Other operating expenses for 2003, before credits for allowances from reinsurers, increased $10.8 million (27%) to $50.6 million. Gross expenses increased at a lower rate than the increase in premium volume because much of the Company's expense structure is fixed and does not vary directly with volume. In general, only commissions to independent agents, premium taxes and other acquisition costs vary directly with premium volume. Personnel related expenses, including amounts allocated to loss expenses and investment income, increased 26% due mainly to employee incentives based upon Company performance in addition to a 7% increase in the number of employees during 2003. Direct commission expense increased $2.9 million (33%) due to growth in all of the Company's business produced by outside agents and as the result of increased participation in voluntary reinsurance assumed treaties. Substantially all fleet trucking business is produced by direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Instead, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. are included in operating expenses. In general, commissions paid by the insurance subsidiaries to the parent company exceed related acquisition costs incurred in the production of fleet trucking business. Ceding commission allowances from reinsurers increased $2.5 million (14%), resulting from increased premium volume ceded under reinsurance agreements covering Protective's fleet trucking business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 26.5% during 2003 compared to 26.1% for 2002. Including the agency operations, and after elimination of inter-company commissions, the ratio of other operating expenses to operating revenue was 18.4% for 2003 compared with 17.8% for 2002, with the increase primarily attributable to the lower ratio of ceding commission income to gross acquisition costs, as less of the gross premium is ceded to reinsurers.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
Approximately 21% of purchases and 38% of sales of investments during the three years ended December 31, 2003 were made through securities broker-dealers in which certain directors of the Company were officers, directors or owners. Fees earned by affiliated investment advisors were $2,820, $482 and $1,110 in 2003, 2002 and 2001, respectively.
NOTE K - NOTE PAYABLE At December 31, 2002, the Company carried a note payable to bank in the amount of $7.5 million at an annual interest rate of 3.22%. The carrying amount of this note payable approximates fair value. This note was repaid in 2003.