Interest expense in this segment was incurred on the trust preferred securities. The increase in interest expense to $10.8 million resulted from the issuance of an additional $50.0 million of trust preferred securities in December 2004 and an increase in the LIBOR interest rates during 2005.
Claims and other policy benefits increased by 31% in 2006 to $101.1 million compared to $76.9 million in 2005. Claims cost grew significantly in 2006 due to the new U.K. protection treaties, amounting to $9.3 million. There was a significant increase in claims cost recorded in the first quarter of 2006 arising from adverse mortality and morbidity experience, adjustments on retrocession recoverables and updated cedant data of approximately $12.0 million in total. Additionally, during the fourth quarter of 2006, claims related to our North American lives business increased $3.0 million as a result of the accelerated processing of backlog. Prior year claims were also higher than average due to $5.3 million of claims in relation to information received from two of our syndicates in Lloyd's of London. Other effects in 2005 amounted to reduced claims cost of $6.0 million.
Operating expenses increased by 23% in 2006 to $31.2 million compared to $25.3 million in 2005. An increase in personnel costs in response to the anticipated growth in the Life Reinsurance International Segment in addition to severance costs, including those related to the Life Reinsurance International Segment head office relocation from Windsor to London, were offset by reductions primarily in various professional services costs and adjustments related to non-commission acquisition costs deferred. A provision for shortfall in future rental income of $2.0 million and accelerated write-down of fixed assets of $1.8 million related to the Windsor property lease was made in the fourth quarter of December 31, 2006.
December 31, 2006 December 31, 2005 ------------------------ ------------------------- Sector $ in millions % $ in millions % - ------- ------------------------ ------------------------- U.S. Treasury securities and U.S. government agency obligations.......... $ 68.0 0.8% $ 47.9 0.7% Corporate securities..... 2,700.5 31.1 2,057.0 30.5 Municipal bonds.......... 52.2 0.6 37.6 0.6 Mortgage and asset backed securities........... 5,244.8 60.3 3,150.1 46.7 Preferred stock.......... 116.9 1.3 133.8 2.0 ------- ------ ----------- ------ 8,182.4 94.1 5,426.4 80.5 Cash..................... 515.5 5.9 1,312.7 19.5 -------- ------ ----------- ------ Total.................... $8,697.9 100.0% $ 6,739.1 100.0% ======== ====== =========== ======
The following tables present the estimated fair values and gross unrealized losses for the fixed maturity investments and preferred stock that have estimated fair values below amortized cost as of December 31, 2006 and 2005. These investments are presented by class and grade of security, as well as the length of time the related market value has remained below amortized cost.
We periodically perform analyses, update guidelines and take other corrective action to keep the assets at the portfolio and enterprise level suitable for the relevant liabilities. Techniques include simulation of in-force assets and liabilities in various interest rate scenarios, adjustment of duration targets for each portfolio, and monitoring the gap between actual and target duration at the portfolio, legal entity and enterprise levels. Historically, variations between the maturity of our investment portfolio and our liabilities have been small at the aggregate level.
Based on our known sources and uses of liquidity, our liquidity position is very tight over the near term. During the third quarter of 2006, we successfully completed a reinsurance transaction that provided approximately $120.0 million of additional liquidity. To further enhance our liquidity position, we are negotiating a $100 million term loan facility with Cerberus to provide a source of liquidity until the closing of the Transaction. To the extent that we are not able to close this term loan facility or obtain additional sources of liquidity, we face the possibility of running out of liquidity in the second quarter of 2007. Over the longer term, we will need significant amounts of new capital to support existing and new business. These capital requirements will largely be satisfied by the consummation of the Transaction.
o $500.0 million of Class A-2 Floating Rate Guaranteed Notes Series B,
Tartan is a variable interest entity under the provisions of FIN 46R. We are not the primary beneficiary of this entity and are, therefore, not required to consolidate it in our consolidated financial statements.
The following table shows our contractual obligations and commitments as of December 31, 2006, other then those arising from our reinsurance business including our payments due by period: