MA-Alabama is the fee owner of one office building located in the metropolitan area of Birmingham, Alabama. MA-Alabama purchased its current home office building in March 1989 and during 1993 sold the office building which it formerly occupied. MAI and its subsidiaries are occupying approximately 55,000 square feet of office space in its current home office building. The remaining office space of approximately 101,000 square feet in this building is leased to unaffiliated persons or is available to be leased. The office building owned by MA-Alabama is currently unencumbered.
MOMED is the fee owner of one office building located in the metropolitan area of St. Louis, Missouri. MOMED and its subsidiaries are occupying approximately 7,700 square feet as their home offices and the remaining office space of approximately 6,500 square feet in this building is leased to unaffiliated persons or is available to be leased. At December 31, 1999 the home office building secured a bank loan in the approximate amount of $357,000; however, this loan was repaid in full in January 2000.
MAI's other insurance subsidiaries maintain additional office space under leases with unaffiliated persons that are not considered material.
The payment of losses, loss adjustment expenses, and operating expenses in the ordinary course of business is currently the Company's principal need for liquid funds. Cash provided from operating activities was sufficient during 1999 to meet the Company's operating needs, and the Company believes those sources will be sufficient to meet its cash needs for operating purposes for at least the next twelve months. Prolonged and increasing levels of inflation could cause increases in the dollar amount of losses and loss adjustment expenses and may therefore adversely affect future reserve development. To minimize such risk, the Company (a) maintains reinsurance at levels management considers to be strong and adequate; (b) conducts regular actuarial reviews to ensure, among other things, that reserves do not become deficient; and (c) maintains adequate asset liquidity.
At December 31, 1999 fixed maturity securities totaling $640.1 million, at fair value, comprised 84% of the Company's invested assets of $761.9 million. Thus, the most significant market risk to the Company is interest rate risk related to the fixed maturity portfolio. The Company believes it is in a position to keep these investments until final maturity and does not invest in fixed maturity securities for trading purposes. Nevertheless, fluctuations in market interest rates would significantly impact the fair value of this portfolio.
At December 31, 1999 the fair value of the Company's investment in common stocks, excluding preferred stocks as discussed in the following paragraph, was $29.4 million which included net unrealized gains of $6.4 million. These securities are subject to price risk. A hypothetical 10% increase in the market prices as of December 31, 1999 would increase the fair value of these securities to $32.3 million; a hypothetical 10% decrease would reduce the fair value to $26.5 million. The selected hypothetical change does not reflect what could be considered the best or worst scenarios.
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 compliant. To date, the Company has experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change.
The largest component of the increase in premiums earned is a $16.9 million increase in medical malpractice premiums. The increase in earned medical malpractice premiums includes $7.1 million related to the MDA book of business and a $5.8 million increase in medical malpractice premiums relating to reinsurance of other insurers. The increase in earned medical malpractice premiums was offset by a $6.4 million decrease in earned accident and health premiums.
Historically, the Company writes accident and health premiums from time to time. Direct accident and health premiums are heavily reinsured; volume fluctuations in direct accident and health premiums are largely offset by similar fluctuations in ceded accident and health premiums. Earnings on direct accident and health premiums are primarily derived from fee and commission income.
Other income decreased to $4.3 million for the year ended December 31, 1999 compared to $12.9 million for the year ended December 31, 1998. The decrease is principally attributable to a $9.5 million decrease in capital gains realized upon the sale of securities during 1999 as compared to 1998. See discussion under Liquidity and Capital Resources for more information regarding gains realized in 1998.
The increase in underwriting, acquisition and insurance expenses is primarily due to increased amortization of policy acquisition costs associated with new business. The decrease in ceding commissions earned is principally due to lower ceded accident and health premiums in 1999. See Note 5 of the Notes to Consolidated Financial Statements.
The $15.1 million increase in premiums ceded for the year ended December 31, 1998 as compared to the year ended December 31, 1997 is principally due to additional direct and assumed premiums in states other than Alabama, offset by increased reinsurance retentions, and consequently lower ceded premiums, for Alabama and West Virginia. The Company continually reviews the levels of coverage ceded and the related costs.
Other income increased to $12.9 million for the year ended December 31, 1998 compared to $3.3 million for the year ended December 31, 1997. The increase is principally attributable to a $9.5 million increase in capital gains realized upon the sale of securities during 1998 as compared to 1997, as discussed under Liquidity and Capital resources.
The increase in underwriting, acquisition and insurance expenses is due to increased amortization of policy acquisition costs associated with new business and increased costs from state guaranty fund assessments, offset by additional ceding commissions earned. Ceding commissions earned increased primarily because during 1998 a greater portion of the Company's reinsurance treaties provided for a ceding commission than was the case during 1997. See Note 5 of the Notes to Consolidated Financial Statements.
The Consolidated Financial Statements and Financial Statement Schedules of MAI and subsidiaries listed in Item 14(a) have been included herein beginning on page 31. The Supplementary Financial Information required by Item 302 of Regulation S-K is included in Note 11 of the Notes to Consolidated Financial Statements of MAI and its subsidiaries.