The information set forth in the following table, as of and for the period indicated, should be read in conjunction with ‘‘
The expense ratio for the Excess and Surplus Insurance segment improved to 20.1% for 2005 from 22.4% for 2004. Our expense ratio for 2005 and 2004 reflected strong expense management of commission expenses and other operating expenses and our use of technology to process and administer our insurance business in a cost efficient manner. The expense ratio for 2005 also benefited from the ceding commission that James River Insurance received on the quota share reinsurance contract, which totaled $9.7 million. The quota share treaty also impacted the expense ratio by reducing net earned premiums by $40.0 million for 2005. The expense ratio for 2005 was negatively impacted by Hurricane Katrina which reduced net earned premiums for 2005 by $12.9 million and other operating expenses by $1.8 million. The 65.4% expense ratio for 2003 reflected a high level of expenses in James River Insurance's first year of operations compared to a relatively small amount of earned premiums for the year.
At December 31, 2005, our cash and invested assets consist of fixed maturity securities and cash and cash equivalents. At December 31, 2005 and December 31, 2004, our investments in fixed maturity securities had carrying values (which were the same as their fair values) of $339.5 million and $172.7 million, respectively. Our fixed maturity securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses on these securities reported, net of tax, as a separate component of accumulated other comprehensive income (loss). The average duration of our fixed maturity security portfolio at December 31, 2005 is approximately 4.2 years. Cash and invested assets per outstanding common share was $25.25 at December 31, 2005.
Our reinsurance is contracted under excess of loss and quota share reinsurance contracts. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company's losses arising out of a defined class of business in exchange for a corresponding percentage of premium. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company's losses in excess of a specified amount. In excess of loss reinsurance, the premium payable to the reinsurer is negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company's losses.
We have identified the accounting policies and estimates below as critical to the understanding of our results of operations and financial position. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and that require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our consolidated financial statements. Actual results may differ from these estimates. We evaluate our estimates regularly using information that we believe to be relevant. For a detailed discussion of our significant accounting policies, see Note 1 to the 2005 audited consolidated financial statements included in this report.
The estimated net reserve at December 31, 2005 using the incurred Bornhuetter-Ferguson method was $99.7 million, and the estimated net reserve at December 31, 2005 using the loss ratio method was $104.4 million. Each of these reserve estimates are individual point estimates and do not constitute an actuarial range. In most instances we have recorded the reserve estimate derived using the loss ratio method as our best reserve estimate because the expected loss ratio used in this method is derived from our management's experience in the lines of business that we write and our current underwriting criteria. We record the reserve estimate derived from the incurred Bornhuetter-Ferguson method as our best estimate when the level of actual reported losses provides sufficient evidence that the ultimate loss ratio will exceed our expected loss ratio. When the level of actual reported losses provides sufficient evidence that the ultimate loss ratio will be less than our expected loss ratio, we generally reduce the expected loss ratio used in the loss ratio method.
IBNR reserve estimates are inherently less precise than case reserve estimates. A 5% change in net IBNR reserves at December 31, 2005 would equate to a $4.7 million change in the reserve for losses and LAE, a $3.1 million change in net income and a 1.7% change in stockholders' equity.
See Note 1 to our audited consolidated financial statements included elsewhere in this annual report for a discussion of our other significant accounting policies.
In November 2005, the FASB issued FSP FAS No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1), which addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized