As of December 31, 2017, 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, 2017, 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.
Our Unum UK segment reported a decrease in adjusted operating income, as measured in Unum UK's local currency, of 8.6 percent in 2017 compared to 2016, due to less favorable benefits experience, partially offset by increases in premium income and net investment income. Premium income in local currency increased 1.9 percent in 2017 relative to 2016. The benefit ratio for Unum UK was 74.4 percent in 2017 compared to 69.4 percent in 2016. Unum UK sales in local currency increased 6.5 percent in 2017 compared to 2016. Persistency was generally stable relative to the prior year and is consistent with our expectations.
Our Colonial Life segment reported a decrease in adjusted operating income, including the 2017 unclaimed death benefits reserve increase, of 0.5 percent in 2017 compared to 2016. Excluding the reserve increase, adjusted operating income increased 3.4 percent due to growth in premium income, partially offset by slightly less favorable benefits experience. The 2017 benefit ratio for Colonial Life was 52.2 percent, or 51.4 percent excluding the unclaimed death benefit reserve increase, compared to 51.3 percent in 2016. Colonial Life sales increased 7.5 percent in 2017 compared to 2016. Persistency was generally stable in 2017 compared to 2016 and is consistent with our expectations.
Our Closed Block segment reported a decrease in adjusted operating income of 4.3 percent in 2017 compared to 2016, due primarily to an expected decline in premium income and declining investment yields. Benefits experience for individual disability remains within our range of expectations. Benefits experience in our long-term care line of business resulted in an interest adjusted loss ratio that was consistent with the prior year, but was slightly higher than our range of expectations.
Although our profit margins continue to be pressured by the impact of the low interest rate environment on our net investment income yields, our invested asset quality remains strong. The net unrealized gain on our fixed maturity securities was $5.7 billion at December 31, 2017, compared to $4.7 billion at December 31, 2016, with the increase due to a decline in U.S. Treasury rates and credit spreads during 2017. The earned book yield on our investment portfolio was 5.23 percent for 2017 compared to a yield of 5.30 percent for 2016.
We believe our capital and financial positions are strong. At December 31, 2017, the RBC ratio for our traditional U.S. insurance subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was approximately 390 percent, lower relative to the prior year, due primarily to the impacts of U.S. tax reform which reduced the admitted deferred tax assets in our insurance subsidiaries. The reduction in the admitted deferred tax assets is a result of the
Beginning in 2011, a number of state regulators began requiring insurers to cross-check specified insurance policies with the Social Security Administration’s Death Master File to identify potential matches. If a potential match was identified, insurers were requested to determine if benefits were due, locate beneficiaries, and make payments where appropriate. We initiated this process where requested, and in 2012 we began implementing this process in all states on a forward-looking basis. In addition to implementing this on a forward-looking basis, in 2013 we began an initiative to search for potential claims from previous years. During 2013, we completed our assessment of benefits which we estimated would be paid under this initiative, and as such, established additional reserves for payment of these benefits.
Similar to other insurers, we are undergoing an examination by a third party acting on behalf of a number of state treasurers concerning our compliance with the unclaimed property laws of the participating states. In the fourth quarter of 2017, we started the process to reach a Global Resolution Agreement with the third party regarding settlement of the examination, which we finalized in January of 2018. During the fourth quarter of 2017, we established reserves which reflect our estimate of the liability expected to be paid as we execute on the terms of the settlement. Claim reserves were increased $18.5 million for Unum US group life, $8.1 million for Unum US voluntary life, and $12.4 million for Colonial Life voluntary life, for a total reserve increase of $39.0 million before tax and $25.4 million after tax.
In January of 2018, we entered into a definitive agreement to acquire Pramerica Zycie TUiR SA ("Pramerica"), a financial protection benefits provider in Poland. The acquisition of Pramerica will expand our European presence, which we believe to be an attractive market for financial protection benefits. The transaction, which we anticipate will close by the end of 2018 subject to customary approvals and closing conditions, is not expected to materially impact our results of operations or financial position for 2018 or alter our share repurchase and common stock dividend strategy.
We believe our disciplined approach to providing financial protection products at the workplace puts us in a position of strength as we seek to capitalize on the growing and largely unfilled need for our products and services. We believe the need for our products and services remains strong, and we intend to continue protecting our solid margins and returns through our pricing and risk actions. We continue to invest in our infrastructure and our employees, with a focus on quality and simplification of processes and offerings. Our strategy is centered on market expansion, enhancing the customer experience, providing an innovative product portfolio of financial protection choices, and investing in new solutions to further improve productivity.
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. Accordingly, we will continue to gradually increase our allocation to alternative assets, particularly in our long-term care line of business, while still adhering to our disciplined risk management strategy. This increase in allocation may cause an increase in volatility in our net investment income. Our reported consolidated financial results may also continue to be unfavorably impacted by political and economic uncertainty in the U.K., specifically lower interest rates, wage inflation and employer spending, and claims volatility due to the U.K. Referendum. As a result of tax reform, we expect our effective tax rate for 2018 to be in the range of 19 percent to 20 percent. Although we expect tax reform to be beneficial to our earnings and long-term cash generation, we may experience some further pressure on our RBC ratios as a result of expected NAIC revisions to the RBC calculations to consider the lower U.S. statutory income tax rate. We expect our insurance subsidiaries to generate stronger statutory earnings. The level of excess capital generation is dependent on the timing and magnitude of these NAIC changes and the extent to which and how quickly the rating agencies will expect the industry to rebuild its RBC ratio levels.
We continue to analyze and employ strategies that we believe will help us navigate the current environment and allow us to maintain solid operating margins and significant financial flexibility to support the needs of our businesses, while also continuing to return capital to our shareholders and exploring merger and acquisition opportunities to enhance our business lines. We have substantial leverage to rising interest rates and an improving economy which generates payroll growth and wage inflation. We believe that consistent operating results, combined with the implementation of strategic initiatives and the effective deployment of capital, will allow us to meet our long-term financial objectives.
We analyze our performance using non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measure of "after-tax adjusted operating income" differs from net income as presented in our consolidated operating results and income statements prepared in accordance with GAAP due to the exclusion of net realized investment gains and losses and certain other items as specified in the reconciliations below. We believe adjusted operating income is a better performance measure and better indicator of the profitability and underlying trends in our business.
We previously excluded the amortization of prior period actuarial gains or losses, a component of the net periodic benefit cost for our pension and other postretirement benefit plans. Effective January 1, 2017, the amortization of prior period actuarial gains or losses is now included in "after-tax adjusted operating income" and "adjusted operating income" in the following charts. Amounts for periods prior to January 1, 2017 have been adjusted to conform to current year reporting.
See Notes 6, 7, and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion regarding the impacts of the TCJA, the unclaimed death benefit reserve increase, and the loss from a guaranty fund assessment, respectively.
Because the key policy reserve assumptions for policy persistency, mortality and morbidity, and discount rates are all locked in at policy issuance based on assumptions appropriate at that time, policy reserve assumptions are generally not changed due to a change in claim status from active to disabled subsequent to policy issuance. Depending on the funding mechanism, a full policy reserve is held during disability reflecting continued funding of the full policy reserve during a disability claim, or a fractional policy reserve is held reflecting that the individual policyholder would need to recover before he or she can again generate future claims for a separate occurrence. The policy reserves build up and release over time based on assumptions made at the time of policy issuance such that the reserve is eliminated as policyholders either reach the terminal age for coverage, die, or voluntarily lapse the policy. Policy reserves for Unum US, Unum UK, and Colonial Life products are determined using the
Policy reserves for our Closed Block segment include certain older policy forms for individual disability, individual and group long-term care, and certain other products, all of which are no longer actively marketed. The reserves for individual disability and individual and group long-term care are determined using the gross premium valuation method. Key assumptions are persistency, mortality and morbidity, claim incidence, claim resolution rates, commission rates, and maintenance expense rates. For long-term care, premium rate increases are also a key assumption. We apply an interest, or discount, rate to determine the present value of the expected future claims, commissions, and expenses we will pay as well as the expected future premiums we will receive, with no provision for future profit. The interest rate is based on our expected net investment returns on the investment portfolio supporting the reserves for these blocks of business. Under the gross premium valuation method, we do not include an embedded provision for the risk of adverse deviation from these assumptions. Gross premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient in the future.
determined in aggregate using a paid loss development method rather than on the individual claimant basis that we use for reported claims on long-term products. The average length of time between the event triggering a claim under a policy and the final resolution of those claims is much shorter for these products than for our long-term liabilities and results in less estimation variability.
Claim reserves for Unum US group life and accidental death and dismemberment products are related primarily to death claims reported but not yet paid, IBNR death claims, and a liability for waiver of premium benefits. The death claim reserve is based on the actual face amount to be paid, the IBNR reserve is calculated using the paid loss development method, and the waiver of premium benefits reserve is calculated using the tabular reserve methodology.
The claim resolution rate, used for both policy reserves and incurred and IBNR claim reserves, is the probability that a disability or long-term care claim will close due to recovery or death of the insured. It is important because it is used to estimate how long benefits will be paid for a claim. Estimated resolution rates that are set too high will result in reserves that are lower than they need to be to pay the claim benefits over time. Claim resolution assumptions involve many factors, including the cause of disability, the policyholder's age, the type of contractual benefits provided, and the time since initial disability. We primarily use our own claim experience to develop our claim resolution assumptions. These assumptions are established for the probability of death and the probability of recovery from disability. Our studies review actual claim resolution experience over a number of years, with more weight placed on our experience in the more recent years. We also consider any expected future changes in claim resolution experience.
Claim incidence rates for Unum US group long-term disability were lower during 2017 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.
Long-term interest rates decreased in 2017 while short-term interest rates increased. The long-term interest rates supporting the majority of our lines of business remain below historical norms. The assumptions we used to discount our reserves during this period were slightly lower for certain of our product lines. Reserve discount rate assumptions for new policies and new claims are periodically adjusted to reflect our current and expected net investment returns. Changes in our average discount rate assumptions tend to occur gradually over a longer period of time because of the long-duration investment portfolios which support the reserves for the majority of our lines of business.
In addition, we consider variability in our reserve assumptions related to long-term care policy reserves. These reserves are held under the gross premium valuation method with assumptions established as of December 31, 2014, the date of loss recognition. Assumptions for policy reserves do not change after the date of loss recognition unless reserves are again determined to be deficient. As such, positive developments will result in the accumulation of reserve margin, while adverse developments would result in an additional reserve charge. Policy reserves for long-term care are based upon a number of key assumptions, and each assumption has various factors which may impact the long-term outcome. Key assumptions with respect to morbidity, mortality, persistency, interest rates, and future premium rate increases must incorporate extended views of expectations for many years into the future. Reserves are highly sensitive to these estimates. For example, a 25 basis point change in the assumed discount rate over the lifetime of our long-term care business would impact reserves within an approximate range of $450 million to $500 million, assuming all other factors held constant.
We defer incremental direct costs associated with the successful acquisition of new or renewal insurance contracts and amortize these costs over the life of the related policies. Deferred costs include certain commissions, other agency compensation, selection and policy issue expenses, and field expenses. Acquisition costs that do not vary with the production of new business, such as commissions on group products which are generally level throughout the life of the policy, are excluded from deferral.
Approximately 88.9 percent of our DAC relates to non-interest sensitive products, and we amortize DAC for these products in proportion to the premium income we expect to receive over the life of the policies. DAC related to interest sensitive policies is amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges, mortality margins, investment returns, and expense margins. Key assumptions used in developing the future amortization of DAC are persistency, premium income, and for our interest sensitive products, mortality margins and investment returns. We use our own historical experience and expectation of the future performance of our businesses in determining our assumptions. For non-interest sensitive products, the estimated premium income in the early years of the amortization period is generally higher than in the later years due to the anticipated cumulative effect of policy persistency in the early years, which results in a greater proportion of the costs being amortized in the early years of the life of the policy. During 2017, our key assumptions used to develop the future amortization of acquisition costs deferred during 2017 did not change materially from those used in 2016. Generally, we do not expect our key assumptions to change significantly in the short-term, and to the extent that these trends do change, we expect those changes to be gradual over a longer period of time.
The following are our current assumptions regarding the length of our amortization periods, the approximate DAC balance that remains at the end of years 3, 10, and 15 as a percentage of the cost initially deferred, and our DAC balances as of December 31, 2017 and 2016.
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 include quoted market prices for actual trades, price quotes from third party pricing vendors, price quotes we obtain from outside brokers, matrix pricing, discounted cash flow, and observable prices for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. Our fair value measurements could differ significantly based on the valuation technique and available inputs.
Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to determine fair value for these securities include risk-free interest rates, risk premiums, performance of underlying collateral (if any), and other factors involving significant assumptions which may or may not reflect those of an active market.
Baa corporate bond spread adjustments ranging from 0.83 percent to 1.97 percent were added to the risk-free rate to reflect additional credit risk and the lack of liquidity. We used spread adjustments ranging from 1.20 percent to 2.32 percent at December 31, 2016. 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, 2017, approximately 9.2 percent of our fixed maturity securities were categorized as Level 1, 87.8 percent as Level 2, and 3.0 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.
There are a number of significant risks inherent in the process of monitoring our investments for impairments and determining when and if an impairment is other than temporary. These risks and uncertainties include the following possibilities:
Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Risk tolerance is established through consideration of plan liabilities, plan funded status, and corporate financial condition. We believe our investment portfolios are well diversified by asset class and sector, with no undue risk concentrations in any one category. See Note 9 of the "Notes to
The amortization of the unrecognized actuarial gain or loss and the unrecognized prior service credit is a component of our net periodic benefit cost and equaled $19.6 million, $15.8 million, and $11.6 million in 2017, 2016, and 2015, respectively.
The fair value of plan assets in our U.K. pension plan was £187.6 million at December 31, 2017, compared to £185.1 million at December 31, 2016. The U.K. pension plan was in an overfunded position of £7.2 million and £4.3 million at December 31, 2017 and 2016, respectively.
The fair value of plan assets in our OPEB plan was $10.5 million and $10.8 million at December 31, 2017 and 2016, respectively. These assets represent life insurance contracts to fund the life insurance benefit portion of our OPEB plan. Our OPEB plan represents a non-vested, non-guaranteed obligation, and current regulations do not require specific funding levels for these benefits, which are comprised of retiree life, medical, and dental benefits. It is our practice to use general assets to pay medical and dental claims as they come due in lieu of utilizing plan assets for the medical and dental benefit portions of our OPEB plan.
In connection with the TCJA, we recognized a tax benefit of $97.9 million in 2017 related to the revaluation of our net deferred tax liabilities associated with our U.S. operations to the newly enacted U.S. corporate tax rate and a tax expense of $66.4 million resulting from the tax on undistributed and previously untaxed foreign earnings and profits. Although we believe these amounts represent a reasonable estimate of the impacts of the TCJA, they should be considered provisional. As we finalize our analysis of these impacts, further adjustments may be required and would be reported as a component of income tax expense during the reporting period in which such adjustments are determined.
The comparability of our financial results between years is affected by the fluctuation in the British pound sterling to dollar exchange rate. The functional currency of our U.K. operations is the British pound sterling. In periods when the pound weakens relative to the preceding period, translating pounds into dollars decreases current period results relative to the prior period. In periods when the pound strengthens, translating pounds into dollars increases current period results relative to the prior period.
We continued to report year-over-year premium growth in 2017 and 2016 in each of our principal operating business segments, as measured in local currency, due to sales growth and the addition of the dental and vision product offerings, partially offset by lower persistency in certain of our product lines. Premium income continues to decline, as expected, in our Closed Block segment.
We recognized $8.1 million of other-than-temporary impairment losses on fixed maturity securities in 2017 compared to losses of $30.5 million and $32.4 million in 2016 and 2015, respectively. We recognized hedge gains of $35.9 million during 2015 associated with the maturity of debt issued by one of our U.K. subsidiaries. Also included in net realized investment gains and losses were changes in the fair value of an embedded derivative in a modified coinsurance arrangement, which resulted in
realized gains (losses) of $30.8 million, $40.9 million, and $(37.7) million in 2017, 2016, and 2015, respectively. See Notes 4 and 8 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Our effective income tax rate for 2017 was 29.2 percent, compared to 30.9 percent in 2016 and 30.0 percent in 2015. Our effective tax rate differs from the U.S. statutory rate of 35 percent primarily due to tax credits and foreign earnings taxed at lower rates than the U.S. statutory rate. The TCJA was enacted in December 2017 which stipulates a reduction of the U.S. statutory rate from 35 percent to 21 percent effective in 2018. Our effective tax rate for 2017 was favorably impacted by the enactment of the TCJA, which reduced the net deferred tax liability related to our U.S. operations by $97.9 million in 2017 partially offset by a tax of $66.4 million on undistributed and previously untaxed foreign earnings and profits. In addition, our effective tax rates for 2016 and 2015 were favorably impacted by the enactment of income tax rate reductions by the U.K government. These enactments reduced the net deferred tax liability related to our U.K. operations by $4.5 million in 2016 and $6.5 million in 2015. Our 2015 income tax also includes a reduction in federal income taxes of $6.8 million related to our resolution with the Internal Revenue Service of certain outstanding issues. See Note 7 in the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Premium income increased compared to 2016, driven primarily by growth in the in-force block due to higher sales, partially offset by lower persistency. Net investment income was lower relative to 2016 due to a decline in yield and a lower level of invested assets, partially offset by higher miscellaneous income. Other income is comprised primarily of fees from administrative services products.
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 was 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 the 50 basis point decrease in the discount rate for group long-term disability new claim incurrals that we implemented in the fourth quarter of 2016.
Unum US Group Life and Accidental Death and Dismemberment Operating Results
Premium income increased compared to 2016 driven by growth in the dental and vision product line associated with the acquisition of Starmount during the third quarter of 2016 as well as growth in the voluntary benefits product line due to higher sales. Premium income for our individual disability product line declined compared to 2016 due to 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. Excluding the impact of this agreement, premium income for our individual disability product line increased relative to 2016, driven by higher sales.
Benefits experience was favorable for the individual disability product line compared to 2016 due primarily to lower claim volumes and a reserve release of $19.5 million resulting from our annual reserve adequacy update, partially offset by the impact to our benefit ratio from the reinsurance agreement we entered into during the fourth quarter of 2016. Benefits experience for voluntary benefits was unfavorable compared to 2016 due primarily to the previously discussed reserve increase for unclaimed death benefits. Excluding this reserve increase, benefits experience was favorable driven primarily by a continued shift in product mix and favorable claims experience, primarily in our critical illness product line. The dental and vision product line will typically have a higher benefit ratio than the other product lines reported in our supplemental and voluntary line of business, but did experience less favorable claims experience relative to 2016.
Premium income was higher compared to 2015, driven by the addition of the dental and vision product offering 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 the fourth quarter of 2016 reinsurance agreement. 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.
Individual disability sales, which are primarily concentrated in the multi-life market, increased compared to 2016 due to higher sales to new customers. Voluntary benefits sales increased compared to 2016, primarily driven by higher sales in both the core and large case markets. Also contributing to supplemental and voluntary sales in 2017 compared to 2016 were higher sales of the dental and vision products resulting from the Starmount acquisition in the third quarter of 2016.
Net investment income increased compared to 2016 due primarily to higher investment income from inflation index-linked bonds and the growth in the level of invested assets, partially offset by a decline in yield on our fixed-rate 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 increase in net investment income attributable to these index-linked bonds was mostly offset by an increase in the reserves for future claims payments related to the inflation index-linked group long-term disability and group life policies.
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. 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.
Group life sales increased compared to 2016 due to higher sales to new and existing customers in our large case market, partially offset by a decline in sales to new and existing customers in our core market.
Group long-term disability sales increased compared to 2015 due to higher sales to new customers in our core market and higher sales to existing customers in our large case market.
Group life sales increased compared to 2015 due to higher sales to existing customers in both the core and large case markets, partially offset by a decline in sales to new customers in our large case market.
We expect to continue to 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 U.K.'s formal notice to withdraw from the EU. We anticipate that lower economic growth, wage inflation, and the interest rate outlook in the U.K. will present challenges in the short to medium term, but we will continue to monitor and adapt our plans accordingly to respond to these challenges. 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, but we believe we are well positioned to capitalize on future growth opportunities as these negotiations are resolved and the operating environment improves.
Commissions and the deferral of acquisition costs were higher relative to 2016 due to overall sales growth. The amortization of deferred acquisition costs increased compared to the prior year due primarily to growth in the level of the deferred asset. The other expense ratio improved relative to 2016 due to growth in premium income and our continued focus on operating effectiveness and expense management.
Premium income increased in 2016 relative to 2015 as a result of sales growth and favorable persistency in all lines of business. Net investment income decreased relative to 2015, due to a decline in yield and lower miscellaneous investment income, partially offset by an increase in the level of invested assets.
Benefits experience was less favorable in 2016 compared to 2015 due to higher claim incidence rates in the life line of business, partially offset by improved claims experience in the accident, sickness, and disability and the cancer and critical illness product lines.
Commissions and the deferral of acquisition costs were higher relative to 2015 due to an increase in deferrable expenses related to sales growth. The amortization of deferred acquisition costs increased compared to 2015 due primarily to growth in 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.
We reported year-over-year sales growth in both new and existing customer account sales for 2017. By market sector, commercial market sales increased due to higher new and existing customer account sales in both the core market, which we define as accounts with fewer than 1,000 employees, and the large case market. The slight increase in our public sector market for 2017 was primarily driven by higher new customer account sales. The number of new accounts increased 9.1 percent in 2017 compared to 2016, and the average new case size increased 1.1 percent.
Sales were higher in 2016 compared to 2015 due to growth in both new and existing customer account sales. By market sector, commercial market sales increased due to higher new and existing customer account sales in both the core market and the large case market. The growth in our public sector market for 2016 was primarily attributable to existing customer account sales. The number of new accounts increased 17.3 percent in 2016 compared to 2015, and the average new case size decreased 5.9 percent.
Premium income for individual disability decreased compared to 2016 due to expected policy terminations and maturities. Premium income for long-term care increased slightly due to rate increases. 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.
Net investment income was slightly higher relative to 2016 due to a higher level of invested assets, partially offset by a lower yield and lower miscellaneous investment income. Other income, which includes the underlying results of certain blocks of individual disability reinsured business and the net investment income of portfolios held by those ceding companies to support the block we have reinsured, continues to decline due to expected terminations and maturities.
Interest and debt expense was lower compared to 2016 due primarily to a lower level of outstanding debt issued by Northwind Holdings, LLC (Northwind Holdings) resulting from principal repayments. The other expense ratio was slightly higher than 2016 due to the expected decline in premium income for individual disability, partially offset by our continued focus on expense management and operating efficiencies.
Individual disability benefits experience was unfavorable relative to 2015 due to unfavorable mortality experience, lower recoveries, and a reduction in the claim reserve discount rate to recognize the impact on future portfolio yields from the higher than normal level of bond tenders and calls experienced during 2016. Long-term care benefits experience was unfavorable relative to 2015 due to higher submitted claims as well as the unfavorable impact of a large group case moving to an individual policy ported status during 2016.
Year Ended December 31, 2016 Compared with Year Ended December 31, 2015
Interest and other expenses were higher relative to 2015 due primarily to higher levels of outstanding debt, expenses related to the acquisition of Starmount, and an increase in the amortization of prior period actuarial losses for our pension and other postretirement benefit plans.
We expect the low interest rate environment to continue to place pressure on investment income. Although we expect tax reform to be beneficial to our earnings and long-term cash generation, we may experience some further pressure on our RBC ratios as a result of expected NAIC revisions to the RBC calculations to consider the lower U.S. statutory income tax rate. We expect our insurance subsidiaries to generate stronger statutory earnings. The level of excess capital generation is dependent on the timing and magnitude of these NAIC changes and the extent to which and how quickly the rating agencies will expect the industry to rebuild its RBC ratio levels.
The following two tables show the length of time our investment-grade and below-investment-grade fixed maturity securities had been in a gross unrealized loss position as of December 31, 2017 and at the end of the prior four quarters. The relationships of the current fair value to amortized cost are not necessarily indicative of the fair value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of the relationships after December 31, 2017. The decrease in the unrealized loss on fixed maturity securities during 2017 was due to a decrease in U.S. Treasury rates and credit spreads.
At December 31, 2017, we held no below-investment grade fixed maturity securities with a gross unrealized loss greater than $10.0 million.
We had no individual realized investment losses of $10.0 million or greater from other-than-temporary impairments during 2017 and no individual realized investment losses of $10.0 million or greater from the sale of fixed maturity securities during 2017, 2016, or 2015.
During 2016, we recognized an other-than-temporary impairment loss of $11.6 million on fixed maturity securities issued by a large U.S.-based energy company. At the time of the impairment loss, the company had a high debt-to-equity ratio, and its projected liquidity had decreased significantly as a result of the declines in oil prices and the likelihood that prices may stay at depressed levels for an extended period of time. The company has assets it can sell, but liquidation may be difficult in the current environment. Additionally, the lower oil prices resulted in the company's banks significantly reducing the availability on the company’s revolving line of credit. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of greater than one year but less than two years.
At December 31, 2017, our mortgage/asset-backed securities had an average life of 4.47 years, effective duration of 5.16 years, and a weighted average credit rating of Aaa. The mortgage/asset-backed securities are valued on a monthly basis using valuations supplied by the brokerage firms that are dealers in these securities as well as independent pricing services. One of the risks involved in investing in mortgage/asset-backed securities is the uncertainty of the timing of cash flows from the underlying loans due to prepayment of principal with the possibility of reinvesting the funds in a lower interest rate environment. We use models which incorporate economic variables and possible future interest rate scenarios to predict future prepayment rates. The timing of prepayment cash flows may also cause volatility in our recognition of investment income. We recognize investment income on these securities using a constant effective yield based on projected prepayments of the underlying loans and the
As of December 31, 2017, the amortized cost and fair value of our below-investment-grade fixed maturity securities was $3,248.6 million and $3,364.3 million, respectively. Below-investment-grade securities are inherently riskier 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 exposure to non-current investments, defined as foreclosed real estate and invested assets which are delinquent as to interest and/or principal payments, totaled $32.9 million and $41.9 million on a fair value basis at December 31, 2017 and 2016, respectively.
See Notes 3 and 4 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of our investments and our derivative financial instruments.
The liquidity requirements of the holding company Unum Group include common stock dividends, interest and debt service, acquisitions, and ongoing investments in our businesses. Unum Group's liquidity requirements are met by assets held by Unum Group and our intermediate holding companies, dividends from primarily our insurance subsidiaries, and issuance of common stock, debt, or other capital securities and borrowings from existing credit facilities, as needed. As of December 31, 2017, Unum Group and our intermediate holding companies held fixed maturity securities, short-term investments, and cash of $864 million. Fixed maturity securities consisted primarily of corporate bonds with an average maturity of 6.4 years. Short-term investments consisted primarily of commercial paper. No significant restrictions exist on our ability to use or access funds in any of our U.S. or U.K. intermediate holding companies. As a result of the TCJA, future amounts repatriated from our foreign subsidiaries in the U.K. are eligible for a 100 percent exemption from U.S. income tax but may be subject to tax on foreign currency gain or loss. See "Regulation" contained herein in Item 1 for further discussion regarding the TCJA and, specifically, a transition tax on undistributed and previously untaxed foreign earnings and profits at reduced rates.
As part of our capital deployment strategy, we have in recent years repurchased shares of Unum Group's common stock, as authorized by our board of directors. Our current share repurchase program was approved by our board of directors in May 2017 and authorizes the repurchase of up to $750 million of common stock through November 2018, with the pace of repurchase activity to depend upon various factors such as the level of available cash, alternative uses for cash, and our stock price. This new authorization replaced the previous authorization of $750 million that was scheduled to expire in November 2017. During 2017, we repurchased 8.2 million shares at a cost of approximately $400 million. The dollar value of shares remaining under the current repurchase program was approximately $513 million at December 31, 2017. See Note 10 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
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. The impacts of the TCJA, in particular the reduction of our admitted deferred tax assets due to the decrease in the U.S. corporate tax rate, have generally reduced our RBC ratios; however, at December 31, 2017, 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.
The amount available during 2017 for the payment of ordinary dividends from Unum Group's traditional U.S. insurance subsidiaries, which excludes our captive reinsurers, was approximately $859 million, of which $756.2 million was declared and paid. The amount available during 2017 from Unum Limited was approximately £271 million, as assessed under the requirements prior to Solvency II, of which £50.0 million was declared and paid to one of our U.K. holding companies. During 2017, Northwind Re paid dividends of $77.2 million to Northwind Holdings. Fairwind paid no dividends during 2017.
Our $350.0 million 7.125% senior unsecured notes matured during 2016, and the remaining balance of our $151.9 million 6.85% senior secured notes matured during 2015.
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, 2017, 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 worsen and we incur unexpected losses, we could violate certain of the financial covenants imposed by the credit facility and lose access to available funds or lines of credit through the facility. While maintenance of the unsecured, revolving credit facility provides a valuable source of contingent liquidity, we believe operating cash flows are sufficient to support our short-term liquidity needs.
We filed a shelf registration with the Securities and Exchange Commission in 2017 to issue various types of securities, including common stock, preferred stock, debt securities, depository shares, stock purchase contracts, units and warrants. The shelf registration enables us to raise funds from the offering of any securities covered by the shelf registration as well as any combination thereof, subject to market conditions and our capital needs.
Short-term and long-term debt includes contractual principal and interest payments and therefore exceeds the amount shown in the consolidated balance sheets.
Pensions and OPEB commitments relate to our defined benefit pension and postretirement plans for our employees, including our non-qualified pension plan. Pension plan obligations, other than the non-qualified plan, represent our contributions to the pension plans and are projected based on the expected future minimum contributions as required under current U.S. and U.K.
Operating leases include noncancelable obligations on certain office space, equipment, and software. Purchase obligations include commitments of $444.0 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 $63.2 million at December 31, 2017.
Certain of our U.S. insurance subsidiaries are members of regional Federal Home Loan Banks (FHLB). As of December 31, 2017, we owned $34.1 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 2017, we purchased and retired the remaining $3.4 million of principal on our senior secured floating rate notes acquired through our purchase of Starmount. During 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 2017, 2016, and 2015 we made principal payments of $60.0 million, $64.0 million, and $74.4 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.
Cash used to repurchase shares of Unum Group's common stock during 2017, 2016, and 2015 was $401.8 million, $405.2 million, and $417.9 million, respectively. During 2017, 2016, and 2015 we paid dividends of $196.0 million, $182.6 million, and $174.2 million, respectively, to holders of Unum Group's common stock.
We have audited the accompanying consolidated balance sheets of Unum Group and subsidiaries (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the "financial statements"). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
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 $3,307.5 million and $3,206.1 million of policy loans ceded to reinsurers at December 31, 2017 and 2016, respectively.
Our investments in private equity partnerships are passive in nature. The underlying investments held by these partnerships include both equity and debt securities. These partnerships 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.
Gains or losses on the termination of ineffective fair value or cash flow hedges are reported in earnings as a component of net realized investment gain or loss. In the event a hedged item is disposed of or the anticipated transaction being hedged is no longer likely to occur, we will terminate the related derivative and recognize the gain or loss on termination in current earnings as a component of net realized investment gain or loss. In the event a hedged item is disposed of subsequent to the termination of the hedging transaction, we reclassify any remaining gain or loss on the cash flow hedge out of accumulated other comprehensive income into earnings as a component of the same income statement line item wherein we report the gain or loss on disposition of the hedged item.
In our consolidated balance sheets, we do not offset fair value amounts recognized for derivatives executed with the same counterparty under a master netting agreement and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from those master netting agreements. See Notes 2, 3 and 4.
Goodwill: Goodwill is the excess of the amount paid to acquire a business over the fair value of the net assets acquired. We review the carrying amount of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount might not be recoverable. Goodwill impairment testing compares the fair value of a reporting unit with its carrying amount, including goodwill. The fair values of the reporting units are determined using discounted cash flow models. The critical estimates necessary in determining fair value are projected earnings and the discount rate. We set our discount rate assumption based on an expected risk adjusted cost of capital. If the fair value of the reporting unit to which the goodwill relates is less than the carrying amount of the unamortized goodwill, the impairment charge is
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 $27.9 million and $31.9 million at December 31, 2017 and 2016, respectively. The accumulated amortization for value of business acquired was $130.4 million and $119.2 million as of December 31, 2017 and 2016, respectively.
product lines. Unlike policy reserves for which assumptions are generally established and locked in at the time of policy issuance, claim reserves are subject to revision as current claim experience and projections of future factors affecting claim experience change. Claim reserves do not include a provision for adverse deviation. See Note 6.
Premium Tax Expense: Premium tax expense is included in other expenses in the consolidated statements of income. For the years ended December 31, 2017, 2016, and 2015, premium tax expense was $158.0 million, $152.5 million, and $146.5 million, respectively.
This update changed the disclosure requirements for certain insurance contracts. These changes included a requirement to disclose the rollforward of the liability for unpaid claims and claim adjustment expenses in both interim and annual reporting periods for long-duration and short-duration insurance contracts. Additional claims disclosures were also required for short-duration contracts. The guidance is to be applied retrospectively.
The adoption of this update expanded our interim reporting period disclosures but had no effect on our financial position or results of operations. The annual reporting period disclosure requirements were only applicable to our individual dental products, which we deem immaterial, and therefore did not alter our annual disclosures.
The adoption of this update did not have a material effect on our financial position or results of operations. The impact of the update reduced our effective income tax rate by a de minimis amount for the year ended December 31, 2017. 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. The amendment related to the reclassification of tax-related cash flows in our consolidated statements of cash flows has been applied prospectively.
The adoption of this update expanded our disclosures, but had no effect on our financial position or results of operations.
These updates supersede virtually all existing guidance regarding the recognition of revenue from customers. Specifically excluded from the scope of these updates are insurance contracts, although our fee-based service products are included within the scope. Our fee-based service products, which are primarily sold in our Unum US segment, are reported in other income within our consolidated statements of income and represent less than one percent of our total revenue. 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 may be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption, with early adoption permitted.
This update requires the service cost component of net periodic pension and postretirement benefit costs to be included as a component of compensation costs in an entity's statement of income. Other components of net periodic pension and postretirement benefit costs are required to be presented separately from the service cost along with a disclosure identifying the line items in which these costs are presented in the statement of income. The amendments in this update are to be applied retrospectively or prospectively depending on the specific requirement of the update, with early adoption permitted.
The adoption of this update will result in reclassifications to certain line items within our consolidated statements of income but will have no effect on our financial position or results of operations.
We have determined that certain of our limited partnership and other equity investments are within the scope of this update. Our modified retrospective adoption of this update as of January 1, 2018 will result in a cumulative-effect increase to retained earnings of approximately $17 million with an offsetting decrease to accumulated other comprehensive income resulting in no impact to total stockholders' equity. Subsequent to adoption of this update, we may experience an increase in volatility in net investment income. In addition, we will be required to modify certain of our disclosures upon adoption.
This update provides targeted improvements to accounting for hedging activities for both nonfinancial and financial risk components, aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements, eases certain documentation and effectiveness assessment requirements, and enhances transparency through expanded disclosures. For cash flow and net investment hedges existing at the date of adoption, the guidance is to be applied using a modified retrospective approach through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year the guidance is adopted. The amended presentation and disclosure guidance is required prospectively. This update is effective for fiscal years beginning after December 15, 2018; however, early adoption is permitted.
This update changes the accounting for leases, requiring lessees to report most leases on their balance sheets, regardless of whether the lease is classified as a finance lease or an operating lease. For lessees, the initial lease liability is equal to the present value of lease payments, and a corresponding asset, adjusted for certain items, is also recorded. Expense recognition for lessees will remain similar to current accounting requirements for capital and operating leases. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period presented and early adoption is permitted.
This update shortens the amortization period to the earliest call date for certain callable debt securities held at a premium. This update does not impact securities held at a discount. The guidance is to be applied using a modified retrospective approach, with early adoption permitted.
This update eliminates the requirement to calculate the implied fair value of goodwill (the second step in the current two-step test) to measure a goodwill impairment charge. Instead, entities should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of the carrying amount over the fair value, with the loss not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is to be applied prospectively, with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017.
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 with early adoption permitted. 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.
Presented as follows are the carrying amounts and fair values of financial instruments. The carrying values of financial instruments such as short-term investments, cash and bank deposits, accounts and premiums receivable, accrued investment income, securities lending agreements, and short-term debt approximate fair value due to the short-term nature of the instruments. As such, these financial instruments are not included in the following chart.
Mortgage Loans: Fair values are estimated using discounted cash flow analyses and interest rates currently being offered for similar loans to borrowers with similar credit ratings and maturities. Loans with similar characteristics are aggregated for purposes of the calculations. These financial instruments are classified within Level 2 of the fair value hierarchy.
Miscellaneous Long-term Investments: Carrying amounts for tax credit partnerships equal the unamortized balance of our contractual commitments and approximate fair value. Fair values for private equity partnerships are primarily derived from net asset values provided by the general partner in the partnerships' financial statements. Our private equity partnerships primarily invest in bank loans, general private equity, the financial services industry, railcar leasing, and mortgage loans. Distributions received from the private equity partnerships arise from income generated by the underlying investments as well as the proceeds
from liquidation of the underlying investments. Our private equity partnerships have a limited life and as of December 31, 2017, we estimate the partnerships to liquidate the underlying assets over the next one to ten years. These financial instruments are classified within Level 3 of the fair value hierarchy. Our shares of FHLB common stock are carried at cost, which approximates fair value. These financial instruments are considered restricted investments and are classified within Level 2 of the fair value hierarchy.
Policyholders' Funds: Policyholders' funds are comprised primarily of deferred annuity products and supplementary contracts without life contingencies and represent customer deposits plus interest credited at contract rates. Carrying amounts of these financial instruments approximate fair value. These financial instruments are classified within Level 3 of the fair value hierarchy.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when
valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.
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 measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position or transfer a net short position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. In regard to our own credit risk component, we adjust the valuation of derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from pricing sources does not effectively include an adequate credit component for our own credit risk.
Fair values for our embedded derivative in a modified coinsurance arrangement are estimated using internal pricing models and represent the hypothetical value of the duration mismatch of assets and liabilities, interest rate risk, and third party credit risk embedded in the modified coinsurance arrangement.
We consider transactions in inactive or disorderly markets to be less representative of fair value. We use all available observable inputs when measuring fair value, but when significant other unobservable inputs and adjustments are necessary, we classify these assets or liabilities as Level 3.
At December 31, 2017 and 2016, 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, 2017, the fair value of below-investment-grade fixed maturity securities was $3,364.3 million, with a gross unrealized gain of $172.7 million and a gross unrealized loss of $57.0 million. The gross unrealized loss on below-investment-grade fixed maturity securities was 46.2 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, 2017, 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.
We held no fixed maturity securities as of December 31, 2017 and 2016, for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income.
At December 31, 2017, we had commitments of $41.8 million to fund private placement fixed maturity securities, the amount of which may or may not be funded.
As of December 31, 2017, the carrying amount of our variable interest entity investments that are not consolidated in our financial statements was $535.4 million, comprised of $128.2 million of tax credit partnerships and $407.2 million of private equity partnerships. At December 31, 2016, the carrying amount of our variable interest entity investments that are not consolidated in our financial statements was $509.3 million, comprised of $165.2 million of tax credit partnerships and $344.1 million of private equity partnerships. These variable interest entity investments are reported as other long-term investments in our consolidated balance sheets.
The Company invests in tax credit partnerships primarily for the receipt of income tax credits and tax benefits derived from passive losses on the investments. Amounts recognized in the consolidated statements of income are as follows:
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 $3.7 million of unfunded unconditional commitments at December 31, 2017. At December 31, 2017, we also have commitments of $356.9 million to fund certain private equity partnerships, the amount of which may or may not be funded.
At December 31, 2017 and 2016, we held no mortgage loans that were greater than 90 days past due regarding principal and/or interest payments.
We are exposed to certain risks relating to our ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk, risk related to matching duration for our assets and liabilities, foreign currency risk, and credit risk. Historically, we have utilized current and forward interest rate swaps, current and forward currency swaps, forward treasury locks, currency forward contracts, forward contracts on specific fixed income securities, and credit default swaps. Transactions hedging interest rate risk are primarily associated with our individual and group long-term care and individual and group disability products. All other product portfolios are periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes. We do not use derivative financial instruments for speculative purposes.
The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted by changes in the market, primarily the change in interest and exchange rates) and credit risk (that the counterparty will not perform according to the terms of the contract). The market risk of the derivatives should generally offset the market risk associated with the hedged financial instrument or liability. To help limit the credit exposure of the 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. Credit exposure on derivatives is limited to the value of those contracts in a net gain position, including accrued interest receivable less collateral held. At December 31, 2017, we had no credit exposure on derivatives. We held cash collateral from our counterparties of $15.7 million and $26.1 million at December 31, 2017 and 2016, respectively. We post either fixed maturity securities or cash as collateral to our counterparties. The carrying value of fixed maturity securities posted as collateral to our counterparties was $46.4 million and $35.2 million at December 31, 2017 and 2016, respectively. We had no cash posted as collateral to our counterparties at December 31, 2017 and 2016. See Note 3 for further discussion of our master netting agreements.
During the fourth quarter of 2015, the remaining principal balance of the U.S. dollar-denominated debt issued by one of our U.K. subsidiaries matured, at which time we terminated the related foreign currency swaps with a notional amount of $150.0 million and reclassified the cash flow hedge gain of $8.2 million from accumulated other comprehensive income to realized investment gain in our consolidated statements of income. We also reclassified the remaining deferred cash flow hedge gain of $27.7 million from previously terminated derivatives associated with the hedge of this debt from accumulated other comprehensive income to realized investment gain. See Note 8.
As of December 31, 2017, we expect to amortize approximately $63.6 million of net deferred gains on derivative instruments during the next twelve months. This amount will be reclassified from accumulated other comprehensive income into earnings and reported on the same income statement line item as the hedged item. The income statement line items that will be affected by this amortization are net investment income and interest and debt expense. Additional amounts that may be reclassified from accumulated other comprehensive income into earnings to offset the earnings impact of foreign currency translation of hedged items are not estimable.
As of December 31, 2017, we are hedging the variability of future cash flows associated with forecasted transactions through the year 2038.
As of December 31, 2017 and 2016, we had $48.0 million and $102.0 million, respectively, notional amount of receive variable, pay fixed interest rate swaps to hedge the changes in fair value of certain fixed rate securities held. These swaps effectively convert the associated fixed rate securities into floating rate securities, which are used to fund our floating rate long-term debt. The change in fair value of the hedged fixed maturity securities attributable to the hedged benchmark interest rate resulted in a
As of December 31, 2017 and 2016, we had $250.0 million notional amount of receive fixed, pay variable interest rate swaps to hedge the changes in the fair value of certain fixed rate long-term debt. These swaps effectively convert the associated fixed rate long-term debt into floating rate debt and provide for a better matching of interest rates with our short-term investments, which have frequent interest rate resets similar to a floating rate security. The change in fair value of the hedged debt attributable to the hedged benchmark interest rate resulted in a gain of $1.4 million, $2.8 million, and $0.1 million for the years ended December 31, 2017, 2016, and 2015, respectively, with an offsetting loss on the related interest rate swaps. During 2016, $350.0 million notional amount of receive fixed, pay variable interest rate swaps matured in conjunction with the maturity of the $350.0 million hedged fixed rate debt. See Note 8.
As of December 31, 2017 and 2016, we held $192.6 million and $222.4 million, respectively, notional amount of receive fixed, pay fixed, foreign currency interest rate swaps. These derivatives are not designated as hedges, and as such, changes in fair value related to these derivatives are reported in earnings as a component of net realized investment gain or loss.
As of December 31, 2016, we held $3.5 million notional amount of a receive variable, pay fixed interest rate swap acquired through our purchase of Starmount during 2016. This swap effectively converted Starmount's floating rate long-term debt into fixed rate debt. During the second quarter of 2017, we purchased and retired the debt and terminated the interest rate swap. We recorded a loss of $0.1 million on the swap termination in our consolidated statements of income as a component of net realized investment gains and losses. See Note 8.
The following table summarizes the location of gains and losses on the effective portion of derivative financial instruments designated as cash flow hedging instruments, as reported in our consolidated statements of income and consolidated statements of comprehensive income.
The net unrealized gain on securities consists of the following components:
"Incurred Related to Prior Years - All Other Incurred" shown in the preceding chart includes the reserve adjustment as discussed in the following paragraphs, which impacts the comparability of 2017 to the other years presented. Excluding that adjustment, the variability exhibited year over year is primarily caused by the level of claim resolutions in the period relative to the long-term expectations reflected in the reserves. 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.
Beginning in 2011, a number of state regulators began requiring insurers to cross-check specified insurance policies with the Social Security Administration's Death Master File to identify potential matches. If a potential match was identified, insurers were requested to determine if benefits were due, locate beneficiaries, and make payments where appropriate. We initiated this process where requested, and in 2012 we began implementing this process in all states on a forward-looking basis. In addition to implementing this on a forward-looking basis, in 2013 we began an initiative to search for potential claims from previous years. During 2013, we completed our assessment of benefits which we estimated would be paid under this initiative, and as such, established additional reserves for payment of these benefits.
Similar to other insurers, we are undergoing an examination by a third party acting on behalf of a number of state treasurers concerning our compliance with the unclaimed property laws of the participating states. In the fourth quarter of 2017, we started the process to reach a Global Resolution Agreement with the third party regarding settlement of the examination, which we finalized in January of 2018. During the fourth quarter of 2017, we established reserves which reflect our estimate of the liability expected to be paid as we execute on the terms of the settlement. Claim reserves were increased $18.5 million for
The adjustment related to unrealized investment gains and losses reflects the changes that would be necessary to policyholder liabilities if the unrealized investment gains and losses related to the corresponding available-for-sale securities had been realized. Changes in this adjustment are reported as a component of other comprehensive income or loss.
Tax years subsequent to 2013 remain subject to examination by the IRS, and tax years subsequent to 2015 remain subject to examination in major foreign jurisdictions. We believe sufficient provision has been made for all potential adjustments for years that are not closed by the statute of limitations in all major tax jurisdictions and that any such adjustments would not have a material adverse effect on our financial position, liquidity, or results of operations.
As of the date of the acquisition of Starmount in 2016, we recorded a net operating loss carryforward of $2.5 million and an alternative minimum tax credit carryforward of $0.6 million. There was no net operating loss carryforward remaining as of December 31, 2017 and there was $1.3 million remaining at December 31, 2016. There was no alternative minimum tax credit carryforward remaining at December 31, 2017 and there was $0.6 million remaining at December 31, 2016. During 2017, we recorded a capital loss carryforward of $0.7 million, which will expire in 2022, related to Starmount, which files a separate company tax return from the Unum Group consolidated tax return. We have net operating loss carryforwards for state and local income tax of approximately $160 million which will expire between 2018 and 2037.
our valuation allowance as of December 31, 2017 and 2016 relates to unrealized tax losses on buildings which we own and occupy in the U.K.
Collateralized debt is comprised of our senior secured notes and ranks highest in priority, followed by unsecured notes, which consist of senior notes and medium-term notes, followed by junior subordinated debt securities. The senior notes due 2018 and medium-term notes are non-callable and the junior subordinated debt securities are callable under limited, specified circumstances. The remaining debt is callable and may be redeemed, in whole or in part, at any time.
In May 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 the right of payment with all of our other unsecured and unsubordinated debt.
The remaining $151.9 million balance of our 6.85% notes matured in November 2015.
In 1998, Provident Financing Trust I (the trust), a 100 percent-owned finance subsidiary of Unum Group, issued $300.0 million of 7.405% capital securities in a public offering. These capital securities are fully and unconditionally guaranteed by Unum Group, have a liquidation value of $1,000 per capital security, and have a mandatory redemption feature under certain circumstances. Unum Group issued 7.405% junior subordinated deferrable interest debentures to the trust in connection with the capital securities offering. The debentures mature in 2038. The sole assets of the trust are the junior subordinated debt securities.
In 2017, we amended our U.S. qualified defined benefit pension plan by modifying the qualified pre-retirement survivor annuity form of payment for married participants from a 67 percent joint and survivor annuity to a 100 percent joint and survivor benefit to the participant's spousal beneficiary in the event a participant pre-deceased prior to reaching pension eligibility and affirmatively electing a form of benefit. This amendment is effective January 1, 2018. As a result of this amendment, we recognized an increase in the net pension liability of $7.6 million, with a corresponding prior service cost included in accumulated other comprehensive income.
Effective August 1, 2016, we amended the retiree medical benefits portion of our OPEB plan to transition a majority of participants to a private exchange for their health insurance coverage. Prior to the plan amendment, participants paid a subsidized premium for their health insurance coverage, but if they elect to continue participation in the plan they will now 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.
Because all participants in the U.S. and U.K. pension plans are considered inactive, we amortize the net actuarial loss and prior service credit for these plans over the average remaining life expectancy of the plans. As of December 31, 2017, the estimate of the average remaining life expectancy of the plans was approximately 25 years for the U.S. plan and 32 years for U.K. plan.
The following table provides the changes recognized in other comprehensive income for the years ended December 31, 2017 and 2016.
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 36 percent to equity securities, 40 percent to fixed income securities, and 24 percent to opportunistic credits, alternative, and real estate investments.
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 2017 or 2016. These investments have no unfunded commitments and no specific redemption restrictions.
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 2017 or 2016. 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, 2017 and 2016 are as follows:
For the years ended December 31, 2017 and 2016, 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 2017 or 2016.
A one percent increase or decrease in the assumed health care cost trend rate at December 31, 2017 would have increased (decreased) the service cost and interest cost by a de minimis amount, respectively, and the postretirement benefit obligation by $0.7 million and $(0.7) million, respectively.
stock units and the nonvested performance share units. The outstanding stock options have exercise prices ranging from $20.78 to $26.29; the nonvested restricted stock units have grant prices ranging from $27.85 to $53.94; and the nonvested performance share units have grant prices ranging from $27.85 to $49.86. See Note 11.
(1) Includes commissions of $0.3 million, $0.2 million, and $0.3 million for the years ended December 31, 2017, 2016, and 2015, respectively.
During 2017, 2016, and 2015, we issued PSUs with a weighted average grant date fair value per share of $51.37, $28.41, and $35.13, 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.
The amount paid per unit awarded was equal to the price per share of Unum Group's common stock at settlement of the award, and as such, we measured the value of the award each reporting period based on the current stock price. The effects of changes in the stock price during the service period were recognized as compensation cost over the service period. Changes in the amount of the liability due to stock price changes after the service period were recognized as compensation cost during the period in which the changes occurred. At December 31, 2017, we had no unrecognized compensation cost related to cash-settled awards.
All outstanding stock options at December 31, 2017 have vested. Stock options 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. Compensation cost for stock options subject to accelerated vesting at the date of retirement eligibility is recognized over the implicit service period. At December 31, 2017, we had no unrecognized compensation cost related to stock options.
There were no stock options granted in the years 2015 through 2017.
Thirteen major companies account for approximately 91 percent of our reinsurance recoverable at December 31, 2017, 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 US segment includes group long-term and short-term disability insurance, group life and accidental death and dismemberment products, and supplemental and voluntary lines of business. The supplemental and voluntary lines of business are comprised of individual disability, voluntary benefits, and dental and vision products. These products are marketed through our field sales personnel who work in conjunction with independent brokers and consultants.
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 (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 broadens our employee benefit offerings in the U.S. Starmount's dental and vision products and new dental and vision products marketed by Unum US are reported in our Unum US segment within our supplemental and voluntary product lines. Colonial Life dental and vision products will be introduced in 2018 and will be reported in our Colonial Life segment.
We measure and analyze our segment performance on the basis of "adjusted operating revenue" and "adjusted operating income" or "adjusted operating loss", which differ from total revenue and income before income tax as presented in our consolidated statements of income due to the exclusion of net realized investment gains and losses and certain other items specified in the reconciliations below. We believe adjusted operating revenue and adjusted 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. Effective December 31, 2017, we changed the naming convention of "operating revenue" to "adjusted operating revenue" and "operating income" to "adjusted operating income." The definition of these labels remains unchanged.
We may at other times exclude certain other items from our discussion of financial ratios and metrics in order 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 and does not replace net income or net loss as a measure of our overall profitability. See "Executive Summary" contained herein in Item 7 and Note 14 of the "Notes to the Consolidated Financial Statements" contained herein in this Item 8 for further discussion regarding the loss from a guaranty fund assessment and the unclaimed death benefit reserve increase.
We have noncancelable lease obligations on certain office space and equipment. As of December 31, 2017, the aggregate net minimum lease payments were $148.1 million payable as follows: $27.0 million in 2018, $24.7 million in 2019, $20.1 million in 2020, $15.9 million in 2021, $12.3 million in 2022, and $48.1 million thereafter. Rental expense for the years ended December 31, 2017, 2016, and 2015 was $54.2 million, $51.4 million, and $42.5 million, respectively.
From time to time class action allegations are pursued where the claimant or policyholder purports to represent a larger number of individuals who are similarly situated. Since each insurance claim is evaluated based on its own merits, there is rarely a single act or series of actions which can properly be addressed by a class action. Nevertheless, we monitor these cases closely and defend ourselves appropriately where these allegations are made.
Similar to other insurers, we are undergoing an examination by a third party acting on behalf of a number of state treasurers concerning our compliance with the unclaimed property laws of the participating states. We have been cooperating fully with
this examination, as well as with a Delaware Market Conduct examination involving the same issue. In the fourth quarter of 2017, we started the process to reach a Global Resolution Agreement with the third party regarding settlement of the examination, which we finalized in January of 2018. Under the terms of the agreement, the third party acting on behalf of the signatory states will compare insured data to the SSDMF to identify deceased insureds and contract holders where a valid claim has not been made. During the fourth quarter of 2017, we established reserves which reflect our estimate of the liability expected to be paid as we execute on the terms of the settlement. The legal and regulatory environment around unclaimed death benefits continues to evolve. It is possible that the current examination and/or similar investigations by other state jurisdictions may result in additional payments to beneficiaries, the payment of abandoned funds under state law, and/or administrative penalties, the total of which may be in excess of the reserves established. See Note 6 for further information regarding the reserves we established.
At December 31, 2017 and 2016, our U.S. insurance subsidiaries had on deposit with U.S. regulatory authorities securities with a book value of $155.7 million and $194.9 million, respectively, held for the protection of policyholders.
Fourth quarter of 2017 net tax benefit of $31.5 million related to the TCJA.