The following Selected Consolidated Financial Data at, or for the years ended, December 31, should be read in conjunction with the Consolidated Financial Statements and accompanying notes included elsewhere herein.
The GAAP measure gross premiums written captures premiums collected in a given period, whether collected up front for business originated in the period, or in installments for business originated in prior periods. Because a significant portion of the Company's premiums are collected in installments, management uses a non-GAAP measure, gross present value originations (PV originations), to reflect the business originated in a given period. PV originations has two components. The first, gross present value of premiums written (PV premiums), reflects estimated future installment premiums discounted to their present value, as well as upfront premiums, but only for business originated in the period. Business ceded through reinsurance placed by a third party is excluded from PV premiums. To calculate PV premiums, management estimates the life of each transaction that has installment premiums and discounts the future installment premium payments. The second component of PV originations is the present value of future net interest margin (PVNIM). PVNIM represents the present value of the difference between the estimated interest to be received on the investments of the Company's financial products segment and the estimated interest to be paid on guaranteed investment contracts (GICs) issued by subsidiaries of the Company (the GIC Subsidiaries) over the estimated life of each transaction. PVNIM is calculated after giving effect to swaps and other derivatives that convert fixed-rate assets and liabilities to floating rates. The Company calculates the discount rate for PV originations as the average pre-tax yield on its investment portfolio for the previous three years. Accordingly, year-to-year comparisons of PV originations are affected by the application of different discount factors. The rates for 2003, 2002 and 2001 were 5.91%, 5.91% and 5.79%, respectively. Management intends to revise the discount rate in future years according to the same formula, in order to reflect interest-rate changes.
New-issue volume in the U.S. municipal bond market reached record levels of $384.8 billion and $358.8 billion in 2003 and 2002, respectively, as low interest rates, diminished tax revenues and continuing needs for infrastructure investment drove municipalities to borrow on an unprecedented scale. Estimated insurance penetration approached 50% in each of those years, up from 47% in 2001, when $288.2 billion of bonds were issued. In each of the three years, FSA guaranteed approximately 27% of the insured par amount of bonds sold. The recent trend toward higher market volumes may not continue. Rising interest rates would be expected to result in a general decline in market volume.
Including both primary and secondary U.S. municipal obligations with closing dates in 2003, the annual par amount insured by FSA increased 6.3%, and PV premiums increased 14.8%, compared with 2002 results. Premium rates were strong throughout 2003 due to wider credit spreads than in prior periods. In 2002, the comparable par amount FSA insured increased 41.6%, and the related PV premiums increased 89.2%, compared with 2001 results. PV premiums rose more rapidly than par insured in 2002 because a smaller portion of par was generated by general obligations, which tend to have lower premium rates than more complex issues of similar credit quality.
In 2003, PV premiums from the Company's U.S. asset-backed business approached that of the previous year, off 9.4%, even though par originated declined 56.2%. Compared with the previous year, the Company's asset-backed business was more diversified, with a shift away from large Super Triple-A credit default swaps (CDS), Triple-A tranches of residential mortgage-backed securities and auto loan transactions and toward higher premium types of transactions, including Triple-A collateralized loan obligations (CLOs), certain residential mortgage obligations and consumer finance issues, such as credit card receivable transactions. In 2002, par value of U.S. asset-backed issues insured by FSA declined 36.4% to $35.6 billion, reflecting the Company's decision to refrain from insuring collateralized debt obligations (CDOs) at mid-year 2002 pending a reevaluation of its underwriting standards, as well as the Company's generally heightened selectivity in all asset-backed sectors during a period of economic weakness. In addition, FSA did not insure any large U.S. asset-backed transactions in 2002 comparable to two transactions that together contributed $90 million of PV premiums in 2001.
Interest expense in 2003, 2002 and 2001 was $33.0 million, $28.1 million and $16.9 million, respectively. For further discussion, see "Liquidity and Capital Resources" below.
The Company also maintains a non-specific general reserve, which is available to be applied against future additions or accretions to existing case reserves or to new case reserves to be established on particular insured obligations in the future. The general reserve is derived from two separate steps. The first step is to multiply loss factors by the Company's total net par underwritten and to discount the result at the then current risk-free rates, which ranged from 1.2% to 7.953% at December 31, 2003. The loss factors used for this purpose are obtained from an independent rating agency study of bond defaults and have been adjusted by the Company's portfolio characteristics and history. The second step pertains to the Company's insured CDOs, where a present value "deterministic" approach (described in Note 16) is utilized to calculate the general reserve for the Company's insured CDOs.
Deferred premium revenue, net of prepaid reinsurance premiums-The carrying amount of deferred premium revenue, net of prepaid reinsurance premiums, represents the Company's future premium revenue, net of reinsurance, on policies where the premium was received at the inception of the insurance contract. The fair value of deferred premium revenue, net of prepaid reinsurance premiums, is an estimate of the premiums that would be paid under a reinsurance agreement with a third party to transfer the Company's financial guaranty risk, net of that portion of the premiums retained by the Company to compensate it for originating and servicing the insurance contract.
GICs and VIE debt-The fair value is the present value of the expected cash flows as of the reporting date.