The amount of premiums recognized as revenue for financial reporting purposes, or premiums earned, increased in 2002 over 2001 due to growth in premiums from title insurance, and modified pool insurance and
Our equity earnings in unconsolidated strategic investments, excluding CMG, increased to $31.8 million in 2002 from $8.1 million in 2001 and $3.3 million in 2000. The increase in 2002 was attributable to The PMI Group’s increased ownership interest in Fairbanks, the expansion of Fairbanks’ servicing operations and our investment in Truman. The contribution of Truman to our equity earnings in 2002 was due to the completion of two securitization transactions by Truman Fund. We anticipate that the results from Truman will vary significantly on a quarterly and yearly basis. The increase in our equity earnings in 2001 was due primarily to growth in Fairbanks’ servicing portfolio. As of December 31, 2002, our investment in Fairbanks was $104.4 million and our ownership interest in Fairbanks was 56.8%. We report our investments in Fairbanks on a one-month lag using the equity method of accounting as a result of an agreement among the shareholders of Fairbanks limiting our ability to control the operations of Fairbanks.
These factors could also materially reduce demand for housing and, consequently, demand for mortgage insurance. The United States has experienced an economic downturn. If this economic downturn continues or worsens, our loss experience could suffer and demand for mortgage insurance could decline.
We cannot cancel the mortgage insurance coverage that we provide, except in the case of non-payment of premium. In addition, we generally establish renewal premium rates for the life of the mortgage insurance policy when the policy is issued. As a result, the impact of unanticipated claims generally cannot be offset by premium increases on policies in force or limited by nonrenewal of insurance coverage. The premiums we charge may not be adequate to compensate us for the risks and costs associated with the insurance coverage we provide to PMI’s customers.
These alternatives, or new alternatives to private mortgage insurance that may develop, could reduce the demand for private mortgage insurance and cause our revenues and profitability to decline.
We have subsidiaries in Australia and Europe. We have committed and may in the future commit additional significant resources to expand our international operations. Accordingly, we are subject to a number of risks associated with international business activities. These risks include:
the need to successfully develop and market products appropriate to the foreign market, including the development and marketing of credit enhancement products to European lenders and mortgage securitizations;
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2002, 2001 and 2000
The Company establishes loss reserves to recognize the liability of unpaid losses related to insurance in force on mortgages that are in default. These loss reserves are based upon our estimates of the claim rate and average claim amounts, as well as the estimated costs of settling claims. These estimates are regularly reviewed and updated using currently available information. Any adjustments due to positive or adverse developments, which may be material, resulting from these reviews would impact current reserve requirements. Our reserves may not be adequate to cover ultimate loss development on incurred defaults. Our financial condition and results of operations could be seriously harmed if our reserve estimates are insufficient to cover the actual related claims paid and loss-related expenses incurred.
11.1% interest in Fairbanks for $48.5 million, increasing the Company’s ownership interest in Fairbanks to 56.8%. As a result of an agreement among the shareholders of Fairbanks limiting the Company’s ability to control the operations of Fairbanks, the Company continues to report its investment in Fairbanks using the equity method of accounting in accordance with EITF Issue No. 96-16, Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights. The cost basis of the investments in unconsolidated subsidiaries reflects the Company’s share of net unrealized gains and losses on the unconsolidated subsidiaries investment portfolio.
Comprehensive Income-Includes foreign currency translation gains and losses and unrealized gains and losses on investments that have been previously excluded from net income and reflected instead in stockholders’ equity.
Senior Convertible Debentures-In July 2001, the Company issued $360.0 million of 2.50% Senior Convertible Debentures (“the Debentures”) in a private offering to qualified institutional buyers, and subsequently filed a shelf registration statement for the resale of the Debentures and the common stock of TPG issuable upon conversion of the Debentures. The Company has used a portion of the net proceeds of $351.9 million for the repayment or retirement of existing indebtedness and for general corporate purposes. The