The Alternative Risk Division discontinued an earthquake program in 1998 which resulted in an approximate $4 million decrease in earned premium in 1999 when compared to 1998. The remaining decrease in net premiums earned of approximately $11 million was primarily attributable to more competitive market conditions in the excess workers' compensation sector.
The overall increase in underwriting and operating expenses was partially offset by approximately $1.7 million due to the net impact of two recently adopted accounting standards (see Note B of the Notes to the Consolidated Financial Statements - Impact of Recently Issued Accounting Standards). Additionally, 1998 expenses were negatively impacted by a $10 million charge to cancel the aggregate excess stop loss agreement for the 1999 treaty year.
The increase in interest expense in 1999 over 1998 was due to increased amounts borrowed under the Deutsche Bank credit facility. During 1999, the Company borrowed an additional $50.8 million, under the credit facility which combined with the $92 million balance at December 31, 1998, resulted in significantly higher interest expense during 1999.
At December 31, 1999 and 1998, the Company's fixed maturity investments included mortgage-backed securities of $368.8 million and $391.3 million, respectively, which are subject to risks associated with variable prepayments of the underlying mortgage loans that differ from typical fixed maturities. Securities that have an amortized cost greater than par value that are backed by mortgages that prepay faster than expected will incur a reduction in yield, while securities that have an amortized cost less than par value that are backed by mortgages that prepay faster than expected will generate an increase in yield. The degree to which a security is susceptible to either gains or losses is influenced by the difference between amortized cost and par value, the relative sensitivity of the underlying mortgages backing the assets to prepayment risk and the repayment priority of the securities in the overall structure of a securitization.
Cash flow needs at the holding company level primarily include corporate operating expenses and interest payments on outstanding debt for which funding is provided through management fees charged to the Company's subsidiaries and, until the end of 1999, the Company's revolving credit facility with a bank group consisting of five banks headed by Deutsche Bank AG, New York Branch ("Deutsche Bank"). Funds borrowed under the credit facility during 1999 amounted to approximately $50.8 million and were primarily used to purchase treasury stock and several small insurance agencies. As a result of the significant reserve charge during the third quarter of 1999, Deutsche Bank suspended any further loans to the Company under the facility until certain credit terms could be renegotiated. In January 2000, terms of the credit agreement were amended and the commitment under the facility was permanently reduced to $67.5 million and, pursuant to the terms of an amendment to the credit facility, the Company applied $75 million of the net proceeds from the sale of Lyndon (see Note S of the Notes to the Consolidated Financial Statements) to repay outstanding loans under the facility. In addition, the common stock of Frontier and Western and other ownership interests in certain noninsurance subsidiaries were pledged by the Company as collateral for amounts outstanding under the credit facility.
The Company has authorized a stock repurchase program to purchase for up to 3 million shares of its common stock under which it repurchased 668,300 shares at a cost of $8.5 million during 1998 and 2,135,446 shares at a cost of $25.9 million in 1999. The Company has no commitment or obligation to purchase any particular number of shares and, given its current financial condition, has suspended the program indefinitely.
Effective January 1, 1998, the Company entered into a stop loss reinsurance agreement with Zurich N.A. for the 1998 and 1999 accident years. The new agreement included selected programs underwritten by United Capitol, Western, and selected core programs of Frontier and Frontier Pacific, which were not part of the original 1995-1997 reinsurance agreement. Under the terms of the new agreement, Zurich N.A. provided reinsurance protection within certain contract aggregate dollar limits for losses and LAE in excess of a predetermined ratio of these expenses to earned premiums for a given accident year for the covered insurance programs. In addition there are line of business specific aggregate limits for medical malpractice and excess workers' compensation. As of December 31, 1998, the Company had exceeded these aggregates.
In addition to the action in the Court of Claims, the Company was pursuing litigation in the New York Supreme Court (the "Supreme Court") that would require the State to defend SUNY faculty members. The Supreme Court litigation differed from the Court of Claims litigation, in that the Company was not attempting to recover funds spent on the settlement of claims. In 1997, the Company received an adverse determination on its action in the Supreme Court.