The financial products segment, in which the Company conducts business through a group of wholly owned subsidiaries (the "GIC Subsidiaries"), produces net interest margin ("FP NIM") rather than insurance premiums. Like installment premiums, FP NIM is expected to be earned and collected in future periods.
PV outstanding is the sum of cumulative years' reported PV premiums originated and PV NIM originated, less what has been earned or adjusted due to changes in estimates as described above. Installment payment contracts, whether in the form of premiums or NIM, are generally non-cancelable and represent a claim to future cash flows. Therefore, management includes these amounts in its estimate of ABV.
standard), and the Company and its subsidiaries do not intend to trade these highly rated, highly structured contracts. Accordingly, management believes it is probable that the financial impact of the fair-value adjustments for the insured CDS will disappear over the finite terms of the exposures, which are typically five to seven years at inception. For this reason, management believes that the market volatility of credit-spread pricing, the primary driver of the Company's change in fair-value results, should not influence a measure of the Company's operating performance.
The table below reconciles Total NIM with FP NIM, which is used as a key performance measure of the financial products business.
Intersegment transactions relate primarily to intercompany notes held in the FP bond portfolio. In connection with the Company's refinancing transactions, the Company obtains funds from the FP operations to fund claim payments, as discussed further in Note 22 to the Consolidated Financial Statements in Item 8, creating an interest-bearing intercompany note. This intercompany note is included in the assets of the financial products segment. The net interest income on intercompany notes is included in FP NIM, but eliminated in the consolidated Total NIM. The GIC Subsidiaries raise funds through the issuance of FSA-insured GICs in the normal course of FP operations.
Income from assets acquired in refinancing transactions was $14.8 million in 2004, $19.5 million in 2003 and $1.9 million in 2002. The significantly higher amounts in 2004 and 2003 than in 2002 were due to the refinancings of several insured transactions whereby the Company accelerated claims payment on transactions that had experienced events of default and acquired the obligations or underlying collateral in order to mitigate future claims. The amounts presented are net of the impact of derivative instruments used to hedge interest-rate risks within this portfolio of assets.
Total equity in earnings of unconsolidated affiliates was a loss of $3.3 million in 2004 and gains of $5.5 million in 2003 and $29.3 million in 2002. The Company has an investment in SPS Holding Corp. ("SPS"), formerly Fairbanks Capital Holding Corp. SPS is owned 64.92% by The PMI Group Inc. and 34.06% by the Company, with the remainder owned by individuals. At December 31, 2004, the Company's interest in SPS had a book value of $49.6 million. At December 31, 2003, the Company's interest in SPS was $46.4 million, of which $7.6 million represented goodwill. The Company's equity in earnings from SPS was a loss of $7.1 million in 2004, a loss of $13.5 million in 2003, and income of $13.8 million in 2002.
On July 31, 2003, FSA Holdings issued $100.0 million principal amount of 5.60% Notes due July 15, 2103, which are callable without premium or penalty in whole or in part at any time on or after July 31, 2008. Debt issuance costs of $3.3 million are being amortized over the life of the Notes. In September 2003, FSA Holdings called for redemption, on November 1, 2003, its 6.950% Senior Quarterly Income Debt Securities ("Senior QUIDS") due November 1, 2098 and delivered to the trustee sufficient collateral to legally defease the 6.950% Senior QUIDS. The unamortized debt issuance costs of $3.2 million for the 6.950% Senior QUIDS were charged to interest expense in 2003. Subsequently, the trustee used the defeasance collateral to redeem all of the 6.950% Senior QUIDS.
FSA Asset Management LLC ("FSAM") has a $100.0 million line of credit with UBS Loan Finance LLC, which expires December 9, 2005, unless extended. This line of credit provides an additional source of liquidity should there be unexpected draws on GICs issued by the GIC Subsidiaries. There were no borrowings under this arrangement at December 31, 2004.
•upfront premiums are recognized as earned when related principal and interest have expired rather than over the expected coverage period;
cancelable operating leases, which expire at various dates through 2013. Future minimum rental payments are as follows (in thousands):
For cash, receivable for investments sold, and payable for investments purchased, the carrying amount is cost, which approximates fair value because of the short maturity of these instruments.
payments of principal only at the ultimate maturity of such transactions. Application of this methodology resulted in recording $68.8 million in gross case reserves and $29.8 million in reinsurance recoverable on unpaid losses, resulting in a $39.0 million increase in net case reserves in 2002. Management, beginning in the second quarter of 2002, has refined the loss factor it applies to its net par underwritten when calculating the non-specific reserve in order to reflect its recent adverse experience. As a result, the non-specific reserve accrual for the year ended December 31, 2002 was $65.6 million, rather than approximately $14.9 million that would have been accrued using the prior assumptions.
Since case and non-specific reserves are based on estimates, there can be no assurance that the ultimate liability will not differ from such estimates. The Company will continue, on an ongoing basis, to monitor these reserves and may periodically adjust such reserves, upward or downward, based on the Company's actual loss experience, its future mix of business and future economic conditions.
Until the fourth quarter of 2004 this investment was accounted for using the equity method of accounting because the Company has significant influence over XLFA's operations. In the second quarter
(1)Ratings are based on the lower of Moody's or S&P ratings available at December 31, 2004.