The accompanying statutory financial statements are different in some respects from financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“United States GAAP”). As of January 1, 2001, the more significant differences between accounting principles pursuant to Codification and United States GAAP are as follows:
Federal income taxes are based upon our best estimate of our current and deferred tax liabilities. Deferred income taxes, which provide for book-tax temporary differences, are subject to limitation and are charged directly to shareholder’s equity. Accordingly, the reporting of miscellaneous temporary differences, such as reserves and policy acquisition costs, and of permanent differences such as tax credits, resulted in effective tax rates which differ from the federal statutory tax rate.
Includes payable to MassMutual of $45.0 million in 2001, $61.2 million in 2000, $49.9 million in 1999, $28.8 million in 1998 and $13.6 million in 1997.
In 2001, we increased the number of investment options in our variable universal life products to better serve our client base. Also, we introduced an enhanced variable universal life insurance product that provides five additional fund options and offers a dollar cost averaging and portfolio rebalancing program. In 2000, we redesigned an existing variable universal life product. In 1999 we redesigned an existing variable universal life product, introduced two new annuity products, introduced one new variable universal life product and added a new fund option to existing annuity products.
The increase in policy loan gross investment income in 2001 is primarily due to a 5% increase in average policy loan balances between years. In 2000, gross investment income from policy loans declined primarily due to a 19% decrease in average corporate owned life insurance policy loan balances between years.
Addition to policyholders’ reserves and funds includes transfers to and from the separate accounts, based upon policyholder elections, and the change in general account reserves. The decrease during 2001 was primarily due to a $928.8 million decrease in separate account deposits, partially offset by an $98.4 million
One of our primary liquidity concerns is the risk of early contract-holder and policyholder withdrawal. Life insurance policies are less susceptible to withdrawal than annuity contracts because annuities are primarily used as investment vehicles, while life policies are used to fulfill longer-term financial planning needs. We closely evaluate and manage our liquidity risk by, for example, including provisions in our products such as contingent deferred sales charges assessed against withdrawals to discourage surrenders.
Separate account assets and liabilities represent segregated funds administered and invested by the Company for the benefit of variable annuity and variable life insurance policyholders. Assets consist principally of marketable securities reported at fair value and are not chargeable with liabilities that arise from any other business of the Company. The Company receives administrative and investment advisory fees from these accounts. Separate accounts reflect two categories of risk assumption: non-guaranteed separate accounts, which comprise the majority of the separate account assets, for which the policyholder assumes the investment risk; and guaranteed separate accounts for which the Company contractually guarantees either a minimum return or account value to the policyholder. Premiums, benefits and expenses of the separate accounts are reported in the Statutory Statements of Income. Investment income and realized and unrealized capital gains and losses on the assets of separate accounts accrue directly to policyholders and, accordingly, are not reflected in the Statutory Statements of Income.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2001 were as follows (in millions):
During 2001 and 2000, MassMutual contributed additional paid-in capital of $45.0 million and $85.0 million, respectively, to the Company.