We experienced favorable prior year loss development of $5.1 million during 2006, primarily because of lower expected ultimate losses for the 2004 and 2005 accident years.
Because our investment portfolio is the largest component of consolidated assets and a multiple of shareholders’ equity, adverse changes in economic conditions subsequent to the statement of financial position date could result in other-than-temporary impairments that are material to our financial condition and operating results. Such economic changes could arise from overall changes in the financial markets or specific changes to industries, companies, or municipalities in which we maintain relatively large investment holdings.
Consolidated expenses for the year ended December 31, 2005 were $214.8 million, an increase of 45%, from $147.7 million for the year ended December 31, 2004. The increase in consolidated expenses is mainly the result of increases in net losses and LAE associated with growth in premiums and higher other underwriting expenses.
Net paid losses and LAE on professional liability claims decreased 6% for the year ended December 31, 2005 compared to the same period in 2004. The number of claims closed with an indemnity payment increased 12% to 391 for the year ended December 31, 2005 from 350 for the year ended December 31, 2004. The CWIP ratio, including incidents for the year ended December 31, 2005 was 16%, compared to 14% for the year ended December 31, 2004. The lower closed claim measures reported for the year ended December 31, 2005, including net paid losses and LAE on professional liability claims, and claims and incidents closed are primarily due to our stricter claims philosophy and a decrease in frequency. Also contributing to the lower net paid losses and LAE on professional liability claims was the lower retention after reinsurance in prior years, which reflects the inherent time lag between when premiums are earned and related claims are paid and closed. The number of professional liability claims with indemnity payment was slightly higher; however this was primarily due to an increase in the number of claims closed that were already in inventory, as opposed to adverse loss experience. Such fluctuations among periods are not unusual and although the current percentage of CWIP to all claims and incidents closed is slightly higher, it remains within a reasonable range of outcomes for the period relative to our carried reserves.
Income taxes increased 12% for the year ended December 31, 2005 compared to the same period in 2004. The increase in income tax expense reflects our higher income from continuing operations before income taxes. Our effective income tax rates were 29% and 34% for the years ended December 31, 2005 and 2004, respectively. The decrease in our effective income tax rate is primarily due to an increase in tax-exempt investment income as a percentage of income before taxes and non-recurrence of a $0.75 million provision for income tax contingencies identified in an IRS examination that was included in income tax expense for the year ended December 31, 2004. During 2005, we reached a settlement with the IRS with regard to the examination of our income tax returns for the years ended December 31, 2000 and 2001. The settlement was approved by the Congressional Joint Committee on Taxation during the first quarter of 2006. We had previously accrued for income tax liabilities related to the examination, and consequently there was no income tax impact to our consolidated financial statements because of the settlement.
Net cash flows used in financing activities was $16.0 million for the year ended December 31, 2006 compared to net cash flows provided by financing activities of $2.1 and $3.2 million for the same period in 2005 and 2004, respectively. The net cash used in financing activities for the year ended December 31, 2006 was primarily due to the repurchase of common shares under our stock repurchase program, which totaled $24.6 million. During 2005, we used $1.5 million for the repurchase of our common shares under our repurchase program. Net cash used in financing activities for the year ended December 31, 2006 also includes $2.9 million for excess tax benefits from share-based compensation as a result of the adoption of FAS 123(R), effective January 1, 2006.