We have expanded through acquisitions in prior years. Our most recent acquisition was Guarantee Life Insurance Company (Guarantee) which we acquired in late 1999. Our acquisition strategy is designed to enhance core business growth and deploy excess capital. The focus is to increase distribution, add products, add technology and provide economies of scale.
We believe the following are our critical accounting policies because they involve the more significant judgments and estimates we use in preparing our financial statements.
(a) Includes $1.5 relating to the cumulative effect of change in accounting for derivatives.
Life insurance premium sales, excluding large case BOLI, increased 19.0% in 2001 and decreased 4.7% in 2000. The 2001 results reflected increased sales as a result of our Premier Partnering initiative and the introduction of several new UL products. Agency channels provided 71.4%, 80.6% and 73.6% of the life insurance premium sales excluding large case BOLI for each of the three years presented above. The remainder was comprised primarily of single premium products targeted principally to financial institutions. Large case BOLI sales increased significantly over 2000. Our business strategy is to respond to individual sales opportunities for large case BOLI when the market accommodates required returns. Thus, BOLI sales will vary widely between periods.
Revenues include traditional insurance premiums, policy charges, and net investment income. Individual traditional premiums decreased 7.6% in 2001 as a result of a decrease in our traditional business in force and certain reclassifications made in 2000 related to the integration of Guarantee. Individual traditional premiums increased 12.3% in 2000 resulting primarily from the Guarantee acquisition. UL and investment product charges increased 2.5% and 16.4% in 2001 and 2000 due to growth in average UL policyholder fund balances of 3.4%
While this list does not cover all of the risks we face in the ordinary course of business, it does highlight some of the major risks on the assumptions that we make as we amortize the DAC and VOBA balances. In general, a change in an assumption that improves our expectations regarding EGP is going to have the impact of deferring the amortization of DAC and VOBA into the future, thus increasing earnings and the current DAC and VOBA balances. Conversely, a change in assumptions that decreases EGP will have the effect of speeding up the amortization of DAC and VOBA, thus reducing earnings and lowering the current DAC and VOBA balances. Our review of these assumptions in recent years has resulted in increases to the year-end Individual UL-type DAC and VOBA balances of 0.8%, 0.8% and 0.0% in 2001, 2000, and 1999.
We have a bank credit agreement for unsecured revolving credit, under which we have the option to borrow at various interest rates. The agreement is for $375 and extends to May 2002. We intend to replace the expiring bank credit agreement with a new agreement in May 2002. The credit agreement principally supports the issuance of commercial paper. As of December 31, 2001, outstanding commercial paper had various maturities, with none in excess of 90 days, although maturities can be up to 270 days. In the event that we are not able to remarket commercial paper at maturity, we have sufficient liquidity, consisting of the bank credit agreement, liquid assets, such as equity securities, and other resources to retire these obligations. The weighted-average interest rates for commercial paper borrowings outstanding of $297 and $405 at December 31, 2001 and 2000 were 3.72% and 6.51%. The maximum amount outstanding during 2001 and 2000 was $565 and $525.
We also consider the timing of cash flows arising from market risk sensitive instruments and insurance portfolios under varying interest rate scenarios as well as the related impact on reported earnings under those varying scenarios. Market risk sensitive instruments include debt and equity securities Available for Sale and Held to Maturity, mortgage loans, policy loans, investment commitments, annuities in the accumulation phase and periodic payment annuities, commercial paper borrowings, repurchase agreements, interest rate swaps and other debt. The following table shows our estimate of the impact that various hypothetical interest rate scenarios would have on our earnings for a calendar year, based on the assumptions contained in our model. The incremental income (loss) derives primarily from differences in the yield curves and in the sensitivities they introduce to our model.
The U.S. insurance industry has experienced an increasing number of mergers, acquisitions, consolidations, sales of business lines and marketing arrangements with other financial services providers. These activities have been driven by a need to reduce costs of distribution and to increase economies of scale in the face of growing competition from larger insurers, banks, securities brokers, mutual funds and other non-traditional competitors. The Gramm-Leach-Bliley Act modernized the regulatory framework for financial services in the U.S. and allows insurance companies, banks and securities firms to affiliate under Financial Holding Companies. With the passage of this law, combined with changing demographics, technological advances and customer expectations for one-stop shopping, we expect further strategic alignments in the financial services industry. We continue to analyze our options within this environment for increasing distribution, adding products and technology and improving economies of scale.
Property and equipment, which is included in other assets, is stated at cost and depreciated principally by the straight-line method over estimated useful lives, generally 30 to 50 years for buildings and approximately 10 years for other property and equipment. Accumulated depreciation was $181 and $159 at December 31, 2001 and 2000.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively referred to as SFAS 133). SFAS 133 requires all derivatives to be recorded on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, changes in its fair value are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS 133 on January 1, 2001 resulted in a cumulative effect of an accounting change of $2 with related income tax expense of $1 being recognized as income in the accompanying consolidated statement of income. There was no cumulative effect recognized in other comprehensive income related to the Company's interest rate swaps, used as cash flow hedges, because these swaps were carried at fair value prior to adoption of SFAS 133. See Note 5 for a complete discussion of the Company's derivative instruments.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143) which is effective for fiscal years beginning after June 15, 2002. The Statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. The Company
Investments in debt and equity securities include 1,820 issuers, with one corporate issuer representing more than one percent of investments. Debt and equity securities include investments in Bank of America of $584 and $492 as of December 31, 2001 and 2000.
In April and June 1997, the Company issued MEDS of $75 at 6.95% and $75 at 6.65%. The MEDS are based on BankAmerica common stock. Interest is payable quarterly. The MEDS represent senior indebtedness of the Corporation. The MEDS had principal amounts at issue of: 6.95% MEDS, $55.55 per security and 6.65% MEDS, $66.625 per security. Two weeks prior to, or at, maturity, the Company has the option of mandatorily exchanging the principal amount of the MEDS into either a number of shares of the common stock of BankAmerica (stock) determined based on an exchange rate reflecting the then trading price for the stock, or cash in an amount of equal value. Subject to adjustments to reflect dilution, the exchange rate is equal to (1) 0.8264 shares if the stock price is at least: 6.95% MEDS, $67.22 and 6.65% MEDS, $80.62, (2) a fractional share of the stock having a value equal to the principal amount if the price is more than the principal amount but less than the amount stated in (1), or (3) one share if the price is less than or equal to the principal amount.
Under the Non-Employee Directors' Stock Option Plan, 764,721 shares of the Company's common stock are reserved for issuance pursuant to outstanding or future awards as of December 31, 2001. Nonqualified stock options are automatically awarded, at market prices on specified award dates. The options vest over a period of one to three years, and terminate ten years from the date of award, but are subject to earlier vesting or termination under certain circumstances. This plan will terminate as to further awards on March 31, 2003.
The insurance statutes of the states of domicile limit the amount of dividends that the life insurance subsidiaries may pay annually without first obtaining regulatory approval. Generally, the limitations are based on a combination of statutory net gain from operations for the preceding year, 10% of statutory surplus at the end of the preceding year, and dividends and distributions made within the preceding twelve months. Depending on the timing of payments, approximately $308 of dividends could be paid to the ultimate parent by the life insurance subsidiaries in 2002 without regulatory approval.
Federal income tax returns for all years through 1994 are closed. The Internal Revenue Service has examined tax years 1995 and 1996, and assessments totaling $15 have been proposed. The assessments pertain to issues related to timing differences between tax accounting and generally accepted accounting principles. The Company has contested the proposed assessments. Tax years 1997, 1998, 1999 and 2000 are currently under examination by the Internal Revenue Service, and no assessments have been proposed to date. In the opinion of management, recorded income tax liabilities adequately provide for these pending assessments as well as all remaining open years.