As more fully discussed in Note G to the consolidated financial statements, at December 31, 2000, $55.7 million, or 19.0% of shareholders' equity, represented net assets of the Company's insurance subsidiaries
which, at that time, could not be transferred in the form of dividends, loans or advances to the parent company due to statutory restrictions on the allowable transfers. However, management believes that these restrictions pose no material liquidity concerns for the Company. The financial strength and stability of the subsidiaries permit ready access by the parent company to short-term and long-term sources of credit. The parent company had cash and marketable investments of approximately $9.4 million at December 31, 2000.
Premiums assumed from other reinsurers of $4.2 million during 2000 were relatively unchanged from 1999 although 2000's premium included $1.7 million of reinstatement premium attributable to losses occurring in late 1999. Without this premium, reinsurance assumed volume would have decreased 37% from the prior year. Pricing in this market began to firm up toward the end of 2000 and management anticipates increased participation during 2001.
Premiums ceded to reinsurers increased $5.8 million (31.8%) during 2000 to $24.2 million. The percentage of premiums ceded to direct premiums written increased to 24.9% for 2000 from 21.3% for 1999 consistent with the increase in direct premiums written for the more heavily reinsured large trucking fleet program discussed above.
After giving effect to changes in unearned premiums, net premiums earned increased 12.0% to $77.4 million for 2000 from $69.1 million for 1999. Premiums earned from private passenger automobile increased by $6.6 million. Net premiums earned from all trucking-related insurance products increased by $1.7 million (5.3%), including $1.9 million (31.7%) for small fleet trucking.
Losses and loss expenses incurred during 2000 increased $12.6 million (28.0%) to $57.5 million. The 2000 consolidated loss and loss expense ratio was 74.2% compared to 65.0% for 1999. The increase in the loss and loss expense ratio is primarily attributable to adverse loss development and an increased frequency and severity of claims in the Company's personal automobile division. Changes in the Company's remaining products were generally favorable. Because of the high limits provided by the Company to its large trucking fleet insureds, the length of time required to settle larger, more complex claims and the volatility of the trucking liability
As a result of the factors mentioned above, net income from consolidated operations for 2000 was $19.7 million compared to $18.6 million for 1999. Diluted earnings per share increased to $1.57 in 2000 from $1.38 in 1999 due primarily to the increase in realized gains on investments. Diluted earnings per share from operations before realized gains on investments was $.93 in 2000 compared to $1.11 in 1999.
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 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.
Premiums assumed from other reinsurers decreased by $3.0 million (42.6%) to $4.0 million during 1999. This decrease is due to non-renewal of the Company's participation in voluntary property catastrophe retrocession pools during 1999 as pricing in this market continued to weaken.
Net investment income decreased by $.2 million (.9%) during 1999 due to lower average invested assets while overall pre-tax yields remained relatively unchanged from 1998. The average pre-tax yield on invested assets was 5.0% for both 1999 and 1998 and after-tax yields also remained unchanged at 3.6%.
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 $4.2 million have been paid in connection with this election.
The Company's fixed maturity portfolio totaled $211.8 million at December 31, 2000. Over half of this portfolio is made up of U. S. government and government agency obligations and state and municipal debt securities, 83% of the portfolio matures within 5 years and the average life of the Company's fixed maturity investments is approximately 4.0 years. Although the Company is exposed to interest rate risk on its fixed maturity investments, given the anticipated duration of the Company's liabilities (principally insurance loss and loss expense reserves) relative to maturities, even a 100 to 200 basis point increase in interest rates would not have a significant impact on the Company's ability to conduct daily operations or to meet its obligations.
To the extent possible, the Company attempts to recover the costs of inflation by increasing the premiums it charges. A majority of the Company's premiums are charged as a percentage of an insured's gross revenue or payroll. As these charging bases increase with inflation, so does premium. The remaining premium rates charged are adjustable only at periodic intervals and often require state regulatory approval. Such periodic increases in premium rates may lag far behind cost increases.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost. Depreciation is computed substantially by the straight-line method.
RESERVES FOR LOSSES AND LOSS EXPENSES: The reserves for losses and loss expenses, certain of which are discounted, are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year end. These reserves include estimates of future trends in claim severity and frequency and other factors which could vary as the losses are ultimately settled. Although it is not possible to measure the degree of variability inherent in such estimates, management believes that the reserves for losses and loss expenses are adequate. The estimates are continually reviewed and as adjustments to these reserves become necessary, such adjustments are reflected in current operations.
RECOGNITION OF REVENUE AND COSTS: Premiums are earned over the period for which insurance protection is provided. A reserve for unearned premiums, computed by the daily pro-rata method, is established to reflect amounts applicable to subsequent accounting periods. Commissions to unaffiliated companies and other acquisition costs applicable to unearned premiums are deferred and expensed as the related premiums are earned. Anticipated investment income is considered in determining recoverability of deferred acquisition costs.
NOTE C - LOSS AND LOSS EXPENSE RESERVES Activity in the reserves for losses and loss expenses is summarized as follows. All amounts are shown net of reinsurance recoverable.
Loss reserves on certain permanent total disability workers' compensation reserves have been discounted to present value at pre-tax rates not exceeding 3.5%. At December 31, 2000 and 1999, loss reserves have been reduced by approximately $5,096 and $5,553, respectively. Discounting is applied to these claims since the amount of periodic payments to be made during the lifetime of claimants is fixed and determinable.
Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $2,698 and $2,363 at December 31, 2000 and 1999, respectively.
NOTE F - REINSURANCE The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess and quota share treaties and by facultative placements. Risks are reinsured with other companies to permit the recovery of a portion of related direct losses. Protective also serves as an assuming reinsurer under retrocessions from certain other reinsurers. These retrocessions include individual risks as well as aggregate catastrophe treaties. Accordingly, the occurrence of a major catastrophic event could have a significant impact on the Company's financial statements. In addition, the insurance subsidiaries participate in certain involuntary reinsurance pools which require insurance companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level.
Shareholders' equity at December 31, 2000 includes $302,858 representing GAAP shareholder's equity of insurance subsidiaries, of which $42,772 may be transferred by dividend or loan to the parent company without approval by, or notification to, regulatory authorities. An additional $204,337 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 $23,408, $18,212 and $18,396 for 2000, 1999 and 1998, respectively. Consolidated statutory shareholder's equity for these subsidiaries was $291,371 and $270,948 at December 31, 2000 and 1999, respectively.
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. All options expire ten years after the date of grant.
The fair value of market value options granted during 1997 was determined using a Black Scholes option pricing model with the following assumptions: risk-free interest rate of 5.8%; dividend yield of 1.8%; volatility factor of the expected market price of the Company's common stock of .21; and an expected life of the option of 10 years. If the Company had followed Financial Accounting Standards Board Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, 2000 net income and earnings per share would have been reduced by $939 and $.07, respectively, related to the issuance of 1997 market value options. Similarly, 1999 and 1998 net income and earnings per share would each have been reduced by $975 and $.07, respectively, related to these options.