amortization of deferred acquisition costs. The benefit ratio for our Unum US segment for 2019 was 66.9 percent, compared to 67.2 percent in 2018. Unum US sales decreased 0.4 percent in 2019 compared to 2018. Persistency in our group product lines was stable while persistency in our supplemental and voluntary product lines was less favorable.
Our Unum International segment reported a decrease in adjusted operating income of 5.3 percent in 2019 compared to 2018, as measured in U.S. dollars. Our Unum UK line of business reported a decrease in adjusted operating income of 4.3 percent compared to 2018, as measured in local currency, due primarily to unfavorable benefits experience, partially offset by an increase in premium income and net investment income. The benefit ratio for our Unum UK line of business was 76.7 percent in 2019 compared to 74.4 percent in 2018. Unum International sales, as measured in U.S. dollars, increased 14.9 percent in 2019 compared to 2018. Unum UK sales, as measured in local currency, increased 8.5 percent in 2019 compared to 2018. Persistency was higher overall relative to the prior year.
common shares outstanding, assuming dilution, equaled 209.9 million for 2019 compared to 220.1 million for 2018, reflecting our capital management strategy of returning capital to shareholders through repurchases of our common stock. As of December 31, 2019, Unum Group and our intermediate holding companies held fixed maturity securities, short-term investments, and cash of $863 million.
In January 2018, we acquired 100 percent of the shares and voting interests in Leavelogic, Inc (Leavelogic), a leave management technology provider. The acquisition of Leavelogic will enhance our current leave management offerings by providing tools for employers and employees to better manage the family leave process and is reported in our Unum US segment.
On December 22, 2017, the U.S. Federal government enacted a tax bill, H.R.1, An Act to Provide Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, more commonly known as the Tax Cuts and Jobs Act (TCJA). The TCJA, among other things, included a reduction to the U.S. corporate statutory tax rate from 35 percent to 21 percent and a tax on undistributed and previously untaxed foreign earnings and profits (Deemed Repatriation Tax) at reduced rates. As a result of these changes, we recognized a tax benefit of $97.9 million in 2017 related to the revaluation of our net deferred tax liabilities associated with our U.S. operations to the newly enacted U.S. corporate tax rate and a tax expense of $66.4 million resulting from the Deemed Repatriation Tax. See "Regulation" contained herein in Item 1 and Note 7 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further details.
On January 31, 2020, an official bill was passed formalizing the withdrawal of the U.K. from the EU. The bill gives approval to an 11- month transition period, until December 31, 2020, to allow for further negotiations regarding the details of the future relationship. We do not expect that the underlying operations of our U.K. business to be significantly impacted by the withdrawal but we may see some continued dampening of growth in the U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in other-than-temporary impairments or defaults, nor do we believe this volatility will impact our ability to hold these investments. There are currently no indications that capital requirements for our U.K. operations will change, but economic conditions may cause volatility in our solvency ratios. Our reported consolidated financial results may continue to be impacted by fluctuations in the British pound sterling to dollar exchange rate. See "Regulation" contained herein in Item 1, "Risk Factors" contained herein Item 1A, and "Unum International Segment" contained herein this Item 7.
We believe our disciplined approach to providing financial protection products at the workplace puts us in a position of strength as we seek to capitalize on the growing and largely unfilled need for our products and services. We believe the need for our products and services remains strong, and we intend to continue protecting our solid margins and returns through our pricing and risk management actions. Our strategy is centered on growing our existing business, expanding our reach, and investing in our operations and technology to anticipate and respond to new market demands to meet the changing needs of our customers.
We expect a continuation of the positive operating trends in our core businesses during 2020, with solid premium growth, consistent risk management, and a continued focus on operational efficiencies.
See "Executive Summary" contained herein in Item 7 and Notes 6, 7, 8, and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion regarding the impacts of the long-term care reserve increase, the TCJA, the unclaimed death benefit reserve increase, cost related to the early retirement of debt, and the loss from a guaranty fund assessment, respectively.
We measure and analyze our segment performance on the basis of "adjusted operating revenue" and "adjusted operating income" or "adjusted operating loss", which differ from total revenue and income before income tax as presented in our consolidated statements of income due to the exclusion of net realized investment gains and losses and certain other items as specified in the reconciliations below. These performance measures are in accordance with GAAP guidance for segment reporting, but they should not be viewed as a substitute for total revenue, income before income tax, or net income.
Reserves for policy and contract benefits are our largest liabilities and represent claims that we estimate we will eventually pay to our policyholders. The two primary categories of reserves are policy reserves for claims not yet incurred and claim reserves for claims that have been incurred or are estimated to have been incurred but not yet reported to us. Reserves for policy and contract benefits equaled $43.7 billion and $43.3 billion at December 31, 2019 and 2018, respectively, or approximately 76.6 percent and 81.3 percent of our total liabilities, respectively. Reserves ceded to reinsurers were $7.2 billion at both December 31, 2019 and 2018 and are reported as a reinsurance recoverable in our consolidated balance sheets.
We use a tabular reserve methodology on reported claims for our Unum US group long-term disability and individual disability claims as well as for our Closed Block individual disability and group and individual long-term care claims. Under the tabular reserve methodology, reserves for reported claims are based on certain characteristics of the actual reported claimants, such as age, length of time disabled, and medical diagnosis, as well as assumptions regarding claim duration, discount rate, and policy benefit offsets. We believe the tabular reserve method is the most accurate to calculate long-term liabilities and allows us to use the most available known facts about each claim. IBNR claim reserves for our long-term products are calculated using the count and severity method using historical patterns of the claims to be reported and the associated claim costs. For Unum US group short-term disability products, an estimate of the value of future payments to be made on claims already submitted, as well as on
Claim reserves supporting the group and individual dental and vision products reported in our Unum US and Colonial Life segments have a short claim payout period. As a result, the reserves, which primarily represent IBNR and a small amount of claims pending payment, are calculated using the paid loss development method.
claim experience to develop our claim resolution assumptions. These assumptions are established for the probability of death and the probability of recovery from disability. Our studies review actual claim resolution experience over a number of years, with more weight placed on our experience in the more recent years. We also consider any expected future changes in claim resolution experience.
Establishing reserve assumptions is complex and involves many factors. Reserves, particularly for policies offering insurance coverage for long-term disabilities and long-term care, are dependent on numerous assumptions other than just those presented in the preceding discussion. The impact of internal and external events, such as changes in claims operational procedures, economic trends such as the rate of unemployment and the level of consumer confidence, the emergence of new diseases, new trends and developments in medical treatments, and legal trends and legislative changes, including changes to social security and other government-based welfare benefits programs which provide policy benefit offsets, among other factors, will influence claim incidence rates, claim resolution rates, and claim costs. In addition, for policies offering coverage for disability or long-term care at advanced ages, the level and pattern of mortality rates at advanced ages will impact overall benefit costs. Reserve assumptions differ by product line and by policy type within a product line. Additionally, in any period and over time, our actual experience may have a positive or negative variance from our long-term assumptions, either singularly or collectively, and these variances may offset each other. We test the overall adequacy of our reserves using all assumptions and with a long-term view of our expected experience over the life of a block of business rather than test just one or a few assumptions independently that may be aberrant over a short period of time. Therefore, while it is possible to evaluate the sensitivity of overall adequacy results in our reserves based upon a change in each individual assumption, the actual impacts of changes to a variety of underlying assumptions must be considered in the aggregate by product line in order to judge the overall potential implications to reserve adequacy. The following section presents an overview of our trend analysis for key assumptions and the results of variability in our assumptions, in aggregate, for the reserves which we believe are reasonably possible to have a material impact on our future financial results if actual claims yield a materially different amount than what we currently expect and have reserved for, either favorable or unfavorable.
In 2019, both short-term and long-term interest rates decreased. The long-term interest rates supporting the majority of our lines of business remain below historical norms. The assumptions we used to discount reserves during this period were slightly lower for certain of our product lines. Reserve discount rate assumptions for new policies and new claims are periodically adjusted to reflect our current and expected net investment returns. Changes in our average discount rate assumptions tend to occur gradually over a longer period of time because of the long-duration investment portfolios which support the reserves for the majority of our lines of business.
Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life of the block of business and will vary from actual experience in any one period, both favorably and unfavorably. Claim resolution rates are very sensitive to operational and environmental changes and have a greater chance of significant variability in a shorter period of time than our other reserve assumptions. These rates are reviewed on a quarterly basis for the death and recovery components separately. Claim resolution rates in our Unum US group long-term disability product line and in our Closed Block individual disability product line have exhibited some variability over the last several years. Relative to the resolution rate we expect to experience over the life of the block of business, actual quarterly rates during 2018 and 2019 have varied between +8 and -12 percent in our Closed Block individual disability line of business. Actual quarterly rates during 2018 and 2019 have varied by +3 and -3 percent in our Unum US group long-term disability line of business. Claim resolution rates
In addition to our Unum US group long-term disability and Closed Block individual disability lines of business, we consider variability in our reserve assumptions related to long-term care policy reserves. These reserves are held under the gross premium valuation method with assumptions established during the third quarter of 2018, the date of the latest loss recognition. Assumptions for policy reserves do not change after the date of loss recognition unless reserves are again determined to be deficient. As such, positive developments will result in the accumulation of reserve margin, while adverse developments would result in an additional reserve charge. Policy reserves for long-term care are based upon a number of key assumptions, and each assumption has various factors which may impact the long-term outcome. Key assumptions with respect to morbidity, mortality, claims incidence and resolutions, persistency, interest rates, and future premium rate increases must incorporate extended views of expectations for many years into the future. Reserves are highly sensitive to these estimates.
•We updated our claim termination assumptions, which are primarily affected by the death, and to a lesser extent, the recovery of the insured to largely reflect our experience. A three percent unfavorable change in the claim termination assumption would result in approximately a $370 million decrease to reserve margin and a three percent favorable change would result in approximately a $360 million increase to reserve margin.
•We updated our premium rate increase assumptions to reflect both our estimate of previously filed rate increases, informed by our historical approval rates, and our anticipated future rate filings. The impact of the update to the premium rate increase assumptions resulted in approximately a $1.4 billion decrease to reserves, of which approximately $700 million relates to currently outstanding requests pending approval with the remaining $700 million related to future rate increase submissions, with a focus on group policies, that will be completed and filed during the next several quarters. A ten percent change in the remaining premium rate increase success rate assumption would result in an approximately $140 million change in reserve margin depending on whether the change was favorable or unfavorable.
•We updated our discount rate assumption to reflect our expectation for the low interest rate environment to persist and our expected impact on future long-term care new money yield rates. Our updated expectation for long-term care new money yield rates assumes a rate of 5.5 percent through 2021 and then a gradual increase to 6.25 percent by 2025, when we assume no further increase. A 0.25 percent change in the new money yield rate assumption would result in an approximately $250 million change in reserve margin depending on whether the change was favorable or unfavorable. Alternatively, a 0.25 percent change in the overall assumed discount rate, which includes the new money yield rate assumption, would impact the reserve margin within an approximate range of $450 million to $500 million, assuming all other factors held constant.
The following are our current assumptions regarding the length of our amortization periods, the approximate DAC balance that remains at the end of years 3, 10, and 15 as a percentage of the cost initially deferred, and our DAC balances as of December 31, 2019 and 2018.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and therefore represents an exit price, not an entry price. The exit price objective applies regardless of our intent and/or ability to sell the asset or transfer the liability at the measurement date. We generally use valuation techniques consistent with the market approach, and to a lesser extent, the income approach. The market approach
As of December 31, 2019, approximately 9.9 percent of our fixed maturity securities were categorized as Level 1, 88.6 percent as Level 2, and 1.5 percent as Level 3. Level 1 is the highest category of the three-level fair value hierarchy classification wherein inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities. The Level 2 category includes assets or liabilities valued using inputs (other than those included in the Level 1 category) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life. The Level 3 category is the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market participants would use in pricing assets or liabilities at the measurement date using unobservable inputs to extrapolate an estimated fair value.
•Significant changes in credit spreads may occur in the related industry.
•Significant increases in interest rates may occur and may not return to levels similar to when securities were initially purchased.
We sponsor several defined benefit pension and other postretirement benefit (OPEB) plans for our employees, including non-qualified pension plans. The U.S. qualified and non-qualified defined benefit pension plans comprise the majority of our total benefit obligation and benefit cost. We maintain a separate defined benefit plan for eligible employees in our U.K. operation. The U.S. defined benefit pension plans were closed to new entrants on December 31, 2013, the OPEB plan was closed to new entrants on December 31, 2012, and the U.K. plan was closed to new entrants on December 31, 2002.
The assumptions chosen for our pension and OPEB plans are reviewed annually, using a December 31 measurement date for each of our plans unless we are required to perform an interim remeasurement. The discount rate, expected long-term rate of return, and mortality rate assumptions have the most significant effect on our net periodic benefit costs associated with these plans. In addition to the effect of changes in our assumptions, the net periodic cost or benefit obligation under our pension and OPEB plans may change due to factors such as plan amendments, actual experience being different from our assumptions, special benefits to terminated employees, and/or changes in benefits provided under the plans.
•Mortality rate - This assumption reflects our best estimate, as of the measurement date, of the life expectancies of plan participants in order to determine the expected length of time for benefit payments. We derive our assumptions from industry mortality tables.
During 2019, the fair value of plan assets in our U.S. qualified defined benefit pension plan increased $145.1 million, or 10.0 percent due to a favorable return on assets which resulted in a gain of approximately 19.4 percent, partially offset by the payment of benefits and expenses. The fair value of plan assets in our U.K. pension plan increased £20.5 million, or 12.1 percent, due primarily to a favorable return on assets which resulted in a gain of approximately 14.2 percent. Although our rate of return on plan assets for 2019 exceeded our assumptions used in the measurement of our net periodic benefit costs, we believe our assumptions appropriately reflect the impact of the current economic environment and our expectations for the future investment returns based on the plan's asset allocation.
The fair value of plan assets in our OPEB plan was $9.9 million and $10.1 million at December 31, 2019 and 2018, respectively. These assets represent life insurance contracts to fund the life insurance benefit portion of our OPEB plan. Our OPEB plan represents a non-vested, non-guaranteed obligation, and current regulations do not require specific funding levels for these benefits, which are comprised of retiree life, medical, and dental benefits. It is our practice to use general assets to pay medical and dental claims as they come due in lieu of utilizing plan assets for the medical and dental benefit portions of our OPEB plan.
We recognized $25.3 million of other-than-temporary impairment losses on fixed maturity securities in net realized investment gains and losses in 2019 compared to $17.5 million and $8.1 million in 2018 and 2017, respectively. Also included in net realized investment gains and losses were changes in the fair value of an embedded derivative in a modified coinsurance arrangement, which resulted in realized gains (losses) of $8.3 million, $(15.2) million, and $30.8 million in 2019, 2018, and 2017, respectively. See Notes 3 and 4 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Other income increased in 2019 compared to 2018 due primarily to growth in our fee-based service products in our Unum US segment, which include leave management services and administrative services only (ASO) business.
Overall benefits experience was favorable in 2019 relative to the prior periods, with a consolidated benefit ratio of 80.0 percent in 2019 compared to 89.3 percent in 2018 and 82.1 percent in 2017. Excluding the 2018 long term care reserve increase and the 2017 unclaimed death benefits reserve increase, the benefit ratios for 2018 and 2017 were 80.9 percent and 81.6 percent, respectively. The underlying benefits experience for each of our operating business segments is discussed more fully in "Segment Results" contained herein in this Item 7.
Premium income increased compared to 2018, driven primarily by growth in the in-force block resulting from higher prior period sales and higher persistency in the group short-term disability product line. Net investment income was lower relative to 2018 due to lower miscellaneous investment income, a decline in yield on invested assets, and a lower level of invested assets. Other income increased relative to 2018 due to growth in our fee-based service products, which include our leave management services and ASO business.
Benefits experience was favorable compared to 2018 due primarily to favorable claim recovery experience in our group long-term disability product line, partially offset by higher claims incidence in both our group long-term and short-term disability product lines.
Commissions were higher compared to 2018 due to prior period sales growth. The deferral of acquisition costs was generally consistent with 2018. The amortization of deferred acquisition costs increased relative to 2018 due to growth in the level of the deferred asset. The other expense ratio improved compared to 2018 due to our continued focus on expense management and operating efficiencies balanced with operational investments in our business.
Commissions and the deferral of acquisition costs were lower in 2019 compared to 2018 due primarily to a shift in product mix that resulted in lower first-year commissions and a lower corresponding deferral of acquisition costs, partially offset by higher sales in the dental and vision product line. The amortization of deferred acquisition costs increased in 2019 relative to 2018 due primarily to the impact of a higher level of policy terminations, particularly in the voluntary benefits product line. Our other expense ratio improved relative to 2018 due to growth in premium income and our continued focus on expense management and operating efficiencies balanced with operational investments in our business.
Premium income increased compared to 2017 driven by higher sales, including dental and vision where we continue to expand its distribution, partially offset by unfavorable persistency. Net investment income was slightly lower compared to 2017 due to a decline in yield on invested assets and lower miscellaneous investment income, partially offset by a higher level of invested assets. Other income declined relative to 2017 due to the expected decline in surrender fees as our interest sensitive life products mature.
Individual disability sales increased compared to 2017 due to higher sales to both new and existing customers. Voluntary benefits sales increased compared to 2017, primarily driven by higher sales to existing customers in both the core and large case markets, partially offset by lower sales to new customers in the large case market. Dental and vision sales increased compared to 2017 driven by higher sales to both new and existing customers resulting from continued expansion.
We remain committed to offering consumers a broad set of financial protection benefit products at the worksite. During 2020, we will continue to invest in a unique customer experience defined by simplicity, empathy, and deep industry expertise through the re-design of our processes and the increased utilization of digital capabilities and technology to enhance enrollment, underwriting, and claims processing. In addition, we will continue to focus on the expansion of our portfolio of products. In particular, we believe our significant investment in leave management services will allow for substantial growth opportunities, particularly with larger employers, and stronger persistency in our core products. With respect to smaller employers, we will continue to enhance our distribution model and provide comprehensive consumer-focused products. We believe our active client management and differentiated integrated customer experience across our product lines, underpinned by strong risk management, will continue to enable us to grow our market.
Shown below are financial results and key performance indicators for the Unum International segment. Certain prior year amounts were reclassified to conform to current year presentation.
The functional currencies of Unum UK and Unum Poland are the British pound sterling and Polish zloty, respectively. Premium income, net investment income, claims, and expenses are received or paid in the functional currency, and we hold functional currency-denominated assets to support functional currency-denominated policy reserves and liabilities. We translate functional currency-denominated financial statement items into dollars for our consolidated financial reporting. We translate income statement items using an average exchange rate for the reporting period, and we translate balance sheet items using the exchange rate at the end of the period. We report unrealized foreign currency translation gains and losses in accumulated other comprehensive income in our consolidated balance sheets.
Fluctuations in exchange rates have an effect on Unum International's reported financial results and our consolidated financial results. In periods when the functional currency strengthens relative to the preceding period, translation increases current period
Net investment income was higher compared to 2018 due to higher miscellaneous investment income resulting from a higher than normal level of bond calls, and a higher level of invested assets, partially offset by a lower yield on fixed-rate bonds and lower investment income from inflation index-linked bonds, which we invest in to support the claim reserves associated with certain of our group policies that provide for inflation-linked increases in benefits. The decrease in net investment income attributable to these index-linked bonds was offset by a decrease in the reserves for future claim payments related to the inflation index-linked group long-term disability and group life policies.
Commissions and the deferral of acquisition costs decreased relative to 2017 due to lower sales. The amortization of acquisition costs was lower in 2018 compared to 2017 due to a decline in the deferred asset. The other expense ratio was lower relative to 2017 due to higher premiums and our continued focus on expense management and operating efficiencies.
Certain prior year amounts below were reclassified to conform to current year presentation.
We are committed to driving growth in the Unum International segment and will build on the capabilities that we believe will generate growth and profitability in our businesses. Within our Unum UK line of business, expanding our group long-term disability market position remains a priority. In addition, we will continue to focus on increasing participation levels in the large case segment while also developing new distribution and services to reach new small case clients. We will also continue the implementation of price increases and will maintain our disciplined sales approach. Within our Unum Poland line of business, we will leverage our U.S. and U.K. expertise to grow existing distribution channels and expand our current product offerings. We continue to invest in digital capabilities, technology, and product enhancements which we believe will drive sustainable growth.
Negotiations following the recent withdrawal of the U.K. from the EU will continue to generate uncertainty in the U.K. economy. This uncertainty may continue to pressure our growth expectations in the near-term and may also lead to a higher rate of claim incidence, lower levels of claim recoveries, or lower claim discount rates, however, we believe we are well positioned to capitalize on future growth opportunities as these negotiations are resolved and the operating environment improves. As part of our continued pricing discipline and our reserving strategy, we continuously monitor emerging interest rate experience and adjust our pricing and reserve discount rates, as appropriate. We will likely continue to experience volatility in net investment income and our benefit ratio due to fluctuations in the level of inflation in the U.K., however, we do not expect this to have a significant impact on adjusted operating income. There are no indications currently that capital requirements for our U.K. operations will change due to the recent withdrawal of the U.K. from the EU, but economic conditions may in the near term cause volatility in our solvency ratios. We continuously monitor key indicators to assess our risks and attempt to adjust our business plans accordingly to respond to external challenges.
The Colonial Life segment includes insurance for accident, sickness, and disability products, which includes our dental and vision products, life products, and cancer and critical illness products issued primarily by Colonial Life & Accident Insurance Company and marketed to employees, on both a group and an individual basis, at the workplace through an independent contractor agency sales force and brokers.
Benefits experience was generally consistent with 2018, with favorable experience in the life line of business mostly offset by unfavorable experience in the accident, sickness, and disability and cancer and critical illness product lines.
Commissions and the deferral of acquisition costs were higher relative to 2017 due to sales growth. The amortization of deferred acquisition costs increased compared to 2017 due primarily to growth in the level of the deferred asset. The other expense ratio was higher relative to 2017 due to costs related to our territory expansion initiatives, investments in our business, and the roll-out of our dental and vision products.
We remain committed to providing employees and their families with simple, modern, and personal benefit solutions. During 2020, we will continue to focus on expanding our distribution system through the growth and development of our agency sales force and establishing effective broker partnerships. We will also continue to invest in new solutions and digital capabilities to enhance the customer experience for our business partners and further improve productivity. We will continue to focus on accelerating growth in our business through territory growth, persistency investments, and increased participation rates. We believe our distribution system, customer service capabilities, the continued expansion of our new dental products, and ability to serve all market sizes position us well for future growth.
The Closed Block segment consists of group and individual long-term care, individual disability, and other insurance products no longer actively marketed. We discontinued offering individual long-term care in 2009 and group long-term care in 2012. Individual disability in this segment generally consists of policies we sold prior to the mid-1990s and entirely discontinued selling in 2004. Other insurance products include group pension, individual life and corporate-owned life insurance, reinsurance pools and management operations, and other miscellaneous product lines.
Premium income for long-term care was generally consistent with the prior year, with rate increases offsetting policy terminations. We continue to file requests with various state insurance departments for premium rate increases on certain of our individual and group long-term care policies which reflect assumptions as of the date of filings. In states for which a rate increase is submitted and approved, we routinely provide customers options for coverage changes or other approaches that might fit their current financial and insurance needs. Premium income for individual disability decreased compared to 2018 due to policy terminations and maturities.
The interest adjusted loss ratio for long-term care, excluding the previously discussed reserve increase, was not comparable to 2018 due to the update in our assumptions during the third quarter of 2018, but was generally consistent with our expectations during 2019. Individual disability benefits experience was favorable relative to 2018 driven by overall favorable claims activity.
Premium income for long-term care was generally consistent with the prior year, with rate increases offsetting policy terminations. Premium income for individual disability decreased compared to 2017 due to policy terminations and maturities.
Net investment income was higher relative to 2017 primarily due to an increase in the level of invested assets and higher miscellaneous investment income, partially offset by a decline in yield on invested assets. Other income declined due to expected terminations and maturities.
The interest adjusted loss ratio for long-term care, excluding the previously discussed reserve increase, was not comparable to 2017 due to the update in our assumptions during the third quarter of 2018, but was generally consistent with our expectations in the second half of 2018, with an interest adjusted loss ratio of 85.4 percent. Individual disability benefits experience was favorable relative to 2017 due primarily to lower claims incidence and a lower average size of new claims.
Profitability of our long-tailed products is affected by claims experience related to mortality and morbidity, resolutions, investment returns, premium rate increases, and persistency. We believe that the interest adjusted loss ratios for long-term care and the individual disability lines of business will be relatively flat over the long term, but these product lines may continue to experience quarterly volatility, particularly in the near term for our long-term care product lines as our claim block matures and as we continue the implementation of premium rate increases. Specific to our long-term care line of business, which is in loss recognition and should report levels of benefits plus operating expenses that equal the gross premium reported, we expect the long term interest adjusted loss ratio to be in the 85 to 90 percent range with some quarterly volatility. Claim resolution rates, which measure the resolution of claims from recovery, deaths, settlements, and benefit expirations, are very sensitive to operational and external factors and can be volatile. Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life of the block of business and will vary from actual experience in any one period. It is possible that variability in any of our reserve assumptions, including, but not limited to, interest rates, mortality, morbidity, resolutions, premium rate increases, benefit change elections, and persistency, could result in a material impact on the adequacy of our reserves, including adjustments to reserves established under loss recognition.
During the third quarter of 2019, we recognized an other-than-temporary impairment loss of $20.8 million on fixed maturity securities issued by a specialty pharmaceutical company. The company has a high level of debt, has experienced some operational issues, and is facing fines and potentially a large litigation expense, which led to our decision to no longer hold these securities to recovery of amortized cost. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of more than three years.
Our mortgage loan portfolio was $2,397.0 million and $2,295.0 million on an amortized cost basis at December 31, 2019 and 2018, respectively. Our mortgage loan portfolio is comprised entirely of commercial mortgage loans. Our mortgage loan portfolio is well diversified geographically and among property types. The incidence of problem mortgage loans and foreclosure activity continues to be low. Due to conservative underwriting, we expect the level of problem loans to remain low. We held no impaired mortgage loans at December 31, 2019. We held one impaired mortgage loan at December 31, 2018 with a net realizable value of $3.4 million, net of a valuation allowance of $0.2 million. During the first quarter of 2019, the impaired mortgage loan was settled, and we recognized an additional loss of $0.1 million.
Our policy benefits are primarily in the form of claim payments, and we have minimal exposure to the policy withdrawal risk associated with deposit products such as individual life policies or annuities. A decrease in demand for our insurance products or an increase in the incidence of new claims or the duration of existing claims could negatively impact our cash flows from operations. However, our historical pattern of benefits paid to revenues is generally consistent, even during cycles of economic downturns, which serves to minimize liquidity risk.
Unum Group and certain of its intermediate holding company subsidiaries depend on payments from subsidiaries to pay dividends to stockholders, to pay debt obligations, and/or to pay expenses. These payments by our insurance and non-insurance
Certain of our domestic insurance subsidiaries cede blocks of business to Northwind Reinsurance Company (Northwind Re) and Fairwind Insurance Company (Fairwind), both of which are affiliated captive reinsurance subsidiaries domiciled in the United States with Unum Group as the ultimate parent. The ability of Northwind Re and Fairwind to pay dividends to their respective parent companies will depend on their satisfaction of applicable regulatory requirements and on the performance of the business reinsured by Northwind Re and Fairwind.
During 2020, we intend to maintain a level of capital in our insurance subsidiaries above the applicable capital adequacy requirements and minimum solvency margins. Although we may not utilize the entire amount of available dividends, based on applicable restrictions under current law, approximately $1,035 million is available, without prior approval by regulatory authorities, during 2020 for the payment of dividends from Unum Group's traditional U.S. insurance subsidiaries, which excludes our captive reinsurers. Approximately £180 million is available for the payment of dividends from Unum Limited during 2020, subject to regulatory approval.
Also in April 2019, we separately entered into a three-year, $100.0 million unsecured revolving credit facility with a different syndicate of lenders, which is set to expire in April 2022. Under the terms of the agreement, we may request that the credit facility be increased up to $140.0 million. We also may request that the lenders' commitment termination dates be extended by one year. The credit facility provides for the issuance of letters of credit subject to certain terms and limitations. At
December 31, 2019, there have been no letters of credit issued from the credit facility and there were no borrowed amounts outstanding.
as to the timing and amount of claim payments. We utilize extensive liability modeling to project future cash flows from the in-force business. The primary assumptions used to project future cash flows are claim incidence rates for mortality and morbidity, claim resolution rates, persistency rates, and interest rates. These cash flows are discounted to determine the current value of the projected claim payments. The timing and amount of payments on policyholder liabilities may vary significantly from the projections above.
Pensions and OPEB commitments relate to our defined benefit pension and postretirement plans for our employees, including our non-qualified pension plan. Pension plan obligations, other than the non-qualified plan, represent our contributions to the pension plans and are projected based on the expected future minimum contributions as required under current U.S. and U.K. legislative funding requirements. Non-qualified pension plan and other postretirement benefit obligations represent the expected benefit payments related to these plans which we expect to pay, as incurred, from our general assets.
Purchase obligations include commitments of $629.8 million to fund certain of our investments. These are included in the preceding table based on the expiration date of the commitments. The funds are due upon satisfaction of contractual notice from appropriate external parties and may or may not be funded. Also included are obligations with outside parties for computer data processing services, software maintenance agreements, and consulting services. The aggregate obligation remaining under these agreements was $54.2 million at December 31, 2019.
As part of our regular investing strategy, we receive collateral from unaffiliated third parties through transactions which include both securities lending and short-term agreements to purchase securities with the agreement to resell them at a later specified date. For both types of transactions, we require that a minimum of 102 percent of the fair value of the securities loaned or securities purchased under repurchase agreements be maintained as collateral. Generally, cash is received as collateral under these agreements. In the event that securities are received as collateral, we are not permitted to sell or re-post them. We also post our fixed maturity securities as collateral to unaffiliated third parties through transactions including both securities lending and short-term agreements to sell securities with the agreement to repurchase them at a later specified date. See "Transfers of Financial Assets" as follows for further discussion.
Our investment policy permits us to lend fixed maturity securities to unaffiliated financial institutions in short-term securities lending agreements, which increases our investment income with minimal risk. We account for all of our securities lending agreements and repurchase agreements as secured borrowings. As of December 31, 2019, we did not hold cash collateral from securities lending agreements. The average balance for securities lending agreements which were collateralized by cash during the year ended December 31, 2019 was $1.9 million, and the maximum amount outstanding at any month end was $5.9 million. In addition, at December 31, 2019, we had $186.5 million of off-balance sheet securities lending agreements which were collateralized by securities that we were neither permitted to sell nor control. The average balance of these off-balance sheet
transactions during the year ended December 31, 2019 was $189.5 million, and the maximum amount outstanding at any month end was $274.5 million.
To manage our cash position more efficiently, we may enter into repurchase agreements with unaffiliated financial institutions. We generally use repurchase agreements as a means to finance the purchase of invested assets or for short-term general business purposes until projected cash flows become available from our operations or existing investments. We had no repurchase agreements outstanding at December 31, 2019, nor did we utilize any repurchase agreements during 2019. Our use of repurchase agreements and securities lending agreements can fluctuate during any given period and will depend on our liquidity position, the availability of long-term investments that meet our purchasing criteria, and our general business needs.
The variance in the change in insurance reserves and liabilities to reconcile net income to net cash provided by operating activities as reported in our consolidated statements of cash flows for 2018 was due primarily to the 2018 reserve increase for our long-term care line of business.
See Notes 3 and 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further information.
During 2019, we purchased and retired $433.1 million aggregate liquidation/principal amount of our outstanding capital and debt securities, including debt repurchase costs of $25.9 million for a total cash outflow of $459.0 million. During 2018, our $200.0 million 7.00% senior unsecured notes matured. During 2017, we purchased and retired the remaining $3.4 million of principal on our senior secured floating rate notes acquired through our purchase of Starmount. During each of the years 2019, 2018, and 2017 we made principal payments of $60.0 million on our senior secured non-recourse notes issued by Northwind Holdings.
During 2019, we issued $450.0 million of 4.50% senior notes due 2049 and $400.0 million of 4.00% senior notes due 2029 and received total proceeds of $841.9 million. During 2018, we issued $300.0 million of 6.25% junior subordinated notes due 2058 and received total proceeds of $290.7 million.
We maintain an ongoing dialogue with the four rating agencies that evaluate us in order to inform them of progress we are making regarding our strategic objectives and financial plans as well as other pertinent issues. A significant component of our
AM Best, Fitch, Moody's, and S&P affirmed their ratings for our domestic insurance subsidiaries and issuer credit ratings for Unum Group during 2019. There have been no other changes in any of the rating agencies' outlooks or ratings during 2019 or in 2020 prior to the date of this filing.
Agency ratings are not directed toward the holders of our securities and are not recommendations to buy, sell, or hold our securities. Each rating is subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be regarded as an independent assessment, not conditional on any other rating. Given the dynamic nature of the ratings process, changes by these or other rating agencies may or may not occur in the near-term. Based on our ongoing dialogue with the rating agencies concerning our insurance risk profile, our financial flexibility, our operating performance, and the quality of our investment portfolio, we do not expect any negative actions from any of the four rating agencies related to either Unum Group's current issuer credit ratings or the financial strength ratings of our insurance subsidiaries. However, in the event that we are unable to meet the rating agency specific guideline values to maintain our current ratings, including but not limited to maintenance of our capital management metrics at the threshold values stated and maintenance of our financial flexibility and operational consistency, we could be placed on a negative credit watch, with a potential for a downgrade to both our issuer credit ratings and our financial strength ratings.
Policy reserves are established based on a gross premium valuation method to estimate the difference between projected future policy benefits and future premiums utilizing assumptions established as of the most recent loss recognition. Claim reserves are established based on a tabular reserve methodology representing assumptions reflecting the best estimate of the present value of the liability for future claim payments and claim adjustment expenses. Management is required to evaluate its long-term care reserves each period to determine if a reserve deficiency exists. There is significant uncertainty in estimating long-term care reserves given the extended period over which claims are paid and sensitivity of the estimate to assumptions, including morbidity, mortality, claims incidence and resolutions, persistency, interest rates, and future premium rate increases.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s internal controls over the long-term care reserves process, including controls over the review and approval of assumptions which incorporate the Company’s most recent experience.
Description of Business: We are a leading provider of financial protection benefits in the United States, the United Kingdom, and Poland. Our products include disability, life, accident, critical illness, dental and vision, and other related services. We market our products primarily through the workplace.
subsequent evaluation there is a significant increase in expected cash flows, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as net investment income over the remaining life of the investment. See Notes 2 and 3.
Derivative Financial Instruments: Derivative financial instruments (including certain derivative instruments embedded in other contracts) are recognized as either other long-term investments or other liabilities in our consolidated balance sheets and are reported at fair value. The accounting for a derivative depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. To qualify for hedge accounting, at the inception of the hedging transaction, we formally document the risk management objective and strategy for undertaking the hedging transaction, as well as the designation of the hedge as either a fair value hedge or a cash flow hedge. Included in this documentation is how the hedging instrument is expected to hedge the designated risk(s) related to specific assets or liabilities on the balance sheet or to specific forecasted transactions as well as a description of the method that will be used to retrospectively and prospectively assess the hedging instrument's effectiveness.
The amortization of value of business acquired, which is included in other expenses in the consolidated statements of income, was $7.1 million, $6.4 million, and $4.8 million for the years ended December 31, 2019, 2018, and 2017, respectively. We periodically review the carrying amount of value of business acquired using the same methods used to evaluate deferred acquisition costs.
Reserves for Policy and Contract Benefits: Policy reserves represent future policy and contract benefits for claims not yet incurred. Policy reserves for non-interest sensitive life and accident and health products are determined using the net level premium method. The reserves are calculated based upon assumptions as to interest, persistency, morbidity, and mortality that were appropriate at the date of issue. Discount rate assumptions are based on actual and expected net investment returns. Persistency assumptions are based on our actual historical experience adjusted for future expectations. Claim incidence and claim resolution rate assumptions related to morbidity and mortality are based on actual experience or industry standards adjusted as appropriate to reflect our actual experience and future expectations. The assumptions vary by plan, year of issue, and policy duration and include a provision for adverse deviation.
Policy reserves require ongoing loss recognition testing. We perform loss recognition tests on our policy reserves annually, or more frequently if appropriate, using best estimate assumptions as of the date of the test, without a provision for adverse deviation. We group the policy reserves for each major product line within a segment when we perform the loss recognition tests. If the policy reserves determined using these best estimate assumptions are higher than our existing policy reserves net of any deferred acquisition cost balance, the existing policy reserves are increased or deferred acquisition costs are reduced to
immediately recognize the deficiency. This becomes the new basis for policy reserves going forward, subject to future loss recognition testing.
Policyholders Funds: Policyholders' funds represent customer deposits plus interest credited at contract rates. We control interest rate risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities.
Short-term and Long-term Debt: Debt is generally carried at the unpaid principal balance, net of unamortized discount or premium and deferred debt issuance costs. Short-term debt consists of debt due within the next twelve months, including that portion of debt otherwise classified as long-term. The amortization of the original issue discount or premium as well as deferred debt issuance costs are recognized as a component of interest expense over the period the debt is expected to be outstanding. The carrying amount of long-term debt that is part of a fair value hedge program includes an adjustment to reflect the effect of the change in fair value attributable to the risk being hedged. Net interest settlements for fair value hedges on our long-term debt are recognized as a component of interest expense. See Note 8.
Right-of-Use Asset (ROU) and Lease Liability: ROU assets represent our right to use an underlying asset for a specified lease term and are included in other assets in our consolidated balance sheet. Lease liabilities represent the present value of lease payments that we are obligated to pay arising from a lease and are included in other liabilities in our consolidated balance sheet.
We consider the likelihood of renewal in determining the lease terms for the calculation of the ROU asset and lease liability. As most of our leases do not provide an implicit rate of interest, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate of interest when readily determinable.
Where applicable, gains or losses on reinsurance transactions are deferred and amortized into earnings based upon expected future premium income for non-interest sensitive insurance policies and estimated future gross profits for interest sensitive insurance policies. The deferred gain on reinsurance included in other liabilities in our consolidated balance sheets at December 31, 2019 and 2018 was $8.5 million and $12.5 million, respectively.
Translation of Foreign Currency: Revenues and expenses of our foreign operations are translated at average exchange rates. Assets and liabilities are translated at the rate of exchange on the balance sheet dates. The translation gain or loss is generally reported in accumulated other comprehensive income, net of income tax. We do not provide for deferred taxes to the extent unremitted foreign earnings are deemed permanently invested.
Accounting for Participating Individual Life Insurance: Participating policies issued by one of our subsidiaries prior to its 1986 conversion from a mutual to a stock life insurance company will remain participating as long as the policies remain in-force. A Participation Fund Account (PFA) was established for the benefit of all such individual participating life and annuity policies and contracts. The assets of the PFA provide for the benefit, dividend, and certain expense obligations of the participating individual life insurance policies and annuity contracts. The assets of the PFA were $311.2 million and $301.2 million at December 31, 2019 and 2018, respectively.
ASC 310 "Receivables - Nonrefundable Fees and Other Costs" This update shortened the amortization period to the earliest call date for certain callable debt securities held at a premium. This update did not impact securities held at a discount. January 1, 2019 The adoption of this update did not have a material impact on our financial position or results of operations.
ASC 718 "Compensation - Stock Compensation" This update generally aligned the accounting guidance for share-based payments issued to non-employees with guidance for share-based payments issued to employees. Specifically, the update required non-employee share-based payments to be measured using the grant date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered rather than being remeasured through the performance completion date. Additionally, for non-employee share-based payments that contain performance conditions, the update changed the criteria regarding the recognition of compensation cost to when achievement of a performance condition is probable rather than upon actual achievement of the performance condition. January 1, 2019 The adoption of this update did not have an impact on our financial position or results of operations.
ASC 842 "Leases" This update changed the accounting for leases, requiring lessees to report most leases on their balance sheets, regardless of whether the lease is classified as a finance lease or an operating lease. For lessees, the initial lease liability is equal to the present value of lease payments, and a corresponding asset, adjusted for certain items, is also recorded. Expense recognition for lessees remained similar to previous accounting requirements for capital and operating leases. For lessors, the guidance modified the classification criteria and the accounting for sales-type and direct financing leases. The guidance was applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings at the beginning of the period of adoption. In addition, the package of practical expedients available to leases that commenced prior to the date of adoption was applied. January 1, 2019 See the summary table below for the financial statement impacts of this modified retrospective adoption on our financial statement line items at January 1, 2019. In addition, see Note 15 for the additional disclosures required by the update.
Summary of Financial Statement Impacts of Accounting Updates Adopted in 2019:
The adoption of this update will result in the recognition of an allowance for expected credit losses on these applicable balances, with a corresponding immaterial cumulative-effect decrease to retained earnings. The adoption of this update will also expand our disclosures and modify the presentation of certain line items in our financial statements.
ASC 820 "Fair Value Measurement" This update amended the fair value measurement guidance by removing or clarifying certain existing disclosure requirements, while also adding new disclosure requirements. Specifically, this update removed certain disclosures related to Level 1 and Level 2 transfers and removed the discussion regarding valuation processes of Level 3 fair value measurements. The update modifies guidance related to investments in certain entities that calculate net asset value to explicitly require disclosure regarding timing of liquidation of the investee's assets and timing of redemption restrictions. The update adds disclosures around the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 investments held at the end of the reporting period and adds disclosures regarding certain unobservable inputs on Level 3 fair value measurements. The guidance is to be applied retrospectively or prospectively depending on the specific requirement of the update. Entities are permitted to early adopt any removed or modified disclosures and may delay adoption of the additional disclosures until their effective date. December 31, 2018 for the removal and modification of certain disclosures and January 1, 2020 for the addition of certain disclosures. We elected to early adopt the removal and modification of disclosures, as permitted by the update. We have elected to delay the adoption of the additional disclosures until the effective date. The adoption of this update will modify our disclosures but will not have an impact on our financial position or results of operations.
ASC 715 "Compensation - Retirement Benefits" This update amends the defined benefit pension and other postretirement benefit guidance by removing or clarifying certain existing disclosure requirements, while also adding new disclosure requirements. Specifically, this update removes the requirement to disclose the effects of a one-percentage point change in the assumed healthcare cost trend and the requirement to disclose amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost of the next year. This update adds a requirement to describe the reasons for significant gains and losses related to changes in the benefit obligation for the period. The update also clarifies that the projected benefit obligation (PBO) and accumulated benefit obligation (ABO) and fair value of plan assets are to be disclosed for plans with PBOs or ABOs in excess of plan assets. The guidance is to be applied retrospectively and early adoption is permitted. December 31, 2020 The adoption of this update will modify our disclosures but will not have an impact on our financial position or results of operations.
pricing vendors to ensure we are in agreement with their current methodologies. When markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. Our internal investment management professionals, which include portfolio managers and analysts, monitor securities priced by brokers and evaluate their prices for reasonableness based on benchmarking to available primary and secondary market information. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not reflect the result of market transactions. We also consider the nature of the quote, particularly whether it is a bid or market quote. If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value. When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in suitable circumstances, provide a more appropriate fair value. During 2019, we have applied valuation approaches and techniques on a consistent basis to similar assets and liabilities and consistent with those approaches and techniques used at year end 2018.
We use observable and unobservable inputs in measuring the fair value of our fixed maturity and equity securities. For securities categorized as Level 1, fair values equal active Trade Reporting and Compliance Engine (TRACE) pricing or unadjusted broker market maker prices. For securities categorized as Level 2 or Level 3, inputs that may be used in valuing each class of securities at any given time period are disclosed below. Actual inputs used to determine fair values will vary for each reporting period depending on the availability of inputs which may, at times, be affected by the lack of market liquidity.
•9.1 percent of our fixed maturity securities were valued based on one or more non-binding broker quotes, if validated by observable market data. When only one price is available, it is used if observable inputs and analysis confirms that it is appropriate. These assets, for which we were able to validate the price using other observable market data, were classified as Level 2.
(a)Private Credit - The limited partnerships described in this category employ various investment strategies, generally providing direct lending or other forms of debt financing including first-lien, second-lien, mezzanine, and subordinated loans. The limited partnerships have credit exposure to corporates, physical assets, and/or financial assets within a variety of industries (including manufacturing, healthcare, energy, business services, technology, materials, and retail) in North America and, to a lesser extent, outside of North America. As of December 31, 2019, the estimated remaining life of the investments that do not allow for redemptions is approximately 43 percent in the next 3 years, 25 percent during the period from 3 to 5 years, 30 percent during the period from 5 to 10 years, and 2 percent during the period from 10 to 15 years.
At December 31, 2019 and 2018, all fixed maturity securities were classified as available-for-sale. The amortized cost and fair values of securities by security type are shown as follows:
As of December 31, 2019, we held 109 individual investment-grade fixed maturity securities and 38 individual below-investment-grade fixed maturity securities that were in an unrealized loss position, of which 19 investment-grade fixed maturity securities and 24 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year.
We held no fixed maturity securities as of December 31, 2019 and 2018, for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income.
At December 31, 2019, we had commitments of $98.7 million to fund private placement fixed maturity securities, the amount of which may or may not be funded.
As of December 31, 2018, we were the sole beneficiary of a special purpose entity which was consolidated in our financial statements. This entity was a securitized asset trust that contained a highly rated bond for principal protection which we contributed into the trust at the time it was established. There were no restrictions on the asset held in this trust, and the trust was free to dispose of the asset at any time. The fair value of the bond was $156.7 million as of December 31, 2018 and was reported as a component of fixed maturity securities in our consolidated balance sheets. During the fourth quarter of 2019, the bond matured and the trust was dissolved.
There were no troubled debt restructurings during 2019 or 2017. We had one mortgage loan which was modified in a troubled debt restructuring during the second quarter of 2018. The loan had a principal balance of $3.6 million prior to the restructuring, wherein the terms of the loan were modified to reduce monthly payments to interest-only at the current note rate and to permit a discounted payoff by September 2018. At time of restructuring, we recorded an allowance for credit losses on mortgage loans and recognized an impairment loss of $0.2 million in the second quarter of 2018. The payoff of the loan did not occur in September 2018 and the loan was considered impaired as of December 31, 2018. The loan was settled during the first quarter of 2019 resulting in an additional loss of $0.1 million. At December 31, 2019, we held no mortgage loans that were greater than 90 days past due regarding principal and/or interest payments.
We had no realized losses on loan foreclosures for the years ended December 31, 2019, 2018, and 2017.
There have been no changes to our accounting policies or methodology from the prior period regarding estimating the allowance for credit losses on our mortgage loans. There was no activity in the allowance for credit losses for the years ended December 31, 2019, 2018 or 2017 other than the impairment losses and associated release of the allowance related to the previously discussed 2018 troubled debt restructuring.
At December 31, 2019, we had commitments of $56.0 million to fund certain commercial mortgage loans, the amount of which may or may not be funded.
Our investment policy also permits us to lend fixed maturity securities to unaffiliated financial institutions in short-term securities lending agreements. These agreements increase our investment income with minimal risk. Our securities lending policy requires that a minimum of 102 percent of the fair value of the securities loaned be maintained as collateral. We may receive cash and/or securities as collateral under these agreements. Cash received as collateral is typically reinvested in short-term investments. If securities are received as collateral, we are not permitted to sell or re-post them.
2 The net unrealized gain recognized in net investment income for the year ended December 31, 2019 related to private equity partnerships still held at December 31, 2019 was $6.8 million. The net unrealized gain recognized in net investment income for the year ended December 31, 2018 related to private equity partnerships still held at December 31, 2018 was $7.1 million.
•Interest rate swaps are used to hedge interest rate risks and to improve the matching of assets and liabilities. An interest rate swap is an agreement in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and variable rate interest amounts. We use interest rate swaps to hedge the anticipated purchase of fixed maturity securities thereby protecting us from the potential adverse impact of declining interest rates on the associated policy reserves. We also use interest rate swaps to hedge the potential adverse impact of rising interest rates in anticipation of issuing fixed rate long-term debt.
•Interest rate swap was used to effectively convert certain of our floating rate, long-term debt into fixed rate long-term debt. Under this swap agreement, we received a variable rate of interest and paid a fixed rate of interest.
•Foreign currency forward contracts are used to minimize foreign currency risk. A foreign currency forward is a derivative without an initial investment where we and the counterparty agree to exchange a specific amount of currencies, at a specific exchange rate, on a specific date. We use these forward contracts to hedge the currency risk arising from foreign-currency denominated securities.
The majority of our derivative instruments contain provisions that require us to maintain specified issuer credit ratings and financial strength ratings. Should our ratings fall below these specified levels, we would be in violation of the provisions, and our derivatives counterparties could terminate our contracts and request immediate payment. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability position was $34.6 million and $38.0 million at December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, we had $213.5 million and $286.4 million, respectively, notional amount of receive fixed, pay fixed, open current and forward foreign currency interest rate swaps to hedge fixed income foreign currency-denominated securities.
As of December 31, 2019 and 2018, we had $250.0 million notional amount of receive fixed, pay variable interest rate swaps to hedge the changes in the fair value of certain fixed rate long-term debt. These swaps effectively convert the associated fixed rate
For the years ended December 31, 2019 and 2018, $2.0 million and $2.5 million, respectively, of the derivative instruments' gain was excluded from the assessment of hedge effectiveness. There were no instances wherein we discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
As of December 31, 2019 and 2018, we held $148.2 million and $173.7 million, respectively, notional amount of receive fixed, pay fixed, foreign currency interest rate swaps. These derivatives are not designated as hedges, and as such, changes in fair value related to these derivatives are reported in earnings as a component of net realized investment gain or loss.
As of December 31, 2019 and 2018, we held $11.4 million and $11.0 million, respectively, notional amount of single name credit default swaps. We entered into these swaps in order to mitigate the credit risk associated with specific securities owned.
As of December 31, 2016, we held $3.5 million notional amount of receive variable, pay fixed interest rate swap acquired through our purchase of Starmount during 2016. This swap effectively converted Starmount's floating rate long-term debt into fixed rate debt. During 2017, we purchased and retired the debt and terminated the interest rate swap. We recorded a loss of $0.1 million on the swap termination in our consolidated statements of income as a component of net realized investment gains and losses. See Note 8.
The following tables summarize the location and fair values of derivative financial instruments, as reported in our consolidated balance sheets.
A reconciliation of the income tax provision at the U.S. federal statutory rate to the income tax rate as reported in our consolidated statements of income is as follows. Certain prior year amounts have been reclassified to conform to current year
Our consolidated statements of income include amounts subject to both domestic and foreign taxation. The income and related tax expense (benefit) are as follows. The federal statutory rates used were 21 percent for 2019 and 2018 and 35 percent for 2017:
During 2018, we recorded $261.1 million gross unrecognized tax benefits for a policyholder reserves position taken on our 2017 federal tax return, which if recognized, would decrease our tax expense by $112.9 million. The balances of unrecognized tax benefits for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility are $127.1 million and $148.2 million at December 31, 2019 and 2018, respectively. It is reasonably possible that this item could reverse in the next 12 months following review by the IRS. We recognize interest expense and penalties, if applicable, related to unrecognized tax benefits in tax expense. We recognized $12.8 million of interest expense related to unrecognized tax benefits during 2019 and a de minimis amount in 2018 and 2017. We held corresponding liabilities related to this interest expense in our consolidated balance sheets.
We file federal and state income tax returns in the United States and in foreign jurisdictions. Tax years subsequent to 2014 remain subject to examination by the IRS. Tax years subsequent to 2015 remain subject to examination by the IRS for the subsidiaries not included in the consolidated tax return. All other major foreign jurisdictions remain subject to examination for tax years subsequent to 2017 with the exception of Poland for which tax years subsequent to 2013 remain subject to examination. We believe sufficient provision has been made for all potential adjustments for years that are not closed by the statute of limitations in all major tax jurisdictions and that any such adjustments would not have a material adverse effect on our financial position, liquidity, or results of operations.
We file state income tax returns in nearly every state in the United States. Tax years subsequent to 2014 remain subject to examination depending on the statute of limitation established by the various states, which is generally three to four years. Tax years subsequent to 2010 remain subject to examination in California.
Total income taxes paid net of refunds during 2019, 2018, and 2017 were $35.1 million, $139.7 million, and $377.0 million, respectively.
The aggregate contractual principal maturities are $400.0 million in 2020, $2.0 million in 2023, $350.0 million in 2024, and $2,602.5 million thereafter.
In July 2018, our $200.0 million 7.000% senior unsecured notes matured.
In May 2018, we issued $300.0 million of 6.250% junior subordinated notes due 2058. The notes are redeemable at or above par on or after June 15, 2023 and rank equally in the right of payment with our other junior subordinated debt securities.
During 2019, we incurred costs of $27.3 million related to the early retirement of certain of our unsecured notes and junior subordinated debt securities as previously discussed.
Interest paid on long-term and short-term debt and related securities during 2019, 2018, and 2017 was $172.9 million, $167.3 million, and $154.4 million, respectively.
In 2017, we amended our U.S. qualified defined benefit pension plan by modifying the qualified pre-retirement survivor annuity form of payment for married participants from a 67 percent joint and survivor annuity to a 100 percent joint and survivor benefit to the participant's spousal beneficiary in the event a participant pre-deceased prior to reaching pension eligibility and affirmatively electing a form of benefit. This amendment became effective January 1, 2018. As a result of this amendment, we recognized an increase in the net pension liability of $7.6 million, with a corresponding prior service cost included in accumulated other comprehensive income.
On January 2, 2020, in a separate transaction, we purchased a second group annuity contract which transferred an additional portion of our U.S. qualified defined benefit pension plan obligation to the same third party. Under the transaction, which was funded with plan assets, we transferred the responsibility for pension benefits and annuity administration for approximately 600 retirees or their beneficiaries receiving between $350 and $500 in monthly benefit payments from the plan. This transfer will reduce our 2020 U.S. qualified benefit pension plan obligation by approximately $44.0 million.
Because all participants in the U.S. and U.K. pension plans are considered inactive, we amortize the net actuarial loss and prior service credit for these plans over the average remaining life expectancy of the plans. As of December 31, 2019, the estimate of the average remaining life expectancy of the plans was approximately 26 years for the U.S. plan and 32 years for U.K. plan.
The amounts recognized in our consolidated balance sheets for our pension and OPEB plans at December 31, 2019 and 2018 are as follows.
The following table provides the changes recognized in other comprehensive income for the years ended December 31, 2019 and 2018.
Assets for our U.K. pension plan are primarily invested in a pooled diversified growth fund. This fund invests in assets such as global equities, hedge funds, commodities, below-investment-grade fixed income securities, and currencies. The objectives of the fund are to generate capital appreciation over the course of a complete economic and market cycle and to deliver equity-like returns in the medium-to-long term while maintaining approximately two thirds of the volatility of equity markets. Performance of this fund is measured against the U.K. inflation rate plus four percent. The remaining assets in the U.K. plan are invested in leveraged interest rate and inflation gilt funds of varying durations designed to broadly match the interest rate and inflation sensitivities of the plan's liabilities. The current target allocation for the assets is 65 percent diversified growth assets and 35 percent interest rate and inflation gilt funds. There are no categories of investments that are specifically prohibited by the U.K. plan, but there are general guidelines that ensure prudent investment action is taken. Such guidelines include the prevention of the plan from using derivatives for speculative purposes and limiting the concentration of risk in any one type of investment.
For the years ended December 31, 2019 and 2018, the actual return on plan assets relates solely to investments still held at the reporting date. There were no transfers into or out of Level 3 during 2019 or 2018.
The expected return assumption for the life insurance reserve for our OPEB plan is based on full investment in fixed income securities with an average book yield of 4.74 percent and 4.73 percent in 2019 and 2018, respectively.
A one percent increase or decrease in the assumed health care cost trend rate at December 31, 2019 would have increased (decreased) the service cost and interest cost by a de minimis amount, respectively, and the postretirement benefit obligation by $0.5 million and $(0.5) million, respectively.
The unrecognized net actuarial loss and the prior service credit included in accumulated other comprehensive income and expected to be amortized and included in net periodic pension cost during 2020 is $19.8 million and $0.2 million before tax, respectively.
The funding policy for our U.S. qualified defined benefit plan is to contribute annually an amount at least equal to the minimum annual contribution required under ERISA and other applicable laws, but generally not greater than the maximum amount that can be deducted for federal income tax purposes. We had no regulatory contribution requirements for our U.S. qualified defined benefit plan in 2019 and made a de minimis amount of voluntary contributions during 2019. We do not expect to make any contributions in 2020. The funding policy for our U.S. non-qualified defined benefit pension plan is to contribute the amount of the benefit payments made during the year. Our expected return on plan assets and discount rate will not affect the cash contributions we are required to make to our U.S. pension plan because such contributions are determined under the minimum funding requirements as set forth in ERISA.
We made no contributions to our U.K. plan during 2019, nor do we expect to make any contributions in 2020, either voluntary or those required to meet the minimum funding requirements under U.K. legislation.
We also offer a defined contribution plan to all eligible U.K. employees under which a portion of employee contributions is matched. We match two pounds for every one pound on the first 1.0 percent of employee contributions into the plan and match additional employee contributions pound-for-pound up to 5.0 percent of base salary. We also make an additional non-elective contribution of 6.0 percent of base salary for all eligible employees who met certain age and years of service criteria as of March 31, 2016.
We compute basic earnings per share by dividing net income by the weighted average number of common shares outstanding for the period. In computing earnings per share assuming dilution, we include potential common shares that are dilutive (those that reduce earnings per share). We use the treasury stock method to account for the effect of outstanding stock options, nonvested restricted stock units, and nonvested performance share units on the computation of diluted earnings per share. Potential common shares not included in the computation of diluted earnings per share because the impact would be antidilutive, approximated 1.1 million, 0.6 million, and 0.3 million for the years ended December 31, 2019, 2018, and 2017, respectively. See Note 11 for further discussion of our stock-based compensation plans.
At December 31, 2019, we had approximately $5.8 million of unrecognized compensation cost related to PSUs that will be recognized over a weighted average period of 1.6 years. The estimated compensation expense is adjusted for actual performance experience and is recognized ratably during the service period, or remaining service period, if and when it becomes probable that the performance conditions will be satisfied. Compensation cost for PSUs subject to accelerated vesting at the date of retirement eligibility is recognized over the implicit service period.
During 2019, 2018, and 2017, we issued RSUs with a weighted average grant date fair value per share of $37.07, $47.76, and $48.92, respectively. RSUs vest over a one to three-year service period, beginning at the date of grant, and the compensation cost is recognized ratably during the vesting period. Forfeitable dividend equivalents on RSUs are accrued in the form of additional RSUs. Compensation cost for RSUs subject to accelerated vesting at the date of retirement eligibility is recognized over the implicit service period.
The total fair value of shares vested during 2019, 2018, and 2017 was $19.5 million, $18.1 million, and $13.3 million, respectively. At December 31, 2019, we had $20.0 million of unrecognized compensation cost related to RSUs that will be recognized over a weighted average period of 0.9 years.
Cash received under all share-based payment arrangements for the years ended December 31, 2019, 2018, and 2017 was $6.1 million, $4.6 million, and $10.8 million, respectively.
On November 1, 2018, we acquired 100 percent of the shares and voting interests in Jaimini Health, Inc. (Jaimini Health), a dental health maintenance organization. The acquisition of Jaimini Health will broaden our employee benefit dental offerings in the U.S., particularly in the state of California, and is reported in our Unum US segment.
See Notes 6, 8, and 14 for further discussion regarding the impacts of the long-term care reserve increase, the cost related to early retirement of debt, the unclaimed death benefit reserve increase, and the loss from a guaranty fund assessment, respectively.
Securities Class Actions: Three alleged securities class action lawsuits have been filed against Unum Group and individual defendants as follows:
•On July 25, 2018, an alleged securities class action lawsuit entitled City of Taylor Police and Fire Retirement System v. Unum Group, Richard McKenney, John McGarry, Steve Zabel, and Daniel Waxenberg was filed in the United States District Court for the Eastern District of Tennessee. The plaintiff seeks to represent purchasers of Unum Group publicly traded securities between October 27, 2016 and May 1, 2018. The allegations and damages claimed mirror those in the Pittman matter. The Company strongly denies these allegations and will vigorously defend the litigation.
We lease certain buildings and equipment under various noncancellable operating lease agreements. In addition, we have sub-lease agreements on a limited number of our building lease agreements. The majority of our building leases and sub-leases expire within a five to ten year period and we generally have the option to renew at the end of the lease term for an additional five to ten year period at the fair rental value at the time of renewal. The majority of our equipment leases expire within a one to
three year period and we generally have the option to renew at the end of the lease term for an additional one to three year period at the fair rental value at the time of renewal.
Operating lease cost as calculated prior to the adoption of ASC 842 was $29.2 million and $27.5 million for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2019, the right-of-use asset was $108.6 million.
Fairwind, which is domiciled in the state of Vermont, is required to follow GAAP in accordance with Vermont reporting requirements for pure captive insurance companies, unless the commissioner permits the use of some other basis of accounting. Fairwind has permission from Vermont to follow accounting practices that are generally consistent with current NAIC statutory accounting principles for its insurance reserves and invested assets supporting reserves. All other assets and liabilities are accounted for in accordance with GAAP, as prescribed by Vermont, which includes the full recognition of deferred tax assets which are more likely than not to be realized. Statutory accounting principles have a stricter limitation for the recognition of deferred tax assets. The impact of following the prescribed and permitted practices of Vermont rather than statutory accounting principles prescribed by the NAIC resulted in higher capital and surplus for Fairwind of approximately $194 million and $137 million as of December 31, 2019 and 2018 respectively. Included in the 2018 results for Fairwind was the assumed portion of the statutory impact of the long-term care reserve increase from Unum America. Included in the 2017 results for Fairwind was the revaluation of the deferred tax asset at the new corporate rate of 21 percent resulting from the enactment of TCJA. Northwind Re has no material state prescribed accounting practices that differ from statutory accounting principles prescribed by the NAIC.
We also have the ability to receive dividends from our foreign subsidiaries, primarily in the U.K., for which the payment may be subject to applicable insurance company regulations and capital guidance. We have £180.0 million available for the payment of dividends from Unum Limited during 2020, subject to regulatory approval.
At December 31, 2019 and 2018, our U.S. insurance subsidiaries had on deposit with U.S. regulatory authorities securities with a book value of $135.2 million and $155.7 million, respectively, held for the protection of policyholders.
The following is a summary of our unaudited quarterly results of operations for 2019 and 2018:
See Notes 6 and 8 for further discussion of the above items.