Interest expense principally reflects the net interest charge on funds withheld from reinsurers under reinsurance and retrocessional contracts. Interest is recorded on the funds withheld balances based on various contractual and negotiated rates. The interest expense attributable to the funds withheld under a variable quota share retrocession agreement with Grand Central Re, our largest funds withheld balance, is based on the average of two total return fixed maturity indices. A charge or credit may be recorded in interest expense on this contract in any given period. As a result, interest expense is expected to vary from period to period with a corresponding entry to funds withheld. Interest expense on the remaining balance of funds withheld from other reinsurers under reinsurance and retrocessional contracts will vary principally due to changes in the balance of funds withheld. In addition, interest expense also includes interest on deposit contracts and interest on the bank loan at a rate based on LIBOR plus a spread.
incurred but not yet reported to us). Our IBNR reserves are largely comprised of casualty exposures and therefore these claims are subject to a higher degree of estimation volatility as a result of changes in the legal environment, jury awards, medical cost trends and general inflation. We regularly review and update these estimates using the most current information available and employing various actuarial methods. The ultimate liability for a loss is likely to differ from the original estimate due to the factors discussed above. Whenever we determine that an existing reserve for losses and benefits needs adjustment, we are required to record a change in estimate, increasing or decreasing the reserve with a corresponding reduction or increase, which could be material, in our operating results in the period in which the deficiency or redundancy is identified. Adjustments resulting from changes in our estimates are recorded in the period such adjustments are determined. The establishment of reserves, or the adjustment of reserves for reported losses, could result in significant upward or downward changes to our financial condition or results of our operations in the period such amounts are reported.
The development of policy benefit reserves requires management to make estimates and assumptions regarding mortality, morbidity, lapse, expense and investment experience. Such estimates are primarily based on historical experience and information provided by ceding companies. Actual results could differ materially from these estimates. We monitor actual experience and, where circumstances warrant, will revise our assumptions and the related reserve estimates. These revisions are recorded in the period they are determined.
Acquisition costs. Acquisition costs were $73.6 million for the year ended December 31, 2005 compared to $110.9 million for the year ended December 31, 2004, a decrease of 33.6%. The decrease in acquisition costs for the year ended December 31, 2005 is due to lower average acquisition costs on premiums earned and to the $141.3 million of additional net premiums written and earned on two contracts written in a prior
General and administrative expenses were $9.4 million for the year ended December 31, 2003, resulting in a general and administrative expense to net premiums earned ratio of 1.6%, lower than in the years ended December 31, 2004 and 2005 due principally to lower personnel costs in 2003.
Reinsurance premiums ceded. Reinsurance premiums ceded for insurance for the year ended December 31, 2005 were $145.7 million compared to $114.2 million for the year ended December 31, 2004, an increase of 27.6%. Reinsurance premiums ceded were principally related to our quota share treaties that are utilized to manage our retained exposure and, therefore, will tend to increase when gross premiums written increase. The ratio of reinsurance premiums ceded to gross premiums written for the year ended December 31, 2005 was 41.0% compared to 46.0% for the year ended December 31, 2004. Not all of the contracts we write qualify for inclusion in our quota share treaties and, accordingly, there may be differences in the ratio of gross premiums written to reinsurance premiums ceded from period to period.
Reinsurance premiums ceded. Gross reinsurance premiums ceded for the life and annuity reinsurance segment were $1.5 million for the year ended December 31, 2005 and $0.7 million for the year ended December 31, 2004, an increase of 114.3%. Gross reinsurance premiums ceded for the life and annuity reinsurance segment were $21.7 million for the year ended December 31, 2003. The life and annuity reinsurance premium ceded relates to our quota share agreement with Grand Central Re. Effective January 2004, Grand Central Re stopped accepting new business and, accordingly, there has been a decline in premium ceded in 2005 and 2004 with the $1.5 million and $0.7 million relating to additional premiums ceded on contracts written in prior years.
Cash and invested assets. Aggregate invested assets, comprising cash and cash equivalents, fixed maturities and alternative investments, were $4,227.8 million at December 31, 2005 compared to $3,514.2 million at December 31, 2004, an increase of 20.3%. The increase in cash and invested assets resulted principally from $389.9 million in cash flows from operations generated in the year ended December 31, 2005, which is net of $72.5 million of additional investments in alternative assets and the appreciation of the alternative investment portfolio of $39.9 million. A further source of cash and invested assets was our sale of 11.0 million common shares and 1.65 million common shares on October 17, 2005 and November 4, 2005, respectively, at a price of $23.50 per share in an underwritten public offering. These common share sales resulted in net proceeds of approximately $284.1 million. The increases were partially offset by a decrease in accumulated other comprehensive income of $17.2 million, net payments of deposit liabilities of $41.2 million, common share repurchases of $7.4 million and dividends paid of $9.0 million.
The amounts in this table represent our gross estimates of known liabilities as of December 31, 2005 and do not include any allowance for claims for future events within the time period specified. Accordingly, it is highly likely that the total amounts paid out in the time periods shown will be greater than that indicated in the table.