The Company leases office space at 1099 North Meridian Street, Indianapolis, Indiana in the Landmark Building. This building is located approximately one mile from downtown Indianapolis. The lease covers approximately 67,000 square feet and expires in August, 2003, with an option to renew for an additional ten years. The Company's entire operations, with the exception of Baldwin & Lyons, California, are conducted from these leased facilities.
The Company's assets at December 31, 1999 included $35.9 million in short-term investments which are readily convertible to cash without market penalty and an additional $44.1 million of fixed maturity investments maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from current operations, are more than sufficient to provide for projected claim payments and operating cost demands. In addition, the Company's reinsurance program is structured to avoid serious cash drains that might accompany catastrophic losses. In the event competitive conditions continue to produce inadequate rates and the Company chooses to further reduce volume, the Company believes that the liquidity of its investment portfolio would permit it to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time.
Shareholders' equity decreased to $284.8 million at December 31, 1999, from $288.6 million at December 31, 1998, due predominantly to $11.8 million in treasury share purchases. The change in shareholders' equity also included a $5.6 million decline in unrealized net gains on investments and $5.4 million of cash dividends to shareholders. Book value per common share outstanding increased 3% to $21.50 at December 31, 1999 from $20.91 per share at December 31, 1998.
Direct premiums written for 1999 totaled $86.1 million, an increase of $8.2 million (10.6%) from 1998. This increase is primarily attributable to an increase in fleet trucking's independent contractor program of $4.1 million (24.6%) from 1998. Direct premium writings from small and large trucking fleet risks also increased by $2.4 million and $2.1 million, respectively. These increases were partially offset by a small decrease in the Company's private passenger automobile business where competitive pressures have increased. Increases in independent contractor premiums resulted from the addition of new accounts and volume increases on existing accounts. Large fleet trucking volume increases resulted primarily from the addition of new accounts and small fleet trucking premium increases were due primarily to geographic expansion.
Realized net capital gains were $5.6 million in 1999 compared to $2.8 million for 1998. The current year net gain consisted of gains on equity securities and other investments of $7.8 million and $.2 million, respectively, and losses on fixed maturities of $2.3 million.
Losses and loss expenses incurred during 1999 increased $2.4 million (5.6%) to $44.9 million. The 1999 consolidated loss and loss expense ratio was 65.0% compared to 61.8% for 1998. The increase in the loss and loss expense ratio is primarily attributable to incurred loss development on discontinued products and residual market participation along with growth in the Company's small trucking fleet program, all of which is measured
against a relatively unchanged consolidated premium base. Changes in the Company's remaining products were individually insignificant. Because of the high limits provided by the Company to its insureds, the length of time required to settle larger, more complex claims and the volatility of the trucking liability insurance business, the Company believes it is important to have a high degree of comfort in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, historically, tended to produce savings from the reserves provided. The Company believes that favorable loss developments in recent years may be attributable, at least in part, to changes in trucking safety in general resulting from the implementation of the national commercial driver license, mandatory drug testing and an increased awareness by trucking companies of the cost of unsafe operations. It is further believed that the Company's selection techniques, minimum safety standards and claims handling have also contributed to this favorable loss experience. However, due to the aforementioned changes in the Company's reinsurance structure for its large trucking fleets, whereby a smaller portion of the risk is retained, the impact of future loss developments on the loss and loss expense ratios may not be consistent with prior years.
Other operating expenses for 1999, before credits for allowances from reinsurers, increased $2.3 million (7.8%) to $31.8 million. Personnel related expenses, including amounts allocated to loss expenses and investment income, increased $2.4 million (16.1%) from 1998. Personnel expense for 1999 was higher primarily as the result of accruals for equity appreciation rights, which represent a broad-based employee incentive program which is tied to changes in the Company's book value, in addition to regular annual payroll increases. Direct commission expense decreased $.9 million (11.0%) as the result of the decline in premiums from voluntary reinsurance assumed, partially offset by increases in premiums from Sagamore's small fleet and small business workers' compensation products. Ceding commission allowances from reinsurers increased $3.7 million (115.7%) resulting from new reinsurance agreements covering Protective's fleet trucking business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 29.6% during 1999 compared to 32.0% for 1998. Including the agency operations, the ratio of other operating expenses to total revenue, adjusted to remove net realized gains, was 27.5% for 1999 compared with 29.4% for 1998. Expenses for 1999 and 1998 include expenditures for Year 2000 (Y2K) compliance, as discussed more thoroughly elsewhere in this discussion. While it is not possible to precisely isolate Y2K expenditures from those for ongoing development of current product lines, management believes that amounts spent during 1999 for Y2K related issues were higher than expenditures during 1998.
Net investment income increased by $.6 million (3.3%) during 1998 due to higher average invested assets while overall pre-tax yields were relatively unchanged. The average pre-tax yield on invested assets was 5.0% for both 1998 and 1997 while the after-tax yield for 1998 was 3.6% compared to 3.5% for 1997. Investment expenses, which are netted directly against income, were relatively unchanged in 1998 and were 5.8% of gross investment income compared to 6.2% for 1997.
A provision in the Technical and Miscellaneous Revenue Act of 1988 created a mechanism which would allow for a recognizable deferred tax asset specifically for property and casualty loss reserves discounted for tax purposes. Adopted as Section 847 of the Internal Revenue Code, this provision allows an insurer to take a special tax deduction equal to the discount on post 1986 accident year loss and loss expense reserves while making "special estimated tax payments" equal to the amount of the tax benefit derived from the special deduction. The "special estimated tax payments" can be carried forward for fifteen years to offset taxes arising from decreases in the special deduction and can be treated as regular estimated payments or refunded at the end of the carryforward period. Based upon the concerns regarding the recognition of deferred tax assets, the Company adopted the provisions of Section 847 for all tax years 1987 and subsequent and has taken deductions for the entire amount of discount on post- 1986 loss reserves. As mentioned above, special Section 847 estimated tax deposits totaling $5.0 million have been paid in connection with this election.
Any forward-looking statements in this report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company's business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company's markets and other changes in the market for insurance products could adversely affect the Company's plans and results of operations; and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission.
The most significant of the three identified market risks relates to prices in the equities market. Though not the largest category of the Company's invested assets, equity securities have the greatest potential for short-term price fluctuation. The market value of the Company's equity positions at December 31, 1999 was $139.3 million or approximately 32% of invested assets, including money market instruments classified as cash. Funds invested in the equities market are not considered to be assets necessary for the Company to conduct its daily operations and, therefore, can be committed for extended periods of time. The long-term nature of the Company's equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuations, are the most important feature.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income and retained earnings, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the Index at Item 14(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.
Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other insurers have been reported as a reduction of premium income. Amounts applicable to reinsurance ceded for unearned premium and claim loss reserves have been reported as reinsurance recoverable assets. Certain reinsurance contracts provide for additional or return premiums and commissions based upon profits or losses to the reinsurer over prescribed periods. Estimates of additional or return premiums and commissions are adjusted quarterly to recognize actual loss experience to date as well as projected loss experience applicable to the various contract periods.
The fair values and the cost or amortized cost of fixed maturity investments at December 31, 1999, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Maturities for mortgage-backed securities are determined on a specific identification basis.
The reserves for losses and loss expenses, net of related reinsurance recoverables, at December 31, 1998, 1997 and 1996 were decreased by $10,609, $10,741 and $7,838, respectively, for claims that had occurred on or prior to those dates. These decreases are the result of the settlement of claims at amounts lower than previously reserved and changes in estimates of losses incurred but not reported as part of the normal reserving process. Development during 1999 and 1998, on reserves outstanding at December 31, 1998 and 1997 included decreases of $1,082 and increases of $1,070, respectively, for incurred losses and loss expenses related to environmental damage claims. Reported cases relate primarily to policies issued in the 1970's to one account which was involved in the business of hauling and disposing of hazardous waste. Included in the above amounts are reserves for incurred but not reported environmental losses of $5,000 at both December 31, 1999 and 1998. Adjusted for environmental claims, management believes that the more favorable than anticipated experience may be attributable, at least in part, to changes in trucking safety in general resulting from the implementation of the national commercial driver license, mandatory drug testing and an increased awareness by trucking companies of the cost of unsafe operations. It is further believed that the Company's selection techniques, minimum safety standards and claims handling have also contributed to the current favorable loss experience. These trends were considered in the establishment of the Company's reserves at December 31, 1999.
Shareholders' equity at December 31, 1999 includes $285,625 representing GAAP shareholder's equity of insurance subsidiaries, of which $40,493 may be transferred by dividend or loan to the parent company without approval by, or notification to, regulatory authorities. An additional $188,756 of shareholder's equity of such insurance subsidiaries may be advanced or loaned to the Company with prior notification to regulatory authorities.
Net income of the insurance subsidiaries, as determined in accordance with statutory accounting practices, was $18,212, $18,396 and $24,895 for 1999, 1998 and 1997, respectively. Consolidated statutory shareholder's equity for these subsidiaries was $270,948 and $256,290 at December 31, 1999 and 1998, respectively.
The Company evaluates performance and allocates resources based on gain or loss from insurance underwriting operations before income taxes. Underwriting gain or loss does not include net investment income nor does it include realized gains or losses on the Company's investment portfolio. All investment-related revenues are managed at the corporate level. Underwriting gain or loss for the fleet trucking segment includes revenue and expense from the Company's agency operations since the agency operations serve solely as a direct marketing facility for this segment. Underwriting gain or loss also includes fee income generated by each segment in the course of its underwriting operations. Management does not identify or allocate assets to reportable segments when evaluating segment performance and depreciation expense is not material for any of the reportable segments. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies.
The Company maintains stock option plans and has reserved an aggregate of 1,050,000 shares of Class B common stock for the granting of stock options to employees and directors. Discounted options granted to employees are generally exercisable immediately while discounted options granted to directors are generally not exercisable for one year from the date of grant. During 1997, the Company granted 497,000 market value options, of which 476,000 remained outstanding at December 31, 1999. These options become exercisable in one-third increments on the first, second and third anniversary of the date of grant, assuming continued employment with the Company of the optionee. 21,000 of said options were forfeited during 1999. All options expire ten years after the date of grant.
Exercise prices for options outstanding as of December 31, 1999 were $.33, $1.00 or $25.75. The weighted-average remaining contractual life of options exercisable at either $.33 or $1.00 is 5.5 years with a weighted-average exercise price of $.68. The remaining contractual life of options exercisable at $25.75 is 8 years. The compensation cost that has been charged against income for all stock-based compensation plans, consisting of directors' fees only, was $140, $135 and $78 for 1999, 1998 and 1997, respectively.