At December 31, 2005, the Insurance Subsidiaries held $1,181.2 million in cash and short-term investments that are readily realizable securities. Management monitors the value, currency and duration of the cash and investments within its Insurance Subsidiaries to ensure that they are able to meet their insurance and other liabilities as they become due and was satisfied that there was a comfortable margin of liquidity as at December 31, 2005 and for the foreseeable future.
Reinsurance ceded. For 2006, we placed in excess of $400 million dollars of reinsurance and retrocessional cover for a reasonable increase over last year's cost given current market conditions. We will continue to review the market for opportunities, and depending on price and availability we may buy further cover.
Reserves for Losses and Loss Expenses. Provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of IBNR claims. The estimated cost of claims includes expenses to be incurred in settling claims and a deduction for the expected value of salvage and other recoveries. Estimated amounts recoverable from reinsurers on unpaid losses and loss adjustment expenses are calculated to arrive at a net claims reserve. As required under U.S. GAAP, no provision is made for our exposure to natural or man-made catastrophes other than for events occurring before the balance sheet date.
Reserving approach. We take all reasonable steps to ensure that we have appropriate information regarding our claims exposures. However, given the uncertainty in establishing claims liabilities, it is likely that the final outcome will prove to be different from the original provision established. Prior to the selection by management of our best estimate of our reserves, our actuary employs a number of techniques to establish a range of estimates (the "actuarial range").
cedents and loss adjustors and information on the cost of settling claims with similar characteristics in previous periods. In addition, for significant events such as the hurricanes in 2005, for example, the detailed analysis of our potential exposures included information obtained directly from cedents which has yet to be processed through market systems enabling us to reduce the time lag between a significant event occurring and establishing case reserves. This additional information is also incorporated into the analysis used to determine the actuarial IBNR. Reinsurance intermediaries are used to assist in obtaining and validating information from cedents but we establish all reserves. In addition, we may engage loss adjusters and perform on site cedent audits to validate the information provided. Disputes do occur with cedents, but the number and frequency are generally low. In the event of a dispute, intermediaries are used to try to resolve the dispute. If a resolution cannot be reached, then the contracts typically provide for binding arbitration. To date, there are no material disputes with cedents.
Policy acquisition, operating and administrative expenses. Total expenses in 2005 increased by 8.8%, mainly as a result of additional acquisition costs on the increased level of business written. Total expenses in 2004 increased by 28.9%. Expenses as a percentage of gross premiums earned were 20.3% in 2005 (2004-22.6%, 2003-25.2%). The decrease in the percentage of expenses to gross premiums earned is attributable to two principal factors: (1) in 2005, gross premiums earned increased by $69.3 million due to reinstatement premiums, which typically do not incur commission charges; and (2) as other business lines developed, a greater amount of central administrative expenses was allocated to the other segments.
Loss expenses increased by 30.3% in 2004 compared to 2003. The only material claim incurred during 2004 arose from a factory fire in Suffolk, U.K. ($14.4 million).
As at December 31, 2005 and 2004, Aspen Holdings held $203.7 million and $19.9 million, respectively, in cash and cash equivalents which management considers sufficient to provide us liquidity at such time. Operating cash flow, borrowing, the issuance of 4,000,000 Perpetual PIERS and the issuance of an additional 25,884,891 ordinary shares for cash in our public offering increased the total cash and cash equivalents held by the Company by $183.8 million during the twelve months ended December 31, 2005. During 2005, we were able to meet all of our obligations on our dividend payments to our ordinary shareholders and our interest payments on the holders of our senior notes, with our net cash flow and dividends received.
Aspen Specialty is regulated by the North Dakota insurance laws and is subject to risk-based capital regulations. See Part I, Item 1, ‘‘Business-Regulatory Matters-U.S. Regulation-North Dakota State Risk-Based Capital Regulations’’ elsewhere in this report. Aspen Specialty's statutory capital and surplus was $113.4 million at December 31, 2005 and $101.5 million at December 31, 2004. Its capital and surplus as measured under U.S. GAAP was $131.0 million at December 31, 2005 (2004-$113.9 million).
The facility can be used by any of the Borrowers to provide funding for the insurance subsidiaries of the Company, to finance the working capital needs of the Company and our subsidiaries and for general corporate purposes of the Company and our subsidiaries. The revolving credit facility provides for a $250 million subfacility for collateralized letters of credit. The facility will expire on August 2, 2010. As of December 31, 2005, no borrowings were outstanding under the credit facilities, though we had $93.7 million and $317.2 million of outstanding collateralized and uncollateralized letters of credit, respectively. The fees and interest rates on the loans and the fees on the letters of credit payable by the Borrowers increase based on the consolidated leverage ratio of the Company.
• on December 12, 2005 and January 10, 2006, we issued 4,000,000 and 600,000, respectively, of our Perpetual PIERS. These sales generated approximately $223 million in net proceeds.
Reference is made to Part IV, Item 15(a) of this report, commencing on page, for the Consolidated Financial Statements of the Company and the Notes thereto, as well as the Schedules to the Consolidated Financial Statements.