EXHIBIT 99.2
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2004
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Citigroup Inc.:
We have audited the accompanying combined balance sheet of Citigroup's Life
Insurance and Annuities Assets to be Acquired and Liabilities to be Assumed (the
"Company") as of December 31, 2004, and the related combined statements of
income, shareholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying combined financial statements represent a carve out of
certain businesses from a consolidated group of companies rather than a complete
legal entity. See Note 1 to the financial statements for a description of the
basis of presentation.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/S/ KPMG LLP
Hartford, Connecticut
May 11, 2005
2
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
COMBINED STATEMENT OF INCOME
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
2004
------------------
($ IN MILLIONS)
REVENUES
Premiums.................................................... $1,314
Net investment income....................................... 2,973
Realized investment gains................................... 14
Fee income.................................................. 711
Other revenues.............................................. 161
------
Total Revenues............................................ 5,173
------
BENEFITS AND EXPENSES
Current and future insurance benefits....................... 1,529
Interest credited to contractholders........................ 1,386
Amortization of deferred acquisition costs.................. 434
General and administrative expenses......................... 580
------
Total Benefits and Expenses............................... 3,929
------
INCOME FROM OPERATIONS BEFORE FEDERAL AND FOREIGN INCOME
TAXES..................................................... 1,244
FEDERAL AND FOREIGN INCOME TAXES
Current................................................... 60
Deferred.................................................. 283
------
Total Federal and Foreign Income Taxes.................... 343
------
NET INCOME.................................................. $ 901
======
</Table>
See Notes to Combined Financial Statements
3
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
COMBINED BALANCE SHEET
<Table>
<Caption>
DECEMBER 31,
2004
---------------
($ IN MILLIONS)
ASSETS
Fixed maturities, available for sale at fair value
(including $2,303 subject to securities lending
agreements) (cost $43,189)................................ $45,433
Equity securities, at fair value (cost $304)................ 346
Mortgage loans.............................................. 2,246
Policy loans................................................ 1,084
Short-term securities....................................... 3,301
Trading securities, at fair value........................... 1,504
Other invested assets....................................... 2,035
-------
Total Investments......................................... 55,949
-------
Cash........................................................ 501
Investments income accrued.................................. 547
Premium balances receivable................................. 171
Reinsurance recoverable..................................... 4,012
Deferred acquisition costs.................................. 2,926
Separate and variable accounts.............................. 31,183
Other assets................................................ 2,044
-------
Total Assets.............................................. 97,333
-------
LIABILITIES
Contractholder funds........................................ 36,076
Future policy benefits and claims........................... 14,211
Separate and variable accounts.............................. 31,183
Deferred Federal and foreign income taxes................... 850
Trading securities sold not yet purchased, at fair value.... 473
Other liabilities........................................... 5,593
-------
Total Liabilities......................................... 88,386
-------
Shareholder's Equity
Common stock (see Note 7)................................... 131
Additional paid-in capital.................................. 3,141
Retained earnings........................................... 4,030
Accumulated other changes in equity from nonowner sources... 1,645
-------
Total Shareholder's Equity................................ 8,947
-------
Total Liabilities and Shareholder's Equity................ $97,333
=======
</Table>
See Notes to Combined Financial Statements
4
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
COMBINED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
2004
------------------
($ IN MILLIONS)
COMMON STOCK
Balance, January 1,......................................... $ 131
Changes in common stock..................................... --
------
Balance, December 31,....................................... 131
======
ADDITIONAL PAID IN CAPITAL
Balance, January 1,......................................... 2,959
Stock options tax expense................................... (2)
Capital contributed by parent............................... 184
------
Balance, December 31,....................................... 3,141
======
RETAINED EARNINGS
Balance, January 1,......................................... 3,848
Net income.................................................. 901
Citigroup MIS (see Note 11)................................. (46)
Dividends................................................... (673)
------
Balance, December 31,....................................... 4,030
======
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
Balance, January 1,......................................... 1,357
Unrealized gains, net of tax................................ 145
Foreign currency translation, net of tax.................... 45
Derivative instrument hedging activity gains, net of tax.... 98
------
Balance, December 31,....................................... 1,645
======
SUMMARY OF CHANGES IN EQUITY FROM NONOWNER SOURCES
Net income.................................................. 901
Citigroup MIS (see Note 11)................................. (46)
Other changes in equity from nonowner sources............... 288
------
Total changes in equity from nonowner sources............... 1,143
======
TOTAL SHAREHOLDER'S EQUITY
Changes in total shareholder's equity....................... 652
Balance, January 1,......................................... 8,295
------
Balance, December 31,....................................... $8,947
======
</Table>
See Notes to Combined Financial Statements
5
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
COMBINED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<Table>
<Caption>
FOR YEAR ENDED
DECEMBER 31,
2004
---------------
($ IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 901
Adjustment to reconciled net income to net cash provided by
operating activities
Net realized (gains)...................................... (14)
Deferred Federal and foreign income taxes................. 283
Amortization of deferred acquisition costs................ 457
Additions to deferred acquisition costs................... (889)
Investment income accrued................................. (175)
Premium balances receivable............................... (28)
Insurance reserves........................................ 500
Change in trading account assets.......................... 279
Change in trading account liabilities..................... (164)
Non-cash Citigroup tax top-off (see Note 6)............... (55)
Other..................................................... 43
--------
Net cash provided by operating activities............ 1,138
--------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities....................................... 6,430
Mortgage loans......................................... 700
Proceeds from sales of investments
Fixed maturities....................................... 8,342
Equity securities...................................... 112
Mortgage loans......................................... 52
Real estate held for sale.............................. 55
Purchases of investments
Fixed maturities....................................... (19,933)
Equity securities...................................... (146)
Mortgage loans......................................... (944)
Policy loans, net......................................... 10
Short-term securities purchases, net...................... (465)
Other investments sales, net.............................. 381
Securities transactions in course of settlement, net...... 711
--------
Net cash used in investing activities................ (4,695)
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits.............................. 10,565
Contractholder fund maturities and withdrawals............ (6,598)
Paid in capital from parent company....................... 184
Dividends to parent company............................... (674)
Other..................................................... (22)
--------
Net cash provided by financing activities............ 3,455
--------
Net (decrease) in cash...................................... (102)
Cash at December 31, previous year.......................... 603
--------
Cash at December 31, current year........................... $ 501
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid......................................... $ 102
========
</Table>
See Notes to Combined Financial Statements
6
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION -- COMBINED FINANCIAL STATEMENTS
The accompanying combined financial statements of Citigroup Life Insurance
and Annuities Assets to be Acquired and Liabilities to be Assumed (the
Transferred Businesses, or TB) represent the Citigroup operations to be sold
pursuant to an Acquisition Agreement (the Agreement) entered into on January 31,
2005 between Citigroup Inc. (Citigroup) and MetLife, Inc. (MetLife). Under the
terms of the Agreement, Citigroup agreed to sell certain of its domestic and
international insurance operations to MetLife for $11.5 billion in
consideration, subject to certain closing adjustments and financing
arrangements. The transaction is subject to Citigroup's execution of specific
transactions to exclude certain assets and liabilities prior to the close.
The following summarizes the domestic and international businesses included
in the sale. The combined financial statements have been prepared as if the TB
had been standalone operations, though they are not necessarily representative
of results had the TB operated as standalone operations. The financial results
reflect allocations of corporate expenses from Citigroup, which may be different
from comparable expenses that would have been incurred had the TB operated as a
standalone company.
DOMESTIC
In accordance with the Agreement, Citigroup will sell the Hartford,
Connecticut based Travelers Life & Annuity insurance operations (the Domestic
Transferred Businesses or DTB). These operations include retail annuities,
individual life insurance, corporate owned life insurance (COLI) and
institutional annuity products. In addition, the sale also includes certain
individual life and retail annuity business in runoff status since 2003. DTB
total assets are $93.5 billion, which is approximately 96% of total TB assets
and DTB net income is $819 million, which is approximately 91% of total TB net
income.
The following table summarizes the legal entities where the DTB reside, and
the associated states of domicile for the insurance entities. These DTB legal
entities, excluding certain assets and liabilities in accordance with the
Agreement, will be transferred to MetLife.
<Table>
<Caption>
STATE OF DOMICILE LEGAL ENTITY NAME
----------------- -----------------
Connecticut The Travelers Insurance Company (TIC)
Connecticut The Travelers Life and Annuity Company (TLAC)
Arizona Citicorp Life Insurance Company (CLIC)
New York First Citicorp Life Insurance Company (FCLIC)
Bermuda Citicorp International Life Insurance Company, Ltd. of
Hamilton Bermuda
Florida Citicorp International Life Insurance Company, Ltd. (U.S.
Branch) of Hamilton Bermuda (CILIC)
South Carolina The Travelers Life and Annuity Reinsurance Company (TLARC)
N/A Trumbull Street Investments LLC (TSI)
</Table>
Among the range of retail annuity products offered are fixed and variable
deferred annuities and payout annuities. Individual life insurance products
offered include term, universal and variable life insurance. The COLI product is
a variable universal life product distributed to corporations through
independent specialty brokers. The institutional annuity products include
institutional pensions, including guaranteed investment contracts (GICs), payout
annuities, group annuities sold to employer-sponsored retirement and savings
plans, structured settlements and funding agreements.
Individual fixed and variable deferred annuities are primarily used for
retirement funding purposes. Variable annuities permit policyholders to direct
retirement funds into a number of separate accounts, which
7
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
offer differing investment options. Individual payout annuities offer a
guaranteed payment stream over a specified or life-contingent period.
Retail annuity products are distributed through Citigroup affiliated
channels and non-affiliated channels. The Citigroup affiliated channels include
CitiStreet Retirement Services, a division of CitiStreet LLC, (CitiStreet), a
joint venture between Citigroup and State Street Bank; Smith Barney (SB), a
division of Citigroup Global Markets Inc.; Primerica Financial Services (PFS);
and Citibank. The non-affiliated channels primarily include a nationwide network
of independent financial professionals and independent broker-dealers. Total
annuity premiums and deposits were $5.7 billion in 2004. The primary Citigroup
affiliated channels were: CitiStreet -- $1.5 billion, PFS -- $983 million,
SB -- $877 million and Citibank -- $529 million. The non-affiliated channels
accounted for $1.8 billion of individual annuity premiums and deposits.
Individual life insurance is used to meet estate, business planning and
retirement needs and also to provide protection against financial loss due to
death. Individual life products are primarily marketed by independent financial
professionals who account for $745 million of the $964 million total life sales
for 2004. SB and Citibank accounted for $81 million and $43 million,
respectively, of total individual life sales for 2004.
Institutional annuity products include fixed and variable rate GICs, which
provide a guaranteed return on investments. Annuities are purchased by
employer-sponsored plans to fulfill retirement obligations to individual
employees. Payout annuities are used primarily as a pension close-out investment
for companies. Structured settlements are purchased as a means of settling
certain indemnity claims and making other payments to policyholders over a
period of time. Funding agreement transactions offer fixed term and fixed or
variable rate investment options with policyholder status to domestic and
foreign institutional investors. These group annuity products are sold through
direct sales and various intermediaries.
Also included in the sale are two active broker-dealers, Tower Square
Securities, Inc. (Tower Square) and Travelers Distribution LLC (TDLLC), wholly
owned subsidiaries of TIC. Tower Square is an introducing broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Associate of Securities Dealers (NASD). Tower Square's principal
activity is to facilitate the sale of variable annuity, variable universal life
and other investment products and advisory services through independent
registered representatives. TDLLC, a Delaware limited liability company, is a
registered limited business broker-dealer under the Securities Exchange Act of
1934 and a member of NASD. TDLLC operates as the principal underwriter and
distributor of the DTB' variable annuities and variable life insurance
contracts.
TIC's ownership of Tribeca Citigroup Investments Ltd. (Tribeca) is included
in the sale. For further details regarding Tribeca, see Note 9.
The DTB are licensed to sell and market their individual products in all 50
states, the District of Columbia, Canada, Puerto Rico, Guam, the Bahamas and the
U.S. and British Virgin Islands.
INTERNATIONAL
In accordance with the Agreement, Citigroup will also sell certain portions
of the International Insurance Manufacturing (IIM) operations (the International
Transferred Businesses, or ITB). The ITB manufacture insurance products in eight
countries with six wholly owned subsidiaries in Australia, Brazil, Argentina,
the UK, Belgium and Poland and two joint ventures in Japan and Hong Kong. ITB
total assets are $3.8 billion, which is approximately 4% of total TB assets and
ITB net income is $82 million, which is approximately 9% of total TB net income.
8
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
From the manufacturing perspective, it offers a range of products including
credit insurance, basic indemnity policies (such as accident and health
products), traditional term life, group life, whole life, endowment, fixed and
variable annuities, pension annuity and unit-linked policies.
These products are distributed through Citigroup's consumer businesses,
including its retail banking, credit cards and consumer finance franchises, as
well as non-proprietary channels. Sales are also conducted through direct
mail/telemarketing, branch sales, wholesaling networks, agencies and direct
sales agents.
The following table summarizes the legal entities and associated countries
of operation. These ITB legal entities, excluding certain assets and liabilities
in accordance with the Agreement, will be transferred to MetLife.
<Table>
<Caption>
COUNTRY OF OPERATION MANUFACTURING OPERATION LEGAL NAME
- -------------------- ----------------------------------
Australia...................... Citicorp General Insurance Limited & Citicorp Life Insurance
Limited
Argentina...................... Compania Previsional Citi S.A.,
Siembra Administradora de Fondos de Jubilaciones y Pensiones
S.A. (the Siembra Group or AFJP),
Siembra Seguros de Retiro S.A.,
Siembra Seguros de Vida S.A.,
Best Market S.A.
Brazil......................... CitiInsurance do Brasil Vida e Previdencia S.A.
Poland......................... CitiInsurance Polska Towarzystwo Ubezpieczen na Zycie S.A.
U.K............................ CitiInsurance General Insurance Company Limited,
CitiInsurance Life Assurance Company Limited & CitiInsurance
Administration Services Limited
Belgium........................ CitiLife S.A./N.V.
Japan.......................... Mitsui Sumitomo CitiInsurance Life Insurance Co., Ltd.
(joint venture)
Citigroup Direct Marketing Japan Co., Ltd.
Hong Kong...................... Citi Fubon Life Insurance Company Hong Kong Limited (joint
venture)
China.......................... CitiInsurance Life Insurance Company, Ltd. (in formation)
Bermuda........................ CitiInsurance Reinsurance (Bermuda) Ltd.
South Korea.................... CDMK, Inc.
USA............................ CitiInsurance International Holdings Inc.
</Table>
The Agreement effectively carves out Citigroup's Life Insurance and Annuity
Business included in its Global Investment Management segment. As noted in the
Agreement, the sale contemplates specific restructuring transactions that will
occur to the legal entities where the TB are contained. The following is a
summary of those assets, liabilities and related earnings which are not
considered part of the TB, and accordingly have been excluded from the
accompanying combined financial statements:
(1) All TIC's membership in Keeper Holdings LLC, which holds an interest
in CitiStreet;
(2) All TIC's shares of Citigroup Series YYY and YY preferred stock, and
all dividends with respect thereto;
(3) All TIC's shares of American Financial Life Insurance Company stock,
and all earnings with respect thereto;
(4) All TIC's shares of Primerica Life Insurance Company stock, and all
earnings with respect thereto;
9
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) All CLIC's shares of Citicorp Assurance Company stock, and all
earnings with respect thereto;
(6) Citilife S.A./N.V.'s .16% equity interest in Europa Financia Limited;
(7) All TIC's obligations in the amount of $74 million and the related
assets (including deferred tax assets) in the amount of $74 million
associated with the Connecticut River Plaza lease;
(8) CLIC's $542 million dividend of fixed maturities, and the earnings
with respect thereto;
(9) Citilife S.A./N.V. (or from one or more subsidiaries of Associates
Financial Corporation Limited, and one or more subsidiaries of
Citicorp Limited) $200 million dividend of short term investments in
aggregate and the earnings with respect thereto;
(10) All owned intellectual property and all trademarks used in connection
with products offered only by or through the TB, its parent or
affiliates. This includes, but is not limited to, the "umbrella"
trademark and umbrella design trademark, and all trademarks which
include the terms "citi," "Citi," the arc design and the blue wave
design;
(11) All TIC's net obligations in the amount of $452 million related to
non-qualified employee benefit plans (including retiree welfare,
pension, long-term disability, workers compensation and deferred
compensation obligations) and associated assets consisting of $294
million in invested assets and other assets and a deferred tax asset
of $158 million, and;
(12) TIC's rights in respect to the future earnings or adverse development
related to long-term care (LTC) accounts.
The Agreement also provides for an indemnification from Citigroup to
MetLife for specified tax liabilities incurred by a TB legal entity prior to the
closing date. As referenced in the Agreement, the TB legal entities maintain tax
reserves for potential audit liabilities for Federal and state income taxes and
other taxes of approximately $80 million with respect to pre-closing date tax
periods. These liabilities remain the obligation of the TB parent under either
the indemnification agreement or under the Federal consolidated income tax
return rules rather than of the TB legal entities. Accordingly, these
liabilities are transferred to the TB parent and are not included in the
accompanying combined financial statements.
In accordance with the Agreement, the assets related to the $152.5 million
dividend TIC paid to its parent on January 3, 2005 have been excluded from the
accompanying combined financial statements. The ITB intercompany debt with
Citigroup in the amount of $213 million, and the related assets associated with
this liability, also have been excluded from the accompanying combined financial
statements in accordance with the Agreement.
The TB consolidate entities deemed to be variable interest entities when
the TB are determined to be the primary beneficiary under Financial Accounting
Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46).
The ITB' operations utilize the Citigroup Management Information Systems
(MIS) process to report their management financial statements. Within Citigroup,
MIS transactions are used to allocate revenue and expense adjustments between
Citigroup legal entities to create management based income statements by region
and product type. The ITB receive allocations for their manufacturing of
insurance products distributed through Citigroup channels not being sold. MIS
transactions are generally recorded on a fair market value basis between
Citigroup entities for various services rendered without transfer of cash. See
Note 11 for further details.
Significant intercompany transactions between TB have been eliminated.
10
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The combined financial statements and accompanying footnotes are prepared
in conformity with accounting principles generally accepted in the United States
of America (U.S. GAAP). The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and benefits and expenses during the reporting period.
Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies discussed in this section are those that are
considered to be significant to the portrayal of the TB' financial condition,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain. In
addition to the policies described below, there are certain accounting policies
specific to the ITB' Argentina business, the Siembra Group, see section detailed
below.
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities, including instruments subject to securities lending agreements
(see Note 3), are classified as "available for sale" and are reported at fair
value, with unrealized investment gains and losses, net of income taxes,
credited or charged directly to shareholder's equity. Fair values of investments
in fixed maturities are based on quoted market prices or dealer quotes. If
quoted market prices are not available, discounted expected cash flows using
market rates commensurate with the credit quality and maturity of the investment
are used to determine fair value. Impairments are realized when investment
losses in value are deemed other-than-temporary. The TB conduct a rigorous
review each quarter to identify and evaluate investments that have possible
indications of impairment. An investment in a debt or equity security is
impaired if its fair value falls below its cost and the decline is considered
other-than-temporary. Factors considered in determining whether a loss is
other-than-temporary include the length of time and extent to which fair value
has been below cost; the financial condition and near-term prospects of the
issuer; and the TB's ability and intent to hold the investment for a period of
time sufficient to allow for any anticipated recovery. Changing economic
conditions -- global, regional, or related to specific issuers or
industries -- could result in other-than-temporary losses.
Also included in fixed maturities are loan-backed and structured securities
(including beneficial interests in securitized financial assets). Beneficial
interests in securitized financial assets that are rated "A" and below are
accounted for under the prospective method in accordance with EITF 99-20. Under
the prospective method of accounting, the investment's effective yield is based
upon projected future cash flows. All other loan-backed and structured
securities are amortized using the retrospective method. The effective yield
used to determine amortization is calculated based upon actual and projected
future cash flows.
Equity securities, which include common and non-redeemable preferred
stocks, are classified as "available for sale" and carried at fair value based
primarily on quoted market prices. Changes in fair values of equity securities
are charged or credited directly to shareholder's equity, net of income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is considered
impaired when it is probable that the TB will be unable to collect principal and
interest amounts due. For mortgage loans that are determined to be impaired, a
reserve is established for the difference between the amortized cost and the
fair market value of the underlying collateral. Cash received on impaired loans
is reported as income. In estimating fair value, the TB use interest rates
reflecting the higher returns required in the current real estate financing
market.
11
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Policy loans are carried at the amount of the unpaid balances that are not
in excess of the net cash surrender values of the related insurance policies.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are carried
at amortized cost, which approximates fair value.
Cash includes certificates of deposits and other time deposits with
original maturities of less than 90 days.
Trading securities and related liabilities, which are designated as such at
time of purchase, are normally held for periods less than six months. These
investments are marked to market with the change recognized in net investment
income during the current period.
Other invested assets include limited partnership and limited liability
company interests in investment funds and real estate joint ventures accounted
for on the equity method of accounting. Undistributed income is reported in net
investment income. Also included in other invested assets is real estate held
for sale, which is carried at the lower of cost or fair value less estimated
cost to sell. Fair value of foreclosed properties is established at the time of
foreclosure by internal analysis or external appraisers, using discounted cash
flow analyses and other accepted techniques. Thereafter, an impairment for
losses on real estate held for sale is established if the carrying value of the
property exceeds its current fair value less estimated costs to sell.
Also included in other invested assets are investments in partially-owned
companies within the ITB. The equity method of accounting is used for the ITB'
investment in companies in which ownership interest approximates 20 percent but
is not greater than 50 percent (minority-owned companies). At December 31, 2004,
the ITB' investments in partially-owned companies included their 50 percent (49
percent voting) interest in Mitsui Sumitomo CitiInsurance Life Insurance
Company, Ltd. and their 50 percent interest in Citi Fubon Life Insurance Company
Hong Kong Limited.
Accrual of investment income is suspended on fixed maturities or mortgage
loans that are in default, or on which it is likely that future payments will
not be made as scheduled. Interest income on investments in default is
recognized only as payment is received.
DERIVATIVE FINANCIAL INSTRUMENTS
The TB use derivative financial instruments, including financial futures
contracts, swaps, interest rate caps, options and forward contracts, as a means
of hedging exposure to interest rate changes, equity price changes, credit and
foreign currency risk. The TB also use derivative financial instruments to
enhance portfolio income and replicate cash market investments. The TB, through
Tribeca Citigroup Investments Ltd., hold and issue derivative instruments in
conjunction with investment strategies designed to enhance portfolio returns.
(See Note 9 for a more detailed description of the TB' derivative use.)
Derivative financial instruments in a gain position are reported in the combined
balance sheet in other invested assets and other assets derivative financial
instruments in a loss position are reported in the combined balance sheet in
other liabilities and derivatives purchased to offset embedded derivatives
related to variable annuity contracts, including equity annuity index and
guaranteed minimum withdrawal benefits (GMWB) features, are reported in other
invested assets.
To qualify for hedge accounting, the hedge relationship is designated and
formally documented at inception detailing the particular risk management
objective and strategy for the hedge. This documentation includes the item and
risk that is being hedged, the derivative that is being used, as well as how
effectiveness is being assessed.
A derivative must be highly effective in accomplishing the objective of
offsetting either changes in fair value or cash flows for the risk being hedged.
12
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For fair value hedges, in which derivatives hedge the fair value of assets
and liabilities, changes in the fair value of derivatives are reflected in
realized investment gains and losses, together with changes in the fair value of
the related hedged item. The TB primarily hedge available-for-sale securities.
For cash flow hedges, the accounting treatment depends on the effectiveness
of the hedge. To the extent that derivatives are effective in offsetting the
variability of the hedged cash flows, changes in the derivatives' fair value
will be reported in accumulated other changes in equity from nonowner sources in
shareholder's equity. For certain strategies in which foreign currency risk is
being hedged, changes in fair value related to changes in foreign exchange rates
are immediately reclassified to earnings. These changes in fair value will be
included in earnings of future periods when earnings are also affected by the
variability of the hedged cash flows. To the extent these derivatives are not
effective, the ineffective portion of the change in fair value is immediately
included in realized investment gains and losses.
For net investment hedges, in which derivatives hedge the foreign currency
exposure of a net investment in a foreign operation, the accounting treatment
will similarly depend on the effectiveness of the hedge. The effective portion
of the change in fair value of the derivative, including any premium or
discount, is reflected in the accumulated other changes in equity from nonowner
sources as part of the foreign currency translation adjustment in shareholder's
equity. The ineffective portion is reflected in realized investment gains and
losses.
The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using qualitative or quantitative measures
of effectiveness. If a hedge relationship is found to be ineffective, it no
longer qualifies for hedge accounting and any gains or losses attributable to
such ineffectiveness as well as subsequent changes in fair value are recognized
in realized investment gains and losses.
For those fair value and cash flow hedge relationships that are terminated,
hedge designations removed, or forecasted transactions that are no longer
expected to occur, the hedge accounting treatment described in the paragraphs
above will no longer apply. For fair value hedges, any changes to the hedged
item remain as part of the basis of the asset or liability and are ultimately
reflected as an element of the yield. For cash flow hedges, any changes in fair
value of the derivative remain in the accumulated other changes in equity from
nonowner sources in shareholder's equity and are included in earnings of future
periods when earnings are also affected by the variability of the hedged cash
flow. If the hedged relationship is discontinued because a forecasted
transaction will not occur when scheduled, the accumulated changes in fair value
of the derivative recorded in shareholder's equity are immediately reflected in
realized investment gains and losses.
The TB enter into derivative contracts that are economic hedges but do not
qualify or are not designated as hedges for accounting purposes. These
derivative contracts are carried at fair value with changes in value and
settlement amounts reflected in realized investment gains and losses.
Derivatives in a gain position are reported in other assets, and derivatives in
a loss position are reported in other liabilities.
Financial instruments with embedded derivatives
The TB bifurcate an embedded derivative from the host contract where the
economic characteristics and risks of the embedded instrument are not clearly
and closely related to the economic characteristics and risks of the host
contract, the entire instrument would not otherwise be remeasured at fair value
and a separate instrument with the same terms of the embedded instrument would
meet the definition of a derivative under FASB Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative and Hedging Instruments"
(SFAS 133).
The TB purchase investments that have embedded derivatives, primarily
convertible debt securities. These embedded derivatives are carried at fair
value with changes in value reflected in realized investment gains and losses.
Derivatives embedded in convertible debt securities are classified in the
combined balance sheet as fixed maturity securities, consistent with the host
instruments.
13
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The TB market certain investment contracts that have embedded derivatives,
primarily variable annuity contracts. These embedded derivatives are carried at
fair value, with changes in value reflected in realized investment gains and
losses. Derivatives embedded in variable annuity contracts, including equity
annuity index and GMWB features, are classified in the combined balance sheet as
future policy benefits and claims.
The TB may enter into derivative contracts to hedge the exposures
represented by these embedded derivatives. These are economic hedges; however
they do not qualify for hedge accounting. These derivatives are carried at fair
value with contract changes in value and settlement amounts reflected in
realized investment gains and losses. Derivatives in a gain position are
reported in other assets, and derivatives in a loss position are reported in
other liabilities.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pre-tax
revenues based upon specific identification of the investments sold on the trade
date. Realized gains and losses also result from fair value changes in
derivative contracts that do not qualify, or are not designated, as hedging
instruments, and the application of fair value hedges under SFAS 133.
Impairments are recognized as realized losses when investment losses in value
are deemed other-than-temporary. The TB conduct regular reviews to assess
whether other-than-temporary losses exist. Also included in pre-tax revenues are
gains and losses arising from the remeasurement of the local currency value of
foreign investments to U.S. dollars, the functional currency of the TB.
TRANSLATION OF FOREIGN CURRENCIES
Financial statement accounts expressed in foreign currencies are translated
into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation"
(SFAS 52). Under SFAS 52, functional currency assets and liabilities are
translated into U.S. dollars using current rates of exchange prevailing at the
balance sheet date of each respective subsidiary and the related translation
adjustments are recorded as a separate component of comprehensive income, net of
any related taxes in shareholder's equity. Functional currencies are generally
the currencies of the local operating environment. Income statement accounts
expressed in functional currencies are translated using average exchange rates.
Exchange gains and losses resulting from foreign currency transactions are
recorded in income.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs (DAC) represent costs that are deferred and
amortized over the estimated life of the related insurance policies. DAC
principally includes commissions and certain expenses related to policy
issuance, underwriting and marketing, all of which vary with and are primarily
related to the production of new business. The method for determining
amortization of deferred acquisition costs varies by product type based upon
three different accounting pronouncements: SFAS No. 60, "Accounting and
Reporting by Insurance Enterprises" (SFAS 60), SFAS No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97, "Accounting and
Reporting by Insurance Enterprises for Certain Long Duration Contracts and for
Realized Gains and Losses from the Sale of Investments" (SFAS 97).
DAC for deferred annuities, both fixed and variable, and payout annuities
is amortized employing a level effective yield methodology per SFAS 91 as
indicated by AICPA Practice Bulletin 8, generally over 10-15 years. An
amortization rate is developed using the outstanding DAC balance and projected
account balances and is applied to actual account balances to determine the
amount of DAC amortization. The projected account balances are derived using a
model that contains assumptions related to investment returns and persistency.
The model rate is evaluated at least annually, and changes in underlying lapse
and interest
14
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
rate assumptions are treated retrospectively. Variances in expected equity
market returns versus actual returns are treated prospectively and a new
amortization pattern is developed so that the DAC balances will be amortized
over the remaining estimated life of the business.
DAC for universal life and COLI are amortized in relation to estimated
gross profits from surrender charges, investment, mortality, and expense margins
per SFAS 97, generally over 16-25 years. Actual profits can vary from
management's estimates, resulting in increases or decreases in the rate of
amortization. Re-estimates of gross profits, performed at least annually, result
in retrospective adjustments to earnings by a cumulative charge or credit to
income.
DAC relating to traditional life, including term insurance, credit
insurance, group life insurance and health insurance is amortized in relation to
anticipated premiums per SFAS 60, generally over 3-20 years. Assumptions as to
the anticipated premiums are made at the date of policy issuance or acquisition
and are consistently applied over the life of the policy.
All DAC is reviewed at least annually to determine if it is recoverable
from future income, including investment income, and if not recoverable, is
charged to expenses. All other acquisition expenses are charged to operations as
incurred.
Sales Inducements to Contract Holders. Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants' Statement
of Position (SOP) No. 03-1, "Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long-Duration Contracts and for Separate Accounts"
(SOP 03-1) provides, prospectively, that sales inducements provided to contract
holders meeting certain criteria are capitalized and amortized over the expected
lives of the contracts as a component of benefit expenses. During 2004, the TB
capitalized sales inducements of approximately $50.6 million in accordance with
SOP 03-1. These inducements relate to bonuses on certain products offered by the
TB. For 2004, amortization of these capitalized amounts was insignificant.
VALUE OF INSURANCE IN FORCE
The value of insurance in force related to prior acquisitions is an asset
that represents the actuarially determined present value of anticipated profits
to be realized from life insurance and annuities contracts at the date of
acquisition using the same assumptions that were used for computing related
liabilities where appropriate. The value of insurance in force for the DTB was
the actuarially determined present value of the projected future profits
discounted at interest rates ranging from 14% to 18%. Traditional life insurance
is amortized in relation to anticipated premiums; universal life is amortized in
relation to estimated gross profits; and annuity contracts are amortized
employing a level yield method. The value of insurance in force, which is
included in other assets, is reviewed periodically for recoverability to
determine if any adjustment is required. Adjustments, if any, are charged to
income.
SEPARATE AND VARIABLE ACCOUNTS
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Each account has specific
investment objectives. The assets of each account are legally segregated and are
not subject to claims that arise out of any other business of the TB. The assets
of these accounts are carried at fair value.
Amounts assessed to the separate account contractholders for management
services are included in revenues. Deposits, net investment income and realized
investment gains and losses for these accounts are excluded from revenues, and
related liability increases are excluded from benefits and expenses.
15
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Variable Annuity Contracts with Guaranteed Minimum Death Benefit
Features. For variable annuity contracts with guaranteed minimum death benefit
features (GMDB), SOP 03-1 requires the reporting entity to categorize the
contract as either an insurance or investment contract based on the significance
of mortality or morbidity risk. SOP 03-1 provides explicit guidance for
calculating a reserve for insurance contracts, and provides that the reporting
entity does not hold reserves for investment contracts (i.e., there is no
significant mortality risk).
Management determined that the mortality risk on its GMDB features was not
a significant component of the overall variable annuity product, and accordingly
continued to classify these products as investment contracts. Prior to the
adoption of SOP 03-1, the DTB held a reserve of approximately $8 million to
cover potential GMDB exposure. This reserve was released during the first
quarter of 2004 as part of the implementation of SOP 03-1. The TB evaluate new
issues of variable products to determine that mortality risk on GMDB features is
insignificant.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are included in other assets. The carrying
amount of goodwill and other intangible assets is reviewed at least annually for
indication of impairment in value. If it is determined that goodwill and other
intangible assets are unlikely to be recovered, impairment is recognized on a
discounted cash flow basis.
In accordance with SFAS No. 141, "Business Combinations" (SFAS 141) and
SFAS No. 142, "Goodwill and Other Intangibles" (SFAS 142), the TB do not
amortize goodwill and intangible assets deemed to have an infinite useful life.
Instead, these assets are subject to an annual review for impairment. Other
intangible assets that are not deemed to have an indefinite useful life will
continue to be amortized over their useful lives. See Note 5.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal
life, COLI, pension investment, GICs, and certain deferred annuity contracts.
For universal life and COLI contracts, contractholder fund balances are
increased by receipts for mortality coverage, contract administration, surrender
charges and interest accrued, where one or more of these elements are not fixed
or guaranteed. These balances are decreased by withdrawals, mortality charges
and administrative expenses charged to the contractholder. Interest rates
credited to contractholder funds related to universal life and COLI range from
3.5% to 5.4%, with a weighted average interest rate of 4.7%.
Pension investment, GICs and certain annuity contracts do not contain
significant insurance risks and are considered investment-type contracts.
Contractholder fund balances are increased by receipts and credited interest,
and reduced by withdrawals and administrative expenses charged to the
contractholder. Interest rates credited to those investment-type contracts range
from 1.0% to 8.0% with a weighted average interest rate of 4.2%. The voluntary
pension products in Argentina, while insignificant in total to these financial
statements, offer crediting rates that are linked to an inflation index. These
crediting rates may fall outside the stated ranges.
Reserving for Universal Life and Variable Universal Life Contracts. SOP
03-1 requires that a reserve, in addition to the account balance, be established
for certain insurance benefit features provided under universal life (UL) and
variable universal life (VUL) products if the amounts assessed against the
contract holder each period for the insurance benefit feature are assessed in a
manner that is expected to result in profits in earlier years and losses in
subsequent years from the insurance benefit function.
16
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The TB' UL and VUL products were reviewed to determine if an additional
reserve is required under SOP 03-1. It was determined that SOP 03-1 applied to
some of its UL and VUL contracts with these features and established an
additional reserve of approximately $1 million. The TB evaluate new issues of UL
and VUL products to determine that mortality risk on GMDB features is
insignificant.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products and are prepared in
accordance with industry standards and U.S. GAAP. The annuity payout reserves
are calculated using the mortality and interest assumptions used in the actual
pricing of the benefit. Mortality assumptions are based on TB experience and are
adjusted to reflect deviations such as substandard mortality in structured
settlement benefits. The DTB interest rates range from 1.7% to 8.7% with a
weighted average of 6.5% for these products. Traditional life products include
whole life and term insurance. Some of the pension payout products offered in
Argentina, while insignificant in total to these financial statements, offer
crediting rates that are linked to an inflation index. The interest rate
assumptions may fall outside the stated ranges. Future policy benefits for
traditional life products are estimated on the basis of actuarial assumptions as
to mortality, persistency and interest, established at policy issue. Interest
assumptions applicable to traditional life products range from 2.5% to 7.0%,
with a weighted average of 3.9%. Assumptions established at policy issue as to
mortality and persistency are based on TB experience, which, together with
interest assumptions, include a margin for adverse deviation. Appropriate
recognition has been given to experience rating and reinsurance.
GUARANTY FUND AND OTHER INSURANCE RELATED ASSESSMENTS
Included in other liabilities is the DTB' estimate of its liability for
guaranty fund and other insurance-related assessments. State guaranty fund
assessments are based upon the DTB' share of premium written or received in one
or more years prior to an insolvency occurring in the industry. Once an
insolvency has occurred, the DTB recognize a liability for such assessments if
it is probable that an assessment will be imposed and the amount of the
assessment can be reasonably estimated. At December 31, 2004, the DTB had a
liability of $22.6 million for guaranty fund assessments and a related premium
tax offset recoverable of $4.8 million. The assessments are expected to be paid
over a period of three to five years and the premium tax offsets are expected to
be realized over a period of 3 to 15 years.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The DTB' insurance operations, domiciled in Arizona, Connecticut, Florida,
New York, and South Carolina, prepare statutory financial statements in
accordance with the accounting practices prescribed or permitted by the
insurance departments of the states of domicile. Prescribed statutory accounting
practices are those practices that are incorporated directly or by reference in
state laws, regulations, and general administrative rules applicable to all
insurance enterprises domiciled in a particular state. Permitted statutory
accounting practices include practices not prescribed by the domiciliary state,
but allowed by the domiciliary state regulatory authority. The DTB do not have
any permitted statutory accounting practices.
PREMIUMS
Premium income is reported for individual payout annuities, group close-out
annuities, whole life and term insurance. The annuities premiums are recognized
as revenue when collected. The life premiums are recognized as revenue when due.
Premiums for contracts with a limited number of premium payments, due over a
significantly shorter period than the period over which benefits are provided,
are considered revenue
17
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
when due. The portion of premium which is not required to provide for benefits
and expenses is deferred and recognized in revenues in a constant relationship
to insurance benefits in force.
FEE INCOME
Fee income is recognized on deferred annuity and universal life contracts
for mortality, administrative and equity protection charges according to
contract due dates. Fee income is recognized on variable annuity and universal
life separate accounts either daily, monthly, quarterly or annually as per
contract terms.
OTHER REVENUES
Other revenues include surrender penalties collected at the time of a
contract surrender, and other miscellaneous charges related to annuity and
universal life contracts recognized when received. Also included are revenues
from unconsolidated non-insurance subsidiaries. Amortization of deferred income
related to reinsured blocks of ceded business is recognized in relation to the
expected remaining life of the underlying policies and is reported in other
revenues.
CURRENT AND FUTURE INSURANCE BENEFITS
Current and future insurance benefits represent charges for mortality and
morbidity related to fixed annuities, universal life, term life and health
insurance benefits.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, COLI, pension investment, GICs and certain deferred annuity contracts in
accordance with contract provisions.
FEDERAL AND FOREIGN INCOME TAXES
The provision for Federal and foreign income taxes is comprised of two
components, current income taxes and deferred income taxes. Deferred Federal and
foreign income taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
SIGNIFICANT ACCOUNTING POLICIES SPECIFIC TO THE ARGENTINA BUSINESSES
Death and Disability Coverage Reserves
The Siembra Group provides group death and disability coverage for
customers of its pension business. Argentine regulators have mandated that this
coverage be provided on a claims-made basis, rather than on an occurrence basis.
A portion of customer commissions charged by the Siembra Group, also mandated by
the Argentine regulators, effectively represents an insurance premium for
providing this coverage. Under this claims-made coverage, losses are recognized
on the date that the loss is reported as approved by the Argentine regulator.
As part of its annual issuance of the group death and disability coverage,
Siembra Group reviews expected commissions, claims and expenses for the upcoming
coverage year. If a deficiency is projected for the upcoming coverage year, a
premium deficiency reserve is recorded. This reserve is re-evaluated
periodically and updated to reflect current experience. At December 31, 2004,
the premium deficiency and related reserves were $28 million.
Given the current uncertain economic, regulatory and legal environment in
Argentina, including the potential for legal or governmental actions related to
pension reform, it is possible that changes may occur which may impact the
obligations of the Siembra Group to its customers. Such developments, if any,
could result in future losses for Siembra Group.
18
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Trading Securities
In Argentina, many of the insurance assets are classified as trading.
Annuity contracts sold in the past were backed by shares in specific assets.
Although the characteristics of these contracts are similar to separate
accounts, they do not meet the definition of separate accounts under SOP 03-1
due to the fact that they are not legally insulated. In order to match the
valuation of assets with liabilities, the majority of these assets are
classified by the TB as trading. Assets backing the Argentina life company's
group death and disability contracts are also classified as trading in order to
match the valuation of the liability; net amount at risk varies with the net
asset values of Pension funds managed by the TB' Argentina pension business. As
of December 31, 2004, assets classified as trading securities in Argentina
totaled $190 million.
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were
as follows:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2004 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- -------
($ IN MILLIONS)
Available For Sale:
Mortgage-backed securities -- CMOs and pass-
through securities........................ $ 7,623 $ 246 $ 9 $ 7,860
U.S. Treasury securities and obligations of
U.S. Government and government agencies
and authorities........................... 2,027 103 -- 2,130
Obligations of states, municipalities and
political subdivisions.................... 364 41 1 404
Debt securities issued by foreign
governments............................... 916 87 -- 1,003
All other corporate bonds................... 25,135 1,404 41 26,498
Other debt securities....................... 6,967 388 12 7,343
Redeemable preferred stock.................. 157 39 1 195
------- ------ --- -------
Total Available For Sale.................... $43,189 $2,308 $64 $45,433
======= ====== === =======
</Table>
Proceeds from sales of fixed maturities classified as available for sale
were $8.3 billion in 2004. Gross gains of $236 million and gross losses of $252
million in 2004 were realized on those sales. Additional losses of $38 million
in 2004 were realized due to other-than-temporary losses in value.
19
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 2004,
by contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<Table>
<Caption>
AMORTIZED FAIR
COST VALUE
--------- -------
($ IN MILLIONS)
Maturity:
Argentina government bonds in default....................... $ 10 $ 12
Due in one year or less..................................... 2,196 2,247
Due after 1 year through 5 years............................ 13,295 13,773
Due after 5 years through 10 years.......................... 12,260 12,984
Due after 10 years.......................................... 7,805 8,557
------- -------
35,566 37,573
======= =======
Mortgage-backed securities.................................. 7,623 7,860
------- -------
Total Maturity.............................................. $43,189 $45,433
======= =======
</Table>
The TB make investments in collateralized mortgage obligations (CMOs). CMOs
typically have high credit quality, offer good liquidity, and provide a
significant advantage in yield and total return compared to U.S. Treasury
securities. The TB' investment strategy is to purchase CMO tranches which are
protected against prepayment risk, including planned amortization class and last
cash flow tranches. Prepayment protected tranches are preferred because they
provide stable cash flows in a variety of interest rate scenarios. The TB invest
in other types of CMO tranches if a careful assessment indicates a favorable
risk/return tradeoff. The TB do not purchase residual interests in CMOs.
At December 31, 2004 the TB held CMOs classified as available for sale with
a fair value of $5.0 billion. Approximately 27% of the TB' CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2004. In
addition, the TB held $2.5 billion of GNMA, FNMA or FHLMC mortgage-backed
pass-through securities at December 31, 2004. All of these securities are rated
AAA.
The TB engage in securities lending transactions whereby certain securities
from its portfolio are loaned to other institutions for short periods of time.
The TB generally receive cash collateral from the borrower, equal to at least
the market value of the loaned securities plus accrued interest, and invests it
in the TIC short-term money market pool. The loaned securities remain a recorded
asset of the TB, however, the TB record a liability for the amount of the cash
collateral held, representing its obligation to return the cash collateral
related to these loaned securities, and reports that liability as part of other
liabilities in the combined balance sheet. At December 31, 2004 the TB held cash
collateral of $2.0 billion. The TB also had $332.9 million of investments held
as collateral with a third party at December 31, 2004.
20
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as
follows:
<Table>
<Caption>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
EQUITY SECURITIES: COST GAINS LOSSES VALUE
- ------------------ ---- ---------- ---------- -----
($ IN MILLIONS)
December 31, 2004 Common stocks................... $180 $41 $1 $220
Non-redeemable preferred stocks................... 124 3 1 126
---- --- -- ----
Total Equity Securities........................... $304 $44 $2 $346
==== === == ====
</Table>
Proceeds from sales of equity securities were $112 million in 2004. Gross
gains of $27 million and gross losses of $10 million in 2004 were realized on
those sales. Additional losses of $5 million in 2004 were realized due to
other-than-temporary losses in value.
OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS
At December 31, 2004, the cost of approximately 963 investments in fixed
maturity and equity securities exceeded their fair value by $66 million. Of the
$66 million, $46 million represents fixed maturity investments that have been in
a gross unrealized loss position for less than a year and of these 93% are rated
investment grade. Fixed maturity investments that have been in a gross
unrealized loss position for a year or more total $18 million and 87% of these
are rated investment grade. The gross unrealized loss on equity securities was
$2 million at December 31, 2004.
Management has determined that the unrealized losses on the TB' investments
in fixed maturity and equity securities at December 31, 2004 are temporary in
nature. The TB conduct a periodic review to identify and evaluate investments
that have indications of possible impairment. An investment in a debt or equity
security is impaired if its fair value falls below its cost and the decline is
considered other-than-temporary. Factors considered in determining whether a
loss is temporary include the length of time and extent to which fair value has
been below cost; the financial condition and near-term prospects of the issuer;
and the TB' ability and intent to hold the investment for a period of time
sufficient to allow for any anticipated recovery. The TB' review for impairment
generally entails:
- Identification and evaluation of investments that have possible
indications of impairment;
- Analysis of individual investments that have fair values less than 80% of
amortized cost, including consideration of the length of time the
investment has been in an unrealized loss position;
- Discussion of evidential matter, including an evaluation of factors or
triggers that would or could cause individual investments to qualify as
having other-than-temporary impairments and those that would not support
other-than-temporary impairment;
- Documentation of the results of these analyses, as required under
business policies.
21
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The table below shows the fair value of investments in fixed maturities and
equity securities that are available for sale and have been in an unrealized
loss position at December 31, 2004:
<Table>
<Caption>
GROSS UNREALIZED LOSSES
----------------------------------------
LESS THAN ONE YEAR ONE YEAR OR LONGER TOTAL
------------------- ------------------ -------------------
GROSS GROSS GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
------ ---------- ----- ---------- ------ ----------
($ IN MILLIONS)
Fixed maturity securities
available-for-sale:
Mortgage-backed securities-CMOs and
pass-through securities............ $ 856 $ 6 $162 $ 3 $1,018 $ 9
U.S. Treasury securities and
obligations of U.S. Government and
government agencies and
authorities........................ 153 -- -- -- 153 --
Obligations of states, municipalities
and political subdivisions......... 7 -- 11 -- 18 --
Debt securities issued by foreign
governments........................ 40 1 5 -- 45 1
All other corporate bonds............ 3,427 30 384 11 3,811 41
Other debt securities................ 966 9 178 3 1,144 12
Redeemable preferred stock........... 13 -- 7 1 20 1
------ --- ---- --- ------ ---
Total fixed maturities............... $5,462 $46 $747 $18 $6,209 $64
Equity securities.................... $ 31 $ 1 $ 29 $ 1 $ 60 $ 2
====== === ==== === ====== ===
</Table>
Fair values of investments in fixed maturities, equity and short term
securities, and fixed for zero swaps, which are recorded as other invested
assets, are based on quoted market prices or dealer quotes or, if these are not
available, discounted expected cash flows using market rates commensurate with
the credit quality and maturity of the investment. The fair value of investments
for which quoted market prices, third-party broker quotations or validated model
prices are not available amounted to $331.3 million at December 31, 2004.
MORTGAGE LOANS
At December 31, 2004 the TB' mortgage loan portfolios consisted of the
following:
<Table>
<Caption>
2004
---------
($ IN
MILLIONS)
Current Mortgage Loans...................................... $2,192
Underperforming Mortgage Loans.............................. 54
------
Total Mortgage Loans........................................ $2,246
======
</Table>
Underperforming mortgage loans include delinquent mortgage loans over 90
days past due, loans in the process of foreclosure and loans modified at
interest rates below market.
22
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 2004 are
shown below. Actual maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties.
<Table>
<Caption>
($ IN
YEAR ENDING DECEMBER 31, MILLIONS)
2005........................................................ $ 122
2006........................................................ 308
2007........................................................ 249
2008........................................................ 93
2009........................................................ 252
Thereafter.................................................. 1,222
------
Total....................................................... $2,246
======
</Table>
CONCENTRATIONS
The TB had concentrations of investments, excluding those in Federal and
government agencies, primarily fixed maturities at fair value, in the following
industries:
<Table>
<Caption>
2004
---------
($ IN
MILLIONS)
Finance..................................................... $7,947
Banking..................................................... 3,408
Electric Utilities.......................................... 3,093
</Table>
The TB held investments in foreign banks in the amount of $1,304 million at
December 31, 2004, which are included in the table above.
The TB define its below investment grade assets as those securities rated
Ba1 by Moody's Investor Services (or its equivalent) or below by external rating
agencies, or the equivalent by internal analysts when a public rating does not
exist. Such assets include publicly traded below investment grade bonds and
certain other privately issued bonds and notes that are classified as below
investment grade. Below investment grade assets included in the categories of
the preceding table include $842 million in Electric Utilities at December 31,
2004. Below investment grade assets in Finance and Banking were $144 million at
December 31, 2004. Total below investment grade assets were $5.2 billion at
December 31, 2004.
Included in mortgage loans were the following group concentrations:
<Table>
<Caption>
2004
---------
($ IN
MILLIONS)
STATE
California.................................................. $ 788
PROPERTY TYPE
Agricultural................................................ $1,177
</Table>
The TB monitor creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits and
other monitoring procedures. Collateral for fixed maturities often includes
pledges of assets, including stock and other assets, guarantees and letters of
credit. The TB'
23
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
underwriting standards with respect to new mortgage loans generally require loan
to value ratios of 75% or less at the time of mortgage origination.
NON-INCOME PRODUCING INVESTMENTS
Investments included in the combined balance sheets that were non-income
producing amounted to $106 million at December 31, 2004.
RESTRUCTURED INVESTMENTS
The TB had mortgage loans and debt securities that were restructured at
below market terms at December 31, 2004. The balances of the restructured
investments were insignificant. The new terms typically defer a portion of
contract interest payments to varying future periods. Gross interest income on
restructured assets that would have been recorded in accordance with the
original terms of such loans was insignificant in 2004. Interest on these
assets, included in net investment income, was also insignificant in 2004.
NET INVESTMENT INCOME
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2004
- ------------------------------- ---------
($ IN
MILLIONS)
GROSS INVESTMENT INCOME
Fixed maturities............................................ $2,468
Mortgage loans.............................................. 209
Trading..................................................... 44
Other invested assets....................................... 286
Other, including policy loans............................... 69
------
Total gross investment income............................... 3,076
------
Investment expenses......................................... (103)
------
Net Investment Income....................................... $2,973
======
</Table>
24
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the period was as follows:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2004
- ------------------------------- ---------
($ IN
MILLIONS)
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities............................................ $(17)
Equity securities........................................... 17
Mortgage loans.............................................. 1
Real estate held for sale................................... (4)
Other invested assets....................................... 5
Derivatives:
Guaranteed minimum withdrawal benefit derivatives, net.... 30
Other derivatives......................................... (16)
Other....................................................... (2)
----
Total realized investment gains (losses)............... $ 14
====
</Table>
Changes in net unrealized investment gains (losses) that are reported in
accumulated other changes in equity from nonowner sources were as follows:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2004
- ------------------------------- ---------
($ IN
MILLIONS)
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities............................................ $ 218
Equity securities........................................... 8
Other....................................................... --
------
Total unrealized investment gains........................... 226
------
Related taxes............................................... (81)
------
Change in unrealized investment gains....................... 145
Balance beginning of year................................... 1,345
------
Balance end of year......................................... $1,490
======
</Table>
25
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
VARIABLE INTEREST ENTITIES
The following table represents the carrying amounts and classification of
combined assets that are collateral for VIE obligations. These two VIEs are a
collateralized debt obligation and a real estate joint venture:
<Table>
<Caption>
DECEMBER 31, 2004
-----------------
($ IN MILLIONS)
Investments................................................. $386
Cash........................................................ 9
Other....................................................... 2
----
Total assets of consolidated VIEs........................... $397
====
</Table>
The debt holders of these VIEs have no recourse to the TB. The TB' maximum
exposure to loss is limited to its investment of approximately $8 million. The
TB regularly become involved with VIEs through its investment activities. This
involvement is generally restricted to small passive debt and equity
investments.
4. REINSURANCE
Reinsurance is used in order to limit losses, minimize exposure to large
risks, provide additional capacity for future growth and to effect
business-sharing arrangements. Reinsurance is accomplished through various plans
of reinsurance, primarily yearly renewable term (YRT), coinsurance and modified
coinsurance. Reinsurance involves credit risk and the TB monitor the financial
condition of these reinsurers on an ongoing basis. The TB remain primarily
liable as the direct insurer on all risks reinsured.
Since 1997 the majority of universal life business has been reinsured under
an 80% ceded/20% assumed YRT quota share reinsurance program and term life
business has been reinsured under a 90%/10% YRT quota share reinsurance program.
Beginning June 1, 2002, COLI business has been reinsured under a 90%/10% quota
share reinsurance program. Beginning in September 2002, newly issued term life
business has been reinsured under a 90%/10% coinsurance quota share reinsurance
program. Subsequently, portions of this term coinsurance has reverted to YRT for
new business. Generally, the maximum retention on an ordinary life risk is $2.5
million. Maximum retention of $2.5 million is generally reached on policies in
excess of $12.5 million for universal life and $25.0 million for term insurance.
For other plans of insurance, it is the policy of the TB to obtain reinsurance
for amounts above certain retention limits on individual life policies, which
limits vary with age and underwriting classification. Total in-force business
ceded under reinsurance contracts is $397.4 billion at December 31, 2004.
Effective July 1, 2000 the DTB sold 90% of its individual long-term care
insurance business to General Electric Capital Assurance Company and its
subsidiary in the form of indemnity reinsurance arrangements.
Written premiums ceded per these arrangements were $224.2 million in 2004,
and earned premiums ceded were $224.3 million in 2004. Reinsurance recoverables
for the life and accident and health business include $1,876 million at December
31, 2004 from General Electric Capital Assurance Company. Assets collateralizing
these receivables in the amount of $1,894 million at December 31, 2004 were held
in trust for the purpose of paying DTB claims.
On January 3, 1995, the DTB sold its group life business to MetLife under
the form of an indemnity insurance arrangement. Premiums written and earned in
2004 were insignificant. Reinsurance recoverables also include $409 million at
December 31, 2004 from MetLife.
Prior to April 1, 2001, the DTB also reinsured substantially all of the
GMDB on its variable annuity product. Total variable annuity account balances
with GMDB were $26.7 billion, of which $12.0 billion, or
26
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
45%, was reinsured, at December 31, 2004. GMDB is payable upon the death of a
contractholder. When the benefit payable is greater than the account value of
the variable annuity, the difference is called the net amount at risk (NAR). NAR
totals $1.1 billion, of which $.9 billion, or 84%, is reinsured at December 31,
2004.
Prior to 2004, TIC wrote workers' compensation business. This business is
reinsured through a 100% quota-share agreement with The Travelers Indemnity
Company, an insurance subsidiary of St. Paul Travelers.
A summary of reinsurance financial data reflected within the combined
statements of income and balance sheets is presented below ($ in millions):
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2004
- ------------------------------- ------
WRITTEN PREMIUMS
Direct...................................................... $1,593
Assumed..................................................... 64
Ceded....................................................... (336)
------
Total Net Written Premiums.................................. $1,321
======
</Table>
<Table>
<Caption>
2004
------
EARNED PREMIUMS
Direct...................................................... $1,584
Assumed..................................................... 64
Ceded....................................................... (334)
------
Total Net Earned Premiums................................... $1,314
======
</Table>
Reinsurance recoverables at December 31, 2004 include amounts recoverable
on unpaid and paid losses and were as follows ($ in millions):
<Table>
<Caption>
2004
------
REINSURANCE RECOVERABLES
Life and accident and health business....................... $2,522
Workers' compensation business.............................. 1,490
------
Total Reinsurance Recoverables.............................. $4,012
======
</Table>
5. INTANGIBLE ASSETS
The TB' intangible assets include DAC, goodwill and the value of insurance
in force. DAC and the value of insurance in force are amortizable.
VALUE OF INSURANCE IN FORCE
The value of insurance in force totaled $91 million at December 31, 2004
and is included in other assets. Amortization expense on the value of insurance
in force was $11 million for the year ended December 31, 2004. Amortization
expense related to the value of insurance in force is estimated to be $13
million in 2005, $14 million in 2006, $11 million in 2007, $8 million in 2008
and $8 million in 2009.
27
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
At December 31, 2004, goodwill totaled $224 million and is included in
other assets.
6. INCOME TAXES
DOMESTIC
The tax provision for the transferred subsidiaries is reflected in
accordance with the actual tax return liabilities (or benefits) incurred by each
subsidiary. For the taxable year ending December 31, 2004, TIC, TLAC, and TLARC
will file Federal tax returns as part of the Citigroup consolidated Federal
income tax return. Neither TIC nor TLAC received any material tax benefit or
additional tax cost from being part of the Citigroup consolidated return. TLARC
had a net operating loss in 2004 for which it will be paid under the terms of
the Citigroup tax sharing agreement. In the event that TLARC did not file its
Federal income tax return as part of the Citigroup consolidated tax return,
these losses would have not have been used to reduce current taxable income of
the Citigroup consolidated group. There is no material Federal income tax
difference for any subsidiaries of TIC that results from TIC and TLAC not being
part of the Citigroup consolidated Federal tax return.
CLIC and FCLIC file a separate consolidated Federal tax return and do not
file as part of the Citigroup consolidated tax return.
INTERNATIONAL
No foreign subsidiary files as part of any U.S. consolidated Federal income
tax return. U.S. Federal income taxes on foreign operations consist of current
U.S. tax paid on subpart F income plus deferred taxes on non-subpart F income,
net of any Accounting Practices Board Opinion No. 23, "Accounting for Income
Taxes -- Special Areas" (APB 23) benefit, for earnings that will not be
distributed to the U.S. Both current and deferred Federal income taxes are net
of any U.S. foreign tax credits. In 2004, the APB 23 benefit was $2 million
based on undistributed earnings of $36 million. The entire APB 23 benefit
relates to Australian operations.
Citigroup adjusts, through a "tax top off" process, local taxes booked in
local legal vehicles to reflect U.S. tax rates. The appropriate U.S. tax rates
are determined by the Citigroup corporate tax division and consider such factors
as availability and utilization of foreign tax credits. The combined financial
statements as they have been presented include the tax top offs in the income
statement, but do not impact the balance sheet. See Note 11 for details on the
Citigroup MIS process.
All ITB entities are included in the Citigroup "tax top off" process. In
2004, ITB' tax top off was $55.4 million, due in large part to the pre-filing
agreement (PFA) in Argentina. A $47 million tax U.S. income tax benefit was
recognized in 2004 with respect to a prior period write-down of Argentina
operations due to a ruling from the IRS confirming the deductibility of those
losses.
28
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EFFECTIVE TAX RATE
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31, 2004
- ------------------------------- ---------
($ IN
MILLIONS)
Income before Federal and foreign income taxes.............. $1,244
Statutory tax rate.......................................... 35%
------
Expected Federal and foreign income taxes................... 435
Tax effect of:
Non-taxable investment income............................... (22)
Tax reserve release......................................... (23)
Utilized foreign losses and other........................... (47)
------
Federal and foreign income taxes............................ $ 343
======
Effective tax rate.......................................... 28%
------
COMPOSITION OF FEDERAL AND FOREIGN INCOME TAXES
Current:
United States............................................... $ 58
Foreign..................................................... 2
------
Total....................................................... 60
------
Deferred:
United States............................................... 261
Foreign..................................................... 22
------
Total....................................................... 283
------
Federal and foreign income taxes............................ $ 343
======
</Table>
Additional tax benefits (expense) attributable to employee stock plans
allocated directly to shareholder's equity for the year ended December 31, 2004,
was $(2) million.
29
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax liability at December 31, 2004 was comprised of the
tax effects of temporary differences related to the following assets and
liabilities:
<Table>
<Caption>
2004
---------
($ IN
MILLIONS)
Deferred Tax Assets:
Benefit, reinsurance and other reserves..................... $ 489
Operating lease reserves.................................... 7
Employee benefits........................................... 11
Other....................................................... 136
-------
Total....................................................... 643
-------
Deferred Tax Liabilities:
Deferred acquisition costs and value of insurance in
force..................................................... (792)
Investments, net............................................ (627)
Other....................................................... (74)
-------
Total....................................................... (1,493)
-------
Net Deferred Tax Liability.................................. $ (850)
=======
</Table>
The TB, collectively, had a $15 million receivable from Citigroup at
December 31, 2004 related to the Tax Sharing Agreement.
At December 31, 2004 FCLIC had a capital loss carryforward of $2 million.
No other TB had any ordinary or capital loss carryforwards.
Under the 1984 Tax Act, life insurance companies were subject to tax on any
subtractions made from the Policyholders' Surplus Account (PSA). The PSA arose
under pre-1984 law, and consists generally of that portion of the gain from
operations that had not been subject to tax, plus certain special deductions.
Under the 2004 Act, distributions may be made from the PSA without triggering
any tax. The balance in the PSA as of December 31, 2004, taking into account the
restructuring transactions reflected in the balance sheet, is zero. As the
result of the changes made by the 2004 Tax Act, no tax is imposed on any of
these distributions.
7. SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY
The DTB' statutory net income and statutory capital and surplus reflect the
excluded restructuring transactions as described in Note 1. The DTB' combined
statutory net income was $474.7 million for the year ended December 31, 2004.
The DTB' combined capital and surplus was $3.293 billion at December 31, 2004.
DIVIDEND AVAILABILITY
Domestic
The DTB are subject to various regulatory restrictions that limit the
maximum amount of dividends available to be paid to their parent without prior
approval of insurance regulatory authorities. The DTB are domiciled in the
following states: Arizona, Connecticut, Florida, New York, and South Carolina.
Depending upon both the timing and the amounts of proposed dividends, procedures
for their payment vary from state to state. The State of Connecticut Insurance
Department requires prior approval for any dividends for a period of
30
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
two years following a change in control. Accordingly, any dividends from TIC or
TLAC, during that period, would require prior approval from the State of
Connecticut Insurance Department. The States of Arizona, New York, and South
Carolina do not have specific statutes addressing dividend capability following
a change in control. The amount of dividends which may be paid without prior
approval during 2005 for CLIC, FCLIC and TLARC are $26.7 million, $5.4 million
and $70.0 million, respectively. In determining whether a dividend is
extraordinary, the dividend limitation threshold is applied to the cumulative
dividends paid during the preceding twelve months. Accordingly, any dividends
paid during 2005 related to Citigroup's execution of specific transactions as
discussed in Note 1, will be included in determining whether a dividend is
considered extraordinary.
CILIC maintains trusteed surplus in accordance with Florida statutes. Any
dividend requires prior approval from the State of Florida Insurance Department.
International
Each ITB is subject to the respective local-country restrictions that limit
the amount of dividends available to be paid to their parent company. Such
limitations include regulatory restrictions on minimum required capital, local
solvency margin calculations as well as local market practices. Restrictions are
primarily formula driven in certain countries and negotiated with regulators in
others. Procedures for remitting dividends also vary by country, ranging from
the requirement to obtain formal regulatory approval to informal notification to
regulators.
31
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
The details of the common stock for the entities included in the TB, as
defined in the Agreement, are as follows:
<Table>
<Caption>
SHARES SHARES SHARES
COUNTRY COMPANY PAR VALUE AUTHORIZED ISSUED OUTSTANDING
- ------- --------------------------------- --------- ---------- ---------- -----------
Argentina
Compania Previsional Citi S.A. 1 AR N/A 11,300,000 11,300,000
AFJP 1 AR N/A 10,340,000 10,340,000
Siembra Seguros de Retiro S.A. 1 AR N/A 10,000,000 10,000,000
Siembra Seguros de Vida S.A. 1 AR N/A 500,000 500,000
Best Market S.A. 1 AR N/A 12,000 12,000
Australia
Citicorp General Insurance N/A N/A 4,400,000 4,400,000
Limited
Citicorp Life Insurance Limited N/A N/A 650,000 650,000
Belgium
CitiLife S.A./N.V. N/A 10,000,000 10,000,000 10,000,000
Bermuda
CitiInsurance Reinsurance $ 1.00 250,000 250,000 250,000
(Bermuda) Ltd.
Brazil
CitiInsurance do Brasil Vida e N/A N/A 23,500,000 23,500,000
Previdencia S.A.
Japan
Citigroup Direct Marketing Japan N/A 800 200 200
Co., Ltd.
Poland
CitiInsurance Polska Towarzystwo 100 PN N/A 500,000 500,000
Ubezpieczen na Zycie S.A.
South Korea
CDMK, Inc. 1 KRW 50,000,000 50,000,000 50,000,000
U.K.
CitiInsurance General Insurance 1 Pound 10,000,000 2,000,000 2,000,000
Company Limited
CitiInsurance Life Assurance 1 Pound 10,000,000 2,000,000 2,000,000
Company Limited
CitiInsurance Administration 1 Pound 100 2 2
Services Limited
United States
TIC $ 2.50 40,000,000 40,000,000 40,000,000
TLAC $100.00 100,000 30,000 30,000
CLIC $ 1.00 10,000,000 3,200,000 3,200,000
FCLIC $ 5.00 400,000 400,000 400,000
CILIC $ 1.00 250,000 250,000 250,000
TLARC N/A 1,000 1,000 1,000
CitiInsurance International $ 0.01 1,000 1,000 1,000
Holdings Inc.
</Table>
32
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from
Nonowner Sources were as follows:
<Table>
<Caption>
ACCUMULATED
NET OTHER
UNREALIZED FOREIGN DERIVATIVE CHANGES IN
GAIN/LOSS ON CURRENCY INSTRUMENTS EQUITY FROM
INVESTMENT TRANSLATION AND HEDGING NONOWNER
SECURITIES ADJUSTMENTS ACTIVITIES SOURCES
------------- ----------- ----------- -----------
($ IN MILLIONS)
BALANCE, DECEMBER 31, 2003........... $1,345 $114 $(102) $1,357
------ ---- ----- ------
Unrealized gains on investment
securities, net of tax of $81...... 145 -- -- 145
Foreign currency translation
adjustment, net of tax of $24...... -- 45 -- 45
Add: Derivative instrument hedging
activity gains, net of tax of
$53................................ -- -- 98 98
------ ---- ----- ------
Period change........................ 145 45 98 288
------ ---- ----- ------
BALANCE, DECEMBER 31, 2004........... $1,490 $159 $ (4) $1,645
====== ==== ===== ======
</Table>
8. LEASES
Most leasing functions for the TB are administered by a Citigroup
subsidiary. Net rent expense for the TB was $11 million in 2004.
<Table>
<Caption>
MINIMUM OPERATING MINIMUM CAPITAL
YEAR ENDING DECEMBER 31, RENTAL PAYMENTS RENTAL PAYMENTS
- ------------------------ ----------------- ---------------
($ IN MILLIONS)
2005................................................ $ 9 $ 5
2006................................................ 8 5
2007................................................ 8 6
2008................................................ 6 6
2009................................................ 1 6
Thereafter.......................................... -- 12
--- ---
Total rental payments............................... $32 $40
=== ===
</Table>
9. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The TB use derivative financial instruments, including financial futures
contracts, swaps, interest rate caps, options and forward contracts, as a means
of hedging exposure to interest rate changes, equity price changes, credit and
foreign currency risk. The TB also use derivative financial instruments to
enhance portfolio income and replicate cash market investments. The TB, through
Tribeca, hold and issue derivative instruments in conjunction with these
investment strategies designed to enhance portfolio returns.
The TB use exchange traded financial futures contracts to manage their
exposure to changes in interest rates or equity market prices that arise from
the sale of certain insurance and investment products, or the need to reinvest
proceeds from the sale or maturity of investments. In addition, the TB enter
into interest rate
33
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
futures contracts in connection with macro hedges intended to reduce interest
rate risk by adjusting portfolio duration. To hedge against adverse changes in
interest rates or equity market prices, the TB enter long or short positions in
financial futures contracts, which offset asset price changes resulting from
changes in market interest rates or equity market prices until an investment is
purchased, or a product is sold. Futures contracts are commitments to buy or
sell at a future date a financial instrument, at a contracted price, and may be
settled in cash or through delivery.
The TB use equity option contracts to manage their exposure to changes in
equity market prices that arise from the sale of certain insurance products. To
hedge against adverse changes in the equity market prices, the TB enter long
positions in equity option contracts with major financial institutions. These
contracts allow the TB, for a fee, the right to receive a payment if the
referenced index, such as the Standard and Poor's 500 Index, falls below agreed
upon strike prices.
Currency option contracts are used on an ongoing basis to hedge the TB'
exposure to foreign currency exchange rates that result from the TB' direct
foreign currency investments. To hedge against adverse changes in exchange
rates, the TB enter into contracts that give them the right, but not the
obligation, to sell the foreign currency within a limited time at a contracted
price that may also be settled in cash, based on differentials in the foreign
exchange rate. These contracts cannot be settled prior to maturity.
The TB enter into interest rate swaps in connection with other financial
instruments to provide greater risk diversification and better match the cash
flows from assets and related liabilities. In addition, the TB enter into
interest rate swaps in connection with macro hedges intended to reduce interest
rate risk by adjusting portfolio duration. Under interest rate swaps, the TB
agree with other parties to exchange, at specified intervals, the difference
between fixed rate and floating rate interest amounts calculated by reference to
an agreed upon notional principal amount. The TB also enter into basis swaps in
which both legs of the swap are floating with each based on a different index.
Generally, no cash is exchanged at the outset of the contract and no principal
payments are made by either party. A single net payment is usually made by one
counterparty at each due date.
The TB enter into currency swaps in connection with other financial
instruments to provide greater risk diversification and better match assets
purchased in one currency, such as U.S. dollars, with a corresponding liability
originated in a different currency. Under currency swaps, the TB agree with
other parties to exchange, at specified intervals, one currency for a different
currency. Generally, there is an exchange of currency at the outset of the
contract based upon prevailing foreign exchange rates. Swap agreements are not
exchange traded so they are subject to the risk of default by the counterparty.
The TB enter into interest rate caps in connection with other financial
instruments to provide greater risk diversification and better match assets and
liabilities. In addition, the TB enter into interest rate caps in connection
with macro hedges intended to reduce interest rate risk by adjusting portfolio
duration. Under interest rate caps, the TB pay a premium and is entitled to
receive cash payments equal to the excess of the market interest rates over the
strike prices multiplied by the notional principal amount. Interest rate cap
agreements are not exchange traded so they are subject to the risk of default by
the counterparty.
Forward contracts are used on an ongoing basis to hedge the TB' exposure to
foreign currency exchange rates that result from direct foreign currency
investments. To hedge against adverse changes in exchange rates, the TB enter
into contracts to exchange foreign currency for U.S. dollars with major
financial institutions. These contracts cannot be settled prior to maturity. At
the maturity date the TB must purchase the foreign currency necessary to settle
the contracts.
The TB enter into credit default swaps in conjunction with a fixed income
investment to reproduce the investment characteristics of a different
investment. The TB will also enter credit default swaps to reduce exposure to
certain corporate debt security investment exposures that it holds. Under credit
default swaps, the
34
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
TB agree with other parties to receive or pay, at specified intervals, fixed or
floating rate interest amounts calculated by reference to an agreed notional
principal amount in exchange for the credit default risk of a specified bond.
Swap agreements are not exchange traded so they are subject to the risk of
default by the counterparty.
Several of the TB' hedging strategies do not qualify or are not designated
as hedges for accounting purposes. This can occur when the hedged item is
carried at fair value with changes in fair value recorded in earnings, the
derivative contracts are used in a macro hedging strategy, the hedge is not
expected to be highly effective, or structuring the hedge to qualify for hedge
accounting is too costly or time consuming.
The TB monitor the creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance sheet financial instruments. The controls include credit approvals,
credit limits and other monitoring procedures. Additionally, the TB enter into
collateral agreements with its derivative counterparties. As of December 31,
2004, the TB held collateral under these contracts amounting to approximately
$813.0 million.
The table below provides a summary of the notional and fair value of
derivatives by type:
<Table>
<Caption>
DECEMBER 31, 2004
FAIR VALUE
----------------------------------
NOTIONAL
DERIVATIVE TYPE AMOUNT ASSETS LIABILITIES
- --------------- --------- -------- -----------
($ IN MILLIONS)
Interest rate, equity and currency swaps.............. $ 9,335.8 $ 949.6 $156.2
Financial futures..................................... 1,775.9 -- --
Interest rate and equity options...................... 1,361.9 201.8 --
Currency forwards..................................... 713.3 8.8 8.5
Credit derivatives.................................... 414.1 3.8 3.4
Interest rate caps.................................... 117.5 3.1 --
Embedded derivatives included in liabilities.......... -- -- 181.3
--------- -------- ------
TOTAL............................................... $13,718.5 $1,167.1 $349.4
========= ======== ======
</Table>
The following table summarizes certain information related to the TB'
hedging activities for the year ended December 31, 2004:
<Table>
<Caption>
YEAR ENDED
IN MILLIONS OF DOLLARS DECEMBER 31, 2004
- ---------------------- -----------------
Hedge ineffectiveness recognized related to fair value
hedges.................................................... $(33.2)
Hedge ineffectiveness recognized related to cash flow
hedges.................................................... 6.1
Net loss recorded in accumulated other changes in equity
from nonowner sources related to net investment hedges.... (0.6)
Net loss from economic hedges recognized in earnings........ (29.5)
</Table>
During the year ended December 31, 2004 there were no discontinued
forecasted transactions. The amount expected to be reclassified from accumulated
other changes in equity from nonowner sources into pre-tax earnings for cash
flow hedges within twelve months from December 31, 2004 is $(68.9) million.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the TB issue fixed and variable rate loan
commitments and have unfunded commitments to partnerships and joint ventures.
All of these commitments are to unaffiliated
35
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
entities. The off-balance sheet risk of fixed and variable rate loan commitments
was $374.3 million at December 31, 2004. The TB had unfunded commitments of
$1,040.9 million to these partnerships at December 31, 2004.
FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS
The TB use various financial instruments in the normal course of its
business. Certain insurance contracts are excluded by SFAS No. 107, "Disclosure
about Fair Value of Financial Instruments," and therefore are not included in
the amounts discussed.
At December 31, investments in fixed maturities had a carrying value and a
fair value of $45.4 billion. See Note 3.
At December 31, 2004, mortgage loans had a carrying value of $2.2 billion
and a fair value of $2.3 billion. In estimating fair value, the TB used interest
rates reflecting the current real estate financing market.
At December 31, 2004, contractholder funds with defined maturities had a
carrying value of $17.4 billion and a fair value of $17.8 billion. The fair
value of these contracts is determined by discounting expected cash flows at an
interest rate commensurate with the TB' credit risk and the expected timing of
cash flows. Contractholder funds without defined maturities had a carrying value
of $14.4 billion and a fair value of $14.1 billion at December 31, 2004. The
contracts without defined maturities are fair valued using surrender values.
The carrying values of $569 million of financial instruments classified as
other assets approximated their fair values at December 31, 2004. The carrying
value of $2.8 billion of financial instruments classified as other liabilities
at December 31, 2004 also approximated their fair values at both December 31,
2004. Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
The carrying values of cash, trading securities and trading securities sold
not yet purchased are carried at fair value. The carrying values of short-term
securities and investment income accrued approximated their fair values. The
carrying value of policy loans, which have no defined maturities, is considered
to be fair value.
10. COMMITMENTS AND CONTINGENCIES
DOMESTIC
Litigation
In August 1999, an amended putative class action complaint captioned Lisa
Macomber, et al. vs. Travelers Property Casualty Corporation, et al. was filed
in New Britain, Connecticut Superior Court against TIC, its parent corporation,
certain of TIC's affiliates (collectively TLA), and TIC's former affiliate,
Travelers Property Casualty Corporation. The amended complaint alleges Travelers
Property Casualty Corporation purchased structured settlement annuities from TIC
and spent less on the purchase of those structured settlement annuities than
agreed with claimants; and that commissions paid to brokers of structured
settlement annuities, including a TIC affiliate, were paid, in part, to
Travelers Property Casualty Corporation. The amended complaint was dismissed and
following an appeal by plaintiff in September 2002 the Connecticut Supreme Court
reversed the dismissal of several of the plaintiff's claims. On May 26, 2004,
the Connecticut Superior Court certified a nation wide class action. The class
action claims against TLA are violation of the Connecticut Unfair Trade Practice
Statute, unjust enrichment and civil conspiracy. On June 15, 2004, the
Defendants, including TLA, appealed the Connecticut Superior Court's May 26,
2004 class certification order.
36
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In 2003 and 2004, several issues in the mutual fund and variable insurance
product industries have come under the scrutiny of Federal and state regulators.
Like many other companies in our industry, TIC and certain of the DTB legal
entities have received a request for information from the Securities and
Exchange Commission (SEC) and a subpoena from the New York Attorney General
regarding market timing and late trading. During 2004 the SEC requested
additional information about variable product operations on market timing, late
trading and revenue sharing, and the SEC, the NASD and the New York Insurance
Department have made inquiries into these issues and other matters associated
with the sale and distribution of insurance products. In addition, like many
insurance companies and agencies, in 2004 and 2005 TIC and certain of the DTB
legal entities received inquiries from certain state Departments of Insurance
regarding producer compensation and bidding practices. TIC and certain of the
DTB legal entities are cooperating fully with all of these requests and are not
able to predict their outcomes.
In addition, TIC and certain of the DTB legal entities are defendants or
co-defendants in various other litigation matters in the normal course of
business. These include civil actions, arbitration proceedings and other matters
arising in the normal course of business out of activities as an insurance
company, a broker and dealer in securities or otherwise.
In the opinion of DTB' management, the ultimate resolution of these legal
and regulatory proceedings would not be likely to have a material adverse effect
on the combined financial condition or liquidity, but, if involving monetary
liability, may be material to the TB' operating results for any particular
period.
Other
DTB are members of the Life & Health Insurance Guarantee Association in
each of the states they are licensed to conduct business, which have the
authority to assess DTB for the purpose of raising funds in order to pay claims
and expenses of insurance companies that have been declared insolvent and are
unable to meet their legal obligations. At this time, DTB cannot make an
estimate of what assessment from the Association would amount to.
TIC is a member of the Federal Home Loan Bank of Boston (the Bank), and in
this capacity has entered into a funding agreement (the funding agreement) with
the Bank where a blanket lien has been granted to collateralize the Bank's
deposits. TIC maintains control of these assets, and may use, commingle,
encumber or dispose of any portion of the collateral as long as there is no
event of default and the remaining qualified collateral is sufficient to satisfy
the collateral maintenance level. The funding agreement further states that upon
any event of default, the Bank's recovery is limited to the amount of the
member's outstanding funding agreement. The amount of TIC's liability for
funding agreements with the Bank as of December 31, 2004 is $1.1 billion,
included in contractholder funds. The TB holds $60.3 million of common stock of
the Bank, included in equity securities.
INTERNATIONAL
Japan Joint Venture
Pursuant to the joint venture agreement governing the ITB' Japan joint
venture interest, upon a change of control of CitiInsurance International
Holdings Inc. (CIHI), Mitsui Sumitomo Insurance Co., Ltd. (MSI), the ITB'
partner in the Japan joint venture, has the right to purchase all of the joint
venture shares owned by CIHI at a price per share equal to the fair market value
thereof as determined by an independent financial advisor. Such right may be
exercised not later than 30 days after notice of the change of control is
received by MSI.
37
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Siembra Group
As the economic situation, as well as legal and regulatory issues, in
Argentina remain fluid, the Siembra Group is watching the potential impact that
government actions may have on our pension and insurance businesses, including
the potential for pension reform, re-dollarization of pension annuities, impact
of debt restructurings, and the liquidity and capital needs of the pension and
insurance subsidiaries. Additional costs to the Siembra Group will depend on
future actions by the Argentine government and the Siembra Group. Additional
losses may be incurred.
Injunctions (Amparos)
The Argentina businesses have received court injunctions relating to
customers' claims that they are owed U.S. dollars despite the government
mandated conversion into pesos of all U.S. dollar denominated contracts at
specified rates. If a customer is successful, an Argentine judge may issue an
order of Amparos allowing the customer to withdrawal the original U.S. dollar
denominated balance at the current free-floating exchange rate, resulting in a
loss to the Siembra Group. The Siembra Group accounts for Amparos as litigation
costs. Because the Siembra Group cannot monitor the number or related amounts of
Amparos in the court system, combined with the uncertainty related to the legal
issues surrounding their enforcement, the total exposure is not reasonably
estimable. Therefore, the Siembra Group accounts for Amparos losses as specific
court orders to pay are received.
In the opinion of ITB' management, the ultimate resolution of these legal
and regulatory proceedings would not be likely to have a material adverse effect
on the combined financial condition or liquidity, but, if involving monetary
liability, may be material to the TB' operating results for any particular
period.
11. RELATED PARTY TRANSACTIONS
DOMESTIC
The DTB conduct business under various company names, including TIC, TLAC,
CLIC, FCLIC, CILIC and TLARC. Prior to the Agreement, all of DTB was
consolidated under Citigroup, their ultimate parent. The following discussions
are categorized between the domestic and international operations and provide a
summary of significant intercompany transactions.
Citigroup and certain of its subsidiaries provide investment management and
accounting services, payroll, internal auditing, benefit management and
administration, property management and information technology services to the
DTB as of December 31, 2004. DTB paid Citigroup and its subsidiaries $102.7
million in 2004 for these services, including $61.7 from TIC to TSI for
investment services. The financial results reflect allocations of corporate
expenses from Citigroup, which may be different from comparable expenses that
would have been incurred, had the DTB operated as a standalone company. The
amounts due to affiliates related to these services, included in other
liabilities at December 31, 2004 was insignificant.
At December 31, 2004 DTB had outstanding loaned securities to its affiliate
Smith Barney (SB), a division of Citigroup Global Markets, Inc., of $348
million.
DTB had investments in an affiliated joint venture, Tishman Speyer, in the
amount of $92.9 million at December 31, 2004. Income of $54.2 million was earned
on these investments in 2004.
DTB also had an investment in Greenwich Street Capital Partners I, an
affiliated private equity investment, in the amount of $42.2 million December
31, 2004. Income of $4.3 million was earned on this investment in 2004.
38
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In the ordinary course of business, DTB purchases and sells securities
through affiliated broker-dealers. These transactions are conducted on an
arm's-length basis. Amounts due to SB were $363.7 million at December 31, 2004
DTB markets deferred annuity products and life insurance through SB.
Annuity deposits related to these products were $877 million in 2004. Life
premiums were $137.5 million in 2004. Commissions and fees paid to SB were $71.9
million in 2004.
DTB also markets individual annuity and life insurance through CitiStreet
Retirement Services, a division of CitiStreet LLC, (CitiStreet), a joint venture
between Citigroup and State Street Bank. Deposits received from CitiStreet were
$1.5 billion in 2004. Commissions and fees paid to CitiStreet were $45.9 million
in 2004.
DTB markets individual life and annuity products through an affiliate
Citibank, N.A. (together with its subsidiaries, Citibank). Life premiums were
$43 million, and annuity deposits received from Citibank were $529 million in
2004. Commissions and fees paid to Citibank were $44.3 million in 2004.
Primerica Financial Services (PFS), an affiliate, is a distributor of
products for DTB. PFS sold $983 million of individual annuities in 2004.
Commissions and fees paid to PFS were $75.4 million in 2004.
INTERNATIONAL
ITB conducts business through various legal entities (see Note 1). Prior to
the Agreement, all of the ITB entities were consolidated under Citigroup, their
ultimate parent. The following discussions provide a summary of significant
intercompany transactions for the international operations.
As of December 31, 2004 ITB has approximately $125.4 million of cash and
short-term securities with Citigroup banking operations around the world.
The ITB are heavily integrated with the Citigroup banking and finance
operations around the world. Wherever possible, the ITB utilize Citigroup's
international infrastructure to support the insurance operations. In general,
services rendered between Citigroup entities and the ITB, which include real
estate services, information technology, treasury services, human resources
services and accounting support, are at fair market value and are settled either
in cash through the Citigroup MIS, as described below.
CITIGROUP MIS PROCESS
ITB operations utilize the Citigroup MIS process to report its management
financial statements. Within Citigroup, MIS transactions are used to allocate
revenue and expense adjustments between Citigroup legal entities to create
management based income statements by region and product type. The ITB receive
allocations for their manufacturing of insurance products distributed through
Citigroup distribution channels not being sold. MIS transactions are generally
at fair market value between Citigroup entities for various services rendered
without transfer of cash.
Within Citigroup, all MIS transactions eliminate in consolidation and have
no impact on the consolidation of Citigroup. The combined financial statements
as they have been presented here do include a number of MIS transactions between
ITB legal entities and Citigroup legal entities that do not impact the balance
sheet, but do impact the income statement. Going forward, ITB entities will no
longer be able to utilize MIS transactions. All services rendered between
Citigroup and ITB must be settled in cash.
As a result of moving from an MIS to a cash basis settlement of
transactions, there may be certain sales tax implications for both parties.
However, the nature and amounts of these taxes are not known at this time, but
are not expected to be material to the business as a whole.
39
CITIGROUP LIFE INSURANCE AND ANNUITIES
ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENT
INTERNATIONAL
On January 14, 2005, AFJP tendered defaulted government debt as part of a
general Argentine debt restructuring in expectation of receiving new securities.
As of December 31, 2004, securities tendered had a fair value of 33 million
Argentine pesos (approximately $11 million). These securities are expected to
have a mandatory trading restriction of one year after receipt and are,
therefore, not expected to have a publicly quoted fair market value until such
time that they can be traded.
40