A portion of the securities acquired during 2016 and 2015 were acquired with the proceeds from advances on our funding agreements with the FHLB. The securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products, due to the shorter maturity and relatively low interest rate paid on those advances. In addition, certain municipal securities acquired are exempt from federal income taxes, and accordingly have a higher actual return than reflected in the yields stated above. The average yield of the securities acquired, excluding the securities supporting the funding agreements and using a tax-adjusted yield for the municipal securities, was 4.39% in 2016 and 4.70% in 2015.
As of December 31, 2016, 95.6% (based on carrying value) of the available-for-sale fixed maturities were investment grade debt securities, defined as being in the highest two National Association of Insurance Commissioners (NAIC) designations. Non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. We regularly review the percentage of our portfolio that is invested in non-investment grade debt securities (NAIC designations 3 through 6). As of December 31, 2016, no single non-investment grade holding exceeded 0.2% of total investments.
State, municipal and other government securities totaled $1,499.2 million, or 21.4% of total fixed maturities at December 31, 2016, and $1,472.4 million, or 22.2% of total fixed maturities at December 31, 2015, and include investments in general obligation, revenue and municipal housing bonds. Our investment strategy is to utilize municipal bonds in addition to corporate bonds, as we believe they provide additional diversification and have historically low default rates compared with similarly rated corporate bonds. We evaluate the credit strength of the underlying issues on both a quantitative and qualitative basis, excluding insurance, prior to acquisition. The majority of the municipal bonds we hold are investment grade credits without consideration of insurance. Our municipal bonds are well diversified by type and geography with the top exposure being water and sewer revenue bonds. We do not hold any Puerto Rico-related bonds. Exposure to the state of Illinois and municipalities within the state accounted for 1.6% of our total fixed maturities at December 31, 2016. As of December 31, 2016, our Illinois-related portfolio holdings were rated investment grade, and were trading at 107.7% of amortized cost. Our municipal bond exposure had an average rating of Aa2/AA and our holdings were trading at 108.1% of amortized cost at December 31, 2016.
reserves for supplementary contracts and similar instruments are computed as the present value of future cash payments while the table above includes cash payments without the impact of discounting;
dividend accumulations and other policy claims are included in the "Other policy claims and benefits" and "Advance premiums and other deposits" lines on our consolidated balance sheet.
The determination of net periodic pension cost and related accrued/prepaid pension expense requires the use of estimates as to the expected return on plan assets, discount rate on plan liabilities and other accrual assumptions. Pension expense for 2016 totaled $5.1 million.
We have reviewed the circumstances surrounding our investments in VIEs, which are classified as securities and indebtedness of related parties, and consist of LIHTC, limited partnerships or limited liability companies accounted for under the equity method. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carrying value and any unfunded commitments that exist for each particular VIE. Based on this analysis, none of our VIEs were required to be consolidated at December 31, 2016 or December 31, 2015.
Also included in Level 2 are private placement corporate bonds for which quoted market prices are not available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread.
Level 2 other investments measured at fair value on a recurring basis include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty, net of collateral received. Level 3 other investments, which
The discount rate was 4.05% for the nine months ended September 30, 2015 and 4.52% for the three months ended December 31, 2015 due to remeasurement at September 30, 2015 for settlement accounting. The discount rate was 4.99% for the nine months ended September 30, 2014 and 4.42% for the three months ended December 31, 2014 due to remeasurement at September 30, 2014 for settlement accounting. Our expected long-term return on plan assets represents the rate of earnings expected in the funds invested to provide for anticipated benefit payments. We have analyzed the expected rates of return on assets and determined that the long-term return assumption is reasonable based on the current and expected asset allocations and on the Multiemployer Plan's historical investment performance. We also completed an actuarial study of our assumptions during 2015. At the remeasurement, this resulted in reducing the expected long-term return on plan assets from 7.00% to 6.75% and increasing assumed annual salary increases from 3.00% to 3.31%.
Operating income adjustments are net of amortization of unearned revenue reserves, deferred acquisition costs and value of insurance in force acquired, as well as changes in interest sensitive product reserves and income taxes attributable to these items.
In 2016, due to changes in product offerings since the last amendment to our policy for calculating operating income, we refined our calculation of operating income to include offsets relating to changes in interest sensitive product reserves. These offsets, net of tax, increased operating income $0.9 million in 2016. These offsets, net of tax, not taken into account in the computation of operating income for 2015 would have increased operating income $0.1 million and for 2014 would have decreased operating income $0.1 million.