transfer to meet the requirements of Statement of Financial Accounting Standards No. 113, SFAS 113, to be accounted for as reinsurance. The ARMC engaged its own law firm, which was assisted by accounting and actuarial consultants, to advise it in performing the internal review. In connection with the internal review, the ARMC voluntarily contacted the SEC. In May 2006, the ARMC concluded its internal investigation and found that the review supported our original determination that the three contracts in question contained sufficient risk transfer to meet the requirements of SFAS 113 to be accounted for as reinsurance. However, the review caused us to re-evaluate other accounting aspects of the three contracts. This re-evaluation led us to conclude that a restatement of our consolidated financial statements for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 was warranted. Specifically, we restated to account for the bifurcation of the retrocessional contracts into retroactive and prospective components and to account for an additional contractual feature on a gross basis as more fully described in our restated consolidated financial statements for the years ended December 31, 2005, 2004, and 2003 in our Annual Report on Form 10-K/A (Amendment No.1) filed on June 7, 2006.
For the year ended December 31, 2006, our return on average shareholders’ equity, ROE, is 16.8%. Our ROE has exceeded 16% in three of the last four years, which we believe is indicative of the strength of our underwriting capability and diversification. The ROE for the year ended December 31, 2005 was 0.9%, which was negatively impacted by hurricanes Katrina, Rita and Wilma, which decreased our net income by $157.4 million during that year. Our increased capital base, as a result of income generated in 2006, as well as capital raised during 2005, has permitted us to continue to diversify our product offerings and expand our franchise. Our intention to enter the excess and surplus lines insurance market in the United States in 2007 is the continuation of our long-term strategic initiative of utilizing our expanding capital base to build our franchise through additional product offerings.
Losses and benefits represented our largest expense and accounted for 72.5% of total liabilities at December 31, 2006. We establish loss expenses and reserves using a combination of loss reserving techniques and actuarial methods. Loss expenses and reserves are reviewed regularly to reflect new information that we receive. We conduct regular quarterly internal reviews of reserves and, in addition, the adequacy of our reserves is reviewed annually, during the fourth quarter of the year, by independent actuaries to corroborate management’s estimates. During the year ended December 31, 2006 we concluded that our excess liability insurance business written in 2003 is developing more favorably than originally estimated. Accordingly, we reduced gross reserves by $35.5 million and losses recoverable from reinsurers by $15.0 million, to reflect the change in estimates.
For each of the years ended December 31, 2006, 2005 and 2004, additional premiums relate to contracts where the coverage period had expired. Therefore, these additional premiums, representing revisions to our initial estimate of ultimate premiums as a result of changes in the estimate of loss reserves, were fully earned since the exposure period has ended.
Certain of the contracts we write, particularly the property and property catastrophe reinsurance risks, provide for reinstatements of coverage. Reinstatement premiums are the premiums for the restoration of the insurance or reinsurance limit of a contract to its full amount after a loss occurrence by the insured or reinsured and principally relate to our property catastrophe reinsurance contracts. The purpose of optional and required reinstatements is to permit the insured/reinsured to reinstate the insurance coverage at a pre-determined price level once a loss event has penetrated the insured layer. In addition, required reinstatement premiums permit the insurer/reinsurer to obtain additional premiums to cover the additional loss limits provided.
The table above makes certain assumptions regarding the split of case reserves and IBNR on property and casualty insurance and reinsurance loss reserves. In our insurance
Net income. Net income attributable to property and casualty reinsurance for the year ended December 31, 2006 was $88.6 million compared to $5.9 million for the year ended December 31, 2005. The primary difference in net income for the year ended December 31, 2006 compared with the year ended December 31, 2005 is the $73.4 million of losses stemming from hurricane activity impacting the year ended December 31, 2005. Further, additional invested assets combined with improved returns on both fixed maturities and the Max Re Diversified portfolio has increased net income for the year ended December 31, 2006.
Net investment income and gains on alternative investments. The overall performance of our fixed maturities portfolio and alternative investment portfolio is discussed within the corporate function results of operations as we manage investments on an aggregate basis.
The nature of life and annuity reinsurance transactions that we consider results in a limited number of transactions actually bound with potentially large variations in quarterly and annual premium volume. Consequently, components of our underwriting results, such as premiums written, premiums earned and benefits can be volatile and, accordingly, period to period comparisons are not representative of future trends.
Net investment income, excluding realized and unrealized gains and losses, for the year ended December 31, 2005 increased $24.0 million to $106.8 million compared to $82.8 million for the year ended December 31, 2004, an increase of 29.0%. The increase was principally attributable to the growth in the fixed maturities portfolio from $2,156.0 million at December 31, 2004 to $2,682.9 million at December 31, 2005, resulting from cash flow from operations since December 31, 2004 and the additional capital we raised in October and November 2005 in connection with a public offering of our common shares. The average annualized investment yield on the cash, fixed maturities investments and funds withheld by clients for the year ended December 31, 2005 was 4.2% compared to 4.2% for the year ended December 31, 2004.