The specialty insurance operations generated an underwriting profit of $322 million in 2006, $115 million higher than in 2005, reflecting premium growth, rate adequacy in most of the businesses, lower catastrophe losses, and the impact of favorable reserve development within the Specialty casualty, Property and transportation and California workers' compensation groups. The 2006 results include $22.2 million (0.9 points) of catastrophe losses compared to $59.7 million (2.5 points) in the 2005 period.
The 2005 study reviewed open and closed A&E claims at June 30, 2005. With respect to asbestos, it considered both direct insurance and assumed reinsurance, products and non-products exposure, paid claims history, the pattern of new claims, settlements and projected development. As has been reported by others, the asbestos legal climate remains very difficult to predict. While some progress has been made in state asbestos tort reform, that progress has been somewhat offset by increased claims costs, increased defense costs, the assertion of non-products theories and an increasing number of claims against small to mid-sized insureds.
Changes in investment income reflect fluctuations in market rates and changes in average invested assets. The increase in investment income for 2006 and 2005 reflects increases of $1.1 billion (7%) and $1.4 billion (10%), respectively, in average cash and investments in each year. AFG's yield on fixed income securities, excluding realized gains, was about 5.8% in 2006, and 5.7% in 2005 and 2004.
In the fourth quarter of 2006, GAFRI conducted its annual review of the actual results and future assumptions underlying its annuity operations, including assumptions related to future interest rates and persistency. There were no significant adjustments or "unlockings" necessary. In 2005, primarily as a result of the continuing low interest rate environment, GAFRI "unlocked" the actuarial assumptions related to its annuity business in force and recorded a pretax charge of approximately $11.6 million to insurance liabilities related to that business. In 2004, these liabilities were increased by approximately $5 million due to trends in actual experience.
As a result of the 2006 annual review of actual results and future assumptions discussed above under "Annuity Benefits," no significant "unlockings" were deemed necessary. In 2005, GAFRI recorded net charges of $4.2 million to annuity and supplemental insurance acquisition expenses primarily related to spread narrowing partially offset by the expected improved future persistency related to GAFRI's annuities, due to the impact of the current interest rate environment. Also in 2005, GAFRI recorded a $13.6 million write-off of DPAC due to an unexpected increase in mortality in GAFRI's run-off life operations. Annuity and supplemental insurance acquisition expenses for 2004 were reduced by $5.1 million related to favorable trends in actual experience.
Prior to the implementation of SFAS No. 123(R), AFG accounted for stock options and other stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Under this method, no compensation expense for stock option grants was recognized because options were granted at exercise prices equal to the fair value of the shares at the dates of grant. See Note I - "Shareholders' Equity" for further information on stock options.
An AFG majority-owned subsidiary, National Interstate Corporation ("NATL"), issued 3.4 million of its common shares in a February 2005 initial public offering. NATL used $15 million of the $40.4 million in proceeds to repay a loan to an AFG subsidiary and the balance for general corporate purposes. At December 31, 2006, AFG owned approximately 53% of NATL's common stock compared to 66% prior to the offering.
The addition to goodwill in 2006 reflects the acquisition of Ceres. GAFRI recorded a goodwill impairment charge of $4.2 million (included in "Other operating and general expenses") during the fourth quarter of 2006 related to an insurance agency subsidiary. A review for impairment was prompted by a decrease in estimated future earnings from this agency. Fair value of the agency was estimated using the present value of expected future cash flows.
Minority interest expense represents the interest of non-controlling investors in the earnings or losses of consolidated subsidiaries. Included in minority interest expense in 2004 is $3.5 million for the interest of minority holders in a collateralized debt obligation that AFG consolidated prior to its liquidation in 2005.
In December 2006, AFG subsidiaries recognized a pretax gain of $44.6 million on the sale of certain New York assets, primarily transferable development rights and assets under long-term leases. The buyer of the assets has the right to require AFG to repurchase the assets if a contingency (considered remote by AFG) is not resolved within six months of the sale.
AFG is the investment manager and has investments in five other CDOs with an aggregate carrying value of $24 million at December 31, 2006 (included in fixed maturities), which are not required to be consolidated. These CDOs were formed between 2004 and 2006 and had approximately $2.1 billion in investments at December 31, 2006.