For much of the insurance and reinsurance sector, 2005 was dominated by the combined impacts of Hurricanes Katrina, Rita and Wilma. These events caused us to re-evaluate the ways in which we manage our property reinsurance portfolio, including assumptions, such as the future frequency and severity of Atlantic hurricanes, used in our modeling techniques for both pricing and exposure management. Following our review, we decided to reduce our overall exposure in peak zones. The financial impact of the 2005 hurricane lossses on Aspen is discussed further below.
The losses incurred from the 2005 hurricanes, together with consequential changes in the measurement of capital adequacy by the rating agencies and an improving market outlook led us to raise additional equity capital. In total, including an over-allotment option exercised in January 2006, we received net proceeds of approximately $819 million after expenses. From these proceeds we contributed $560 million as additional equity capital to Aspen Bermuda prior to the year-end. We also contributed $15 million dollars to Aspen Specialty. In January 2006, we contributed $150 million to Aspen Re. The balance of the capital raised, amounting to approximately $94 million is currently being held in Aspen Holdings. Taking into account these capital injections, both Aspen Re and Aspen Bermuda now have net assets of just over $1 billion. Aspen Specialty has surplus of approximately $110 million dollars on a U.S. GAAP basis.
The increases in gross premiums written in each of our segments for the twelve months ended December 31, 2005 and 2004 are as follows:
We incurred a tax expense in 2005 of $17.4 million because Aspen Re was profitable in 2005 notwithstanding our hurricane losses.
(3) 4,000,000 Perpetual PIERS in our public offering in December 2005;
Our consolidated financial statements contain certain amounts that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values.
In determining the range of net reserves, we estimate recoveries due under our proportional and excess of loss reinsurance programs. For the period ended December 31, 2005, there was a strong correlation between the gross and net reserve ranges as the majority of recoveries were from our
In selecting our best estimates of the reserves for each line of business we take into account all of the factors set out above, and in particular the quality of the historical information we have on which to establish our reserves and the degree of estimation where information is received from cedents on an underwriting year basis and needs to be converted to an accident year basis. In addition, consideration is given to the point estimate produced by our independent consulting actuaries, which was towards the upper end of the range for the year ended December 31, 2005.
For the twelve months ended December 31, 2004. The analysis of the favorable development by each segment is as follows:
Operating and administrative expenses. Operating and administrative expenses increased by 35.4% in 2005 compared to 2004 and increased by 74.5% in 2004 compared to 2003. Operating and administrative expenses as a percentage of gross premiums earned were 6.5% in 2005, 6.3% in 2004
and 5.4% in 2003, representing increases broadly in line with the growth of our business. The main components of increasing expenditure have been staff costs, accommodation costs and costs associated with the development of our information technology. The increase in 2004 represented higher staffing levels as new business lines were introduced, and in addition full year costs for Aspen Specialty and Aspen Re America were incurred.
Net investment income. Net investment income consists primarily of interest on fixed income securities and is stated after deduction of expenses relating to the management of our investments. Net investment income increased substantially in 2005 by 77.6% compared to 2004, and in 2004 increased by 130.7% compared to 2003. The increases have been driven by rising interest rates and increases in our total cash and investment balances by 46.9% in 2005 and 63.5% in 2004. The increase in cash and investment balances in 2005 includes approximately $790 million after expenses in respect of the issuance of new ordinary shares and Perpetual PIERS (2004-$249 million in respect of issuance of long-term debt).
Specialty insurance increased by $221.6 million in 2005 and represented 72.0% of the gross premiums written in this segment. In 2004, our specialty insurance lines represented 34.8% of this segment as we began writing marine and energy insurance in the final quarter of 2004 and did not write any aviation insurance in that period. In 2004, our specialty reinsurance line of business decreased by $69.7 million as we did not continue into 2004 our quota share reinsurance of Syndicate 2020, which accounted for $78.4 million in 2003.
We manage these risks by making regular forecasts of the timing and amount of expected cash outflows and ensuring that we maintain sufficient balances in cash and short-term investments to meet these estimates within a comfortable margin for error. Notwithstanding this policy, if our cash flow forecast is incorrect, we could be forced to liquidate investments prior to maturity, potentially at a significant loss.