As of December 31, 2016, 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, 2016, we leased approximately 0.2 million square feet of office space in Worcester, Massachusetts and approximately 0.6 million square feet in various other locations throughout the United States, the United Kingdom, and Ireland. 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.
For 2016, we reported net income of $931.4 million, or $3.95 per diluted common share, compared to net income of $867.1 million, or $3.50 per diluted common share, in 2015. Net income includes net realized investment gains and losses and non-operating retirement-related gains or losses. Excluding these items, after-tax operating income for 2016 was $926.2 million, or $3.92 per diluted common share, compared to $901.0 million, or $3.64 per diluted common share, in 2015. See "Reconciliation of Non-GAAP and Other Financial Measures" contained herein in this Item 7 for further discussion and a reconciliation of these items.
Our Unum US segment reported an increase in operating income of 7.6 percent in 2016 compared to 2015, with growth in premium income and overall favorable benefits experience, partially offset by lower net investment income. The benefit ratio for our Unum US segment for 2016 was 69.2 percent, compared to 70.1 percent in 2015. Unum US sales were generally consistent in 2016 compared to 2015, aided by our acquisition in 2016 of a provider of dental and vision insurance in the U.S. workplace. Persistency continues to be strong and is consistent with our expectations.
During 2016, the U.K. held a referendum and voted to leave the EU. The U.K. subsequently indicated that it will initiate the withdrawal process by the end of March 2017. Assuming the U.K. initiates the withdrawal process by giving notice that it is withdrawing from the EU, the U.K. and the EU will negotiate a withdrawal agreement during a maximum two-year period. We may see some dampening of growth in the U.K. due to the current disruption and uncertainty in the U.K. economy. We may 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. The magnitude and longevity of potential negative economic impacts on our growth will depend on the agreements reached by the U.K. and EU as a result of exit negotiations and the resulting response of the U.K. marketplace. 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 unfavorably impacted by the weakening of the British pound sterling. Further discussion is contained herein in this Item 7.
In August 2016, we acquired 100 percent of the shares and voting interests in H&J Capital, L.L.C., parent of Starmount Life Insurance Company and AlwaysCare Benefits (which collectively we refer to as Starmount), for a total cash purchase price of $140.3 million plus contingent cash consideration of $10.0 million to be paid in two increments of $5.0 million each, at 18 and 24 months from the date of acquisition upon satisfaction of certain conditions. Starmount Life Insurance Company is an independent provider of dental and vision insurance in the U.S. workplace, and AlwaysCare Benefits is a nationally licensed, third-party administrator. The acquisition of Starmount will broaden our employee benefit offerings in the U.S. Starmount's dental and vision products and new dental and vision products to be marketed by Unum US are reported in our Unum US segment within our supplemental and voluntary product lines. Colonial Life dental and vision products are expected to be introduced in 2018 and will be reported in our Colonial Life segment. This acquisition, the results of which are included in our consolidated financial statements for the period subsequent to the date of acquisition, did not have a material impact on revenue, operating results, or sales for 2016.
Policy reserves for our long-term care block of business are determined using the gross premium valuation method and, prior to the fourth quarter of 2014, were valued based on assumptions established as of December 31, 2011, the date of the initial loss recognition. Gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient. We undertake a review of policy reserve adequacy annually during the fourth quarter of each year, or more frequently if appropriate, using best estimate assumptions as of the date of the review.
Based on our analysis, as of December 31, 2014 we lowered the discount rate assumption to reflect the low interest rate environment and our revised expectation of future investment portfolio yield rates. Our revised assumptions anticipated the low
interest rate environment persisting for the next three to five years, with a return to more historical averages over the following five year period. We updated our mortality assumptions to reflect emerging experience due to an increase in life expectancies which increases the ultimate number of people who will utilize long-term care benefits and also lengthens the amount of time a claimant may receive long-term care benefits. We changed our morbidity assumptions to reflect emerging industry experience as well as our own company experience, and we updated our projection of future premium rate increase approvals. Using our revised best estimate assumptions, as of December 31, 2014 we determined that our policy and claim reserves should be increased $698.2 million to reflect our current estimate of future benefit obligations. This charge decreased our 2014 net income $453.8 million.
The low interest rate environment continues to place pressure on our profit margins and could unfavorably impact the adequacy of our reserves for some products. Tax reform may impact our operating results or the statutory capital of our U.S. insurance subsidiaries. Our reported consolidated financial results may also continue to be unfavorably impacted by the weakening of the British pound sterling.
A reconciliation of GAAP financial measures to our non-GAAP financial measures is as follows:
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 $41.5 billion and $41.4 billion at December 31, 2016 and 2015, respectively, or approximately 78.3 percent and 79.9 percent of our total liabilities, respectively. Reserves ceded to reinsurers were $7.1 billion and $6.9 billion at December 31, 2016 and 2015, respectively, and are reported as a reinsurance recoverable in our consolidated balance sheets.
Policy reserves for certain other products, excluding individual disability and individual and group long-term care, which are no longer actively marketed and are reported in our Closed Block segment represent $5.8 billion on a gross basis. We have ceded $5.0 billion of these other products' policy reserves to reinsurers. The ceded reserve balance is reported in our consolidated
Multiple estimation methods exist to establish claim reserve liabilities, with each method having its own advantages and disadvantages. Available reserving methods utilized to calculate claim reserves include the tabular reserve method, the paid loss development method, the incurred loss development method, the count and severity method, and the expected claim cost method. No single method is better than the others in all situations and for all product lines. The estimation methods we have chosen are those that we believe produce the most reliable reserves.
Claim incidence rates for Unum US and Unum UK group long-term disability were lower during 2016 compared to the prior year. Claim incidence rates for our Closed Block long-term care line of business continue to be generally consistent with the revised assumptions we established during our 2014 reserve review and assumption update. See "2014 Long-term Care Reserve Increase" contained herein in this Item 7.
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 over the last several years exhibited some variability. Relative to the resolution rate we expect to experience over the life of the block of business, actual quarterly rates during 2015 and 2016 have varied by -5 and +3 percent in our Unum US group long-term disability line of business and between -3 and +5 percent in our Closed Block individual disability line of business, which represent the majority of our claim reserves. During 2016, claim resolution rates pertaining to life and overall mortality experience were relatively consistent with the levels of 2015 and 2014. On an annual basis for the years 2014 to 2016, our overall claim resolution rates were fairly consistent with or slightly favorable to our long-term assumptions.
All of our fixed maturity securities are classified as available-for-sale and are reported at fair value. Our derivative financial instruments, including certain derivative instruments embedded in other contracts, are reported as either assets or liabilities and measured at fair value. We hold an immaterial amount of equity securities, which are also reported at fair value.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. The market sources from which we obtain or derive the fair values of our assets and liabilities carried at market value
Risk-free interest rates of 1.93 percent for five-year maturities to 3.07 percent for 30-year maturities were derived from the December 31, 2016 yield curve for U.S. Treasury Bonds with similar maturities. This compares to interest rates of 1.76 percent for five-year maturities to 3.02 percent for 30-year maturities used at December 31, 2015.
Baa corporate bond spread adjustments ranging from 1.20 percent to 2.32 percent were added to the risk-free rate to reflect additional credit risk and the lack of liquidity. We used spread adjustments ranging from 1.60 percent to 3.30 percent at December 31, 2015. The changes were based on observable market spreads. Newly issued private placement securities have historically offered yield premiums higher than a similar interest rate spread on comparable newly issued public securities.
As of December 31, 2016, approximately 9.2 percent of our fixed maturity securities were categorized as Level 1, 86.6 percent as Level 2, and 4.2 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.
We evaluate available information, including the factors noted above, both positive and negative, in reaching our conclusions. In particular, we also consider the strength of the issuer’s balance sheet, its debt obligations and near term funding requirements, cash flow and liquidity, the profitability of its core businesses, the availability of marketable assets which could be sold to increase liquidity, its industry fundamentals and regulatory environment, and its access to capital markets. Although all available and applicable factors are considered in our analysis, our expectation of recovering the entire amortized cost basis of the security, whether we intend to sell the security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost, and whether the security is current on principal and interest payments are the most critical factors in determining whether impairments are other than temporary. The significance of the decline in value and the length of time during which there has been a significant decline are also important factors, but we generally do not record an impairment loss based solely on these two factors, since often other more relevant factors will impact our evaluation of a security.
See Notes 1 and 3 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
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.
As of December 31, 2016, our pension and OPEB plans have an aggregate unrecognized net actuarial loss of $736.0 million and an unrecognized prior service credit of $11.1 million, which together represent the cumulative liability and asset gains and losses as well as the portion of prior service credits that have not been recognized in pension expense. The unrecognized net actuarial loss for our pension plans, which is $746.1 million at December 31, 2016, will be amortized over the average remaining life expectancy of the plan, which is approximately 25 years for the U.S. plan and 33 years for the U.K. plan, to the extent that it exceeds the 10 percent corridor, as described below. The unrecognized net actuarial gain of $10.1 million for our OPEB plan will be amortized over the average future working life of OPEB plan participants, estimated at four years, to the extent the loss is outside of the corridor. The corridor for the pension and OPEB plans is established based on the greater of 10 percent of the plan assets or 10 percent of the benefit obligation. At December 31, 2016, $506.6 million of the actuarial loss was outside of the corridor for the U.S. plans and £17.2 million was outside of the corridor for the U.K. plan. At December 31, 2016, none of the actuarial gain was outside of the corridor for the OPEB plan.
The fair value of plan assets in our U.S. qualified defined benefit pension plan was $1,454.1 million at December 31, 2016, compared to $1,403.3 million at December 31, 2015. The plan was in an underfunded position of $312.1 million and $233.8
See Note 9 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
We provide for federal, state, and foreign income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Our accounting for income taxes represents our best estimate of various events and transactions. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws in a multitude of jurisdictions, both domestic and foreign. The amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect profitability.
In establishing a liability for unrecognized tax benefits, assumptions are made in determining whether, and to what extent, a tax position may be sustained. GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in income tax returns. The evaluation of a tax position is a two step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. The second step is to measure a position that satisfies the recognition threshold at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not threshold but that now satisfy the recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. If a previously recognized tax position is settled for an amount that is different from the amount initially measured, the difference will be recognized as a tax benefit or expense in the period the settlement is effective.
Our weighted average pound/dollar exchange rate was 1.357, 1.528, and 1.646 for years ended 2016, 2015, and 2014, respectively. If the 2015 and 2014 results for our U.K. operations had been translated at the lower exchange rate of 2016, our operating revenue by segment in 2015 and 2014 would have been lower by approximately $80 million and $135 million, respectively, and our operating income in 2015 and 2014 would have been lower by approximately $25 million and $10 million, respectively. However, it is important to distinguish between translating and converting foreign currency. Except for a limited number of transactions, we do not actually convert pounds into dollars. As a result, we view foreign currency translation as a financial reporting item and not a reflection of operations or profitability in the U.K.
value of an embedded derivative in a modified coinsurance arrangement, which resulted in realized gains (losses) of $40.9 million, $(37.7) million, and $3.3 million in 2016, 2015, and 2014, respectively. See Notes 4 and 8 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Commissions and the deferral of acquisition costs increased year-over-year in each of the years presented above due primarily to sales growth. Growth in the level of the deferred asset resulted in higher amortization in each of the years presented, relative to the preceding period. Also affecting the year-over-year comparability of amortization of acquisition costs was the increase in amortization in 2015 due to a higher level of Unum US supplemental and voluntary policy terminations relative to assumptions for certain issue years.
In describing our results, we may at times note certain items and exclude the impact on financial ratios and metrics to enhance the understanding and comparability of our operational performance and the underlying fundamentals, but this exclusion is not an indication that similar items may not recur. We also measure and analyze our segment performance on the basis of "operating revenue" and "operating income" or "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 non-operating retirement-related gains or losses. 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. See "Reconciliation of Non-GAAP Financial Measures" contained herein in this Item 7. See also "Segment Results" contained herein in this Item 7 for further discussion of operating and sales results for each of our segments and major product lines.
Premium income increased compared to 2015, driven primarily by growth in the in-force block due to prior year sales, partially offset by lower persistency. Net investment income was lower relative to 2015 due primarily to a decline in yield on invested assets. Other income, which is comprised primarily of fees from administrative services products, is generally consistent with 2015.
Benefits experience was favorable compared to 2015 due primarily to lower claim incidence rates and favorable claim recovery experience in our group long-term disability product line as well as lower prevalence rates in our group short-term disability product line. Our renewal premium rate increases over the past several quarters also contributed to the improvement in the benefit ratio. Partially offsetting the favorable claim experience was a 50 basis point decrease in the discount rate for group long-term disability new claim incurrals which we implemented in the fourth quarter of 2016.
Benefits experience was consistent with 2015, with favorable benefits experience under group life waiver of premium benefits generally offset by a higher average claim size in accidental death & dismemberment.
Commissions and the deferral of acquisition costs were higher compared to 2015 due to sales growth. The amortization of deferred acquisition costs increased relative to 2015 due to growth in the level of the deferred asset. The other expense ratio was favorable to 2015 due to growth in premium income and a continued focus on expense management.
Commissions and the deferral of acquisition costs were higher compared to 2014 due to strong sales in the second half of 2014 and a corresponding increase in deferrable commissions which were expensed during the applicable periods of 2015. The amortization of deferred acquisition costs increased compared to 2014 due to growth in the level of the deferred asset. The growth in premium income during 2015 more than offset the growth in other expenses related to continued investment in the growth of our business, resulting in a slight decline in the other expense ratio compared to 2014.
Premium income was higher compared to 2015, driven by the addition of the dental and vision product offering as a result of the Starmount acquisition during the third quarter of 2016 as well as growth in the in-force block of voluntary benefits products due to sales and favorable persistency. Premium income for our individual disability product line was generally consistent with 2015, with growth in premium income mostly offset by the impact of a reinsurance agreement we entered into during the fourth quarter of 2016 whereby we ceded 30 percent of the risk for certain blocks of our individual disability business on a non-proportional modified coinsurance basis. Net investment income was slightly higher compared to 2015 due to growth in the level of invested assets, partially offset by a decline in yield on invested assets. Other income decreased relative to 2015 due primarily to the expected decline in surrender fees as our interest sensitive life products mature.
Benefits experience for the individual disability product line was generally consistent with 2014. Benefits experience for voluntary benefits was favorable compared to 2014 due primarily to improved claim experience in our disability product line and a release of active life reserves in the critical illness product line resulting from a higher level of policy terminations during 2015 relative to 2014.
Group disability sales decreased compared to 2015 due to lower sales to new customers in both the core market segment, which we define as employee groups with fewer than 2,000 employees, and in the large case market segment, partially offset by an increase in sales to existing customers. Sales for group life and accidental death and dismemberment increased compared to 2015, primarily driven by higher sales in the large case market. The sales mix in the group market sector for 2016 was approximately 63 percent core market and 37 percent large case market.
Individual disability sales, which are primarily concentrated in the multi-life market, decreased compared to 2015 due to lower sales to large case customers. Voluntary benefits sales were generally consistent with 2015, with an increase in sales in the core market offset by lower sales to new customers in the large case market. We also reported sales of $14.5 million for the Starmount dental and vision products for the period subsequent to the date of acquisition.
Group disability sales increased compared to 2014 due to higher sales to existing customers in both the core market and in the large case market. Sales for group life and accidental death and dismemberment declined compared to 2014 due to lower sales to new customers, partially offset by higher sales to existing customers in the core market. The sales mix in the group market sector for 2015 was approximately 67 percent core market and 33 percent large case market, generally consistent with the level of 2014.
Individual disability sales increased due primarily to sales to new customers. Sales of voluntary benefits were higher compared to 2014, with increases in both core and large case market sales.
We remain committed to offering consumers a broad set of financial protection benefit products at the worksite. During 2017, we will focus on client expansion, consumer engagement, and collaborative partnerships, all underpinned by strong risk management. We intend to broaden our client relationships and build additional partnerships to open new digital channels. We also aim to enhance the customer experience through new product offerings such as dental and vision, investing in processes with a focus on quality and simplification, and the utilization of technology to enhance enrollment, underwriting, and online claims. We believe our active client management and differentiated integrated customer experience across our product lines will continue to enable us to grow our market.
We anticipate solid operating income growth in 2017, with disciplined sales and premium growth, consistent risk management, and improving operational efficiency. We believe further improvement in our premium and sales growth rates will occur if overall economic conditions continue to improve and/or industry pricing levels increase to better align with our view of adequate premium rates. We believe future profit margin improvement is achievable, driven primarily by our continued product mix shift, expense efficiencies, and consistent operating effectiveness. Underpinning our strategy is our continued commitment to risk management discipline, talent development, and our core values.
Net investment income increased compared to 2015 due primarily to growth in the level of invested assets and higher investment income from inflation index-linked bonds. We invest in inflation index-linked bonds to support the claim reserves associated with certain of our group policies that provide for inflation-linked increases in benefits. The year-over-year increase in net investment income attributable to these index-linked bonds was more than offset by changes in the reserves for future claims payments related to the inflation-linked group long-term disability and group life policies.
Overall benefits experience was unfavorable compared to 2015 due primarily to an increase in the claim incidence rate in our group life product line. Group long-term disability benefits experience was slightly favorable compared to 2015 due primarily to a higher level of net claim settlements and lower claims incidence. Benefits experience for our supplemental line of business was less favorable due to a higher average claim size in our group critical illness product line and the addition of the dental product line, which typically has a higher benefit ratio than other product lines in our supplemental line of business.
Commissions were higher compared to 2015 due primarily to sales growth in 2016. The deferral of acquisition costs and amortization of deferred acquisition costs were generally consistent in 2016 compared to 2015. The other expense ratio was lower relative to 2015 due to our continued focus on expense management.
We had goodwill of £29.4 million, or $36.3 million, at December 31, 2016, none of which is currently believed to be at risk for future impairment.
Premium income was higher compared to 2014 due primarily to growth in our in-force group long-term disability product line resulting from prior year sales growth and stable persistency and in the supplemental product line resulting from the acquisition of the dental product offering.
Net investment income declined compared to 2014 due primarily to lower income from inflation index-linked bonds. The year-over-year decrease in net investment income attributable to these index-linked bonds was largely offset by a more favorable year-over-year change in the reserves for future claims payments related to the inflation-linked group long-term disability and group life policies.
Commissions were higher compared to 2014 due primarily to sales growth in 2015. The deferral of acquisition costs and amortization of deferred acquisition costs were generally consistent compared to 2014. The other expense ratio decreased in 2015 relative to 2014 due to our focus on expense management.
Group long-term disability sales increased compared to 2015 due to higher sales to new customers in our core market, or employee groups with fewer than 500 employees, and higher sales to existing customers in our large case market.
Sales in group long-term disability were generally consistent compared to 2014. In the group long-term disability core market sales increased in 2015 relative to 2014 due primarily to sales to new customers. Sales in the group long-term disability large case market were lower due to a decline in sales to existing customers partially offset by higher sales to new customers.
Group life sales increased compared to 2014 due to higher sales to new customers in both the core and large case markets, partially offset by a decline in sales to existing customers.
We remain committed to driving growth in the U.K. market, and during 2017 we will continue to build on those capabilities that we believe will generate growth and profitability in our businesses. Expanding our group long-term disability market position remains a significant opportunity and priority. Our key priorities in 2017 include the implementation of price increases across interest sensitive product lines while maintaining solid persistency results, continuing to follow a disciplined approach to new sales activity in the competitive pricing environment. We intend to accelerate growth in non-interest sensitive product lines such as group life, critical illness, and dental. We will expand our distribution and build marketing and digital capabilities which we believe will drive sustainable growth. We are simplifying our processes and operations to deliver efficiencies and maintain service levels. We will remain focused on risk discipline and putting our customers first.
We may see some near-term dampening of growth in Unum UK due to the current disruption and uncertainty in the U.K. economy as a result of the referendum by the U.K. to withdraw from the EU. The magnitude and longevity of potential negative economic impacts on our growth will depend on the agreements reached by the U.K. and EU as a result of exit negotiations and the resulting response of the U.K. marketplace. We anticipate returning to more normal levels of premium growth when economic conditions improve and there are higher levels of employment, increases in corporate payrolls, and expansion of benefit spending.
We expect the lower interest rate environment to continue to have a negative impact on our growth expectations in the near-term, and unfavorable economic conditions may also lead to a higher rate of claim incidence, lower levels of claim recoveries, or lower claim discount rates. 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 believe the current low levels of inflation in the U.K. may adversely impact our index-linked net investment income, with an expected corresponding reduction in the cost of benefits. There are no indications currently that capital requirements for our U.K. operations will change, 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.
The Colonial Life segment includes insurance for accident, sickness, and disability 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.
the level of the deferred asset. The other expense ratio was consistent with 2015 as the growth rate in expenses was commensurate with our premium growth rate.
Premium income increased relative to 2014 as a result of sales growth in all lines of business, partially offset by a decline in persistency. Net investment income was generally consistent in 2015 relative to 2014, with an increase in the level of invested assets offset by a decline in yield and lower miscellaneous investment income.
Benefits experience was favorable compared to 2014 due to favorable incurred benefits in the accident, sickness, and disability product line and the release of active life reserves in the cancer and critical illness product lines related to policy terminations.
We expect to see continued favorable sales and premium growth trends in 2017. The lower interest rate environment will continue to have an unfavorable impact on our profit margins, and volatility in miscellaneous investment income is likely to continue. We expect our annual benefit ratio for 2017 to be generally consistent with the level of 2016. While we believe our underlying profitability will remain strong, current economic conditions and increasing competition in the voluntary workplace market are seen as external risks to achievement of our business plans. We continuously monitor key indicators to assess our risks and attempt to adjust our business plans accordingly.
Premium income for individual disability decreased compared to 2015 due to expected policy terminations and maturities. Premium income for long-term care increased due to rate increases, partially offset by 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. The rate increases reflect current interest rates and claim experience, higher expected future claims, longevity, persistency, and other factors related to pricing long-term care coverage. 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.
Interest and debt expense was slightly higher compared to 2015 due to increases in the underlying floating rate for the outstanding debt issued by Northwind Holdings, LLC (Northwind Holdings), partially offset by a lower level of outstanding debt resulting from principal repayments. The other expense ratio was lower than 2015 due to lower litigation expenses and our continued focus on operating effectiveness and expense management.
Premium income for individual disability decreased compared to 2014 due to expected policy terminations and maturities. Premium income for long-term care increased slightly due to rate increases and stable persistency.
Net investment income was higher relative to 2014 due to increased invested asset levels and higher miscellaneous investment income, partially offset by a decrease in yield on invested assets. Other income was lower compared to 2014 primarily due to lower investment income from the investment portfolios held by the ceding companies.
Individual disability benefits experience was favorable relative to 2014 primarily due to favorable mortality. Long-term care benefits experience was favorable relative to the prior year due to the 2014 reserve increase, as previously discussed. Excluding this reserve increase, long-term care benefits experience was unfavorable compared to 2014 due to less favorable development in active life reserves as a result of higher persistency.
Profitability of our long-tailed products is affected by claims experience related to mortality and morbidity, investment returns, premium rate increases, and persistency. We believe that the interest adjusted loss ratios for the individual disability and long-term care 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. We also believe the implementation of our long-term care rate increases contributed to higher claim submissions and may continue to do so in the near term. 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, 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.
Net investment income was lower relative to 2015 due primarily to the decrease in the yield on invested assets and lower miscellaneous investment income.
Interest and other expenses were higher relative to 2015 due primarily to higher levels of outstanding debt and expenses related to the acquisition of Starmount.
Net investment income was lower relative to 2014 due primarily to lower levels of invested assets.
We expect the low interest rate environment to continue to place pressure on investment income. We are currently holding capital at our insurance subsidiaries and holding companies at levels that exceed our long-term requirements, and we expect to continue to generate excess capital on an annual basis through our statutory earnings. While we intend to maintain our disciplined approach to risk management, we believe we are well positioned with substantial flexibility to preserve our capital strength and at the same time explore opportunities to deploy the excess capital that is generated.
At December 31, 2016, we held one below-investment grade fixed maturity security with a gross unrealized loss greater than $10.0 million. The security was in the communications sector and had a fair value of $60.5 million and a gross unrealized loss of $10.9 million.
debt-to-equity ratio, and its projected liquidity had decreased significantly as a result of the declines in oil and natural gas prices. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of greater than 90 days but less than 180 days.
As of December 31, 2016, the amortized cost and fair value of our below-investment-grade fixed maturity securities was $3,346.1 million and $3,398.0 million, respectively. Below-investment-grade securities are inherently more risky than investment-grade securities since the risk of default by the issuer, by definition and as exhibited by bond rating, is higher. Also, the secondary market for certain below-investment-grade issues can be highly illiquid. Additional downgrades may occur, but we do not anticipate any liquidity problems resulting from our investments in below-investment-grade securities, nor do we expect these investments to adversely affect our ability to hold our other investments to maturity.
Our investment portfolio has exposure to companies whose businesses are negatively impacted by lower oil and natural gas prices. These include exploration and production companies, refineries, midstream and pipeline companies, and oilfield service businesses. The sharp drop in the price of oil, which began in 2014 and accelerated in 2015, put pressure on the earnings and cash flows of some of these businesses. During the latter part of 2016, the price of oil recovered from the low levels experienced in 2015 and early 2016, which alleviated some of the pressure on these businesses. The degree to which a business is affected by oil and gas prices can vary greatly depending on, among other things, its energy subsector, exposure to different types of oil and gas within a subsector, geographic locations, cost structure flexibility, capital structure, and hedging policies. At December 31, 2016, approximately one-third of our exposure to the energy sector was represented by the independent and oilfield subsectors where demand for products is highly correlated with oil and gas prices. The remaining two-thirds of our exposure to the energy sector was represented by the midstream, integrated, refining, and other energy subsectors, which tend to be more correlated to product volume sales as opposed to the commodity price. The majority of our energy sector holdings are investment-grade fixed maturity securities. During 2016, we recognized other-than-temporary impairment losses totaling $30.3 million on fixed maturity securities issued by energy sector companies, including the $11.6 million loss as previously discussed. At December 31, 2016, the fair value of investment-grade fixed maturity securities in the energy sector was $4,376.1 million, with a gross unrealized gain of $505.8 million and a gross unrealized loss of $15.5 million. The fair value of below-investment-grade fixed maturity securities in the energy sector was $640.3 million, with a gross unrealized gain of $11.6 million and a gross unrealized loss of $19.5 million. The following table shows additional information related to our holdings in the energy sector.
Our mortgage loan portfolio was $2,038.9 million and $1,883.6 million on an amortized cost basis at December 31, 2016 and 2015, respectively. Our mortgage loan portfolio is comprised entirely of commercial mortgage loans. We believe 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 relative to the industry. We held no impaired mortgage loans at December 31, 2016 or 2015.
Our exposure to non-current investments, defined as foreclosed real estate and invested assets which are delinquent as to interest and/or principal payments, totaled $41.9 million and $36.8 million on a fair value basis at December 31, 2016 and 2015, respectively.
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 consistent, even during cycles of economic downturns, which serves to minimize liquidity risk.
The ability of Unum Group and certain of its intermediate holding company subsidiaries to continue to receive dividends from their insurance subsidiaries also depends on additional factors such as RBC ratios and capital adequacy and/or solvency requirements, funding growth objectives at an affiliate level, and maintaining appropriate capital adequacy ratios to support desired ratings. At December 31, 2016, the capital adequacy and individual RBC ratios for each of our U.S. insurance subsidiaries, including our captive reinsurers, is above the range that would require state regulatory action.
Unum Group and/or certain of its intermediate holding company subsidiaries may also receive dividends from our U.K. subsidiaries, the payment of which may be subject to applicable insurance company regulations and capital guidance in the U.K. As of January 1, 2016, Solvency II, an EU directive that prescribes new capital requirements and risk management standards for the European insurance industry, replaced the previous capital requirements for Unum Limited. Our European holding company is also subject to the Solvency II requirements relevant to insurance holding companies, while its subsidiaries (the Unum European Economic Area (EEA) Group), which includes Unum Limited, are subject to group supervision under Solvency II. The Unum EEA Group received approval from the U.K. Prudential Regulatory Authority to use its own internal model for calculating regulatory capital and also received approval for certain associated regulatory permissions including transitional relief as the Solvency II capital regime is implemented. As a result there was no material change to capital requirements or to solvency ratios for the Unum EEA Group. There are currently no indications that capital requirements for the Unum EEA Group will change as a result of the U.K. referendum to withdraw from the EU, but economic conditions may in the near term cause volatility in our solvency ratios.
During 2017, we intend to maintain a level of capital in our U.S. and U.K. 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 $859 million is available, without prior approval by regulatory authorities, during 2017 for the payment of dividends from Unum Group's traditional U.S. insurance subsidiaries, which excludes our captive reinsurers. Following the changes established by Solvency II regarding dividend capacity, approximately £271 million is available for the payment of dividends from Unum Limited during 2017, subject to regulatory approval.
We made contributions of $64.8 million and £3.6 million to our U.S. and U.K. defined contribution plans, respectively, in 2016 and expect to make contributions of approximately $75 million and £4 million during 2017. We made no contributions to our U.S. qualified defined benefit pension plan or our U.K. defined benefit pension plan during 2016, nor do we expect to make any contributions to either plan during 2017. We have met all minimum pension funding requirements set forth by the Employee Retirement Income Security Act. We have estimated our future funding requirements under the Pension Protection Act of 2006 and under applicable U.K. law and do not believe that any future funding requirements will cause a material adverse effect on our liquidity. See Note 9 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of our employee benefit plans.
In 2016, we issued a total of $600.0 million aggregate principal amount of senior notes: (i) $350.0 million aggregate principal amount of senior notes due in 2021 with an annual coupon rate of 3.00%, and (ii) $250.0 million aggregate principal amount of senior notes due in 2042 with an annual coupon rate of 5.75%, pursuant to a reopening of the $250.0 million aggregate principal amount outstanding of our 5.75% senior notes due 2042 issued in 2012. Both issuances are callable at or above par and rank equally in right of payment with all of our other unsecured and unsubordinated debt. A portion of the net proceeds of the offering were used for repayment of the debt which matured in 2016. The remainder of the proceeds are expected to be used for general corporate purposes.
In 2016, we amended the terms of our five-year, $400 million unsecured revolving credit facility, which was previously set to expire in 2018, to extend through March 2021. Under the terms of the agreement, we may request that the credit facility be increased up to $600 million. Borrowings under the credit facility are for general corporate uses and are subject to financial covenants, negative covenants, and events of default that are customary. The credit facility provides for borrowing at an interest rate based either on the prime rate or LIBOR. In addition, the credit facility provides for the issuance of letters of credit subject to certain terms and limitations. At December 31, 2016, letters of credit totaling $2.1 million had been issued from the credit facility, but there was no borrowed amount outstanding. Our credit facility's financial covenants contain provisions regarding our leverage and net worth. We do not anticipate any violation of these covenants. However, if economic conditions
The following table summarizes contractual obligations and our reinsurance recoverable by period as of December 31, 2016:
Long-term debt includes contractual principal and interest payments and therefore exceeds the amount shown in the consolidated balance sheets.
Payables for collateral on investments include obligations to return unrestricted cash collateral to our securities lending and derivative counterparties and obligations to repay advances from regional Federal Home Loan Banks (FHLBs). The amounts presented in the preceding chart include contractual interest payments and therefore exceed what is reported in the consolidated balance sheets.
Miscellaneous liabilities include commissions due and accrued, deferred compensation liabilities, contingent considerations, state premium taxes payable, amounts due to reinsurance companies, legally binding commitments to fund investments, and various other liabilities that represent contractual obligations. Obligations where the timing of the payment is uncertain are included in the one year or less category.
See "Critical Accounting Estimates" contained herein in this Item 7 and Notes 3, 4, 6, 8, 9, 13, and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information on our various commitments and obligations.
Operating leases include noncancelable obligations on certain office space, equipment, and software. Purchase obligations include commitments of $314.0 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 $13.8 million at December 31, 2016.
As part of our regular investing strategy, we receive collateral from unaffiliated third parties through transactions which include both securities lending and also 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 also 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.
To help limit the credit exposure of derivatives, we enter into master netting agreements with our counterparties whereby contracts in a gain position can be offset against contracts in a loss position. We also typically enter into bilateral, cross-collateralization agreements with our counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount. Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, including accrued interest receivable less collateral held, was $0.8 million at December 31, 2016. We held cash collateral from our counterparties of $26.1 million at December 31, 2016 and had posted fixed maturity securities with a carrying value of $35.2 million as collateral to our counterparties.
We had no repurchase agreements outstanding at December 31, 2016, nor did we utilize any repurchase agreements during 2016. 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.
Certain of our U.S. insurance subsidiaries are members of regional Federal Home Loan Banks (FHLB). As of December 31, 2016, we owned $31.6 million of FHLB common stock and had obtained $350.0 million in advances from the regional FHLBs for the purpose of purchasing fixed maturity securities.
During 2016, we repaid $350.0 million principal upon maturity of our 7.125% notes. During 2015, we repaid $151.9 million principal upon maturity of our 6.85% notes. During 2014, we retired $145.0 million principal of the 6.85% notes, including a make-whole amount of $13.2 million, for a total cash outflow of $158.2 million. During 2016, 2015, and 2014 we made principal payments of $64.0 million, $74.4 million, and $41.6 million, respectively, on our senior secured non-recourse notes issued by Northwind Holdings.
During 2016, we issued $350.0 million of 3.00% unsecured senior notes due in 2021 and $250.0 million of 5.75% unsecured senior notes due in 2042 and received total proceeds of $609.1 million, excluding the associated debt issuance costs and discounts. During 2015, we issued $275.0 million of 3.875% unsecured senior notes due in 2025 and received proceeds of $271.4 million, excluding the associated debt issuance costs and discounts. During 2014, we issued $350.0 million of 4.00% unsecured senior notes due in 2024 and received proceeds of $347.2 million, excluding the associated debt issuance costs and discounts.
Cash used to repurchase shares of Unum Group's common stock during 2016, 2015, and 2014 was $405.2 million, $417.9 million, and $306.0 million, respectively. During 2016, 2015, and 2014 we paid dividends of $182.6 million, $174.2 million, and $159.4 million, respectively, to holders of Unum Group's common stock.
AM Best, Fitch, and S&P affirmed their ratings for our domestic insurance subsidiaries and issuer credit rating for Unum Group during 2016. Moody's affirmed its ratings during 2015. On August 5, 2016, AM Best upgraded its rating of Starmount Life Insurance Company to A- from the previous rating of B++, reflecting that company's favorable overall operating performance in recent periods, as well as the increased financial flexibility and potential operational efficiencies resulting from Unum Group's acquisition of Starmount. There have been no other changes in any of the rating agencies' outlook statements or ratings during 2016 or in 2017 prior to the date of this filing.
We have audited the accompanying consolidated balance sheets of Unum Group and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Unum Group and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
If we determine that the decline in value of an investment is other than temporary, the investment is written down to fair value, and an impairment loss is recognized in the current period, either in earnings or in both earnings and other comprehensive income, as applicable. Other-than-temporary impairment losses on fixed maturity securities which we intend to sell or more likely than not will be required to sell before recovery in value are recognized in earnings and equal the entire difference between the security's amortized cost basis and its fair value. For securities which we do not intend to sell and it is not more likely than not that we will be required to sell before recovery in value, other-than-temporary impairment losses recognized in earnings generally represent the difference between the amortized cost of the security and the present value of our best estimate of cash flows expected to be collected, discounted using the effective interest rate implicit in the security at the date of acquisition. For fixed maturity securities for which we have recognized an other-than-temporary impairment loss through
Policy Loans: Policy loans are presented at unpaid balances directly related to policyholders. Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Included in policy loans are $3,206.1 million and $3,150.1 million of policy loans ceded to reinsurers at December 31, 2016 and 2015, respectively.
Other Long-term Investments: Other long-term investments are comprised primarily of tax credit partnerships and private equity partnerships.
Our investments in private equity partnerships are passive in nature. The underlying investments held by these partnerships include both equity and debt securities and are accounted for using the equity or cost method, depending on the level of ownership and the degree of our influence over partnership operating and financial policies. For partnerships accounted for under the equity method, our portion of partnership earnings is reported as a component of net investment income in our consolidated statements of income. For those partnerships accounted for under the cost method, we record income received from partnership distributions as either a component of net investment income or net realized investment gain or loss, in accordance with the source of the funds distributed from the partnership. See Notes 2 and 3.
For certain products, policyholders can elect to modify product benefits, features, rights, or coverages by exchanging a contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacement transactions. Internal replacement transactions wherein the modification does not substantially change the policy are accounted for as continuations of the replaced contracts. Unamortized deferred acquisition costs from the original policy continue to be amortized over the expected life of the new policy, and the costs of replacing the policy are accounted for as policy maintenance costs and expensed as incurred. Internal replacement transactions, principally on group contracts, that result in a policy that is substantially changed are accounted for as an extinguishment of the original policy and the issuance of a new policy. Unamortized deferred acquisition costs on the original policy that was replaced are immediately expensed, and the costs of acquiring the new policy are capitalized and amortized in accordance with our accounting policies for deferred acquisition costs.
Value of Business Acquired: Value of business acquired represents the present value of future profits recorded in connection with the acquisition of a block of insurance policies. The asset is amortized based upon expected future premium income for non-interest sensitive insurance policies and estimated future gross profits from surrender charges, mortality margins, investment returns, and expense margins for interest sensitive insurance policies. The value of business acquired, which is included in other assets in our consolidated balance sheets, was $31.9 million and $24.0 million at December 31, 2016 and 2015, respectively. The accumulated amortization for value of business acquired was $119.2 million and $133.1 million as of December 31, 2016 and 2015, respectively.
Revenue Recognition: Our non-interest sensitive life and accident and health products are long-duration contracts, and premium income is recognized as revenue when due from policyholders. If the contracts are experience rated, the estimated ultimate premium is recognized as revenue over the period of the contract. The estimated ultimate premium, which is revised to reflect current experience, is based on estimated claim costs, expenses, and profit margins.
Premium Tax Expense: Premium tax expense is included in other expenses in the consolidated statements of income. For the years ended December 31, 2016, 2015, and 2014, premium tax expense was $152.5 million, $146.5 million, and $139.2 million, respectively.
Stock-Based Compensation: The cost of stock-based compensation is generally measured based on the grant-date fair value of the award. The Black-Scholes options valuation model is used for estimating the fair value of stock options, and the Monte-Carlo valuation model is used for estimating the fair value of performance share units. Restricted stock units are valued based on the fair value of common stock at the grant date. Stock-based awards are expensed over the requisite service period, or for performance share units over the requisite service period, or remaining service period, if and when it becomes probable that the performance conditions will be satisfied, with an offsetting increase to additional paid-in capital in stockholders' equity. See Note 11.
The adoption of this update resulted in the following reclassification adjustments to our consolidated balance sheets but had no effect on our financial position or results of operations.
The adoption of this update will not have a material effect on our financial position or results of operations. During periods in which the vesting date fair value differs from the grant date fair value of certain stock-based compensation awards, we may experience volatility in the income tax recognized in our results of operations.
This update supersedes virtually all existing guidance regarding the recognition of revenue from customers. Specifically excluded from the scope of this update are contracts under ASC 944, which includes insurance contracts, although our fee-based service products, which represent less than one percent of 2016 total revenue, are included within the scope. The core principle of this guidance is that revenue recognition should depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance is to be applied retrospectively.
This update eliminates the exception that requires intra-entity asset transfers other than inventory to be deferred until the transferred asset is sold to a third party or otherwise recovered through use. It requires recognition of tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. The guidance is to be applied retrospectively.
This update amends the guidance on the impairment of financial instruments. The update adds an impairment model known as the current expected credit loss model that is based on expected losses rather than incurred losses and will generally result in earlier recognition of allowances for losses. The current expected credit loss model applies to financial instruments such as mortgage loans, fixed maturity securities classified as held-to-maturity, and certain receivables. The update also modifies the other-than-temporary impairment model used for available-for-sale fixed maturity securities such that credit losses are recognized as an allowance rather than as a reduction in the amortized cost of the security. The reversal of previously recognized credit losses on available-for-sale fixed maturity securities is allowed under specified circumstances. Additional disclosures will also be required, including information used to develop the allowance for losses. The guidance is to be applied to most instruments in scope using a modified retrospective approach at the beginning of the earliest comparative period presented. For available-for-sale fixed maturity securities, the update is applied prospectively. Other-than-temporary impairment losses recognized on available-for-sale fixed maturity securities prior to adoption of the update cannot be reversed.
Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the LIBOR-setting syndicate in determining the effect of credit risk on our derivatives' fair values. If net counterparty credit risk for a derivative asset is determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing sources, we adjust the valuations obtained from our pricing sources. For purposes of valuing net counterparty risk, we
The remaining 90.8 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and unobservable inputs, as discussed below.
Approximately 3.2 percent of our fixed maturity securities were valued based on one or more non-binding broker quotes, if validated by observable market data, or on TRACE prices for identical or similar assets absent current market activity. 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.
At December 31, 2016 and 2015, 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:
At December 31, 2016, the fair value of below-investment-grade fixed maturity securities was $3,398.0 million, with a gross unrealized gain of $118.7 million and a gross unrealized loss of $66.8 million. The gross unrealized loss on below-investment-grade fixed maturity securities was 30.6 percent of the total gross unrealized loss on fixed maturity securities. Generally, below-investment-grade fixed maturity securities are more likely to develop credit concerns than investment-grade securities. At
December 31, 2016, the unrealized losses in our below-investment-grade fixed maturity securities were generally due to credit spreads in certain industries or sectors and, to a lesser extent, credit concerns related to specific securities. For each specific security in an unrealized loss position, we believe that there are positive factors which mitigate credit concerns and that the securities for which we have not recorded an other-than-temporary impairment will recover in value.
As of December 31, 2016, we held 332 individual investment-grade fixed maturity securities and 69 individual below-investment-grade fixed maturity securities that were in an unrealized loss position, of which 16 investment-grade fixed maturity securities and 37 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year. Of the 332 individual investment-grade securities in an unrealized loss position, 132 are held in the portfolio acquired through our 2016 purchase of H&J Capital, L.L.C., parent of Starmount Life Insurance Company and AlwaysCare Benefits (which collectively we refer to as Starmount). The fair value of the Starmount portfolio was $38.8 million and had a net unrealized loss of $1.5 million at December 31, 2016. See Note 13.
equity partnerships. These variable interest entity investments are reported as other long-term investments in our consolidated balance sheets.
Contractually, we are a limited partner in these tax credit partnerships, and our maximum exposure to loss is limited to the carrying value of our investment, which includes $4.6 million of unfunded unconditional commitments at December 31, 2016. At December 31, 2016, we also have unfunded unconditional commitments of $0.4 million to fund certain private equity partnerships as well as commitments of $251.9 million, the amount of which may or may not be funded.
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. The activity in the allowance for credit losses is as follows:
$0.6 million and $1.0 million, for the years ended December 31, 2015 and 2014, respectively. We did not recognize any interest income during 2016 on mortgage loans subsequent to impairment.
At December 31, 2016, we had commitments of $32.1 million to fund certain commercial mortgage loans, the amount of which may or may not be funded.
As of December 31, 2016, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $178.5 million, for which we received collateral in the form of cash and securities of $29.9 million and $155.3 million, respectively. As of December 31, 2015, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $181.6 million, for which we received collateral in the form of cash and securities of $29.0 million and $159.3 million, respectively. We had no outstanding repurchase agreements at December 31, 2016 or 2015.
Certain of our U.S. insurance subsidiaries are members of regional FHLBs. Membership, which requires that we purchase a minimum amount of FHLB common stock on which we receive dividends, provides access to low-cost funding. As of December 31, 2016 and 2015, we owned $31.6 million and $30.9 million of FHLB common stock, respectively. Advances from the regional FHLBs for the purpose of purchasing fixed maturity securities totaled $350.0 million as of December 31, 2016 and 2015. The carrying values of fixed maturity securities and commercial mortgage loans posted as collateral to the regional FHLBs were $323.7 million and $288.5 million, respectively as of December 31, 2016, and $317.2 million and $96.0 million, respectively as of December 31, 2015. Additional common stock purchases may be required, based on the amount of funds we borrow from the FHLBs.
We have securities lending agreements with unaffiliated financial institutions that post collateral to us in return for the use of our fixed maturity securities. A right of set-off exists that allows us to keep and apply collateral received in the event of default by the counterparty. Default within a securities lending agreement would typically occur if the counterparty failed to return the securities borrowed from us as contractually agreed. In addition, if we default by not returning collateral received, the counterparty has a right of set-off against our securities or any other amounts due to us.
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 $52.8 million and $50.2 million at December 31, 2016 and 2015, respectively.
As of December 31, 2016 and 2015, we had $394.1 million and $427.9 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.
We have an embedded derivative in a modified coinsurance arrangement for which we include in our realized investment gains and losses a calculation intended to estimate the value of the option of our reinsurance counterparty to cancel the reinsurance
well as trends based on available and appropriate industry data and studies. Our premium rate increase assumptions were updated to reflect progress-to-date and our on-going rate increase strategy.
We have not provided U.S. deferred taxes on the cumulative earnings of our non-U.S. subsidiaries. We consider these unremitted earnings to be permanently invested as they relate to ongoing operations of our non-U.S. subsidiaries. We do not intend to repatriate these earnings to fund our U.S. operations as we expect that future domestic cash flow generation will be sufficient to meet future domestic cash needs. As of December 31, 2016, we had not recorded a deferred tax liability on approximately $1 billion of the excess of the U.S. GAAP carrying value over the tax basis of investments in non-U.S. subsidiaries that is considered permanent in duration. This amount becomes taxable upon repatriation of assets from a foreign subsidiary or a sale or liquidation of foreign subsidiaries. Should we sell the stock in our non-U.S. subsidiaries for an amount equal to the U.S. GAAP carrying value, we would recognize tax expense of approximately $200 million, assuming our ability to fully utilize foreign tax credits.
We file state income tax returns in nearly every state in the United States. Tax years subsequent to 2011 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 2009 remain subject to examination in California.
In 2007, Northwind Holdings, LLC (Northwind Holdings), a wholly-owned subsidiary of Unum Group, issued $800.0 million of insured, senior secured notes (the Northwind notes) in a private offering. The Northwind notes bear interest at a floating rate equal to the three-month LIBOR plus 0.78%.
Recourse for the payment of principal, interest and other amounts due on the Northwind notes is limited to the collateral for the Northwind notes and the other assets, if any, of Northwind Holdings. The collateral consists of a first priority, perfected security interest in (a) the debt service coverage account (DSCA) that Northwind Holdings is required to maintain in accordance with the indenture pursuant to which the Northwind notes were issued (the Northwind indenture), (b) the capital stock of Northwind Re and the dividends and distributions on such capital stock, and (c) Northwind Holdings' rights under the transaction documents related to the Northwind notes to which Northwind Holdings is a party. At December 31, 2016, the amount in the DSCA was $27.6 million. None of Unum Group, the ceding insurers, Northwind Re, or any other affiliate of Northwind Holdings is an obligor or guarantor with respect to the Northwind notes.
Northwind Holdings is required to repay a portion of the outstanding principal under the Northwind notes at par on the quarterly scheduled payment dates under the Northwind notes in an amount equal to the lesser of (i) a targeted amortization amount as defined in the Northwind indenture and (ii) the amount of the remaining available funds in the DSCA minus an amount equal to the minimum balance that is required to be maintained in the DSCA under the Northwind indenture, provided that Northwind Holdings has sufficient funds available to pay its other expenses, including interest payments on the Northwind notes, and to maintain the minimum balance in the DSCA as required under the Northwind indenture. During 2016, 2015, and 2014, Northwind Holdings made principal payments of $64.0 million, $74.4 million, and $41.6 million, respectively, on the Northwind notes.
In 2014, we purchased and retired $145.0 million principal of our 6.85% notes, including a make-whole amount of $13.2 million, for a total cost of $158.2 million. In conjunction with this retirement, we reclassified $13.1 million of the deferred gain on previously terminated derivatives associated with the hedge of this debt from accumulated other comprehensive income to realized investment gain in our consolidated statements of income. The remaining $151.9 million balance of these notes matured in November 2015.
Interest paid on long-term and short-term debt and related securities during 2016, 2015, and 2014 was $153.6 million, $146.9 million, and $145.9 million, respectively.
In March 2016, we amended the terms of our five-year, $400.0 million unsecured revolving credit facility, which was previously set to expire in 2018, to extend through March 2021. Under the terms of the agreement, we may request that the credit facility be increased up to $600.0 million. Borrowings under the credit facility are for general corporate uses and are subject to financial covenants, negative covenants, and events of default that are customary. The credit facility provides for borrowing at an interest rate based either on the prime rate or LIBOR. In addition, the credit facility provides for the issuance of letters of credit subject to certain terms and limitations. At December 31, 2016 and 2015, letters of credit totaling $2.1 million had been issued from the credit facility, but there were no borrowed amounts outstanding.
purchase coverage on a private exchange and will subsequently be reimbursed through a Health Reimbursement Account (HRA) for an amount equivalent to the subsidy that was previously provided. Participants who continued in the plan received a one-time subsidy to minimize the initial out-of-pocket cost of purchasing health insurance. The amendment did not materially change the benefit obligation of the plan.
The following table provides the changes recognized in other comprehensive income for the years ended December 31, 2016 and 2015.
Our U.S. qualified defined benefit pension plan assets include a diversified blend of domestic, international, global, and emerging market equity securities, fixed income securities, opportunistic credit securities, real estate investments, alternative investments, and cash equivalents. Equity securities are comprised of funds and individual securities that are designed to track the respective indices specified below. International and global equity funds may allocate a certain percentage of assets to forward currency contracts. Fixed income securities include U.S. government and agency asset-backed securities, corporate investment-grade bonds, private placement securities, and bonds issued by states or other municipalities. Opportunistic credits consist of investments in funds that hold varied fixed income investments purchased at depressed values with the intention to later sell those investments for a gain. Real estate investments consist primarily of funds that hold commercial real estate investments. Alternative investments, which include private equity direct investments, private equity funds of funds, and hedge
funds of funds, utilize proprietary strategies that are intended to have a low correlation to the U.S. stock market. Prohibited investments include, but are not limited to, unlisted securities, futures contracts, options, short sales, and investments in securities issued by Unum Group or its affiliates. The invested asset classes, asset types, and benchmark indices for our U.S. qualified defined benefit pension plan is as follows. We target approximately 33 percent to equity securities, 40 percent to fixed income securities, and 27 percent to opportunistic credits, alternative, and real estate investments.
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 swap and 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 swap 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.
Certain equity, opportunistic credit, and real estate investments are valued based on the NAV of the underlying holdings. We made no adjustments to the NAV for 2016 or 2015. These investments have no unfunded commitments and no specific redemption restrictions.
Alternative investments are valued based on NAV in a period ranging from one month to one quarter in arrears. We evaluate the need for adjustments to the NAV based on market conditions and discussions with fund managers in the period subsequent to the valuation date and prior to issuance of the financial statements. We made no adjustments to the NAV for 2016 or 2015. The private equity direct investments and private equity funds of funds generally cannot be redeemed by investors, and distributions are received following the maturity of the underlying assets. It is estimated that these underlying assets will mature between five and eight years from the date of initial investment. Redemptions on the hedge funds of funds can be made on either a quarterly or bi-annual basis, depending on the fund, with prior notice of at least 90 calendar days.
The categorization of fair value measurements by input level for the invested assets in our U.K. pension plan is shown below. Investments valued using NAV as a practical expedient are not required to be categorized by input level, but these investments are included as follows to reconcile to total invested assets. Prior year amounts have been reclassified to conform to current year presentation.
Level 1 fixed interest and index-linked securities consist of individual funds that are valued based on unadjusted quoted prices from active markets for identical securities. Diversified growth assets and certain fixed interest and index-linked securities are valued based on the NAV of the underlying holdings. We made no adjustments to the NAV for 2016 or 2015. These investments have no unfunded commitments and no specific redemption restrictions.
Changes in our OPEB plan assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2016 and 2015 are as follows:
For the years ended December 31, 2016 and 2015, 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 2016 or 2015.
The following table provides the components of the net periodic benefit cost for the years ended December 31.
A one percent increase or decrease in the assumed health care cost trend rate at December 31, 2016 would have increased (decreased) the service cost and interest cost by $0.2 million and $(0.2) million, respectively, and the postretirement benefit obligation by $0.9 million and $(0.8) million, 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 2016 and made no voluntary contributions during 2016. We do not expect to make any contributions in 2017. 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 and OPEB plans 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 2016, nor do we expect to make any contributions in 2017, either voluntary or those required to meet the minimum funding requirements under U.K. legislation.
During the years ended December 31, 2016, 2015, and 2014, we recognized costs of $72.2 million, $71.5 million, and $76.0 million, respectively, for our U.S. defined contribution plan and $4.9 million, $5.7 million, and $5.0 million, respectively, for our U.K. defined contribution plan.
The May 2016 share repurchase program has an expiration date of November 26, 2017.
(1) Includes commissions of $0.2 million, $0.3 million, and $0.1 million for the years ended December 31, 2016, 2015, and 2014, respectively.
During 2014, we retired 60.0 million shares of our treasury stock with an average total cost of $1,451.7 million.
Under the Stock Incentive Plan of 2012 (the 2012 Plan), up to 20 million shares of common stock are available for awards to our employees, officers, consultants, and directors. Awards may be in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance share units, and other stock-based awards. Each full-value award, defined as any award other than a stock option or stock appreciation right, is counted as 1.76 shares. The exercise price for stock options issued cannot be less than the fair value of the underlying common stock as of the grant date. Stock options generally have a term of eight years after the date of grant and fully vest after three years. At December 31, 2016, approximately 14.2 million shares were available for future grants under the 2012 Plan.
During 2016, 2015, and 2014, we issued PSUs with a weighted average grant date fair value per share of $28.41, $35.13, and $34.72, respectively. Vesting for the PSUs occurs at the end of a three-year period and is contingent upon our achievement of prospective company performance goals and our total shareholder return relative to a board-approved peer group during the three-year period. Actual performance, including modification for relative total shareholder return, may result in the ultimate award of 40 to 180 percent of the initial number of PSUs issued, with the potential for no award if company performance goals are not achieved during the three-year period. Forfeitable dividend equivalents on PSUs are accrued in the form of additional PSUs.
PSU shares in the preceding table represent aggregate initial target awards and accrued dividend equivalents and do not reflect potential increases or decreases resulting from the performance factor determined after the end of the performance periods. At December 31, 2016, the three-year performance period for the 2014 PSU grant was completed, but the performance factor had not yet been applied. Vested amounts in the preceding table represent vested PSUs for which the 2014 through 2016 performance factor will be applied during the first quarter of 2017, with distribution of the stock thereafter.
At December 31, 2016, we had approximately $7.4 million of unrecognized compensation cost related to PSUs that will be recognized over a weighted average period of 1.5 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 2016, 2015, and 2014, we issued RSUs with a weighted average grant date fair value per share of $28.80, $34.08, and $33.77, 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.
There were no outstanding cash-settled awards at December 31, 2016 and 2015. All cash-settled awards were fully vested at December 31, 2015. Fully vested awards not distributed in 2015 were paid in 2016.
Cash received under all share-based payment arrangements for the years ended December 31, 2016, 2015, and 2014 was $8.5 million, $6.4 million, and $12.3 million, respectively.
Thirteen major companies account for approximately 91 percent of our reinsurance recoverable at December 31, 2016, and all are rated A or better by A.M. Best Company (AM Best) or are fully securitized by letters of credit or investment-grade fixed maturity securities held in trust. Approximately eight percent of our reinsurance recoverable relates to business reinsured either with companies rated A- or better by AM Best, with overseas entities with equivalent ratings or backed by letters of credit or trust agreements, or through reinsurance arrangements wherein we retain the assets in our general account. The remaining one percent of our reinsurance recoverable is held by companies either rated below A- by AM Best or not rated.
The Unum UK segment includes insurance for group long-term disability, group life, and supplemental lines of business, which include dental, individual disability, and critical illness products. Unum UK's products are sold primarily in the United Kingdom through field sales personnel and independent brokers and consultants.
We report goodwill in our Unum US, Unum UK, and Colonial Life segments, which are the segments expected to benefit from the originating business combinations. At December 31, 2016 and 2015, goodwill was $335.1 million and $230.9 million, respectively, with $271.1 million and $187.6 million, respectively, attributable to Unum US, $36.3 million and $43.3 million, respectively, attributable to Unum UK, and $27.7 million in 2016 attributable to Colonial Life. Changes in the goodwill balances for our Unum US and Colonial Life segments are attributable to the acquisition of Starmount, while changes in our Unum UK segment result from fluctuation in foreign currency exchange rates.
We measure and analyze our segment performance on the basis of "operating revenue" and "operating income" or "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 non-operating retirement-related gains or losses as specified in the reconciliations below. We believe operating revenue and operating income or loss are better performance measures and better indicators of the revenue and profitability and underlying trends in our business. 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.
A reconciliation of total revenue to "operating revenue" and income before income tax to "operating income" is as follows:
We have noncancelable lease obligations on certain office space and equipment. As of December 31, 2016, the aggregate net minimum lease payments were $189.6 million payable as follows: $50.8 million in 2017, $25.8 million in 2018, $22.5 million in 2019, $18.0 million in 2020, $13.9 million in 2021, and $58.6 million thereafter. Rental expense for the years ended December 31, 2016, 2015, and 2014 was $51.4 million, $42.5 million, and $44.2 million, respectively.
At December 31, 2016, we had unfunded commitments of $314.0 million for certain of our investments, the amount of which may or may not be funded.
provided, within prescribed limits, by state guaranty associations. These guaranty associations assess fees to meet these obligations on insurance companies that sell insurance within the state, which are generally based on a company's pro rata portion of average premiums written or received for several years prior to the insolvency. Under Pennsylvania statutes, an insurer is declared insolvent only after it is placed under an order of liquidation by a court of competent jurisdiction with a finding for insolvency. We expect the formal order of liquidation to be issued during the first quarter of 2017, and as such, we would then be subject to an assessment by those guaranty associations that are responsible for policyholder claims. In the period during which the formal order of liquidation is issued, we expect to accrue an estimated loss contingency in the range of $12 million to $15 million. This amount is net of expected recoverable premium tax offsets and net of income tax. We do not believe our exposure to potential assessment is material to our consolidated financial position, cash flows, or results of operations.
Given the complexity and scope of our litigation and regulatory matters, it is not possible to predict the ultimate outcome of all pending investigations or legal proceedings or provide reasonable estimates of potential losses, except if noted in connection with specific matters. It is possible that our results of operations or cash flows in a particular period could be materially affected by an ultimate unfavorable outcome of pending litigation or regulatory matters depending, in part, on our results of operations or cash flows for the particular period. We believe, however, that the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on our financial position.
We also have the ability to receive dividends from Unum Limited, subject to applicable insurance company regulations and capital guidance in the United Kingdom. As of January 1, 2016, Solvency II, a European Union directive that prescribes new capital requirements and risk management standards for the European insurance industry, replaced the previous capital requirements for Unum Limited. There was no material change to capital requirements or to solvency ratios. We have £271.0 million available for the payment of dividends from Unum Limited during 2017, subject to regulatory approval.