(2) Included are reserve increases of $698.2 million in 2014 and $573.6 million in 2011 related to our long-term care closed block business and a reserve increase of $183.5 million in 2011 related to our individual disability closed block business. See Note 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the 2014 reserve increase.
(3) Includes the net change in deferred acquisition costs as well as compensation expense and other expenses. Included in these expenses is $64.4 million in 2014 related to a settlement loss for a pension plan amendment and $196.0 million in 2011 related to the impairment of long-term care closed block deferred acquisition costs. See Note 9 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of the 2014 settlement loss.
For 2015, we reported net income of $867.1 million, or $3.50 per diluted common share, compared to net income of $402.1 million, or $1.57 per diluted common share, in 2014. Included in the results for both years are net realized investment gains and losses and non-operating retirement-related gains or losses. Also included in our 2014 results is a reserve increase related to our long-term care block of business ($698.2 million before tax and $453.8 million after tax, or $1.77 per diluted common share) and costs related to the early retirement of debt ($13.2 million before tax and $10.4 million after tax, or $0.04 per diluted common share). Adjusting for these items, after-tax operating income for 2015 was $901.0 million, or $3.64 per diluted common share, compared to $899.1 million, or $3.51 per diluted common share, in 2014, reflecting a 3.7 percent growth in earnings per diluted common share. Our weighted average common shares outstanding, assuming dilution, equaled 247.9 million for 2015 compared to 256.7 million for 2014, reflecting our capital management strategy of returning capital to shareholders through repurchases of our common stock. See "Reconciliation of Non-GAAP Financial Measures" contained in this Item 7 for further discussion of these items.
Our Unum US segment reported a slight increase in operating income of 0.6 percent in 2015 compared to 2014, with growth in premium income and overall favorable benefits experience partially offset by lower net investment income. Premium income increased 6.4 percent in 2015 compared to 2014. The benefit ratio for our Unum US segment for 2015 was 70.1 percent, compared to 70.6 percent in 2014. Unum US sales increased 4.2 percent in 2015 compared to 2014. Persistency for certain of our product lines is slightly below the level of the prior year but remains within our range of expectations.
Our Closed Block segment reported a 0.8 percent decrease in operating income in 2015 compared to 2014 when excluding the reserve increase discussed in "2014 Long-term Care Reserve Increase" contained herein, with less favorable benefits experience in our long-term care line of business mostly offset by an increase in net investment income and more favorable benefits experience in our individual disability line of business. Benefits experience in our long-term care line of business was less favorable than in 2014, but the benefits experience of this block of business remains within our range of expectations.
Treasury rates and credit spreads during 2015. The earned book yield on our investment portfolio was 5.40 percent for 2015 compared to a yield of 5.52 percent for 2014.
We believe our capital and financial positions are strong. At December 31, 2015, 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 400 percent and generally consistent with the prior year end. During 2015, we repurchased 12.3 million shares of Unum Group common stock at a cost of approximately $427 million under our share repurchase program. Cash equivalents and marketable securities held at Unum Group and our other intermediate holding companies, which are a significant source of liquidity for us, were approximately $475 million at December 31, 2015.
Based on our analysis, as of December 31, 2014 we lowered the discount rate assumption to reflect the low interest rate environment and our revised expectation of future investment portfolio yield rates. Our revised assumptions anticipated the low interest rate environment persisting for the next three to five years, with a return to more historical averages over the following five year period. We updated our mortality assumptions to reflect emerging experience due to an increase in life expectancies which increases the ultimate number of people who will utilize long-term care benefits and also lengthens the amount of time a claimant may receive long-term care benefits. We changed our morbidity assumptions to reflect emerging industry experience as well as our own company experience, and we updated our projection of future premium rate increase approvals. Using our revised best estimate assumptions, as of December 31, 2014 we determined that our policy and claim reserves should be increased $698.2 million to reflect our current estimate of future benefit obligations. This charge decreased our 2014 net income $453.8 million.
In 2014, we amended our U.S. qualified defined benefit pension plan to allow a limited-time offer of benefit payouts to eligible former employees with a vested right to a pension benefit. The offer provided eligible former employees, regardless of age, with an option to elect to receive a lump-sum settlement of his or her entire accrued pension benefit in December 2014 or to elect receipt of monthly pension benefits commencing in January 2015. We recognized a settlement loss of $64.4 million before tax, or $41.9 million after tax, during the fourth quarter of 2014. This non-operating retirement-related loss represented 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. We believe adopting this process, which reflects an evolving regulatory and industry practice, is in the best interest of our customers. Therefore, in addition to implementing this on a forward-looking basis, in 2013 we began an initiative to search for potential claims from previous years.
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 maintaining a strong customer focus while providing an innovative product portfolio of financial protection choices to deepen employee coverages, broaden employer relationships, and open new markets.
Our focus throughout 2016 will remain on profitably growing our business, maintaining solid margins through disciplined pricing, underwriting and expense management, and effectively managing our capital. Although 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, we continue to analyze and employ strategies that we believe will help us navigate this 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. 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.
Further discussion is included in "Reconciliation of Non-GAAP Financial Measures," "Consolidated Operating Results," "Segment Results," "Investments," and "Liquidity and Capital Resources" contained in this Item 7 and in the "Notes to Consolidated Financial Statements" contained herein in Item 8.
A reconciliation of "operating revenue" to total revenue and "before-tax operating income" to income before income tax is as follows:
contract benefits equaled $41.4 billion and $41.3 billion at December 31, 2015 and 2014, respectively, or approximately 79.8 percent and 76.6 percent of our total liabilities, respectively. Reserves ceded to reinsurers were $6.9 billion at both December 31, 2015 and 2014, and are reported as a reinsurance recoverable in our consolidated balance sheets.
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.
Claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported (IBNR) to us and, as prescribed by GAAP, equals our long-term best estimate of the present value of the liability for future claim payments and claim adjustment expenses. A claim reserve is based on actual known facts regarding the claim, such as the benefits available under the applicable policy, the covered benefit period, the age, and, as appropriate, the occupation and cause of disability of the claimant, as well as assumptions derived from our actual historical experience and expected future changes in experience for factors such as the claim duration, discount rate, and policy benefit offsets, including those for social security and other government-based welfare benefits. Reserves for IBNR claims, similar to incurred claim reserves, include our assumptions for claim duration and discount rates, but because we do not yet know the facts regarding the specific claims, these reserves are also established based on historical incidence rate assumptions, including claim reporting patterns, the average cost of claims, and the expected volumes of incurred claims. Our incurred claim reserves and IBNR claim reserves do not include any provision for the risk of adverse deviation from our assumptions.
We use a tabular reserve methodology for our Unum US group and individual long-term disability claims and for our Closed Block group and individual long-term care claims that have been reported. Under the tabular reserve methodology, reserves for reported claims are based on certain characteristics of the actual reported claimants, such as age, length of time disabled, and medical diagnosis, as well as assumptions regarding claim duration, discount rate, and policy benefit offsets. We believe the tabular reserve method is the most accurate to calculate long-term liabilities and allows us to use the most available known facts about each claim. IBNR claim reserves for our long-term products are calculated using the count and severity method using historical patterns of the claims to be reported and the associated claim costs. For Unum US group short-term disability products, an estimate of the value of future payments to be made on claims already submitted, as well as on IBNR claims, is determined in aggregate using a paid 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.
The majority of the Colonial Life segment lines of business have short-term benefits, which generally have less estimation variability than our long-term products because of the shorter claim payout period. Our claim reserves for Colonial Life's lines of business are predominantly determined using the incurred loss development method based on our own experience. The
incurred loss development method uses the historical patterns of payments by loss date to predict future claim payments for each loss date. Where the incurred loss development method may not be appropriate, we estimate the incurred claims using an expected claim cost per policy or other measure of exposure. The key assumptions for claim reserves for the Colonial Life lines of business are: (1) the timing, rate, and amount of estimated future claim payments; and (2) the estimated expenses associated with the payment of claims.
The discount rate, which is used in calculating both policy reserves and incurred and IBNR claim reserves, is the interest rate that we use to discount future claim payments to determine the present value. A higher discount rate produces a lower reserve. If the discount rate is higher than our future investment returns, our invested assets will not earn enough investment income to support our future claim payments. In this case, the reserves may eventually be insufficient. We set our assumptions based on our current and expected future investment yield of the assets supporting the reserves, considering current and expected future market conditions. If the investment yield on new investments that are purchased is below or above the investment yield of the existing investment portfolio, it is likely that the discount rate assumption on claims will be established to reflect the effect of the new investment yield.
Generally, we do not expect our mortality and morbidity claim incidence trends or our persistency trends 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. We have historically experienced an increase in our group long-term disability morbidity claim incidence trends during and following a recessionary period, particularly in our Unum US operations. During 2015, claim incidence rates for Unum US group long-term disability improved slightly relative to the levels of 2014. We believe claim incidence trends for Unum US group long-term disability may continue to somewhat follow general economic conditions and demographics of the general U.S. workforce.
During 2015, claim incidence rates for our Closed Block long-term care line of business were generally consistent with the revised assumptions we established during our 2014 reserve review and assumption update. See "2014 Long-term Care Reserve Increase" contained in this Item 7.
Interest rates were slightly higher at the end of 2015 compared to the overall level of 2014. However, they remain well 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.
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.
As of December 31, 2015, approximately 6.8 percent of our fixed maturity securities were categorized as Level 1, 88.9 percent as Level 2, and 4.3 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.
The U.K. defined benefit pension plan was closed to new entrants effective December 31, 2002 and was amended in 2013 to freeze participation effective June 30, 2014 and to reduce the maximum rate of inflation indexation from 5.0 percent to 2.5 percent for pension benefits which were earned prior to April 1997 effective at the date of adoption in 2013.
During 2015, the fair value of plan assets in our U.S. qualified defined benefit pension plan decreased $70.4 million, or 4.8 percent due primarily to the payment of benefits and expenses and a negative return on assets. The fair value of plan assets in our U.K. pension plan decreased £1.1 million, or 0.7 percent due to payment of benefits and expenses offset partially by the return on assets. Although the effect of these decreases in fair value had no impact on our 2015 net periodic pension costs, the less favorable rate of return on plan assets during 2015 relative to our assumed rate of return will partially offset the favorable impact on our 2016 net periodic pension costs resulting from the discount rate increase for our plans. We believe our assumptions appropriately reflect the impact of the current economic environment.
U.S. plan from the life expectancy of 35 years assumed in the prior year was due primarily to the 2015 plan amendment as previously discussed. The unrecognized net actuarial gain of $6.2 million for our OPEB plan will be amortized over the average future working life of OPEB plan participants, estimated at four years, to the extent the loss is outside of the corridor. The corridor for the pension and OPEB plans is established based on the greater of 10 percent of the plan assets or 10 percent of the benefit obligation. At December 31, 2015, $423.4 million of the actuarial loss was outside of the corridor for the U.S. plans and £3.4 million was outside of the corridor for the U.K. plan. At December 31, 2015, none of the actuarial gain was outside of the corridor for the OPEB plan.
The fair value of plan assets in our U.S. qualified defined benefit pension plan was $1,403.3 million at December 31, 2015, compared to $1,473.7 million at December 31, 2014. The plan was in an underfunded position of $233.8 million and $245.1 million at December 31, 2015 and December 31, 2014, respectively. This year over year change was due primarily to the decrease in period benefit obligations due to the increase in discount rate, mostly offset by lower than expected asset returns.
The fair value of plan assets in our OPEB plan was $11.2 million and $11.3 million at December 31, 2015 and December 31, 2014, 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.
Net investment income declined in 2015 relative to 2014 due primarily to a decrease in yield on invested assets and lower income from inflation index-linked bonds in our Unum UK segment, partially offset by higher levels of invested assets and higher miscellaneous investment income, which includes income from bond call premiums, mortgage fees and payoffs, and partnership investments. Net investment income declined in 2014 relative to 2013 due primarily to a decrease in yield on invested assets and lower miscellaneous investment income, partially offset by higher levels of invested assets.
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 a realized loss of $37.7 million during 2015 compared to realized gains of $3.3 million and $30.7 million in 2014, and 2013, respectively. We recognized $32.4 million of other-than-temporary impairment losses on fixed maturity securities in 2015 compared to losses of $13.5 million and $0.8 million in 2014 and 2013, 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 and $13.1 million during 2014 associated with the early retirement of a portion of that debt. Our 2013 net realized investment gain includes a $30.0 million loss related to the sale of lower yielding securities during a period when interest rates increased, and we advantageously reinvested the proceeds into higher yielding investments. See Notes 4 and 8 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Commissions and the deferral of acquisition costs increased year over year due primarily to sales growth in our Unum US and Colonial Life segments. Amortization of acquisition costs was higher year over year due primarily to growth in the level of the deferred assets in our Unum US and Colonial Life segments and a higher level of Unum US supplemental and voluntary policy terminations relative to assumptions for certain issue years.
Interest and debt expense was lower in 2015 relative to 2014 due primarily to $13.2 million of costs incurred in 2014 related to the early retirement of a portion of the debt issued by one of our U.K. subsidiaries. Interest and debt expense for 2014, excluding the costs related to the early retirement of debt, was higher than 2013 due primarily to the issuance of $350 million of 4.00% senior notes in the first quarter of 2014, partially offset by the second quarter of 2014 retirement of $145 million of principal outstanding on 6.85% debt. See Note 8 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of our debt.
Higher sales in certain of our product lines led to year over year increases in acquisition-related expenses as reported in compensation expense and in other expenses. Our pension amendments and the associated expenses related to those amendments also impact the comparability of expenses year over year, with the previously mentioned settlement loss recorded in 2014, higher expenses in both 2015 and 2014 related to increased contributions to our defined contribution plans resulting from the 2014 pension plan amendment, and a lower level of net actuarial loss amortization related to plan amendments adopted in 2013. We also continue to invest in technology and other growth-related investments, thereby increasing our level of spend related to 2013. See Note 9 in the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion of our employee benefit plans.
Further discussion of operating results for each of our segments and major product lines is included in "Segment Results" herein in Item 7.
Premium income increased in 2015 compared to 2014, driven by sales growth and premium rate increases, as well as favorable persistency in the group long-term disability product line. Net investment income declined in 2015 relative to 2014 due to a decrease in the level of invested assets and a decline in yields. Other income, which is comprised primarily of fees from administrative services products, increased slightly in 2015 relative to 2014.
Benefits experience was favorable in 2015 compared to 2014 due to lower claim incidence rates and favorable claim recovery experience in our group long-term disability product line, offset partially by the 50 basis point decrease in the discount rate which we implemented during the fourth quarter of 2014 for group long-term disability new claim incurrals.
The deferral of acquisition costs was higher in 2014 relative to 2013 due to an increase in deferrable expenses related to sales growth. The amortization of acquisition costs increased in 2014 compared to 2013 due to growth in the level of the deferred asset. The other expense ratio for 2014 was higher compared to 2013 due to an increase in other expenses driven by technology and other growth-related investments, a higher level of allocated retirement-related costs, and higher acquisition-related expenses resulting from the increased level of sales.
Commissions and the deferral of acquisition costs were higher in 2015 compared to 2014 due to strong sales in the second half of 2014 and a corresponding increase in deferrable commissions which were expensed during the applicable periods of 2015. The amortization of deferred acquisition costs increased in 2015 compared to 2014 due to growth in the level of the deferred asset. The growth in premium income during 2015 more than offset the growth in other expenses related to continued investment in the growth of our business, resulting in a slight decline in the other expense ratio compared to 2014.
Benefits experience was unfavorable in 2014 compared to 2013 due to the net favorable impact of the 2013 reserve adjustments for group life waiver of premium benefits and unclaimed death benefits. Excluding these two reserve adjustments, benefits experience was slightly favorable in 2014 compared to 2013 due to lower claim incidence rates, partially offset by a higher average claim size.
The deferral of acquisition costs was higher in 2014 relative to 2013 due to sales growth. The amortization of acquisition costs increased in 2014 compared to 2013 due to growth in the level of the deferred asset. The other expense ratio in 2014 was consistent with 2013 as the increase in premium income more than offset expense increases driven by technology and other growth-related investments, a higher level of allocated retirement-related costs, and higher acquisition-related expenses resulting from the increased level of sales.
Commissions and deferral of acquisition costs were higher in 2015 compared to 2014 due primarily to sales growth. The amortization of deferred acquisition costs was higher in 2015 compared to 2014 due primarily to growth in the level of the deferred asset and the impact of a higher level of policy terminations in 2015 relative to assumptions for certain issue years within certain product lines. The growth in premium income during 2015 more than offset the growth in other expenses related to continued investment in the growth of our business, resulting in a slight decline in the other expense ratio compared to 2014.
The individual disability product line had goodwill of $187.6 million at December 31, 2015, none of which is currently believed to be at risk for future impairment.
Commissions and deferral of acquisition costs were higher in 2014 relative to 2013 due primarily to higher sales. The amortization of deferred acquisition costs was higher in 2014 compared to 2013 due to growth in the level of the deferred asset. The other expense ratio for 2014 increased compared to 2013 due to an increase in other expenses driven by technology and other growth-related investments, a higher level of allocated retirement-related costs, and higher acquisition-related expenses resulting from the increased level of sales.
Group disability sales increased in 2015 compared to 2014 due to higher sales to existing customers in both the core market, which we define as employee groups with fewer than 2,000 lives, and in the large case market. Sales for group life and accidental death and dismemberment declined during 2015 compared to 2014 due to lower sales to new customers, partially offset by higher sales to existing customers in the core market. The sales mix in the group market sector for 2015 was approximately 67 percent core market and 33 percent large case market, generally consistent with the level of 2014.
Individual disability sales, which are primarily concentrated in the multi-life market, increased in 2015 due primarily to sales to new customers. Sales of voluntary benefits were higher in 2015 compared to 2014, with increases in both core and large case market sales.
We attribute a portion of our 2014 sales growth relative to 2013 to the distraction which occurred in the marketplace during 2013 as a result of healthcare reform implementation, which we believe negatively impacted our core market sales for our group and voluntary benefits products throughout 2013.
The Unum UK segment includes insurance for group long-term disability, group life, and supplemental lines of business which include dental, individual disability, and critical illness. Unum UK's products are sold primarily in the United Kingdom through field sales personnel and independent brokers and consultants. During the third quarter of 2015, we acquired National Dental, a provider of dental insurance in the U.K. workplace. The acquisition of National Dental did not have a material impact on our operating results or sales for the year ended December 31, 2015. See Note 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further details on the acquisition.
Premium income was higher in 2015 compared to 2014 due primarily to growth in our in-force group long-term disability product line resulting from prior year sales growth and stable persistency and in the supplemental product line resulting from the acquisition of National Dental.
Commissions were higher in 2015 compared to 2014 due primarily to sales growth in 2015. The deferral of acquisition costs and amortization of deferred acquisition costs were generally consistent in 2015 compared to 2014. The other expense ratio decreased in 2015 relative to 2014 due to a continued focus on expense management initiatives.
We had goodwill of $43.3 million at December 31, 2015, primarily related to the acquisition of National Dental. None of the goodwill is currently believed to be at risk for future impairment.
Premium income was higher in 2014 compared to 2013 due to premium rate increases in our group long-term disability and group life product lines, favorable persistency, and an increased retention level in our reinsurance program, as of January 1, 2014, for our group life products that provide lump sum benefits. Partially offsetting these increases were large case policy terminations in our group life and supplemental product lines. Net investment income declined in 2014 compared to 2013 due primarily to lower yields on invested assets and lower income from inflation index-linked bonds.
Group long-term disability and group life benefits experience was favorable in 2014 compared to 2013 due primarily to lower claim incidence rates. Supplemental benefits experience was favorable in 2014 compared to 2013 due to lower claim incidence rates for the group critical illness product line.
Supplemental sales were higher in 2015 compared to 2014 due primarily to higher sales in our group critical illness and individual disability product lines.
Sales in group long-term disability increased in 2014 compared to 2013 due to higher sales in the large case market, with an increase in sales to new customers partially offset by lower sales to existing customers. In the group long-term disability core market sales declined in 2014 relative to 2013.
We expect the low interest rate environment to continue to contribute to a dampening of overall earnings growth, and unfavorable economic conditions may lead to a higher rate of claim incidence, lower levels of claim recoveries, or lower claim discount rates. As part of our continued pricing discipline and our reserving strategy, we continuously monitor emerging interest rate experience and adjust our pricing and reserve discount rates, as appropriate. We believe the current low levels of inflation in the U.K. may continue to adversely impact our index-linked net investment income, with an expected corresponding reduction in the cost of benefits. Prior to our adoption of Solvency II, a new European Union capital regime that became effective January 1, 2016, we received approval from the Prudential Regulation Authority (PRA) to use our own internal model for calculating regulatory capital and also received approval for certain associated regulatory permissions, including transitional relief as the Solvency II capital regime is implemented. As a result, there was no material change to our capital requirements or to solvency ratios. We continuously monitor key indicators to assess our risks and attempt to adjust our business plans accordingly.
Premium income increased in 2015 relative to 2014 as a result of sales growth in all lines of business, partially offset by a decline in persistency. Net investment income was generally consistent in 2015 relative to the prior year, with an increase in the level of invested assets offset by a decline in yield and lower miscellaneous investment income.
Premium income increased in 2014 relative to 2013 due to sales and continued strong persistency. Net investment income was higher in 2014 relative to 2013 due to an increase in the level of invested assets, partially offset by a decrease in yield on invested assets and lower miscellaneous investment income.
Favorable benefits experience in 2014 compared to 2013 primarily reflects improved claim experience in the cancer and critical illness product line. This was partially offset by less favorable experience in the accident, sickness, and disability product line due to a higher average claim size and in the life product line due to less favorable mortality experience. The release of active life reserves on terminations of older cases in the accident, sickness, and disability and cancer and critical illness product lines also favorably impacted 2014 relative to 2013.
Commissions and the deferral of acquisition costs were higher in 2014 relative to 2013 due to sales growth. The amortization of deferred acquisition costs was higher in 2014 compared to 2013 due primarily to continued growth in the level of the deferred asset. The other expense ratio was higher in 2014 compared to 2013 due primarily to continued investment in our business, higher sales compensation, and a higher level of allocated retirement-related costs.
Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
Sales were higher in 2014 compared to 2013 due to growth in both new and existing customer account sales and across all market segments. Commercial market sales increased in 2014, with higher sales in both the core commercial market and in the large case commercial market. The growth in our core commercial market sales for 2014 was primarily attributable to new account sales, although we also experienced favorable growth in existing account sales. The growth in the large case commercial market was primarily attributable to higher sales to existing accounts. Public sector sales for 2014 increased due
primarily to new account sales. The number of new accounts increased 13.4 percent in 2014 compared to 2013, and the average new case size increased 5.8 percent.
We expect to see continued favorable sales and premium growth trends in 2016. Volatility in net investment income is likely to continue as a result of fluctuations in miscellaneous investment income. We expect our annual benefit ratio for 2016 to be generally consistent with the level of 2015. While we expect the low interest rate environment to continue to pressure our profit margins, we believe our underlying profitability will remain strong.
Disciplined execution of our growth strategy should deliver sales and premium growth that are in line with long-term expectations. Unfavorable U.S. economic conditions and the increasing competition in the voluntary market are seen as external risks to achievement of our business plans. We continuously monitor key indicators to assess our risks and attempt to adjust our business plans accordingly.
Total premium income decreased in 2014 compared to 2013 due to expected policy terminations and maturities. The premium decrease resulting from persistency trends in the long-term care line of business was partially offset by the favorable impact of premium rate increases on certain of these policies.
Net investment income was higher in 2014 relative to 2013 due to increased invested asset levels and higher miscellaneous investment income, partially offset by a decrease in yield on invested assets. Other income was lower in 2014 compared to 2013 primarily due to lower investment income from the investment portfolios held by the ceding companies.
We intend to continue our focus on operational effectiveness, rate increases, enhancement of our experience analysis tools, and capital management. We expect operating revenue to decline over time as these closed blocks of business wind down, although we anticipate additional premium income associated with long-term care rate increases. We also expect a small amount of group long-term care certificates may continue to be issued where we are required to do so under the terms of existing group policies. We will likely experience volatility in net investment income due to fluctuations of miscellaneous investment income. We continuously monitor key indicators to assess our risks and attempt to adjust our business plans accordingly. We expect the low interest rate environment to continue to place pressure on our earnings and the adequacy of our reserves.
We expect the low interest rate environment, as well as holding lower levels of assets in this segment, to continue to place pressure on investment income. We are currently holding capital at our insurance subsidiaries and holding companies at levels that exceed our long-term requirements, and we expect to continue to generate excess capital on an annual basis through our statutory earnings. While we intend to maintain our disciplined approach to risk management, we believe we are well positioned with substantial flexibility to preserve our capital strength and at the same time explore opportunities to deploy the excess capital that is generated.
We had no individual realized investment losses of $10.0 million or greater from other-than-temporary impairments during 2013 and no individual realized investment losses of $10.0 million or greater from the sale of fixed maturity securities during 2015, 2014, or 2013.
At December 31, 2015, our mortgage/asset-backed securities had an average life of 5.17 years, effective duration of 6.03 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 estimated economic life of the securities. Actual prepayment experience is reviewed periodically, and effective yields are recalculated when differences arise between prepayments originally projected and the actual prepayments received and currently projected. The effective yield is recalculated on a retrospective basis, and the adjustment is reflected in net investment income.
Our investments in issuers in foreign countries are chosen for specific portfolio management purposes, including asset and liability management and portfolio diversification across geographic lines and sectors to minimize non-market risks. In our approach to investing in fixed maturity securities, specific investments within approved countries and industry sectors are evaluated for their market position and specific strengths and potential weaknesses. For each security, we consider the political, legal, and financial environment of the sovereign entity in which an issuer is domiciled and operates. The country of domicile is based on consideration of the issuer's headquarters, in addition to location of the assets and the country in which the majority of sales and earnings are derived. We do not have exposure to foreign currency risk, as the cash flows from these investments are either denominated in currencies or hedged into currencies to match the related liabilities. We continually evaluate our foreign
We perform sensitivity analysis on all energy-related investments in our portfolios, using different oil and gas price scenarios, and we continue to closely monitor this situation. While downgrades and impairments may occur, we currently believe that the impact would not materially alter our financial position or capital plans. If oil prices were to remain at the current depressed levels for a period of several years, we would expect losses on these investments to increase. The following table shows additional information related to our holdings in the energy sector.
Our mortgage loan portfolio was $1,883.6 million and $1,856.6 million on an amortized cost basis at December 31, 2015 and 2014, respectively. Our mortgage loan portfolio is comprised entirely of commercial mortgage loans. We believe our mortgage loan portfolio is well diversified geographically and among property types. The incidence of problem mortgage loans and foreclosure activity continues to be low. Due to conservative underwriting, we expect the level of problem loans to remain low relative to the industry.
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 $36.8 million and $40.4 million on a fair value basis at December 31, 2015 and 2014, respectively.
We have established an investment strategy that we believe will provide for adequate cash flows from operations. We attempt to match our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of our business. However, deterioration in the credit market may delay our ability to sell our positions in certain of our fixed maturity securities in a timely manner and adversely impact the price we receive for such securities, which may negatively impact our cash flows. Furthermore, if we experience defaults on securities held in the investment portfolios of our insurance subsidiaries, this will negatively impact statutory capital, which could reduce our insurance subsidiaries' capacity to pay dividends to our holding companies. A reduction in dividends to our holding companies could force us to seek external financing to avoid impairing our ability to pay dividends to our stockholders or meet our debt and other payment obligations. As requirements of Dodd-Frank continue to take effect in 2016 and in subsequent years, to the extent that we enter into derivatives that are subject to centralized exchanges and cleared through a regulated clearinghouse, we may be subject to stricter collateral requirements which could have an adverse effect on our overall liquidity.
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 2015 and authorizes the repurchase of up to $750 million of common stock through November 2016, 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. During 2015, we repurchased 12.3 million shares at a cost of approximately $427 million. The dollar value of shares remaining under the repurchase program was approximately $502 million at December 31, 2015. 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. At December 31, 2015, 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.
In 2015, we made a debt repayment of $151.9 million at the maturity date of our remaining 6.85% notes due November 2015.
In 2013, we entered into a five-year, $400 million unsecured revolving credit facility. 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, 2015, 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.
The following table summarizes contractual obligations and our reinsurance recoverable by period as of December 31, 2015:
Policyholder liability maturities and the related reinsurance recoverable represent the projected payout of the current in-force policyholder liabilities and the expected cash inflows from reinsurers for liabilities ceded and therefore incorporate uncertainties as to the timing and amount of claim payments. We utilize extensive liability modeling to project future cash flows from the in-force business. The primary assumptions used to project future cash flows are claim incidence rates for mortality and morbidity, claim resolution rates, persistency rates, and interest rates. These cash flows are discounted to determine the current value of the projected claim payments. The timing and amount of payments on policyholder liabilities may vary significantly from the projections above.
Miscellaneous liabilities include commissions due and accrued, deferred compensation liabilities, state premium taxes payable, amounts due to reinsurance companies, legally binding commitments to fund investments, and various other liabilities that represent contractual obligations. Obligations where the timing of the payment is uncertain are included in the one year or less category.
To help limit the credit exposure of derivatives, we enter into master netting agreements with our counterparties whereby contracts in a gain position can be offset against contracts in a loss position. We also typically enter into bilateral, cross-collateralization agreements with our counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount. Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, including accrued interest receivable less collateral held, was $8.5 million at December 31, 2015. We held cash collateral from our counterparties of $36.4 million at December 31, 2015 and had posted fixed maturity securities with a carrying value of $27.3 million as collateral to our counterparties.
Our investment policy permits us to lend fixed maturity securities to unaffiliated financial institutions in short-term securities lending agreements, which increases our investment income with minimal risk. We account for all of our securities lending agreements and repurchase agreements as secured borrowings. We had $29.0 million of securities lending agreements outstanding which were collateralized by cash at December 31, 2015 and were reported as payables for collateral on investments in our consolidated balance sheets. The cash received as collateral was reinvested in short-term investments. The average balance during the year ended December 31, 2015 was $33.1 million, and the maximum amount outstanding at any month end was $52.1 million. In addition, at December 31, 2015, we had $159.3 million of off-balance sheet securities lending agreements which were collateralized by securities that we were neither permitted to sell nor control. The average balance of these off-balance sheet transactions during the year ended December 31, 2015 was $165.2 million, and the maximum amount outstanding at any month end was $208.7 million.
Investing cash inflows consist primarily of the proceeds from the sales and maturities of investments. Investing cash outflows consist primarily of payments for purchases of investments. Our investment strategy is to match the cash flows and durations of our assets with the cash flows and durations of our liabilities to meet the funding requirements of our business. When market opportunities arise we may sell selected securities and reinvest the proceeds to improve the yield and credit quality of our portfolio, as was the case during 2013 when we sold lower yielding fixed maturity securities to take advantage of the higher interest rate environment by reinvesting the proceeds into higher yielding mortgage-backed and corporate securities with a higher credit quality. We may at times also sell selected securities and reinvest the proceeds to improve the duration matching of our assets and liabilities and/or re-balance our portfolio. As a result, sales before maturity may vary from period to period. The sale and purchase of short-term investments is influenced by our securities lending program and by the amount of cash which is at times held in short-term investments to facilitate the availability of cash to fund the purchase of appropriate long-term investments and/or to fund our capital deployment program. Our cash flows for 2015 include the proceeds received from our FHLB funding advances and the subsequent deployment of those funds to purchase fixed maturity securities.
See Notes 3, 4, and 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further information.
During 2015, we repaid $151.9 million principal upon maturity of our 6.85% notes. During 2014, we retired $145.0 million principal of the 6.85% notes, including a make-whole amount of $13.2 million, for a total cash outflow of $158.2 million. During 2015, 2014, and 2013 we made principal payments of $74.4 million, $41.6 million, and $60.0 million, respectively, on our senior secured non-recourse notes issued by Northwind Holdings. During 2013, we purchased and retired the outstanding principal of $62.5 million on our floating rate, senior secured non-recourse notes issued by Tailwind Holdings for $56.2 million.
We have audited the accompanying consolidated balance sheets of Unum Group and subsidiaries as of December 31, 2015 and 2014, 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, 2015. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Unum Group and subsidiaries' internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2016, expressed an unqualified opinion thereon.
Description of Business: We are the largest provider of group and individual disability products in the United States and the United Kingdom. We also provide a complementary portfolio of other insurance products, including life insurance, employer- and employee-paid group benefits, and other related services, either as stand-alone products or combined with other coverages. We market our products primarily through the workplace.
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 $3,150.1 million and $3,068.4 million of policy loans ceded to reinsurers at December 31, 2015 and 2014, respectively.
Policy and Contract Benefits: Policy and contract benefits represent amounts paid and expected to be paid based on reported losses and estimates of incurred but not reported losses for non-interest sensitive life and accident and health products. For interest sensitive products, benefits are the amounts paid and expected to be paid on insured claims in excess of the policyholders' policy fund balances.
Claim reserves represent future policy and contract benefits for claims that have been incurred or are estimated to have been incurred but not yet reported to us. Our claim reserves relate primarily to disability policies and are calculated based on assumptions as to interest and claim resolution rates that are currently appropriate. Claim resolution rate assumptions are based on our actual experience. The interest rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults and investment expenses, for the assets supporting the liabilities for the various 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. See Note 6.
Income Tax: Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Deferred taxes have been measured using enacted statutory income tax rates and laws that are currently in effect. We record deferred tax assets for tax positions taken in the U.S. and other tax jurisdictions based on our assessment of whether a position is more likely than not to be sustained upon examination based solely on its technical merits. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. See Note 7.
Premium Tax Expense: Premium tax expense is included in other expenses in the consolidated statements of income. For the years ended December 31, 2015, 2014, and 2013, premium tax expense was $146.5 million, $139.2 million, and $137.0 million, respectively.
Accounting for Participating Individual Life Insurance: Participating policies issued by one of our subsidiaries prior to its 1986 conversion from a mutual to a stock life insurance company will remain participating as long as the policies remain in-force. A Participation Fund Account (PFA) was established for the benefit of all such individual participating life and annuity policies and contracts. The assets of the PFA provide for the benefit, dividend, and certain expense obligations of the participating individual life insurance policies and annuity contracts. The assets of the PFA were $338.8 million and $358.6 million at December 31, 2015 and 2014, respectively.
This update simplifies the presentation of deferred debt issuance costs by requiring these costs to be presented in the balance sheet as a reduction of the carrying amount of the debt liability to which the deferred costs relate, rather than classifying the deferred costs as an asset. This classification is consistent with the treatment of debt discounts. The guidance is to be applied retrospectively.
The adoption of this update will modify our disclosures but will not have an effect on our financial position or results of operations.
Policy Loans: Fair values for policy loans, net of reinsurance ceded, are estimated using discounted cash flow analyses and interest rates currently being offered to policyholders with similar policies. Carrying amounts for ceded policy loans, which equal $3,150.1 million and $3,068.4 million as of December 31, 2015 and 2014, respectively, approximate fair value and are reported on a gross basis in our consolidated balance sheets. A change in interest rates for ceded policy loans will not impact our financial position because the benefits and risks are fully ceded to reinsuring counterparties. These financial instruments are assigned a Level 3 within the fair value hierarchy.
Long-term Debt: Fair values for long-term debt are obtained from independent pricing services or discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements. Debt instruments which are valued by pricing services using active trades for which there was current market activity in that specific debt instrument have fair values of $956.4 million and $849.7 million as of December 31, 2015 and 2014, respectively, and are assigned a Level 1 within the fair value hierarchy. Debt instruments which are valued based on prices from pricing services that generally use observable inputs for securities or comparable securities in active markets in their valuation techniques have fair values of $1,689.5 million and $2,062.9 million as of December 31, 2015 and 2014, respectively, and are assigned a Level 2.
We report fixed maturity securities, derivative financial instruments, and unrestricted equity securities at fair value in our consolidated balance sheets. 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. An active market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions.
The management of our investment portfolio includes establishing pricing policy and reviewing the reasonableness of sources and inputs used in developing pricing. We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a security's price. In the event we receive a vendor's market price that does not appear reasonable based on our market analysis, we may challenge the price and request further information about the assumptions and methodologies used by the vendor to price the security. We may change the vendor price based on a better data source such as
Approximately 78.3 percent of our fixed maturity securities were valued based on prices from pricing services that generally use observable inputs such as prices for securities or comparable securities in active markets in their valuation techniques. These assets were classified as Level 2. Level 2 assets or liabilities are those valued using inputs (other than prices included in Level 1) 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.
Realized and unrealized investment gains and losses presented in the preceding tables represent gains and losses only for the time during which the applicable financial instruments were classified as Level 3. The transfers between levels resulted primarily from a change in observability of three inputs used to determine fair values of the securities transferred: (1) transactional data for new issuance and secondary trades, (2) broker/dealer quotes and pricing, primarily related to changes in the level of activity in the market and whether the market was considered orderly, and (3) comparable bond metrics from which to perform an analysis. For fair value measurements of financial instruments that were transferred either into or out of Level 3, we reflect the transfers using the fair value at the beginning of the period. We believe this allows for greater transparency, as all changes in fair value that arise during the reporting period of the transfer are disclosed as a component of our Level 3 reconciliation. Gains (losses) which are included in earnings and are attributable to the change in unrealized gains or losses relating to assets or liabilities valued using significant unobservable inputs and still held at each year end were $(37.7) million and $3.3 million for the years ended December 31, 2015 and 2014, respectively. These amounts relate entirely to the changes in fair value of an embedded derivative in a modified coinsurance arrangement which are reported as realized investment gains and losses.
Represents basis point adjustments for changes in benchmark spreads associated with various industry sectors
Represents basis point adjustments based on issue/issuer size relative to the benchmark
At December 31, 2015 and 2014, all fixed maturity securities were classified as available-for-sale.
At December 31, 2015, the fair value of investment-grade fixed maturity securities was $40,056.3 million, with a gross unrealized gain of $4,264.4 million and a gross unrealized loss of $360.4 million. The gross unrealized loss on investment-grade fixed maturity securities was 56.1 percent of the total gross unrealized loss on fixed maturity securities. Unrealized losses on investment-grade fixed maturity securities principally relate to changes in interest rates or changes in market or sector credit spreads which occurred subsequent to the acquisition of the securities.
At December 31, 2015, the fair value of below-investment-grade fixed maturity securities was $3,298.1 million, with a gross unrealized gain of $73.6 million and a gross unrealized loss of $281.9 million. The gross unrealized loss on below-investment-grade fixed maturity securities was 43.9 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, 2015, the unrealized losses in our below-investment-grade fixed maturity securities were generally due to credit
As of December 31, 2015, we held 269 individual investment-grade fixed maturity securities and 100 individual below-investment-grade fixed maturity securities that were in an unrealized loss position, of which 14 investment-grade fixed maturity securities and 32 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year.
As of December 31, 2015, the carrying amount of our variable interest entity investments that are not consolidated in our financial statements was $442.6 million, comprised of $202.1 million of tax credit partnerships and $240.5 million of private equity partnerships. These variable interest entity investments are reported as other long-term investments in our consolidated balance sheets.
Contractually, we are a limited partner in these tax credit partnerships, and our maximum exposure to loss is limited to the carrying value of our investment, which includes $5.0 million of unfunded unconditional commitments at December 31, 2015. We also had commitments of $168.5 million to fund certain private equity partnerships at December 31, 2015, the amount of which may or may not be funded.
We are the sole beneficiary of a special purpose entity which is consolidated in our financial statements. This entity is a securitized asset trust containing a highly rated bond for principal protection and a private equity partnership investment which we contributed into the trust at the time it was established. There are no restrictions on the assets held in this trust, and the trust is free to dispose of the assets at any time. The fair values of the bond and partnership were $148.0 million and $0.9 million, respectively, as of December 31, 2015 and $143.9 million and $1.4 million, respectively, as of December 31, 2014. The bond is reported as a component of fixed maturity securities, and the partnership is reported as a component of other long-term investments in our consolidated balance sheets. At December 31, 2015, we had no commitments to fund the underlying partnership, nor did we fund any amounts to the partnership during the years ended December 31, 2015, 2014, and 2013.
At December 31, 2015 and 2014, we held no mortgage loans that were greater than 90 days past due regarding principal and/or interest payments.
Options on U.S. Treasury rates are used to hedge the interest rate risk associated with the anticipated purchase of fixed maturity securities. These options give us the right, but not the obligation, to receive a specific interest rate for a specified period of time. These options enable us to lock in a minimum investment yield to hedge the potential adverse impact of declining interest rates.
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. Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, including accrued interest receivable less collateral held, was $8.5 million at December 31, 2015. We held cash collateral from our counterparties of $36.4 million and $15.4 million at December 31, 2015 and 2014, 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 $27.3 million and $67.0 million at December 31, 2015 and 2014, respectively. We had no cash posted as collateral to our counterparties at December 31, 2015 and 2014. 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. During 2014, we redeemed a portion of this debt and reclassified $13.1 million, the applicable portion of the deferred gain on cash flow hedges from the previously terminated derivatives associated with the hedge of this debt, from accumulated other comprehensive income to realized investment gain in our consolidated statements of income. See Note 8.
During 2013, we terminated, as scheduled, $150.0 million notional amount of received fixed, pay variable forward starting interest rate swaps used to hedge the anticipated purchase of fixed maturity securities.
For the years ended December 31, 2015, 2014, and 2013 there was no material ineffectiveness related to our cash flow hedges, and no component of the derivative instruments' gain or loss was excluded from the assessment of hedge effectiveness.
As of December 31, 2015, we are hedging the variability of future cash flows associated with forecasted transactions through the year 2038.
As of December 31, 2015 and 2014, we had $150.0 million 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 loss of $5.3 million, $5.3 million, and $11.5 million for the years ended December 31, 2015, 2014, and 2013, respectively, with an offsetting gain on the related interest rate swaps.
As of December 31, 2015 and 2014, we had $600.0 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 (loss) of $0.1 million, $(5.5) million, and $21.1 million for the years ended December 31, 2015, 2014, and 2013, respectively, with an offsetting gain or loss on the related interest rate swaps.
For the years ended December 31, 2015, 2014, and 2013, there was no material ineffectiveness related to our fair value hedges, and no component of the derivative instruments' gain or loss was excluded from the assessment of hedge effectiveness. There were no instances wherein we discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
As of December 31, 2015 and 2014, we held $222.4 million notional amount of receive fixed, pay fixed, foreign currency interest rate swaps. During 2014, we entered into $125.4 million notional amount of foreign currency interest rate swaps in conjunction with the previously discussed transaction wherein we de-designated foreign currency interest rate swaps with a notional amount of $97.0 million. These derivatives were not designated as hedges, and as such, changes in fair value related to these derivatives will be reported in earnings as a component of net realized investment gain or loss. We expect the changes in fair value of these derivatives to materially offset the changes in fair value related to the de-designated derivatives.
As of December 31, 2015 and 2014, we held $70.0 million and $97.0 million, respectively, notional amount of single name credit default swaps. We entered into these swaps in order to mitigate the credit risk associated with specific securities owned.
Amounts reclassified from accumulated other comprehensive income were recognized in our consolidated statements of income as follows:
Included in our 2014 review was an analysis of our reserve assumptions, including those for the discount rate, mortality and morbidity rates, persistency, and premium rate increases. Our analysis of reserve discount rate assumptions considered the continued historic low interest rate environment, future market expectations, and our view of future portfolio yields. The assumptions we established in 2011 were set at a level that we estimated would be sustainable in a low interest rate environment for three to five years, with improvements in market yields beginning after the third year. Since that time, however, interest rates had continued to hover near historic lows, and credit spreads had tightened. Our assumption update for mortality incorporated the last three years of Company-specific experience and emerging trends as well as industry data, where available and appropriate, and reflected improvements in life expectancies beyond what was initially anticipated in 2011. Our morbidity assumptions were updated to reflect trends from our own emerging Company experience in claim incidence and terminations, as
Based on our analysis at that time, we lowered the discount rate assumption to reflect the low interest rate environment and our revised expectation of future investment portfolio yield rates. Our revised assumptions anticipated the low interest rate environment persisting for the next three to five years, with a return to more historical averages over the following five year period. We updated our mortality assumptions to reflect emerging experience due to an increase in life expectancies which increases the ultimate number of people who will utilize long-term care benefits and also lengthens the amount of time a claimant may receive long-term care benefits. We changed our morbidity assumptions to reflect emerging industry experience as well as our own Company experience, and we updated our projection of future premium rate increase approvals. Using our revised best estimate assumptions, as of December 31, 2014, we determined that our policy and claim reserves should be increased $698.2 million to reflect our current estimate of future benefit obligations. Of this amount, $85.8 million was related to claim reserves, which can be attributed to prior year incurred claims, thereby impacting the results shown in the preceding chart.
A reconciliation of the income tax provision at the U.S. federal statutory rate to the income tax rate as reported in our consolidated statements of income is as follows. Certain prior year amounts have been reclassified to conform to current year reporting.
In 2014, our U.S. earnings included a long-term care reserve charge that resulted in a larger proportion of our 2014 earnings derived from our foreign operations and taxed at the lower rate, therefore reducing our overall effective tax rate.
Our net deferred tax liability consists of the following. Certain prior year amounts have been reclassified to conform to current year reporting.
The U.K. government enacted income tax rate reductions during 2015 and 2013. During 2015, the rate was reduced from 20 percent to 19 percent effective April 2017, and to 18 percent effective April 2020. During 2013, the rate was reduced from 23 percent to 21 percent effective April 2014, and to 20 percent effective April 2015. Although the rate reductions in each instance became or will become effective during a subsequent year, we are required to adjust deferred tax assets and liabilities through income on the date of enactment of a rate change. As a result, we recorded income tax benefits of $6.5 million and $6.3 million for the tax rate reductions enacted during 2015 and 2013, respectively.
Included in the balances at December 31, 2014 and 2013 were $10.4 million and $10.2 million, respectively, of unrecognized tax benefits for tax positions for which the ultimate deductibility was highly certain but for which there was uncertainty about the timing of such deductibility. Other than potential interest and penalties, the disallowance of the shorter deductibility period would not have affected our results of operations but would have accelerated the payment of cash to the taxing authority.
We recognize interest expense and penalties, if applicable, related to unrecognized tax benefits in tax expense net of federal income tax. We recognized an increase (reduction) in interest expense related to unrecognized tax benefits of $(1.0) million, $0.2 million, and $(1.1) million during 2015, 2014, and 2013, respectively. We held a de minimis liability in our consolidated balance sheets for accrued interest and penalties related to unrecognized tax benefits at December 31, 2015. At December 31, 2014, we held a liability of $1.0 million. There are no positions for which it is reasonably possible that unrecognized tax benefits could materially increase or decrease within the next 12 months.
We file federal and state income tax returns in the United States and in foreign jurisdictions. We have been under continuous examination by the Internal Revenue Service (IRS) with regard to our U.S. federal income tax returns. During 2015, we settled our IRS audit for 2009 and 2010 and resolved a claim for refund we filed related to tax credits for years 2003 through 2012. As a result, we recognized a tax benefit of $6.8 million in our consolidated statements of income and paid an immaterial amount of additional tax.
Tax years subsequent to 2010 remain subject to examination by tax authorities in the U.S., and tax years subsequent to 2013 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 December 31, 2015 and 2014, we had no net operating loss carryforward for U.S. income taxes. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. During 2015, we recorded a valuation allowance of $1.3 million related to unrealized tax losses on buildings which we own and occupy in the U.K. We had no valuation allowance at December 31, 2014.
Total income taxes paid net of refunds during 2015, 2014, and 2013 were $189.1 million, $155.7 million, and $398.1 million, respectively.
Northwind Holdings is required to repay a portion of the outstanding principal under the Northwind notes at par on the quarterly scheduled payment dates under the Northwind notes in an amount equal to the lesser of (i) a targeted amortization amount as defined in the Northwind indenture and (ii) the amount of the remaining available funds in the DSCA minus an amount equal to the minimum balance that is required to be maintained in the DSCA under the Northwind indenture, provided that Northwind Holdings has sufficient funds available to pay its other expenses, including interest payments on the Northwind notes, and to maintain the minimum balance in the DSCA as required under the Northwind indenture. During 2015, 2014, and 2013, Northwind Holdings made principal payments of $74.4 million, $41.6 million, and $60.0 million, respectively, on the Northwind notes.
In 2006, Tailwind Holdings, LLC (Tailwind Holdings) a wholly-owned subsidiary of Unum Group, issued $130.0 million of insured, senior, secured notes due 2036 in a private offering. In 2013, we purchased and retired the outstanding principal of $62.5 million on these notes, resulting in a before-tax gain of $4.0 million.
As of December 31, 2015 and 2014, we had $600.0 million notional amount interest rate swaps which effectively convert certain of our unsecured senior notes into floating rate debt. Under these agreements, we receive fixed rates of interest and pay variable rates of interest, based off of three-month LIBOR. See Note 4 for further information on our interest rate swaps.
Interest paid on long-term and short-term debt and related securities during 2015, 2014, and 2013 was $146.9 million, $145.9 million, and $144.6 million, respectively.
Because all participants in the U.S. and U.K. pension plans are considered inactive as a result of the 2013 plan amendments, we are required to 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, 2015, the estimate of the average remaining life expectancy of the plans was approximately 25 years for the U.S. plan and 34 years for U.K. plan.
Level 1 investments consist of individual holdings and funds that are valued based on unadjusted quoted prices from active markets for identical securities. Level 2 equity, opportunistic credit, and real estate investments consist of funds that are valued based on the net asset value (NAV) of the underlying holdings. These investments have no unfunded commitments and no specific redemption restrictions. Level 2 fixed income securities are valued using observable inputs through market corroborated pricing.
Changes in our U.S. pension plans' assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2015 and 2014 are as follows:
Our long-term rate of return on plan assets assumption is selected from a range of probable return outcomes generated by statistical analysis of the asset portfolio. Our expectations for the future investment returns of the asset categories are based on a combination of historical market performance, evaluations of investment forecasts obtained from external consultants and economists, and current market yields. The methodology underlying the return assumption includes the various elements of the expected return for each asset class such as long-term rates of return, volatility of returns, and the correlation of returns between various asset classes. The expected return for the total portfolio is calculated based on the plan's strategic asset allocation. 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.
The expected return assumption for the life insurance reserve for our OPEB plan at December 31, 2015 and 2014 is 5.75 percent, which is based on full investment in fixed income securities with an average book yield of 5.24 percent and 5.46 percent in 2015 and 2014, respectively.
The funding policy for our U.S. qualified defined benefit plan is to contribute annually an amount at least equal to the minimum annual contribution required under ERISA and other applicable laws, but generally not greater than the maximum amount that can be deducted for federal income tax purposes. We had no regulatory contribution requirements for our U.S. qualified defined benefit plan in 2015 and made no voluntary contributions during 2015. We do not expect to make any contributions in 2016. The funding policy for our U.S. non-qualified defined benefit pension plan is to contribute the amount of the benefit payments made during the year. Our expected return on plan assets and discount rate will not affect the cash contributions we are required to make to our U.S. pension and OPEB plans because such contributions are determined under the minimum funding requirements as set forth in ERISA.
During the years ended December 31, 2015, 2014, and 2013, we recognized costs of $71.5 million, $76.0 million, and $18.8 million, respectively, for our U.S. defined contribution plan and $5.7 million, $5.0 million, and $2.9 million, respectively, for our U.K. defined contribution plan.
We use the treasury stock method to account for the effect of outstanding stock options, nonvested restricted stock units, and nonvested performance share units on the computation of diluted earnings per share. Under this method, these potential common shares will each have a dilutive effect, as individually measured, when the average market price of Unum Group common stock during the period exceeds the exercise price of the stock options and the grant price of the nonvested restricted stock units and the nonvested performance share units. The outstanding stock options have exercise prices ranging from $11.37 to $26.29; the nonvested restricted stock units have grant prices ranging from $23.97 to $36.95; and the nonvested performance share units have grant prices ranging from $23.97 to $34.08. See Note 11.
In computing earnings per share assuming dilution, only potential common shares that are dilutive (those that reduce earnings per share) are included. Potential common shares not included in the computation of diluted earnings per share because the impact would be antidilutive, based on then current market prices, approximated 0.3 million, 0.1 million, and 0.1 million for the years ended December 31, 2015, 2014, and 2013, respectively.
PSU shares in the preceding table represent aggregate initial target awards and accrued dividend equivalents and do not reflect potential increases or decreases resulting from the performance factor determined after the end of the performance periods. At December 31, 2015, the three-year performance period for the 2013 PSU grant was completed, but the performance factor had not yet been applied. The preceding table includes 0.1 million vested PSUs for which the 2013 through 2015 performance factor will be applied during the first quarter of 2016, with distribution of the stock thereafter.
At December 31, 2015, we had approximately $8.1 million of unrecognized compensation cost related to PSUs that will be recognized over a weighted average period of 1.6 years. The estimated compensation expense is adjusted for actual performance experience and is recognized ratably during the service period, or remaining service period, if and when it becomes probable that the performance conditions will be satisfied. Compensation cost for PSUs subject to accelerated vesting at the date of retirement eligibility is recognized over the implicit service period.
There is no unrecognized compensation cost related to the cash-settled awards, other than future changes in the liability due to future stock price changes, as the units do not require additional future service.
Thirteen major companies account for approximately 92 percent of our reinsurance recoverable at December 31, 2015, 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 seven 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 Corporate segment includes investment income on corporate assets not specifically allocated to a line of business, interest expense on corporate debt other than non-recourse debt, and certain other corporate income and expense not allocated to a line of business.
The amortization of prior period actuarial gains or losses, a component of the net periodic benefit cost for our pensions and other postretirement benefit plans, is driven by market performance as well as plan amendments and is not indicative of the operational results of our businesses. We believe that excluding the amortization of prior period gains or losses, as well as the 2014 settlement loss resulting from our pension plan amendment, from operating income or loss provides investors with additional information for comparison and analysis of our operating results. Although we manage our non-operating retirement-related gains or losses separately from the operational performance of our business, these gains or losses impact the overall profitability of our company and have historically increased or decreased over time, depending on plan amendments and market conditions and the resulting impact on the actuarial gains or losses in our pensions and other postretirement benefit plans.
We have noncancelable lease obligations on certain office space and equipment. As of December 31, 2015, the aggregate net minimum lease payments were $220.9 million payable as follows: $56.8 million in 2016, $40.1 million in 2017, $21.4 million in 2018, $19.9 million in 2019, $16.9 million in 2020, and $65.8 million thereafter. Rental expense for the years ended December 31, 2015, 2014, and 2013 was $42.5 million, $44.2 million, and $44.1 million, respectively.
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 estimate will 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. We are cooperating fully with this examination, as well as with a Delaware Market Conduct examination involving the same issue. 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.
As derived from the most recent annual statutory basis financial statements filed with insurance regulators, the statutory net income and statutory capital and surplus of our United Kingdom insurance subsidiary, Unum Limited, were £50.7 million and £445.9 million, respectively.
Based on the restrictions under current law, $663.6 million is available, without prior approval by regulatory authorities, during 2016 for the payment of dividends to Unum Group from its traditional U.S. life insurance subsidiaries. The ability of our captive insurers to pay dividends to their respective parent companies will depend on their satisfaction of applicable regulatory requirements and on the performance of the business reinsured.
Fourth quarter of 2014 reserve increase of $698.2 million before tax and $453.8 million after tax related to long-term care.