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<SEC-DOCUMENT>0001047469-99-008860.txt : 19990309
<SEC-HEADER>0001047469-99-008860.hdr.sgml : 19990309
ACCESSION NUMBER: 0001047469-99-008860
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 14
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990308
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CITIGROUP INC
CENTRAL INDEX KEY: 0000831001
STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331]
IRS NUMBER: 521568099
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-09924
FILM NUMBER: 99559696
BUSINESS ADDRESS:
STREET 1: 153 EAST 53RD STREET
STREET 2: CORPORATE LAW DEPARTMENT
CITY: NEW YORK
STATE: NY
ZIP: 10043-
BUSINESS PHONE: (212)-559-1000
MAIL ADDRESS:
STREET 1: 153 EAST 53RD STREET
STREET 2: LEGAL DEPT 20TH FLOOR
CITY: NEW YORK
STATE: NY
ZIP: 10043
FORMER COMPANY:
FORMER CONFORMED NAME: TRAVELERS GROUP INC
DATE OF NAME CHANGE: 19950519
FORMER COMPANY:
FORMER CONFORMED NAME: TRAVELERS INC
DATE OF NAME CHANGE: 19940103
FORMER COMPANY:
FORMER CONFORMED NAME: PRIMERICA CORP /NEW/
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>10-K405
<TEXT>
<PAGE>
FINANCIAL INFORMATION
THE COMPANY 2
FIVE-YEAR SUMMARY OF
SELECTED FINANCIAL DATA 4
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 5
GLOBAL CONSUMER 7
Banking/Lending 7
Citibanking North America 7
Mortgage Banking 8
Cards 8
Consumer Finance Services 9
Insurance 9
Travelers Life and Annuity 9
Primerica Financial Services 10
Personal Lines 11
International Consumer 12
Europe, Midd
le East, & Africa 12
Asia Pacific 12
Latin America 13
Global Private Bank 14
e-Citi 14
Other Consumer 14
Consumer Portfolio Review 15
Global Consumer Outlook 17
GLOBAL CORPORATE AND
INVESTMENT BANK 19
Salomon Smith Barney 20
Emerging Markets 21
Global Relationship Banking 22
Commercial Lines Insurance 22
Global Corporate and
Investment Bank Outlook 28
ASSET MANAGEMENT 29
CORPORATE/OTHER 30
INVESTMENT ACTIVITIES 30
DISCONTINUED OPERATIONS 30
YEAR 2000 31
FUTURE APPLICATION OF
ACCOUNTING STANDARDS 31
FORWARD-LOOKING STATEMENTS 31
MANAGING GLOBAL RISK 32
The Credit Risk Management Process 32
The Market Risk Management Process 33
Management of Cross-Border
Risk at Citigroup 36
LIQUIDITY AND CAPITAL RESOURCES 37
REPORT OF MANAGEMENT 41
INDEPENDENT AUDITORS' REPORT 41
CONSOLIDATED FINANCIAL STATEMENTS--
CITIGROUP INC. AND SUBSIDIARIES 42
CONSOLIDATED STATEMENT OF INCOME 42
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION 43
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY 44
CONSOLIDATED STATEMENT OF
CASH FLOWS 45
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 46
FINANCIAL DATA SUPPLEMENT 80
Average Balances and Interest Rates,
Taxable Equivalent Basis 80
Analysis of Changes in Net
Interest Revenue 82
Ratios 83
Loans Outstanding 83
Loan Maturities and Sensitivity to
Changes in Interest Rates 84
Cash-Basis, Renegotiated, and
Past Due Loans 84
Other Real Estate Owned and Assets
Pending Disposition 85
Foregone Interest Revenue on Loans 85
Details of Credit Loss Experience 85
Average Deposit Liabilities in Offices
Outside the U.S. 86
Time Deposits in U.S. Offices
Maturity Profile 86
Short-Term and Other Borrowings 86
10-K CROSS REFERENCE INDEX 94
1
<PAGE>
THE COMPANY
Citigroup Inc. (together with its subsidiaries, the "Company") is a diversified
holding company whose businesses provide a broad range of financial services to
consumer and corporate customers around the world. The Company's activities are
conducted through Global Consumer, Global Corporate and Investment Bank, Asset
Management, and Investment Activities.
The Company's Global Consumer segment includes a global, full-service
consumer franchise encompassing, among other things, branch and electronic
banking, consumer lending services and credit and charge card services,
personalized wealth management services for high net worth clients, and life,
auto and homeowners insurance. The businesses included in the Company's Global
Corporate and Investment Bank segment serve corporations, financial
institutions, governments and other participants in developed and emerging
markets throughout the world. These businesses provide, among other things,
investment banking, retail brokerage, corporate banking and cash management
products and services and commercial insurance. Asset Management includes asset
management services provided to mutual funds, institutional and individual
investors. The Investment Activities segment includes the Company's venture
capital activities, the realized investment gains and losses related to certain
corporate- and insurance-related investments and the results of certain
investments in countries that refinanced debt under the 1989 Brady Plan or plans
of a similar nature. Corporate/Other includes net corporate treasury results,
unallocated expenses, corporate administration, and variances between the
consolidated and local tax rate for banking segments.
Global Consumer
Global Consumer delivers a wide array of banking and lending services,
including the issuance of credit and charge cards, and personal insurance
products in 57 countries around the world.
Global Consumer creates products and platforms to meet the expanding needs
of the world's growing middle class. Citibanking North America delivers banking
services to customers through the branch network and through electronic delivery
systems. Through its Mortgage Banking unit, Global Consumer makes mortgage and
student loans to customers across North America.
The Cards unit offers products such as MasterCard and VISA, Diners Club
and private label credit cards. The April 1998 acquisition of Universal Card
Services from AT&T added approximately $15 billion in credit card receivables.
Global Consumer accounts for approximately 15% of the U.S. credit card
receivables market. Worldwide, Global Consumer has approximately 53 million card
member accounts.
The Consumer Finance Services unit of Global Consumer provides
community-based lending services through the branch network system of Commercial
Credit Company ("CCC"). As of December 31, 1998, Consumer Finance Services
maintained 980 loan offices in 45 states, including 19 servicing centers for
$.M.A.R.T. loans(R) and $.A.F.E.(R) loans sold through the independent agents
(the "Primerica sales force") of Primerica Financial Services ("Primerica"), a
subsidiary of Citigroup. Loans to consumers include real estate-secured loans,
unsecured and partially secured personal loans and loans to finance consumer
goods purchases.
The Insurance units of Global Consumer, through The Travelers Life and
Annuity Company ("TLAC") offer fixed and variable deferred annuities, payout
annuities and term, universal and variable life and long-term care insurance
to individuals and small businesses domestically. These products are primarily
marketed through The Copeland Companies ("Copeland"), an indirect wholly owned
subsidiary of The Travelers Insurance Company ("TIC"), Salomon Smith Barney
Financial Consultants and a nationwide network of independent agents.
Travelers Life and Annuity also provides group pension products,
including guaranteed investment contracts, and group annuities to U.S.
employer-sponsored retirement and savings plans through direct sales and
various intermediaries.
The business operations of Primerica involve the sale in North America of
life insurance as well as other products manufactured by the Company, including
mutual funds manufactured by Salomon Smith Barney and others, mortgages and
personal loans of CCC, automobile and homeowners insurance of Travelers Property
Casualty Corp. ("TAP") and Citibank personal checking and other accounts. The
Primerica sales force is composed of approximately 150,000 independent
representatives. A great majority of the sales force works on a part-time basis.
Through TAP, a subsidiary in which Citigroup has an approximate 84%
interest, Global Consumer writes virtually all types of property and casualty
insurance covering personal risks. TAP is the second largest writer of personal
lines insurance through independent agents in the U.S. based on 1997 direct
written premiums published by A.M. Best Company. The Personal Lines unit of TAP
had approximately 5.1 million policies in force at December 31, 1998. The
primary coverages are personal automobile and homeowners insurance sold to
individuals. These products are distributed through approximately 5,000
independent agencies located throughout the United States, most of which
represent several unrelated property and casualty companies. Personal Lines also
uses alternative distribution channels, including sponsoring organizations such
as employee and affinity groups, joint marketing arrangements with other
insurers and through the Primerica sales force.
The International unit of Global Consumer provides full-service banking
and lending, including credit and charge cards, in Europe, Middle East and
Africa, Asia Pacific (including Japan and Australia) and Latin America.
Citibank's Global Private Bank provides personalized wealth management services
for high net worth clients through 97 offices in 31 countries, generating fee
income from investment funds management, trust and fiduciary services and
custody services. Its Relationship Managers use their knowledge about their
clients' individual needs and goals to bring them an array of personal banking
services.
Through e-Citi, Global Consumer focuses on the development of electronic
banking initiatives, including Internet-based transactional banking products.
These initiatives help place customers' entire financial relationships at their
fingertips.
Global Corporate and Investment Bank
Global Corporate and Investment Bank provides investment advice, financial
planning and extensive retail brokerage services, banking and other financial
services and commercial insurance products throughout the United States and in
98 foreign countries.
Global Corporate and Investment Bank through Salomon Smith Barney delivers
investment banking services that encompass a full range of global capital market
activities, including the underwriting and distribution of fixed income and
equity securities for United States and foreign corporations and for state,
local and other governmental and government-sponsored authorities. Global
Corporate and Investment Bank also provides capital raising, advisory, research
and other brokerage services to its customers, acts as a market-maker and
executes securities and commodities futures brokerage transactions on all major
United States and international exchanges on behalf of customers and for its own
account. It also executes proprietary trading strategies on its own behalf,
principally in fixed income securities and in commodities. During 1998, these
trading strategies were
2
<PAGE>
significantly scaled down. In August 1998, Salomon Smith Barney entered into a
strategic alliance with The Nikko Securities Co., Ltd. to provide investment
banking, sales and trading and research services for corporate and institutional
clients in Japan and other overseas markets. The joint venture began operating
in the first quarter of 1999.
Global Corporate and Investment Bank is a major participant in foreign
exchange and in the over-the-counter ("OTC") market for derivative instruments
involving a wide range of products, including interest rate, equity and currency
swaps, caps and floors, options, warrants and other derivative products. It also
creates and sells various types of structured securities.
Citibank has a long-standing presence in emerging markets, which include
all locations outside the economies of North America, Western Europe, and Japan.
Citibank's Emerging Markets business offers a wide array of products and
services that help multinational and local companies fulfill their financial
goals or needs. Initially, Citibank typically enters a country to serve global
customers, providing them with cash management, short-term loans, and
foreign-exchange services. As the market begins to develop, Citibank offers
trade services, project finance, and fixed-income issuance and trading and,
thereafter, introduces securities custody, loan syndications and derivatives
services. Finally, as services for locally headquartered companies become
significant, consumer banking services may be offered. The Company's strategy in
emerging markets also targets middle market businesses, and is designed to
increase the Company's presence in the country and to help establish Citibank as
a local "hometown" bank, as well as a leading international bank.
The Global Relationship Bank provides banking and financial services to
multinational companies and their subsidiaries all over the world. This business
is organized by customer rather than by region or product. A dedicated
relationship team serves each parent company and its subsidiaries everywhere
they operate. Product offerings are determined by the demands of these
sophisticated customers. Core products include cash management, foreign
exchange, securities custody and structured products.
TAP's Commercial Lines unit offers a broad array of property and casualty
insurance and insurance-related services which it distributes through
approximately 5,200 brokers and independent agencies located throughout the
United States. TAP is the third largest writer of commercial lines insurance in
the U.S. based on 1997 direct written premiums published by A.M. Best Company.
Commercial Lines is organized into four marketing and underwriting groups that
are designed to focus on a particular client base or industry segment to provide
products and services that specifically address customers' needs: National
Accounts, primarily serving large national corporations; Commercial Accounts,
serving mid-size businesses; Select Accounts, serving small businesses; and
Specialty Accounts, providing a variety of specialty coverages. Environmental,
asbestos and other cumulative injury claims are segregated from other claims and
are handled separately by TAP's Special Liability Group, a special unit staffed
by dedicated legal, claim, finance and engineering professionals.
Asset Management
The Asset Management group is comprised of three primary asset management
business platforms: Salomon Brothers Asset Management, Smith Barney Asset
Management and Citibank Global Asset Management. These companies offer a broad
range of asset management products and services from global investment centers
around the world, including mutual funds, closed-end funds, managed accounts and
unit investment trusts.
Clients include private and public retirement plans, endowments,
foundations, banks, central banks, insurance companies, other corporations,
government agencies, high net worth and other individuals. Client relationships
may be introduced through the cross marketing and distribution opportunities
within the Citigroup structure, through Asset Management's own sales force or
through independent sources.
As of December 31, 1998, aggregate assets under management exceeded $327
billion with about $100 billion in each of the equity, fixed income and
liquidity product categories. Approximately $225 billion is managed in the
United States, $60 billion in Europe, $15 billion in Japan, $10 billion in Latin
America, $8 billion in Asia Pacific and $5 billion in Australia.
Investment Activities
In addition to the Company's three business segments, its Investment Activities
segment consists primarily of the Company's venture capital activities, the
realized investment gains and losses related to certain corporate- and
insurance-related investments and the results of certain investments in
countries that refinanced debt under the 1989 Brady Plan or plans of a similar
nature.
Corporate/Other
Corporate/Other includes net treasury results, revenues derived from charging
banking segments for funds employed, based upon a marginal cost of funds
concept, corporate staff and similar expenses, and the offset created by
attributing income taxes to core business activities on a local tax-rate basis
for Citicorp.
The periodic reports of Citicorp, CCC, Salomon Smith Barney Holdings Inc.
("SSBH"), TAP, The Student Loan Corporation ("STU"), the Travelers Insurance
Company ("TIC"), and the Travelers Life and Annuity Company ("TLAC"),
subsidiaries of the Company that make filings pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), provide additional
business and financial information concerning those companies and their
consolidated subsidiaries.
The principal executive offices of the Company are located at 153 East
53rd Street, New York, New York 10043; telephone number 212-559-1000.
3
<PAGE>
Citigroup Inc. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
In Millions of Dollars, Except Per Share Amounts 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 76,431 $ 72,306 $ 65,101 $ 58,957 $ 54,369
Total revenues, net of interest expense 48,936 47,782 43,765 36,567 31,841
Provisions for benefits, claims, and credit losses 11,116 9,911 9,566 7,193 7,260
Operating expenses(2) 28,551 27,121 23,475 20,460 19,151
Income from continuing operations(2) 5,807 6,705 7,073 5,610 4,182
Discontinued operations -- -- (334) 150 180
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,807 $ 6,705 $ 6,739 $ 5,760 $ 4,362
==================================================================================================================================
Earnings per share(3)
Basic earnings per share:
Income from continuing operations $ 2.49 $ 2.86 $ 2.97 $ 2.41 $ 1.75
Net income 2.49 2.86 2.83 2.48 1.83
Diluted earnings per share:
Income from continuing operations 2.43 2.74 2.84 2.19 1.60
Net income 2.43 2.74 2.71 2.25 1.68
Dividends declared per common share(4) 0.555 0.400 0.300 0.267 0.192
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31,
Total assets $ 668,641 $ 697,384 $ 626,906 $ 559,146 $ 537,540
Total deposits 228,649 199,121 184,955 167,131 155,726
Long-term debt 48,671 47,387 43,246 40,723 40,171
Mandatorily redeemable securities of subsidiary trusts 4,320 2,995 2,545 -- --
Redeemable preferred stock 140 280 420 560 700
Common stockholders' equity 40,395 38,498 35,213 31,000 24,646
Total stockholders' equity 42,708 41,851 38,416 35,183 29,945
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and preferred
stock dividends 1.32x 1.41x 1.48x 1.35x 1.21x
Return on average common stockholders' equity(5) 13.95% 17.49% 19.42% 18.88% 16.56%
Common stockholders' equity to assets 6.04% 5.52% 5.62% 5.54% 4.58%
Total stockholders' equity to assets 6.39% 6.00% 6.13% 6.29% 5.57%
- ----------------------------------------------------------------------------------------------------------------------------------
Income Analysis(6)
Total revenues, net of interest expense $ 48,936 $ 47,782 $ 43,765 $ 36,567 $ 31,841
Effect of credit card securitization activity(7) 2,187 1,713 1,392 917 934
Net cost to carry(8) 8 (5) (46) 23 89
Capital building transactions -- -- -- -- (80)
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted revenues, net of interest expense 51,131 49,490 45,111 37,507 32,784
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted operating expenses(9) 27,812 25,475 23,533 20,565 19,142
- ----------------------------------------------------------------------------------------------------------------------------------
Provisions for benefits, claims, and credit losses(10) 11,116 9,911 9,566 7,193 7,260
Effect of credit card securitization activity(7) 2,187 1,713 1,392 917 934
Net cost to carry and net OREO benefits (48) (77) (90) (82) 98
Acquisition-related costs -- -- (541) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted provisions for benefits, claims, and credit costs 13,255 11,547 10,327 8,028 8,292
- ----------------------------------------------------------------------------------------------------------------------------------
Restructuring charges and merger-related costs (795) (1,718) -- -- --
Acquisition-related costs -- -- (650) -- --
Operating loss from discontinued operations -- -- 123 -- --
Gain on sale of stock by subsidiary -- -- 363 -- --
Gain on sale of subsidiaries and affiliates -- -- -- -- 226
Capital building transactions -- -- -- -- 80
- ----------------------------------------------------------------------------------------------------------------------------------
Income before taxes and minority interest 9,269 10,750 11,087 8,914 5,656
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 3,234 3,833 3,967 3,304 1,474
Minority interest, net of income taxes 228 212 47 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 5,807 6,705 7,073 5,610 4,182
Discontinued operations, net of tax -- -- (334) 150 180
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,807 $ 6,705 $ 6,739 $ 5,760 $ 4,362
==================================================================================================================================
</TABLE>
(1) All periods have been restated to reflect the mergers of Travelers Group
and Citicorp on October 8, 1998 and Salomon Inc on November 28, 1997. The
results of the property casualty business of Aetna P&C are included from
the date of acquisition, April 2, 1996. (See Note 2 of Notes to
Consolidated Financial Statements).
(2) The years ended December 31, 1998 and 1997 include net restructuring
charges (and in 1998 merger-related costs) of $795 million ($535 million
after-tax) and $1,718 million ($1,046 million after-tax), respectively.
(3) All amounts have been adjusted to reflect various stock splits.
(4) Amounts represent Travelers' historical dividends per common share.
(5) The return on average common stockholders' equity is calculated using net
income after deducting preferred stock dividend requirements. Excluding
gains and losses on discontinued operations, return on average common
stockholders' equity was 13.95% in 1998, 17.49% in 1997, 20.43% in 1996,
18.34% in 1995 and 15.79% in 1994.
(6) The income analysis reconciles amounts shown in the Consolidated Statement
of Income on page 42 to the basis employed by management for assessing
financial results.
(7) Commencing in 1997, includes effect related to credit card receivables
held for sale.
(8) Principally the net cost to carry commercial cash-basis loans and other
real estate owned (OREO).
(9) Excludes restructuring charges and net OREO benefits (principally gains
and losses on sales, direct revenue and expense, and writedowns of
commercial OREO), and in 1996, operating loss from discontinued operations
and acquisition-related costs.
(10) Includes a provision in excess of net credit losses to increase the
allowance for credit losses by $107 million, $128 million, $242 million,
$309 million, and $751 million for 1998, 1997, 1996, 1995 and 1994,
respectively.
4
<PAGE>
Citigroup Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Merger with Citicorp
On October 8, 1998, Citicorp merged with and into a newly formed, wholly owned
subsidiary of Travelers Group Inc. (TRV) (the Merger). Following the Merger, TRV
changed its name to Citigroup Inc. (Citigroup). Under the terms of the Merger,
approximately 1.1 billion shares of Citigroup common stock were issued in
exchange for all of the outstanding shares of Citicorp common stock based on an
exchange ratio of 2.5 shares of Citigroup common stock for each share of
Citicorp common stock. Each share of TRV common stock automatically represented
one share of Citigroup common stock. Following the exchange, former shareholders
of Citicorp and TRV each owned approximately 50% of the outstanding common stock
of Citigroup. Each outstanding share of Citicorp preferred stock was converted
into one share of a corresponding series of preferred stock of Citigroup having
identical terms (See Note 18 of Notes to Consolidated Financial
Statements--Series O through Series V).
The consolidated financial statements give retroactive effect to the
Merger in a transaction accounted for as a pooling of interests. The pooling of
interests method of accounting requires the restatement of all periods presented
as if TRV and Citicorp had always been combined. The consolidated statement of
changes in stockholders' equity reflects the accounts of Citigroup together with
its subsidiaries (the Company) as if the additional preferred and common stock
had been issued during all the periods presented.
Upon consummation of the Merger, the Company became a bank holding company
subject to the provisions of the Bank Holding Company Act of 1956 (the BHCA).
The BHCA precludes a bank holding company and its affiliates from engaging in
certain activities, generally including insurance underwriting. Under the BHCA
in its current form, the Company has two years from the date it became a bank
holding company to comply with all applicable provisions (the BHCA Compliance
Period). The BHCA Compliance Period may be extended, at the discretion of the
Federal Reserve Board, for three additional one-year periods so long as the
extension is not deemed to be detrimental to the public interest. At this time,
the Company believes that its compliance with applicable laws following the
Merger will not have a material adverse effect on the Company's financial
condition, results of operations, or liquidity.
There is pending federal legislation that would, if enacted, amend the
BHCA to authorize a bank holding company to own certain insurance underwriters.
There is no assurance that such legislation will be enacted. At the expiration
of the BHCA Compliance Period, the Company will evaluate its alternatives in
order to comply with whatever laws are then applicable.
Merger with Salomon
On November 28, 1997, a newly formed, wholly owned subsidiary of the Company
merged with and into Salomon Inc (Salomon) (the Salomon Merger). Under the terms
of the Salomon Merger, approximately 188.5 million shares of Citigroup common
stock were issued in exchange for all of the outstanding shares of Salomon
common stock, based on an exchange ratio of 1.695 shares of Citigroup common
stock for each share of Salomon common stock. Shares of each of Salomon's series
of preferred stock outstanding were exchanged for a corresponding series of
Citigroup preferred stock having substantially identical terms, except that the
Citigroup preferred stock issued in conjunction with the Salomon Merger has
certain voting rights. Thereafter, Smith Barney Holdings Inc. (Smith Barney), a
wholly owned subsidiary of Citigroup, was merged with and into Salomon to form
Salomon Smith Barney Holdings Inc. (Salomon Smith Barney). The Salomon Merger
was accounted for under the pooling of interests method.
Acquisition of Aetna P&C
On April 2, 1996, Travelers Property Casualty Corp. (TAP), an indirect
majority-owned subsidiary of Citigroup, acquired the domestic property and
casualty insurance subsidiaries of Aetna Services, Inc. (Aetna P&C) for
approximately $4.2 billion in cash. This acquisition was financed in part by the
issuance by TAP of common stock resulting in a minority interest in TAP of
approximately 18% at that time (currently 16%). The acquisition was accounted
for under the purchase method of accounting and, accordingly, the consolidated
financial statements include the results of Aetna P&C's operations from the date
of acquisition. TAP also owns The Travelers Indemnity Company and its
subsidiaries (Travelers P&C). TAP's insurance subsidiaries are the primary
vehicles through which the Company engages in the property and casualty
insurance business.
Business Focus
The table below shows the business income (loss) for each of Citigroup's
businesses:
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Global Consumer
Citibanking North America $ 113 $ 71 $ (12)
Mortgage Banking 175 117 64
Cards 737 523 713
Consumer Finance Services 264 213 199
- -------------------------------------------------------------------------------
Banking/Lending 1,289 924 964
- --------------------------------------------------------------------------------
Travelers Life & Annuity 496 424 360
Primerica Financial Services 400 335 273
Personal Lines 319 300 193
- -------------------------------------------------------------------------------
Insurance 1,215 1,059 826
- --------------------------------------------------------------------------------
Total North America 2,504 1,983 1,790
- --------------------------------------------------------------------------------
Europe, Middle East, & Africa 155 138 190
Asia Pacific 410 428 496
Latin America 163 273 281
Global Private Bank 254 281 231
- -------------------------------------------------------------------------------
Total International 982 1,120 1,198
- --------------------------------------------------------------------------------
e-Citi (142) (79) (51)
Other (86) 24 46
- -------------------------------------------------------------------------------
Total Global Consumer 3,258 3,048 2,983
- -------------------------------------------------------------------------------
Global Corporate and Investment Bank
Salomon Smith Barney 408 1,438 1,638
Emerging Markets 690 909 1,000
Global Relationship Banking 220 559 510
Commercial Lines Insurance 723 632 499
- -------------------------------------------------------------------------------
Total Global Corporate and Investment Bank 2,041 3,538 3,647
- --------------------------------------------------------------------------------
Asset Management 273 243 208
Corporate/Other (159) (370) (451)
- -------------------------------------------------------------------------------
Business Income 5,413 6,459 6,387
Investment Activities 929 1,292 594
- -------------------------------------------------------------------------------
Core Income 6,342 7,751 6,981
Restructuring charges and
merger-related costs (535) (1,046) --
Gain on sale of stock by subsidiary -- -- 363
Acquisition-related costs -- -- (346)
Loss on disposition of subsidiary -- -- (259)
- -------------------------------------------------------------------------------
Net Income $ 5,807 $ 6,705 $ 6,739
===============================================================================
5
<PAGE>
Results of Operations
Citigroup reported 1998 core income of $6.342 billion ($2.66 per diluted common
share), down $1.409 billion or 18% from $7.751 billion ($3.18 per diluted share)
in 1997, both excluding the after-tax effects of restructuring charges (and in
1998 merger-related costs) of $535 million in 1998 and $1.046 billion in 1997.
Net income including the charges was $5.807 billion ($2.43 per diluted share),
down $898 million or 13% from $6.705 billion ($2.74 per diluted share) in 1997.
Citigroup 1997 core income was up $770 million or 11% from $6.981 billion ($2.81
per diluted share) in 1996, excluding the after-tax effect of restructuring
charges in 1997 and the $242 million of net charges related to acquisitions and
dispositions in 1996. Net income in 1997 including those amounts was down $34
million or 1% from $6.739 billion ($2.71 per diluted share) in 1996. Excluding
the charges, return on common equity was 14.9% for 1998 compared to 20.2% a year
ago.
Core income in 1998 was sharply impacted by the global economic turmoil
experienced during the year as income decreased 42% in Global Corporate and
Investment Bank to $2.041 billion, reflecting events in Russia and Asia, and
decreased 28% in Investment Activities to $929 million. Partially offsetting
this was a 7% increase in Global Consumer to $3.258 billion, complemented by a
12% increase in SSB Citi Asset Management Group (Asset Management) core income
to $273 million. The $770 million increase in 1997 core income compared to 1996
primarily reflected strong performance in Investment Activities and the Global
Consumer Insurance business, up $698 million and $233 million, respectively,
partially offset by a $200 million decline in Salomon Smith Barney.
Global Consumer core income growth in 1998 was led by the Banking/Lending
and Insurance businesses in North America, up 40% to $1.289 billion and 15% to
$1.215 billion, respectively, partially offset by a 12% decrease in
International due to global economic conditions. Global Consumer core income was
also reduced by spending on global advertising, marketing, and distribution
development initiatives, and spending on the technological enhancements of
e-Citi. The decline in Global Corporate and Investment Bank reflected decreases
of 72% in Salomon Smith Barney to $408 million, 61% in Global Relationship
Banking to $220 million, and 24% in Emerging Markets to $690 million, partially
offset by an increase of 14% to $723 million in Commercial Lines Insurance.
Adjusted revenues of $51.1 billion and $49.5 billion in 1998 and 1997 were
up $1.6 billion or 3% from 1997 and $4.4 billion or 10% from 1996. Revenues in
Global Consumer in 1998 increased $3.2 billion or 14% to $25.9 billion, led
primarily by Cards, up $1.7 billion or 31%, including the $1.1 billion impact of
the Universal Card Services (UCS) acquisition. Also contributing to Global
Consumer growth were the Insurance businesses, up $858 million or 11% and
Consumer Finance Services up $271 million or 25%. Revenues in Global Consumer in
1997 increased $1.8 billion or 9% to $22.7 billion, led by a $1.1 billion or 17%
increase in Insurance and a $657 million or 8% increase in Banking/Lending.
Global Corporate and Investment Bank revenues of $21.7 billion in 1998 were down
$1.5 billion or 6%, principally reflecting a Salomon Smith Barney decline of
$1.9 billion or 18% to $8.3 billion, driven by a sharp drop in principal
transactions revenue. Emerging Markets increased by 8% to $3.4 billion,
Commercial Lines Insurance was up 3% to $6.5 billion, and Global Relationship
Banking was unchanged at $3.5 billion. Global Corporate and Investment Bank
revenues of $23.2 billion in 1997 were up $1.5 billion or 7%, led by increases
of $879 million or 16% in Commercial Lines, $319 million or 10% in Global
Relationship Banking, and $176 million or 6% in Emerging Markets. Asset
Management revenues growth of $192 million or 18% and $172 million or 20% in
1998 and 1997, respectively, reflected continued growth in assets under
management. Corporate/Other revenues of $932 million and $838 million in 1998
and 1997, respectively, were up $94 million in 1998 and down $64 million in
1997, primarily reflecting treasury activities. The $395 million decrease in
Investment Activities 1998 revenues was a result of lower venture capital
revenues, while the $978 million increase in 1997 revenues reflected increased
investment and net asset sales and venture capital revenues.
Adjusted net interest revenues (taxable equivalent basis), including
the effect of credit card securitization, of $22.6 billion were up $2.4
billion or 12% from 1997, reflecting the acquisitions of UCS and certain
consumer businesses in Latin America, and business volume growth in most
other markets, which was partially offset by the effect of foreign currency
translation. Adjusted net interest revenues of $20.2 billion in 1997 were up
$1.1 billion or 6% from 1996, reflecting business volume growth in most
markets which was partially offset by the effect of foreign currency
translation. Commissions and fees revenues of $11.6 billion were up $653
million or 6%, led by growth in Cards, including UCS, and were up $830
million or 8% in 1997, also led by growth in Cards. Insurance premiums of
$9.9 billion in 1998 were up $855 million or 10% and were up $1.362 billion
or 18% in 1997 reflecting solid growth in all sectors. Asset management and
administration fees of $2.3 billion were up $577 million or 34% in 1998 and
up $325 million or 23% in 1997 as a result of continued growth in assets
under management. These increases were partially offset by a drop of $2.5
billion in principal transactions revenues to $1.8 billion in 1998,
reflecting the difficult trading conditions in the markets for Global
Corporate and Investment Bank during the second half of the year, and a $297
million decline in 1997.
Adjusted operating expenses in 1998 of $27.8 billion, which exclude the
restructuring charges, and in 1998 merger-related costs, were up $2.3 billion or
9% from 1997, and grew $1.9 billion or 8% from 1996. Expenses increased in
Global Consumer by 16% in 1998 and 10% in 1997, reflecting UCS (in 1998), global
advertising, marketing, and distribution initiatives, and electronic banking
development efforts. Global Corporate and Investment Bank expenses were up 2% in
1998 and 8% in 1997, primarily attributable to increased spending on technology,
volume-related increases, and costs associated with implementing plans to gain
market share in selected emerging market countries.
Restructuring charges and merger-related costs of $795 million in 1998
represented $1.122 billion of exit costs associated with business improvement
and integration initiatives to be implemented over a 12 to 18 month period
and $65 million of costs associated with administratively closing the Merger,
partially offset by a $392 million reduction in the 1997 restructuring
charges due to changes in estimates. The $1.718 billion of restructuring
charges in 1997 consisted of $880 million related to cost management programs
and customer service initiatives in the Citicorp businesses, and $838 million
related to the Salomon Smith Barney merger. See Note 15 of Notes to
Consolidated Financial Statements for additional details.
Adjusted provisions for benefits, claims, and credit costs were $13.3
billion in 1998 compared with $11.5 billion and $10.3 billion in 1997 and 1996,
respectively. Policyholder benefits and claims increased 8% to $8.4 billion in
1998 and 5% to $7.7 billion in 1997. The adjusted provision for credit losses
increased 28% to $4.9 billion in 1998 and 9% to $3.8 billion in 1997. Global
Consumer managed net credit losses in 1998 were $4.4 billion and the related
loss ratio was 2.70%, compared with $3.8 billion and 2.61% in 1997 and $3.4
billion and 2.41% in 1996. The increases in the 1998 net credit losses
6
<PAGE>
primarily reflected the UCS acquisition. The managed consumer loan delinquency
ratio (90 days or more past due) was 2.12%, a decrease from 2.23% and 2.54% at
the end of 1997 and 1996, respectively.
Global Corporate and Investment Bank adjusted net credit costs increased
to $367 million from net benefits of $35 million in 1997 and $12 million in
1996, primarily reflecting the turmoil in Asia and Russia. Commercial cash-basis
loans and OREO of $2.1 billion at year-end were up from $1.8 billion a year
earlier, primarily reflecting the economic conditions in Asia, and down from
$2.2 billion in 1996.
The provision for benefits, claims, and credit losses as shown on the
Consolidated Statement of Income was $11.1 billion in 1998, compared to $9.9
billion and $9.6 billion in 1997 and 1996, respectively, reflecting the
increases described above.
Total capital (Tier 1 and Tier 2) was $55.0 billion or 11.43% of net
risk-adjusted assets, and Tier 1 capital was $41.8 billion or 8.68% at December
31, 1998. See page 38 for the components of Tier 1 and Tier 2 capital.
GLOBAL CONSUMER
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $23,743 $20,992 $19,513
Effect of credit card securitization activity 2,187 1,713 1,392
Net cost to carry cash-basis loans and OREO (17) (2) (10)
- -------------------------------------------------------------------------------
Adjusted revenues 25,913 22,703 20,895
- -------------------------------------------------------------------------------
Total operating expenses(1) 12,423 10,678 9,183
Restructuring charges (706) (580) --
Net OREO benefits (costs)(2) 4 4 (5)
- -------------------------------------------------------------------------------
Adjusted operating expenses 11,721 10,102 9,178
- -------------------------------------------------------------------------------
Operating margin 14,192 12,601 11,717
- -------------------------------------------------------------------------------
Provisions for benefits, claims, and
credit losses(1)(3) 6,968 6,314 5,918
Effect of credit card securitization activity 2,187 1,713 1,392
Net cost to carry and net OREO (benefits) costs (21) (6) (5)
- -------------------------------------------------------------------------------
Adjusted provisions for benefits, claims, and
credit costs 9,134 8,021 7,305
- -------------------------------------------------------------------------------
Business income before taxes and
minority interest 5,058 4,580 4,412
Income taxes 1,731 1,470 1,396
Minority interest, after-tax 69 62 33
- -------------------------------------------------------------------------------
Business income 3,258 3,048 2,983
Restructuring charges, after-tax 446 351 --
Acquisition-related benefits, after-tax -- -- 26
- -------------------------------------------------------------------------------
Net income $ 2,812 $ 2,697 $ 3,009
===============================================================================
(1) Excludes acquisition-related benefits in 1996.
(2) Includes amounts related to writedowns, gains and losses on sales, and
direct expense related to OREO for certain real estate lending activities.
(3) Includes a provision in excess of net credit losses to increase the
allowance for credit losses by $129 million, $128 million, and $242
million in 1998, 1997, and 1996, respectively.
Global Consumer--which provides banking, lending, and personal insurance
products and services, including credit and charge cards, to customers around
the world--reported business income of $3.258 billion in 1998, up $210 million
or 7% from 1997, reflecting strong growth in the businesses across North
America. Results in the International businesses declined during 1998,
reflecting economic conditions, including weakened currencies, in Asia Pacific
and Latin America. Net income of $2.812 billion in 1998 and $2.697 billion in
1997, included restructuring charges of $706 million ($446 million after-tax)
and $580 million ($351 million after-tax), respectively. Business income in 1997
of $3.048 billion was up $65 million from 1996.
The 1998 restructuring initiatives are designed to realize synergies and
operating efficiencies including regional consolidation of call centers and
other back office functions worldwide, reduction of management layers, sales
force restructuring and integration of overlapping marketing and product
management groups. Global Consumer also expects to improve results by exiting
several non-strategic operations. The 1997 restructuring charge was for the
consolidation of data centers and operations processing and customer service
facilities, the reconfiguration of electronic and other distribution channels,
the outsourcing of various technological functions, and the rationalization of
administrative and management functions. See Note 15 of Notes to Consolidated
Financial Statements for a discussion of restructuring charges.
BANKING/LENDING
Citibanking North America
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,989 $ 1,875 $ 1,619
Adjusted operating expenses(1) 1,705 1,611 1,507
- -------------------------------------------------------------------------------
Operating margin 284 264 112
Credit costs(2) 111 131 140
- -------------------------------------------------------------------------------
Business income (loss) before taxes 173 133 (28)
Income taxes (benefits) 60 62 (16)
- -------------------------------------------------------------------------------
Business income (loss) 113 71 (12)
Restructuring charges, after-tax 89 124 --
- -------------------------------------------------------------------------------
Net income (loss) $ 24 $ (53) $ (12)
===============================================================================
Average assets (in billions of dollars) $ 12 $ 11 $ 12
Return on assets 0.20% NM NM
===============================================================================
Excluding restructuring charges
Return on assets 0.94% 0.65% NM
===============================================================================
(1) Excludes restructuring charges.
(2) Represents provision for credit losses.
NM Not Meaningful.
Citibanking North America--which delivers banking services to customers
through Citibank's branch network and electronic delivery systems--reported
business income of $113 million in 1998, up $42 million or 59% from 1997
reflecting higher revenues, improved credit costs, and a lower effective tax
rate. Net income (loss) of $24 million in 1998 and ($53) million in 1997,
included restructuring charges of $139 million ($89 million after-tax) and $203
million ($124 million after-tax), respectively. Business income of $71 million
in 1997 was up significantly from a loss of $12 million in 1996, principally
reflecting higher revenues.
Revenues, net of interest expense, were $1.989 billion in 1998, up from
$1.875 billion in 1997 and $1.619 billion in 1996, reflecting growth in customer
deposits and higher investment product fees and commissions. The 1997 increase
also reflects higher spreads and a $64 million assessment in 1996 to
recapitalize the U.S. Savings Association Insurance fund (SAIF). Average
customer deposits were $39.6 billion in 1998, up from $37.1 billion in 1997 and
$34.9 billion in 1996.
7
<PAGE>
Adjusted operating expenses in 1998 were up $94 million or 6% from 1997
and grew $104 million or 7% in 1997, reflecting business volume growth.
Credit costs improved to $111 million in 1998 from $131 million in 1997
and $140 million in 1996. The net credit loss ratio was 1.49% in 1998, down from
1.61% in 1997 and 1.72% in 1996.
Business income in both 1998 and 1997 benefited from a lower effective tax
rate. The effective tax rates on business income (loss) before taxes were 35%,
47%, and 57%, in 1998, 1997, and 1996, respectively. Fluctuations in the
effective income tax rates result from changes in the nature and geographic mix
of pretax earnings.
Mortgage Banking
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $ 558 $519 $ 458
Adjusted operating expenses(1) 243 234 219
- -------------------------------------------------------------------------------
Operating margin 315 285 239
Credit costs(2) 20 87 134
- -------------------------------------------------------------------------------
Business income before taxes and
minority interest 295 198 105
Income taxes 115 81 41
Minority interest 5 -- --
- -------------------------------------------------------------------------------
Business income 175 117 64
Restructuring charges, after-tax 6 12 --
- -------------------------------------------------------------------------------
Net income $ 169 $105 $ 64
===============================================================================
Average assets (in billions of dollars) $ 25 $ 24 $ 22
Return on assets 0.68% 0.44% 0.29%
===============================================================================
Excluding restructuring charges
Return on assets 0.70% 0.49% 0.29%
===============================================================================
(1) Excludes restructuring charges.
(2) Represents provision for credit losses.
Mortgage Banking--which provides mortgages and student loans to customers
across North America--reported business income of $175 million in 1998, up $58
million or 50% from 1997, reflecting lower credit costs and higher revenues
resulting from increased business volumes. Net income of $169 million in 1998
and $105 million in 1997, included restructuring charges of $9 million ($6
million after-tax) and $20 million ($12 million after-tax), respectively. 1997
business income of $117 million was up from $64 million in 1996.
As shown in the following table, Mortgage Banking grew accounts, loans,
and mortgage originations in both 1998 and 1997.
In Billions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Accounts (in millions)(1) 2.8 2.5 2.2
Average loans(1) $ 23.9 $ 22.3 $ 20.8
Mortgage originations 16.1 8.2 5.3
================================================================================
(1) Includes student loans.
Revenues, net of interest expense, of $558 million in 1998 grew $39
million or 8% from 1997 and in 1997 were up $61 million or 13% from 1996,
reflecting increased mortgage originations, including refinancing activity, and
growth in the student loan portfolio. Adjusted operating expenses were up $9
million or 4% in 1998 and grew $15 million or 7% in 1997, reflecting additional
business volumes.
Credit costs of $20 million in 1998 declined from $87 million in 1997 and
$134 million in 1996. The 1998 net credit loss ratio of 0.31%, was down from
0.51% and 0.64% in 1997 and 1996, respectively, reflecting continued improvement
in the mortgage portfolio. Credit costs included a benefit of $55 million and
$28 million in 1998 and 1997, respectively, arising from a reduction in the
allowance for credit losses attributed to Mortgage Banking, reflecting continued
credit improvement in the mortgage portfolio.
Cards
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $4,921 $3,717 $3,848
Effect of credit card securitization activity 2,187 1,713 1,392
- -------------------------------------------------------------------------------
Adjusted revenues 7,108 5,430 5,240
Adjusted operating expenses(1) 2,692 1,832 1,737
- -------------------------------------------------------------------------------
Operating margin 4,416 3,598 3,503
Adjusted credit costs(2) 3,253 2,808 2,407
- -------------------------------------------------------------------------------
Business income before taxes 1,163 790 1,096
Income taxes 426 267 383
- -------------------------------------------------------------------------------
Business income 737 523 713
Restructuring charges, after-tax 39 36 --
- -------------------------------------------------------------------------------
Net income $ 698 $ 487 $ 713
===============================================================================
Average assets (in billions of dollars) $ 28 $ 25 $ 21
Return on assets 2.49% 1.95% 3.40%
===============================================================================
Excluding restructuring charges
Return on assets(3) 2.63% 2.09% 3.40%
===============================================================================
(1) Excludes restructuring charges.
(2) Represents provision for credit losses (on a managed basis).
(3) Adjusted for the effect of credit card securitization, the return on
managed assets for Cards was 1.13% in 1998, 0.97% in 1997, and 1.51% in
1996.
In 1998, Citibank acquired Universal Card Services from AT&T. As of
December 31, 1998, UCS added $16.9 billion in managed customer receivables and
14 million accounts to Cards. In 1998, UCS contributed $1.082 billion to
revenues, $693 million to expenses, and $500 million to credit costs, resulting
in a net loss of approximately $72 million. These amounts included $320 million
(pretax) of UCS acquisition premium costs (including funding costs associated
with the acquisition purchase premium).
Cards--U.S. bankcards (including Travelers Bank), Diners Club, and private
label cards--reported business income of $737 million, up $214 million or 41%
from 1997 reflecting significant improvements in the U.S. bankcards business.
Net income of $698 million in 1998 and $487 million in 1997, included
restructuring charges of $58 million ($39 million after-tax) and $59 million
($36 million after-tax), respectively. Business income of $523 million in 1997
was down from $713 million in 1996, reflecting higher credit costs in U.S.
bankcards.
Adjusted revenues of $7.108 billion increased $1.678 billion or 31% from
1997, reflecting the acquisition of UCS, and in other U.S. bankcards portfolios
increased delinquency charges due to pricing actions and higher interchange fee
revenue. Revenues in 1997 increased $190 million or 4% principally in U.S.
bankcards reflecting business volume growth and increased delinquency charges,
partially offset by lower spreads.
8
<PAGE>
As shown in the following table, on a managed basis, the U.S. bankcard
portfolio experienced strong growth in the year reflecting the acquisition of
UCS and the impact of enhanced target marketing efforts in 1998 and 1997.
Increase from 1997
- -----------------------------------------------------------------------------
In Billions of Dollars 1998 % % Ex UCS
- -----------------------------------------------------------------------------
Accounts (in millions) 41 58 4
Cards in force (in millions) 69 68 10
Charge volumes $ 140.6 32 11
End-of-period receivables 69.6 40 6
=============================================================================
Adjusted operating expenses of $2.692 billion were up $860 million or 47%,
reflecting the acquisition of UCS and increased target marketing efforts in U.S.
bankcards. Expenses in 1997 increased $95 million or 5% from 1996, principally
in U.S. bankcards, reflecting costs associated with risk management initiatives
and increased marketing efforts.
Adjusted credit costs in 1998 were $3.253 billion, up from $2.808 billion
in 1997 and $2.407 billion in 1996. Managed net credit losses in U.S. bankcards
were $3.123 billion, or 5.33% of average managed loans (excluding UCS $2.623
billion or 5.53% of average managed loans) compared to $2.662 billion or 5.74%
in 1997 and $2.169 billion or 4.95% in 1996. The decline in the net credit loss
ratio in 1998 reflects moderating industry-wide bankruptcy trends and the effect
of previously implemented credit risk management initiatives.
Adjusted credit costs include a provision in excess of net credit losses
to increase the allowance for credit losses by $62 million, $85 million, and
$183 million in 1998, 1997, and 1996, respectively. The decline in the
additional provision reflects credit improvements in the U.S. bankcards
portfolio.
Consumer Finance Services
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $1,338 $1,067 $ 917
Adjusted operating expenses(1) 504 422 316
- -------------------------------------------------------------------------------
Operating margin 834 645 601
Credit costs(2) 419 316 296
- -------------------------------------------------------------------------------
Business income before taxes 415 329 305
Income taxes 151 116 106
- -------------------------------------------------------------------------------
Business income 264 213 199
Restructuring charges, after-tax 1 -- --
- -------------------------------------------------------------------------------
Net income $ 263 $ 213 $ 199
===============================================================================
Average assets (in billions of dollars) $ 12 $ 9 $ 8
Return on assets 2.19% 2.37% 2.49%
===============================================================================
Excluding restructuring charges
Return on assets 2.20% 2.37% 2.49%
===============================================================================
(1) Excludes restructuring charges.
(2) Represents provision for credit losses.
Consumer Finance Services includes the consumer lending operations
(including secured and unsecured personal loans, real estate-secured loans and
consumer goods financing) of Commercial Credit Company. Also included are
related credit insurance services provided through subsidiaries. The credit card
operations of Commercial Credit Company are included in Cards, and accordingly,
all data has been restated to reflect this.
Business income was $264 million in 1998 compared to $213 million in
1997 and $199 million in 1996. The 24% increase in 1998 reflects continued
internal receivables growth in all major products, an improved charge-off
rate, and the integration of Security Pacific Financial Services (Security
Pacific) into the Commercial Credit branch system since July 1997. The 7%
increase in 1997 reflects strong receivables growth in all major products,
largely as a result of investments made over the prior year in marketing,
training and systems enhancements. Net receivables at December 31, 1998
reached a record $11.9 billion compared to $9.8 billion at year-end 1997 and
$7.1 billion at year-end 1996. Much of the growth in 1998 in real
estate-secured loans resulted from the continued strong performance of the
$.M.A.R.T. loan-Registered Trademark- program, as well as solid sales in the
branch network. The receivables increase in 1997 reflects strong internal
growth as well as the July 31, 1997 acquisition of Security Pacific, which
contributed approximately $1.2 billion in receivables growth. Internal
sources grew receivables 21% over year-end 1996 levels. The internal growth
during 1998 and 1997 was led by the Primerica generated portfolio, which grew
31% to $2.95 billion in 1998 and 49% to $2.26 billion in 1997.
While total interest margin increased in 1998 from the 1997 and 1996
periods due to the increase in the portfolio, average net interest margin
declined 10 basis points in 1998 to 8.46% and declined 46 basis points in 1997
to 8.56%, reflecting a decline in the average yield to 14.88% in 1998 and 15.24%
in 1997. These declines were partially offset by a decrease in cost of funds
over the period. The decline in the average yield has resulted from a shift in
the portfolio mix towards lower yielding, higher quality real estate loans,
particularly first mortgage loans. Consumer Finance borrows from the corporate
treasury operations of Commercial Credit Company (CCC), a holding company
subsidiary of Citigroup that raises funds externally. For fixed rate loan
products, Consumer Finance is charged agreed-upon rates that generally have been
set within a narrow range. For variable rate loan products, Consumer Finance is
charged rates based on prevailing short-term rates. CCC's actual cost of funds
may be higher or lower than rates charged to Consumer Finance, with the
difference reflected in the Corporate/Other segment. Overall rates charged
to Consumer Finance approximated 6.42% in 1998, 6.68% in 1997 and 6.84% in 1996.
The net credit loss ratio of 2.74% in 1998 was down from 2.82% in 1997 and
3.14% in 1996. As a result of the Security Pacific acquisition, net credit
losses in the second half of 1997 reflect a short-term benefit largely from the
transition of that portfolio to Commercial Credit's charge-off policies. Credit
costs included a provision in excess of net credit losses of $59 million, $21
million, and $38 million for 1998, 1997, and 1996, reflecting growth in the
portfolio.
As of December 31, 1998, CCC had 980 branches, making it one of the
largest domestic branch networks in the consumer finance industry.
INSURANCE
Travelers Life and Annuity
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $3,006 $2,670 $2,322
Policyholder claims and benefits 1,871 1,677 1,474
Adjusted operating expenses(1) 376 348 297
- --------------------------------------------------------------------------------
Business income before taxes 759 645 551
Income taxes 263 221 191
- --------------------------------------------------------------------------------
Business income(2) 496 424 360
Restructuring charges, after-tax 8 -- --
- --------------------------------------------------------------------------------
Net income $ 488 $ 424 $ 360
================================================================================
(1) Excludes restructuring charges.
(2) Excludes investment gains/losses included in Investment Activities
segment.
9
<PAGE>
Travelers Life and Annuity consists of annuity, life and long-term care
products marketed by The Travelers Insurance Company (TIC) and its wholly owned
subsidiary The Travelers Life and Annuity Company (TLAC) under the Travelers
name. Among the range of products offered are fixed and variable deferred
annuities, payout annuities and term, universal and variable life and long-term
care insurance to individuals and small businesses. These products are primarily
marketed through The Copeland Companies (Copeland), an indirect wholly owned
subsidiary of TIC, Salomon Smith Barney Financial Consultants and a nationwide
network of independent agents. In 1998, Travelers Life and Annuity products were
also introduced into the Primerica and Citibank distribution networks. Travelers
Life and Annuity also provides group pension products, including guaranteed
investment contracts, and group annuities to employer-sponsored retirement and
savings plans. The majority of the annuity business and a substantial portion of
the life business written by Travelers Life and Annuity is accounted for as
investment contracts, with the result that the premium and deposits collected
are not included in revenues.
Business income was $496 million in 1998 compared to $424 million in 1997
and $360 million in 1996. The 17% improvement in 1998 reflects strong
double-digit business volume growth in annuity account balances and life and
long term care premiums, an increase in net investment income despite a decline
in investment income yields during 1998, which vary by product line, resulting
primarily from participation in partnership investment interests being
negatively impacted by volatile market conditions. This decline in yields was
substantially offset by earnings on an increased capital base created by
business volume growth. Business income was also impacted by a favorable reserve
settlement in the runoff group life and health business. The 18% improvement in
1997 was largely driven by strong investment income as well as by double-digit
growth in individual and group annuity account balances and long-term care
insurance premiums.
The successful cross-selling initiative of Travelers Life and Annuity
products through the Primerica, Citibank, Copeland, and Salomon Smith Barney
Financial Consultants distribution channels, along with improved sales through a
nationwide network of independent agents, reflect the ongoing effort to build
market share by strengthening relationships in key distribution channels.
The following table shows net written premiums and deposits by product
line for the three years ended December 31, 1998:
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Deferred annuities
Fixed $ 774 $ 779 $ 621
Variable 2,651 1,775 1,370
Payout annuities 429 310 142
GIC and other annuities 3,690 2,109 1,100
Individual life insurance
Direct periodic premiums and deposits 322 290 286
Single premium deposits 85 56 59
Reinsurance (66) (58) (53)
Individual long-term care insurance 213 184 128
- -------------------------------------------------------------------------------
$ 8,098 $ 5,445 $ 3,653
===============================================================================
Significant deferred annuities sales, combined with favorable market
returns from variable annuities, drove account balances to $19.8 billion at
December 31, 1998, up 23% from $16.1 billion at year-end 1997 and $13.2 billion
at year-end 1996. Net written premiums and deposits increased 35% in 1998 to
$3.43 billion from $2.55 billion in 1997 and $1.99 billion in 1996. The strong
sales reflect the marketing initiatives at Salomon Smith Barney, as well as
Copeland's successful penetration of the small company segment of the 401(k)
market and a new product introduction in the Primerica distribution channel.
Payout and group annuity account balances and benefit reserves reached
$13.84 billion at December 31, 1998, up 16% from $11.94 billion at year-end
1997, and the $10.86 billion at year-end 1996. The revitalization of the payout
and group annuities business reflects strong sales of new payout annuities and
guaranteed investment contracts (GIC). Net written premiums and deposits
(excluding the Company's employee pension plan deposits) in 1998 were $4.12
billion, up 70% from $2.42 billion in 1997 and $1.24 billion in 1996.
Direct periodic premiums and deposits for individual life insurance of
$322 million in 1998 were 11% ahead of the $290 million in 1997 and $286 million
in 1996. Life insurance in force was $55.4 billion at December 31, 1998, up from
$51.6 billion at year-end 1997 and $50.4 billion at year-end 1996.
Net written premiums for the growing long-term care insurance line reached
$213 million in 1998 compared to $184 million in 1997 and $128 million in 1996.
Primerica Financial Services
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $1,654 $1,522 $1,415
Policyholder claims and benefits 484 497 528
Adjusted operating expenses(1) 546 502 460
- --------------------------------------------------------------------------------
Business income before taxes 624 523 427
Income taxes 224 188 154
- --------------------------------------------------------------------------------
Business income(2) 400 335 273
Restructuring charges, after-tax 2 -- --
- --------------------------------------------------------------------------------
Net income $ 398 $ 335 $ 273
================================================================================
(1) Excludes restructuring charges.
(2) Excludes investment gains/losses included in Investment Activities
segment.
Business income was $400 million in 1998 compared to $335 million in 1997
and $273 million in 1996. The 19% improvement in 1998 reflects continued success
at cross-selling a range of products, growth in life insurance in force,
favorable mortality experience and disciplined expense management. The 23%
increase in 1997 results principally reflects strong sales of mutual funds and
variable annuities, continued growth in life insurance in force, as well as
favorable mortality experience and disciplined expense management. Substantial
increases in total production and cross-selling initiatives were achieved during
1998 as Primerica continued to benefit from greater application of the Financial
Needs Analysis (FNA)--the diagnostic tool that enhances the ability of the
Personal Financial Analysts to address client needs. More than 535,000 FNAs were
submitted during 1998, an 18% increase over the 454,000 submitted in 1997.
Earned premiums net of reinsurance were $1.057 billion, $1.035 billion, and
$1.030 billion in 1998, 1997, and 1996, including $987 million, $967 million,
and $954 million for Primerica individual term life policies.
Total face amount of issued term life insurance was $57.4 billion in 1998
compared to $52.6 billion in 1997 and $52.0 billion in 1996. The number of
policies issued was 223,600 in 1998, compared to 228,900 in 1997 and 247,600 in
1996. The average face value (in thousands) per policy issued was $223 in 1998
compared to $200 in 1997 and $185 in 1996. Life insurance in
10
<PAGE>
force at year-end 1998 reached $383.7 billion, up from $369.9 billion at
year-end 1997 and $359.9 billion at year-end 1996, and continued to reflect good
policy persistency.
Over the last several years, Primerica has focused upon the strategic
expansion of its business beyond life insurance and now offers a greater
variety of financial products and services, delivered through its sales
force. Primerica has traditionally offered mutual funds to customers as a
means to invest the relative savings realized through the purchase of term
life insurance as compared to traditional whole life insurance. Sales of
mutual funds were $2.942 billion in 1998 compared to $2.689 billion in 1997
and $2.327 billion in 1996. During 1998, Salomon Smith Barney funds accounted
for 60% of Primerica's U.S. sales and 50% of Primerica's total sales.
Variable annuities continued to show momentum, reaching net written premiums
and deposits of $652 million in 1998 up from $347 million in 1997. Cash
advanced on $.M.A.R.T. loan-Registered Trademark- and $.A.F.E.-Registered
Trademark- loan products underwritten by Commercial Credit was $1.46 billion
in 1998, up 13% from the comparable period in 1997. The TRAVELERS
SECURE-Registered Trademark- line of property and casualty insurance products
showed strong growth, with premiums up 192% to $213 million in 1998 compared
to $73 million in 1997. The number of agents licensed to sell auto and
homeowners insurance jumped to almost 14,100 individuals at December 31,
1998, a 63% increase since the beginning of the year.
Personal Lines
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $3,666 $3,276 $2,658
Operating expenses(1) 930 884 665
Claims and claim adjustment expenses(1) 2,181 1,853 1,660
- --------------------------------------------------------------------------------
Business income before taxes and
minority interest 555 539 333
Income taxes 172 177 107
Minority interest 64 62 33
- --------------------------------------------------------------------------------
Business income(2) 319 300 193
Acquisition-related benefits, net,
after-tax and minority interest -- -- 26
- --------------------------------------------------------------------------------
Net income $ 319 $ 300 $ 219
================================================================================
(1) Excludes acquisition-related adjustments.
(2) Excludes investment gains/losses included in Investment Activities segment
and acquisition-related adjustments.
Business income was $319 million in 1998 compared to $300 million in 1997
and $193 million in 1996. The 1998 increase was primarily due to higher net
investment income and increased production, partially offset by higher
catastrophe losses and a decrease in favorable prior year reserve development.
The 1997 increase primarily reflected the inclusion in 1997 of Aetna P&C for the
entire year compared to only nine months in 1996, lower catastrophe losses, an
increase in favorable prior year reserve development of approximately $40
million, primarily in the automobile bodily injury line, and production-related
growth, partially offset by investments in service centers and market
expansions.
The following table shows net written premiums by product line for the
three years ended December 31:
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Personal automobile $2,328 $1,950 $1,645
Homeowners and other 1,162 1,124 714
- --------------------------------------------------------------------------------
$3,490 $3,074 $2,359
================================================================================
Certain production statistics related to Aetna P&C operations are provided
in the following narrative for comparative purposes for periods prior to April
2, 1996 and are not reflected in such prior period revenues or operating
results.
Personal Lines net written premiums for 1998 were $3.490 billion
compared to $3.074 billion in 1997 and $2.359 billion in 1996. On a combined
total basis including Aetna P&C (for periods prior to April 2, 1996 for
comparative purposes only), Personal Lines net written premiums in 1996 were
$2.675 billion. The 1998 and 1997 increases compared to 1997 and 1996,
respectively, primarily reflected growth in sales in target markets served by
independent agents and growth in affinity marketing, joint marketing
arrangements and TRAVELERS SECURE-Registered Trademark-. In addition, the
1997 increase compared to 1996 was partially attributable to lower ceded
premiums due to a change in a reinsurance arrangement in January 1997. The
growth in premiums from the independent agent distribution channel has been
primarily due to pursuing transfers of books of business to the Company
within certain independent insurance agencies. Frequently, Personal Lines
will pay these agencies an incentive to cover their expenses related to the
transfer and include a competitive inducement to move the book. Many
independent agencies are consolidating their business to a smaller number of
insurance carriers resulting in transfers of business to their preferred
carriers.
Catastrophe losses, net of taxes and reinsurance, were $44 million in 1998
compared to $10 million in 1997 and $58 million in 1996. Catastrophe losses in
1998 were primarily due to Hurricanes Bonnie and Georges, severe first quarter
winter storms and second and third quarter hail and wind storms. Catastrophe
losses in 1996 were primarily due to Hurricane Fran, severe first quarter winter
storms and second quarter hail and wind storms.
Statutory and GAAP combined ratios (before allocation of corporate
expenses) for Personal Lines were as follows:
1998 1997 1996
- -------------------------------------------------------------------------------
Statutory
Loss and LAE ratio(1) 66.7% 63.5% 68.7%
Underwriting expense ratio 27.2 28.7 28.9
Combined ratio 93.9 92.2 97.6
- -------------------------------------------------------------------------------
GAAP
Loss and LAE ratio(1) 66.7% 63.5% 68.8%
Underwriting expense ratio 26.5 28.3 28.3
Combined ratio 93.2 91.8 97.1
===============================================================================
(1) LAE represents loss adjustment expenses.
GAAP combined ratios for Personal Lines differ from statutory combined
ratios primarily due to the deferral and amortization of certain expenses for
GAAP reporting purposes only. In addition, certain 1996 purchase accounting
adjustments recorded in connection with the Aetna P&C acquisition resulted in a
charge to statutory expenses.
The 1997 statutory and GAAP combined ratios for Personal Lines include an
adjustment associated with a change in the quota share reinsurance arrangement.
Excluding this adjustment, the 1997 statutory and GAAP combined ratios would
have been 92.1% and 92.5%, respectively. The increase in the 1998 statutory and
GAAP combined ratios compared to the 1997 statutory and GAAP combined ratios
excluding this adjustment was primarily due to higher catastrophe and other
weather-related losses and reduced favorable prior year reserve development,
partially offset by a decrease in the underwriting expense ratio due to a lower
commission expense ratio associated with the alternative distribution channels.
The 1996 statutory and
11
<PAGE>
GAAP combined ratios for Personal Lines include a benefit resulting from the
Company's review of reserves associated with the acquisition of Aetna P&C.
Excluding this item, the 1996 statutory and GAAP combined ratios were 100.1% and
99.7%, respectively. The decrease in the 1997 statutory and GAAP combined
ratios, excluding the adjustment associated with the change in the quota share
reinsurance arrangement, compared to the 1996 statutory and GAAP combined ratios
excluding the adjustment associated with the acquisition of Aetna P&C was due to
lower catastrophe losses and favorable prior year reserve development, primarily
in the automobile bodily injury line.
INTERNATIONAL CONSUMER
Europe, Middle East, & Africa
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $1,954 $1,864 $1,989
Adjusted operating expenses(1) 1,346 1,323 1,368
- -------------------------------------------------------------------------------
Operating margin 608 541 621
Credit costs(2) 292 274 303
- -------------------------------------------------------------------------------
Business income before taxes 316 267 318
Income taxes 161 129 128
- -------------------------------------------------------------------------------
Business income 155 138 190
Restructuring charges, after-tax 125 65 --
- -------------------------------------------------------------------------------
Net income $ 30 $ 73 $ 190
===============================================================================
Average assets (in billions of dollars) $ 21 $ 21 $ 24
Return on assets 0.14% 0.35% 0.79%
===============================================================================
Excluding restructuring charges
Return on assets 0.74% 0.66% 0.79%
===============================================================================
(1) Excludes restructuring charges.
(2) Represents provision for credit losses.
Europe, Middle East, & Africa (EMEA)--which provides banking and lending
services, including credit and charge cards, to customers throughout the
region--reported business income of $155 million in 1998, up $17 million or 12%
from 1997. Net income of $30 million in 1998 and $73 million in 1997, included
restructuring charges of $239 million ($125 million after-tax) and $112 million
($65 million after-tax), respectively. Business income of $138 million in 1997
was down from $190 million in 1996, reflecting the effect of foreign currency
translation and the 1996 gain associated with the sale of the consumer mortgage
portfolio in the United Kingdom.
As shown in the following table, EMEA reported 7% account growth in 1998
primarily reflecting loan growth, including credit cards. In 1997 accounts grew
3%; however, customer deposits and loans were reduced by the effect of foreign
currency translation.
In Billions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Accounts (in millions) 9.5 8.9 8.6
Average customer deposits $ 16.7 $ 16.8 $ 18.0
Average loans 15.8 15.1 17.3
================================================================================
Revenues, net of interest expense, of $1.954 billion in 1998 grew $90
million or 5% from 1997 reflecting growth across all countries except India and
Pakistan where revenues declined as a result of economic conditions. In 1998,
foreign currency translation reduced revenue growth by approximately 3
percentage points. Revenues in 1997 declined $125 million or 6% from 1996
reflecting the effect of foreign currency translation that reduced revenue
growth by approximately 11 percentage points and the 1996 gain associated with
the sale of the consumer mortgage portfolio in the United Kingdom, partially
offset by business volume growth.
Adjusted operating expenses of $1.346 billion were up $23 million or 2%
from 1997. Expenses in 1997 declined $45 million or 3% from 1996. Foreign
currency translation reduced expense growth by approximately 4 and 10 percentage
points in 1998 and 1997, respectively. Excluding the effect of foreign currency
translation, expenses in 1998 and 1997 reflected higher business volumes and
costs associated with expansion efforts in Central and Eastern Europe and
Africa.
Credit costs in 1998 were $292 million, compared to $274 million in 1997
and $303 million in 1996. The net credit loss ratio was 1.71% in 1998, compared
to 1.77% in 1997 and 1.68% in 1996. Foreign currency translation reduced credit
costs by approximately $8 million and $37 million in 1998 and 1997,
respectively.
Credit costs include a provision in excess of net credit losses to
increase the allowance for credit losses by $19 million, $7 million, and $12
million in 1998, 1997, and 1996, respectively, reflecting an increase in loans
in 1998, and a higher net credit loss ratio in 1997 compared to 1996.
Business income in both 1998 and 1997 was reduced by a higher effective
tax rate. The effective tax rates on business income before taxes were 51%, 48%,
and 40%, in 1998, 1997, and 1996, respectively. Fluctuations in the effective
income tax rates result from changes in the nature and geographic mix of pretax
earnings.
Asia Pacific
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $1,773 $1,799 $1,838
Adjusted operating expenses(1) 968 1,024 977
- -------------------------------------------------------------------------------
Operating margin 805 775 861
Credit costs(2) 251 201 167
- -------------------------------------------------------------------------------
Business income before taxes 554 574 694
Income taxes 144 146 198
- -------------------------------------------------------------------------------
Business income 410 428 496
Restructuring charges, after-tax 64 60 --
- -------------------------------------------------------------------------------
Net income $ 346 $ 368 $ 496
===============================================================================
Average assets (in billions of dollars) $ 28 $ 28 $ 25
Return on assets 1.24% 1.31% 1.98%
===============================================================================
Excluding restructuring charges
Return on assets 1.46% 1.53% 1.98%
===============================================================================
(1) Excludes restructuring charges.
(2) Represents provision for credit losses.
Asia Pacific (including Japan and Australia)--which provides banking and
lending services, including credit and charge cards, to customers throughout the
region--reported business income of $410 million in 1998, down from $428 million
and $496 million in 1997 and 1996, respectively, reflecting economic conditions
in the region, including weakened currencies. Foreign currency translation
reduced business income by approximately $127 million in 1998 and $34 million in
1997. The effect of foreign currency translation moderated during the second
half of 1998. Net income of $346 million in 1998 and $368 million in 1997,
included restructuring charges of $83 million ($64 million after-tax) and $97
million ($60 million after-tax), respectively.
12
<PAGE>
As shown in the following table, Asia Pacific accounts grew 19% and 13% in
1998 and 1997, respectively, principally reflecting growth in customer deposits
due to the "flight-to-quality" in the region, particularly in Japan. Customer
deposits grew 18% and 8% (32% and 16% excluding the effect of foreign currency
translation) in 1998 and 1997, respectively.
In Billions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Accounts (in millions) 7.4 6.2 5.5
Average customer deposits $ 36.1 $ 30.5 $ 28.2
Average loans 20.2 20.8 19.6
================================================================================
Revenues, net of interest expense, of $1.773 billion declined $26 million
from 1997 and in 1997 were down $39 million from 1996, reflecting the effect of
foreign currency translation and spread compression in certain countries, offset
by account and business volume growth due to the "flight-to-quality" in the
region. The 1997 decline in revenues also reflects the 1996 gain associated with
the sale of an affiliate. Foreign currency translation reduced revenue growth by
approximately 22 and 8 percentage points in 1998 and 1997, respectively.
Adjusted operating expenses in 1998 were down $56 million or 5% from 1997
reflecting the effect of foreign currency translation, partially offset by costs
associated with business volume growth. Expenses in 1997 increased $47 million
or 5% from 1996, reflecting account and business volume growth. Foreign currency
translation reduced expense growth by approximately 15 and 8 percentage points
in 1998 and 1997, respectively.
Credit costs in 1998 were $251 million, up from $201 million in 1997 and
$167 million in 1996. The net credit loss ratio was 1.12% in 1998, up from 0.82%
in 1997 and 0.81% in 1996, reflecting economic conditions in the region. Foreign
currency translation reduced credit costs by approximately $70 million and $26
million in 1998 and 1997, respectively.
Credit costs include a provision in excess of net credit losses to
increase the allowance for credit losses by $24 million, $30 million, and $8
million in 1998, 1997, and 1996, respectively, reflecting higher credit losses
in the portfolio.
Latin America
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $1,562 $1,446 $1,304
Adjusted operating expenses(1) 1,071 923 790
- -------------------------------------------------------------------------------
Operating margin 491 523 514
Credit costs(2) 265 192 192
- -------------------------------------------------------------------------------
Business income before taxes 226 331 322
Income taxes 63 58 41
- -------------------------------------------------------------------------------
Business income 163 273 281
Restructuring charges, after-tax 67 20 --
- -------------------------------------------------------------------------------
Net income $ 96 $ 253 $ 281
===============================================================================
Average assets (in billions of dollars) $ 12 $ 8 $ 7
Return on assets 0.80% 3.16% 4.01%
===============================================================================
Excluding restructuring charges
Return on assets 1.36% 3.41% 4.01%
===============================================================================
(1) Excludes restructuring charges.
(2) Represents provision for credit losses.
Latin America--which provides banking and lending services, including
credit and charge cards, to customers throughout the region--reported business
income of $163 million in 1998 down from $273 million and $281 million in 1997
and 1996, respectively, primarily reflecting lower earnings in Credicard, a
Brazilian Card affiliate. Net income of $96 million in 1998 and $253 million in
1997, included restructuring charges of $88 million ($67 million after-tax) and
$33 million ($20 million after-tax), respectively.
As shown in the following table, Latin America experienced strong business
volume growth in 1998 and 1997, including the effect of certain acquisitions
made in 1998. Customer deposit growth also reflects a "flight-to-quality" in the
region during 1998.
In Billions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Accounts (in millions) 6.7 4.9 4.2
Average customer deposits $ 10.2 $ 8.2 $ 7.8
Average loans 7.8 6.6 5.4
================================================================================
Revenues, net of interest expense, of $1.562 billion were up $116 million
or 8% from 1997 reflecting account and business volume growth and certain
acquisitions in the region, partially offset by lower earnings in Credicard and
reduced spreads. In 1998, foreign currency translation reduced revenue growth by
approximately 5 percentage points. 1997 revenues were up $142 million or 11%
from 1996, reflecting business volume growth offset by lower earnings in
Credicard.
Adjusted operating expenses in 1998 grew $148 million or 16% from 1997
reflecting acquisitions in the region, spending on new strategic alliances, and
increased collection efforts. In 1998, foreign currency translation reduced
expense growth by approximately 8 percentage points. Expenses in 1997 increased
$133 million or 17% from 1996 reflecting account growth, business expansion
efforts, and spending on technology initiatives.
Credit costs were $265 million in 1998, up from $192 million in both 1997
and 1996 reflecting economic conditions and loan growth. The net credit loss
ratio was 3.07% in 1998, compared to 2.66% in 1997 and 3.44% in 1996.
Credit costs include a provision in excess of net credit losses to
increase the allowance for credit losses by $26 million, $17 million, and $7
million in 1998, 1997, and 1996, respectively, reflecting the higher credit loss
experience in the portfolio during 1998 and portfolio growth.
Business income in 1998 and 1997 was also reduced by a higher effective
tax rate. The effective tax rates on business income before taxes were 28%, 18%,
and 13%, in 1998, 1997, and 1996, respectively. Fluctuations in the effective
income tax rates result from changes in the nature and geographic mix of pretax
earnings.
13
<PAGE>
Global Private Bank
In Millions of Dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Adjusted revenues(1) $ 1,061 $ 1,018 $ 929
Adjusted operating expenses(2) 725 670 637
- ------------------------------------------------------------------------------
Operating margin 336 348 292
Adjusted credit benefits (3) (16) (19) (1)
- ------------------------------------------------------------------------------
Business income before taxes 352 367 293
Income taxes 98 86 62
- ------------------------------------------------------------------------------
Business income 254 281 231
Restructuring charges, after-tax 43 18 --
- ------------------------------------------------------------------------------
Net income $ 211 $ 263 $ 231
==============================================================================
Average assets (in billions of dollars) $ 17 $ 17 $ 16
Return on assets 1.24% 1.55% 1.44%
==============================================================================
Excluding restructuring charges
Return on assets 1.49% 1.65% 1.44%
==============================================================================
(1) Excludes net cost to carry cash-basis loans and OREO.
(2) Excludes restructuring charges and net OREO benefits (costs).
(3) Represents provision for credit losses, net cost to carry, and net OREO
benefits (costs).
Global Private Bank--which provides personalized wealth management
services for high net-worth clients around the world--reported business income
in 1998 of $254 million, down $27 million or 10% from 1997, primarily reflecting
lower earnings in Asia Pacific. Net income of $211 million in 1998 and $263
million in 1997, included restructuring charges of $70 million ($43 million
after-tax) and $28 million ($18 million after-tax), respectively. 1997 business
income of $281 million was up from $231 million in 1996, reflecting revenue
growth across all regions along with higher credit benefits in the United
States.
Client business volumes under management were $116 billion at the end of
the year, up from $101 billion in 1997 and $96 billion in 1996, reflecting
growth in all regions except Asia Pacific. Growth was led by the custody
business, investment funds management, banking, and trust and fiduciary
relationships.
Adjusted revenues in 1998 were $1.061 billion, up $43 million or 4% from
1997, reflecting strong growth in client-related foreign exchange and growth in
other fee revenues. Revenues for 1997 were $1.018 billion, up $89 million or 10%
from 1996, reflecting growth in fees from new investment products introduced
during the year and an increase in client-related foreign exchange.
Adjusted operating expenses of $725 million in 1998 were up $55 million or
8% from 1997, reflecting an increased sales force and higher product management
costs. Expenses of $670 million in 1997 were up $33 million or 5% from 1996,
reflecting a rise in staffing needed to support higher business volumes, as well
as increased spending on technology initiatives.
Adjusted credit benefits for 1998 were $16 million, compared with $19
million in 1997 and $1 million in 1996. 1998 credit benefits reflect increased
income on cash basis loans and higher recoveries in Europe and the United
States, offset by higher write-offs in Asia Pacific and Latin America. 1997
credit benefits improved from 1996, as the U.S. business continued to benefit
from recoveries, gains on sale of OREO, and income on cash-basis loans.
Business income in 1998 and 1997 was also reduced by a higher effective
tax rate. The effective tax rates on business income before taxes were 28%, 23%,
and 21%, in 1998, 1997, and 1996, respectively. Fluctuations in the effective
income tax rates result from changes in the nature and geographic mix of pretax
earnings.
e-CITI
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $ 147 $ 112 $ 88
Adjusted operating expenses(1) 379 239 163
- -------------------------------------------------------------------------------
Operating margin (232) (127) (75)
Credit costs 3 4 5
- -------------------------------------------------------------------------------
Business loss before taxes (235) (131) (80)
Income tax benefit (93) (52) (29)
- -------------------------------------------------------------------------------
Business loss (142) (79) (51)
Restructuring charges, after-tax 2 16 --
- -------------------------------------------------------------------------------
Net loss $(144) $ (95) $ (51)
===============================================================================
(1) Excludes restructuring charges.
e-Citi--the business that manages the Company's Internet strategy and
execution, including the creation and delivery of electronic financial services
and e-commerce initiatives, such as Direct Access and other Internet-based
transactional banking products, and provides to customers certain other
electronic banking services such as Global Debit Card Services--reported
business losses of $142 million in 1998, compared to $79 million in 1997 and $51
million in 1996. Net losses of $144 million in 1998 and $95 million in 1997,
included restructuring charges of $3 million ($2 million after-tax) and $28
million ($16 million after-tax), respectively.
Revenues, net of interest expense, were $147 million in 1998, up from $112
million in 1997 and $88 million in 1996, reflecting business volume increases in
certain electronic banking services.
Adjusted operating expenses of $379 million increased from $239 million
and $163 million in 1997 and 1996, respectively, reflecting Internet-based
financial services and e-commerce initiatives, and additional investment
spending on certain other electronic banking services.
OTHER CONSUMER
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $ 97 $ 105 $ 118
Operating expenses 236 90 42
- --------------------------------------------------------------------------------
Business income (loss) before taxes (139) 15 76
Income taxes (benefits) (53) (9) 30
- --------------------------------------------------------------------------------
Net income (loss) $ (86) $ 24 $ 46
================================================================================
Other Consumer--which includes certain treasury operations and global
marketing and other programs--reported a net loss of $86 million in 1998,
compared to net income of $24 million and $46 million in 1997 and 1996,
respectively, primarily reflecting higher spending on global advertising,
marketing, and distribution development initiatives.
14
<PAGE>
CONSUMER PORTFOLIO REVIEW
Managed loans of $181.6 billion as of December 31, 1998 were up from $149.8
billion and $145.4 billion as of December 31, 1997 and 1996, respectively. The
increase in managed consumer loans from December 31, 1997 reflects the
acquisition of UCS and worldwide portfolio growth.
In the consumer portfolio, credit loss experience is often expressed in
terms of annual net credit losses as a percentage of average loans. Pricing and
credit policies reflect the risk and credit loss experience of each particular
product. Consumer loans are generally written off no later than a predetermined
number of days past due on a contractual basis, or earlier in the event of
bankruptcy. The number of days is set at an appropriate level according to loan
product and country.
The table on page 16 summarizes delinquency and net credit loss experience
in both the managed and on-balance sheet loan portfolio in terms of loans 90
days or more past due, net credit losses, and as a percentage of related loans.
In North America, Mortgage Banking and Citibanking credit trends continue
to improve from both 1997 and 1996 levels. Mortgage Banking loans delinquent 90
days or more of $625 million at December 31, 1998 declined from $715 million at
December 31, 1997 and $903 million at December 31, 1996. Citibanking North
America delinquencies of $87 million declined from $142 million and $231
million, respectively. Similarly, Mortgage Banking net credit losses of $75
million in 1998 declined from $115 million in 1997 and $133 million in 1996.
Citibanking North America net credit losses of $124 million declined from $135
million and $147 million, respectively.
U.S. bankcards managed loans delinquent 90 days or more were $1.0 billion
or 1.45% ($812 million or 1.55% excluding UCS) at December 31, 1998, compared
with $868 million or 1.77% at December 31, 1997 and $897 million or 1.89% at
December 31, 1996. Net credit losses in 1998 were $3.1 billion and the related
loss ratio was 5.33% ($2.6 billion and 5.53% excluding UCS), compared with $2.7
billion and 5.74% in 1997 and $2.2 billion and 4.95% in 1996. The improvement in
1998 from 1997 in both the delinquency and net credit loss ratios reflects
moderating industry-wide bankruptcy trends and previously implemented credit
risk management initiatives. Citigroup continues to write off bankrupt accounts
upon notice of filing of bankruptcy.
Consumer Finance Services loans delinquent 90 days or more of $172 million
and the related ratio of 1.44% at December 31, 1998 increased from $133 million
or 1.36% at December 31, 1997 and $94 million or 1.33% at December 31, 1996. Net
credit losses in 1998 were $291 million and the related loss ratio was 2.74%,
compared with $233 million and 2.82% in 1997 and $209 million and 3.14% in 1996.
The increase in both dollar delinquencies and net credit losses principally
reflects loan growth.
In Europe, Middle East, & Africa, credit trends have been stable to
improving in most countries. Loans delinquent 90 days or more were $937 million
with a related ratio of 5.49% at December 31, 1998, compared with $905 million
or 6.00% at December 31, 1997 and $959 million or 5.91% at December 31, 1996.
Net credit losses in 1998 were $270 million and the related loss ratio was
1.71%, compared with $267 million and 1.77% in 1997 and $291 million and 1.68%
in 1996.
In Asia Pacific and Latin America, delinquencies and net credit losses
have increased from both 1997 and 1996 due to economic conditions in the
regions. Asia Pacific loans delinquent 90 days or more of $498 million at
December 31, 1998 increased from $259 million at December 31, 1997 and $256
million at December 31, 1996. Net credit losses of $227 million in 1998
increased from $171 million in 1997 and $159 million in 1996. Foreign currency
translation reduced net credit losses in Asia Pacific by approximately $70
million and $26 million in 1998 and 1997, respectively. Latin America loans
delinquent 90 days or more of $288 million at December 31, 1998 increased from
$173 million at December 31, 1997 and $124 million at December 31, 1996. Net
credit losses of $239 million in 1998 increased from $175 million in 1997 and
$185 million in 1996. The increase in Latin America delinquencies and net credit
losses also reflects loan growth.
Global Private Bank loans delinquent 90 days or more were $193 million at
December 31, 1998, compared with $110 million at December 31, 1997 and $193
million at December 31, 1996. The increase in delinquencies from 1997 reflects
an increase in Asia Pacific and Europe, the Middle East and Africa, partially
offset by improvements in North America. Net credit losses in 1998 were $5
million, compared with net recoveries of $13 million in 1997 and net credit
losses of $4 million in 1996. The increase in net credit losses from 1997
reflects higher write-offs in Asia Pacific and Latin America, partially offset
by improvements in North America.
Total consumer loans on the balance sheet delinquent 90 days or more on
which interest continued to be accrued were $1.1 billion at December 31, 1998
and $1.0 billion at both December 31, 1997 and 1996. Included in these amounts
are U.S. government-guaranteed student loans of $267 million at December 31,
1998, up from $240 million and $239 million at December 31, 1997 and 1996,
respectively, reflecting growth in the loan portfolio. Other consumer loans
delinquent 90 days or more on which interest continued to be accrued (which
primarily include worldwide bankcard receivables and certain loans in Germany)
were $790 million, $762 million, and $770 million, respectively. The majority of
these other loans are written off upon reaching a stipulated number of days past
due.
Citigroup's policy for suspending the accrual of interest on consumer
loans varies depending on the terms, security, and credit loss experience
characteristics of each product, as well as write-off criteria in place. At
December 31, 1998, interest accrual had been suspended on $2.3 billion of
consumer loans, primarily consisting of mortgage, installment, revolving, and
Private Banking loans, compared with $2.0 billion at December 31, 1997 and $2.3
billion at December 31, 1996. The increase from 1997 reflects increases in Asia
Pacific, Latin America, and the Global Private Bank, partially offset by
improvements in Mortgage Banking.
15
<PAGE>
Consumer Loan Delinquency Amounts, Net Credit Losses, and Ratios
<TABLE>
<CAPTION>
Total Average
Loans 90 Days or More Past Due(1) Loans Net Credit Losses(1)
- ---------------------------------------------- ------------------------------- ------- -------------------------------
In Millions of Dollars,
Except Loan Amounts in Billions 1998 1998 1997 1996 1998 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Citibanking North America $ 8.4 $ 87 $ 142 $ 231 $ 8.3 $ 124 $ 135 $ 147
Ratio 1.04% 1.61% 2.50% 1.49% 1.61% 1.72%
Mortgage Banking 25.6 625 715 903 24.0 75 115 133
Ratio 2.44% 3.13% 4.32% 0.31% 0.51% 0.64%
U.S. Bankcards(2) 69.1 1,001 868 897 58.6 3,123 2,662 2,169
Ratio 1.45% 1.77% 1.89% 5.33% 5.74% 4.95%
Other Cards 2.3 46 37 35 2.3 68 61 55
Ratio 1.96% 1.72% 1.76% 2.91% 2.86% 2.86%
Consumer Finance Services 11.9 172 133 94 10.6 291 233 209
Ratio 1.44% 1.36% 1.33% 2.74% 2.82% 3.14%
Europe, Middle East, & Africa 17.1 937 905 959 15.8 270 267 291
Ratio 5.49% 6.00% 5.91% 1.71% 1.77% 1.68%
Asia Pacific 21.8 498 259 256 20.2 227 171 159
Ratio 2.28% 1.34% 1.23% 1.12% 0.82% 0.81%
Latin America 8.0 288 173 124 7.8 239 175 185
Ratio 3.60% 2.34% 2.05% 3.07% 2.66% 3.44%
Global Private Bank 17.0 193 110 193 15.9 5 (13) 4
Ratio 1.14% 0.72% 1.26% 0.03% NM 0.02%
e-Citi 0.4 2 1 1 0.3 3 4 5
Ratio 0.35% 0.60% 0.56% 1.15% 1.93% 2.95%
- --------------------------------------------------------------------------------------------------------------------------------
Total managed 181.6 3,849 3,343 3,693 163.8 4,425 3,810 3,357
Ratio 2.12% 2.23% 2.54% 2.70% 2.61% 2.41%
- --------------------------------------------------------------------------------------------------------------------------------
Securitized credit card receivables (44.3) (658) (481) (501) (36.5) (2,053) (1,587) (1,392)
Loans held for sale(3) (5.0) (38) (35) -- (4.6) (134) (126) --
- --------------------------------------------------------------------------------------------------------------------------------
Total loans $ 132.3 $ 3,153 $ 2,827 $ 3,192 $ 122.7 $ 2,238 $ 2,097 $ 1,965
Ratio 2.38% 2.36% 2.66% 1.82% 1.79% 1.74%
================================================================================================================================
</TABLE>
(1) The ratios of 90 days or more past due and net credit losses are
calculated based on end-of-period and average loans, respectively, both
net of unearned income.
(2) Includes U.S. Bankcards and Travelers Bank. The U.S. Bankcards managed
ratios of 90 days or more past due and net credit losses were reduced by
10 and 20 basis points, respectively, in 1998, due to the acquisition of
the Universal Card portfolio.
(3) Commencing in 1997, Citigroup classifies credit card and mortgage loans
intended for sale as loans held for sale (included in other assets), which
are accounted for at the lower of cost or market value with net credit
losses charged to other income.
NM Not meaningful.
Consumer Loan Balances, Net of Unearned Income
<TABLE>
<CAPTION>
End of Period Average
- ------------------------------------------------------------------- -----------------------------
In Billions of Dollars 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Managed $ 181.6 $ 149.8 $ 145.4 $ 163.8 $ 145.7 $ 139.3
Securitized credit card receivables (44.3) (26.8) (25.2) (36.5) (25.2) (26.1)
Loans held for sale(1) (5.0) (3.5) -- (4.6) (3.6) --
- -------------------------------------------------------------------------------------------------------------
On-balance sheet $ 132.3 $ 119.5 $ 120.2 $ 122.7 $ 116.9 $ 113.2
=============================================================================================================
</TABLE>
(1) Commencing in 1997, Citigroup classifies credit card and mortgage loans
intended for sale as loans held for sale (included in other assets), which
are accounted for at the lower of cost or market value with net credit
losses charged to other income.
The portion of Citigroup's allowance for credit losses attributed to the
consumer portfolio was $3.3 billion as of December 31, 1998, up from $2.8
billion and $2.3 billion as of December 31, 1997 and 1996, respectively,
reflecting the 1998 addition of $320 million of credit loss reserves related to
the acquisition of the Universal Card portfolio and the 1997 restoration to the
allowance of $373 million of reserves that had previously been attributable to
credit card securitization transactions. The allowance as a percentage of loans
on the balance sheet was 2.50% as of December 31, 1998, compared with 2.35% and
1.93% at December 31, 1997 and 1996, respectively. The attribution of the
allowance is made for analytical purposes only and the entire allowance is
available to absorb probable credit losses inherent in the portfolio.
Global Consumer
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Allowance for credit losses $3,310 $2,808 $2,319
As a percentage of total loans 2.50% 2.35% 1.93%
===============================================================================
16
<PAGE>
GLOBAL CONSUMER OUTLOOK
During 1998, Global Consumer announced a number of business improvement and
integration initiatives that are projected to yield expense savings of
approximately $380 million pretax in 1999, and to reach a run rate of
approximately $540 million in annual pretax savings beginning in 2000. In 1999,
these actions, together with tighter management of non-customer expenses and
realized savings from earlier efficiency initiatives still in progress, are
expected to yield gross annual pretax expense savings of approximately $800
million. There can be no assurance that the projected cost savings will be
achieved.
Banking/Lending
Citibanking North America. The business is poised for growth in 1999 as a result
of continued improvements in revenues along with a reduction in operating
expenses. In addition, the business should benefit from the implementation of
cross-selling initiatives. Cross-selling programs and pilots currently underway
include the offering of credit cards, mortgages, investment products, and life
insurance to Citibanking customers, as well as the offering of Citibanking
products to customers of Primerica and Consumer Finance Services. Citibanking
has launched new training, licensing and compensation programs to enable and
motivate current bankers to sell the full range of financial services products
that meet clients' needs.
Mortgage Banking. Mortgage Banking, which includes Student Loans, will continue
to develop its national franchise in 1999. Growth in existing and new
distribution channels--including cross-selling programs--should maintain loan
volumes. Student Loans should continue to grow through affinity programs with
major universities and capitalize on its recently regained top position in the
U.S. government-guaranteed loan program. Continued development of other
products, including home equity and installment loans, will complement the
product offerings and should enable the business to establish lifetime
relationships with new and existing customers. Mortgage refinancing activity is
expected to moderate in 1999, however, lower than expected interest rates and
competitive pricing could result in continued higher than expected levels of
prepayment activity. Management has instituted hedging programs designed to
mitigate the impairment effects of prepayment activity.
Cards. In 1998, the business increased profitability through risk based pricing
initiatives and improved credit conditions. Additionally, the acquisition of UCS
drove the 40% growth in U.S. bankcard receivables and significantly increased
market share. As a result, the business will move into 1999 with strong
momentum. While competitive pressures will continue, the business expects to
leverage its size in meeting the needs of existing customers and to gain wallet
share by continuing to grow existing profitable relationships and testing new
value propositions and channels. Furthermore, Cards plans to meet its customers
broader financial and insurance needs through cross-selling opportunities that
should provide the fuel for continued portfolio growth. Credit costs and
delinquencies may increase from 1998 levels as a result of continued portfolio
growth.
The Consumer Finance results over the last several years have been affected by
the interest rate environment and general economic conditions. The lower
interest rate environment has resulted in modest downward pressure on interest
rates charged on new receivables secured by real estate. For CCC overall,
however, these trends have been offset somewhat by the lower costs of funds.
From time to time low interest rates combined with aggressive competitor pricing
may increase the likelihood of prepayments of mortgage loans. This impact has
been mitigated by a number of programs that have been instituted including those
designed to attract first mortgage business.
Insurance
Changes in the general interest rate environment affect the return received by
the insurance subsidiaries on newly invested and reinvested funds. While a
rising interest rate environment enhances the returns available, it reduces the
market value of existing fixed maturity investments and the availability of
gains on disposition. A decline in interest rates reduces the return available
on investment of funds, but could create the opportunity for realized investment
gains on disposition of fixed maturity investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are subject to assessments from state-administered guaranty
associations, second injury funds and similar associations. Management believes
that such assessments will not have a material impact on the Company's results
of operations, financial condition or liquidity.
Certain social, economic, and political issues have led to an increased
number of legislative and regulatory proposals aimed at addressing the cost and
availability of certain types of insurance. While most of these provisions have
failed to become law, these initiatives may continue as legislators and
regulators try to respond to public availability and affordability concerns and
the resulting laws, if any, could adversely affect the Company's ability to
write business with appropriate returns.
Travelers Life and Annuity should benefit from growth in the aging population
who are becoming more focused on the need to accumulate adequate savings for
retirement, to protect these savings and to plan for the transfer of wealth to
the next generation. Travelers Life and Annuity is well positioned to take
advantage of the favorable long-term demographic trends through its strong
financial position, widespread brand name recognition and broad array of
competitive life, annuity and long-term care insurance products sold through
established distribution channels.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry, other
financial services organizations are increasingly involved in the sale and/or
distribution of insurance products. Deregulation of the banking industry,
including possible reform of restrictions on entry into the insurance business,
will likely accelerate this trend. Also, the annuities business is interest
sensitive, and swings in interest rates could influence sales and retention of
in force policies. In order to strengthen its competitive position, Travelers
Life and Annuity expects to maintain a current product portfolio, further
diversify its distribution channels, and retain its healthy financial position
through strong sales growth and maintenance of an efficient cost structure.
Primerica, during the last few years has instituted programs including sales and
product training that are designed to maintain high compliance standards,
increase the number of producing agents and customer contacts and, ultimately,
increase production levels. Additionally, increased effort has been made to
provide all Primerica customers full access to all Primerica marketed lines.
Insurance in force is continuing to grow and the number of producing agents is
stable. A continuation of these trends could positively influence future
operations. Primerica continues to expand cross-selling with other Company
subsidiaries of products such as loans, mutual funds, property
17
<PAGE>
and casualty insurance (automobile and homeowners), and more recently the
initiatives with Citibank.
Personal Lines strategy includes control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents
and continued expansion of alternative marketing channels to broaden
distribution to a wider customer base. Personal Lines is continuing its state by
state rollout of nonstandard auto insurance to broaden its product capabilities.
These growth strategies also provide opportunities to leverage the existing cost
structure and achieve economies of scale. In addition, Personal Lines continues
to take action to control its exposure to catastrophe losses, including limiting
the writing of new homeowners business in certain markets, and implementing
price increases in certain hurricane-prone areas, subject to restrictions
imposed by insurance regulatory authorities.
The personal auto insurance marketplace has become more competitive in
1998 as some personal auto carriers have reduced prices in selected markets.
This trend is expected to continue in 1999.
The property and casualty insurance industry in the United States
continues to consolidate. The Company's strategic objectives are to enhance its
position as a consistently profitable market leader and to become a low-cost
provider of property and casualty insurance in the United States, as the
industry consolidates. In this regard, an emphasis on claim payout and
performance and enhanced productivity efforts are expected to continue.
International Consumer
As a result of global economic conditions, particularly in Latin America and
Asia Pacific, net credit losses and the related loss ratios in certain
International Consumer businesses are expected to increase from 1998 levels.
Additionally, delinquencies and loans on which the accrual of interest is
suspended could remain at relatively high levels.
Europe, Middle East, & Africa. The newly unified Europe represents a large
market whose size and strong demographic characteristics rival that of the U.S.
Additional growth opportunity comes from the developing markets of Central and
Eastern Europe where an emerging middle class is expected to fuel the demand for
financial services. Along with the markets, consumers are experiencing profound
changes. Not unlike the U.S., as the social reforms take hold, an increasing
recognition on the part of consumers that they will need to fund their own
retirements is fueling a substantial investment product opportunity. Although
the European Economic Monetary Union (EMU) represents great opportunity, the
challenges are substantial. A single market requires pan-European product
offerings, brings increased competition, and creates a greater ability on the
part of consumers to comparison shop across borders. Citigroup's strengths in
distribution and consistent global advertising and marketing efforts will
provide a strong platform to expand beyond the current European presence.
Asia Pacific. The macroeconomic environment across Asia Pacific was difficult
during 1998 with most economies contracting along with significant volatility of
interest rates and foreign exchange rates. From a competitive perspective, the
economic turbulence has begun to lead to early rationalization and some
consolidation in the financial services and banking sector. During 1998,
franchise growth reflected the "flight-to-quality" in the region, particularly
in Japan. The business maintained a tight focus on loan underwriting and
increased productivity throughout the region, especially in the back office.
Credit costs have risen since 1997 and are expected to remain at high levels in
1999 as unemployment rises and GDP growth remains sluggish. However, the
business is well positioned in 1999 for continued franchise growth.
Latin America. Latin America now serves nearly five million customers, with
credit and charge cards commanding a leading share position in four countries.
Substantial steps have been taken to build the franchise across the region,
including acquisitions in Mexico and Argentina, and opening sales and service
channels through non-traditional means, such as presence in retail outlets in
four countries and enhanced online banking offerings in five countries. The
region has experienced deteriorating economic conditions in many of its
countries, which has resulted in reduced GDP growth and a difficult credit
environment. This trend is expected to continue in 1999, as the impact of the
Brazilian currency devaluation is felt across the region. Latin America will
mitigate the effects of this downturn by re-focusing lending efforts toward less
risky segments of the population. Additionally, increased efforts will be made
to grow existing customer relationships and toward continued operating expense
reductions.
Global Private Bank. The market for private banking services is extremely
attractive because the "wealth" segment has been growing faster than the overall
market. Although the financial crisis in a number of emerging market countries
has had an adverse impact, several regions, particularly the United States and
Europe, remain very strong and the prospects for the overall market continue to
be positive over the longer term. While competition for this attractive and
dynamic market segment is increasing, the global market is highly fragmented
with no dominant competitors. This presents the Global Private Bank with an
extremely attractive business opportunity because it is one of the few providers
that can claim to offer a full range of private banking services on a global
basis.
18
<PAGE>
GLOBAL CORPORATE AND
INVESTMENT BANK
<TABLE>
<CAPTION>
In Millions of Dollars 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Adjusted revenues(1) $ 21,744 $ 23,204 $ 21,719
Adjusted operating expenses(2) 14,512 14,237 13,202
Provisions for benefits, claims, and credit losses(3) 4,160 3,667 3,153
Net cost to carry and net OREO benefits (27) (71) (85)
- ----------------------------------------------------------------------------------------
Adjusted provisions for benefits, claims,
and credit costs 4,133 3,596 3,068
- ----------------------------------------------------------------------------------------
Business income before taxes and
minority interest 3,099 5,371 5,449
Income taxes 915 1,701 1,712
Minority interest, after-tax 143 132 90
- ----------------------------------------------------------------------------------------
Business income 2,041 3,538 3,647
Restructuring charges (credit), after-tax (26) 664 --
Acquisition-related costs, after-tax -- -- 372
Loss on disposition of subsidiary, after-tax -- -- 290
- ----------------------------------------------------------------------------------------
Net income $ 2,067 $ 2,874 $ 2,985
========================================================================================
</TABLE>
(1) Excludes net cost to carry cash-basis loans and OREO.
(2) Excludes restructuring charges (credit), net OREO benefits, and
acquisition-related costs and includes operating expenses from
discontinued operations.
(3) Excludes acquisition-related costs.
Citigroup's Global Corporate and Investment Bank business serves
corporations, financial institutions, governments, investors, and other
participants in capital markets throughout the world and consists of Salomon
Smith Barney (SSB), Emerging Markets, Global Relationship Banking (GRB), and the
Commercial Lines Insurance business of TAP. SSB is one of the largest brokerage
firms in the world, with a significant presence in most major financial
products. Emerging Markets provides a wide array of banking products and
services to multi-national and large and emerging local corporations in nearly
80 emerging-market countries worldwide. Global Relationship Banking focuses on
providing banking, capital markets, and transaction processing services to large
multi-national companies in 22 developed countries and to their subsidiaries
around the world. TAP is one of the largest property and casualty insurers in
the United States offering, among other products, workers' compensation,
commercial multi-peril, commercial auto, other liability, fidelity and surety,
and property and other lines, which it distributes through independent agents
and brokers. Adjusted revenues of $21.744 billion in 1998 were attributed to the
following geographic regions: North America--79%, Asia Pacific--8%, Latin
America--5%, Europe--3%, Japan--2%, and all other--3%.
During 1998, Global Corporate and Investment Bank recorded a restructuring
charge totaling $324 million ($203 million after-tax). The restructuring
initiatives are designed to realize synergies and operating efficiencies. The
savings will come from SSB, Emerging Markets, and GRB as the businesses
rationalize their presence in countries with multiple operations, consolidate
Citibank and SSB locations, integrate trading platforms, and exit non-strategic
businesses. During 1997 SSB recorded a restructuring charge of $838 million
($496 million after-tax) primarily for severance and costs related to excess or
unused office space, facilities, and other assets. During 1998 SSB recorded an
adjustment of $354 million ($209 million after-tax) to the 1997 restructuring
reserve as a result of negotiations indicating that certain excess space would
be disposed of on terms more favorable than had originally been estimated.
During 1997 Emerging Markets and GRB recorded an aggregate restructuring charge
of $281 million ($168 million after-tax) related to standardization and
consolidation of operations, the outsourcing of various technological functions,
the rationalization of support functions, and other organizational realignments
designed to better serve target market customers. During 1998, Emerging Markets
and GRB recorded an adjustment of $32 million ($20 million after-tax) to reduce
the 1997 restructuring reserve primarily reflecting lower than anticipated
severance costs due to higher attrition and redeployment of personnel within the
Company. See Note 15 of Notes to Consolidated Financial Statements.
Global Corporate and Investment Bank results in 1998 were adversely
affected by the global economic turmoil experienced during the year, which
dampened revenue performance at SSB, Emerging Markets, and GRB and negatively
affected credit at Emerging Markets and GRB. In addition, costs associated with
the Year 2000 and preparation for the introduction of the Euro contributed to
expense growth in GRB. Commercial Lines reported improved results compared with
1997 due to increased net investment income, partially offset by catastrophe and
other weather-related losses during the year. Global Corporate and Investment
Bank results in 1997 compared with 1996 reflected lower principal trading
revenues at SSB resulting from the volatility in the global equity markets and a
loss on a risk arbitrage position. Additionally, lower results in Emerging
Markets were largely attributable to investment spending on franchise expansion
and higher credit costs in Asia. Improved results in GRB reflected revenue
growth and better credit performance. A 27% improvement in Commercial Lines
results primarily related to higher net investment income, lower catastrophe
losses, and expense savings associated with the integration of the business
acquired from Aetna P&C.
Losses on commercial lending activities can vary widely with respect to
timing and amount, particularly within any narrowly-defined business or loan
type. Commercial loans are identified as impaired and placed on a nonaccrual
basis when it is determined that the payment of interest or principal is
doubtful of collection or when interest or principal is past due for 90 days or
more, except when the loan is well secured and in the process of collection.
Impaired commercial loans are written down to the extent that principal is
judged to be uncollectible. Citigroup's allowance for credit losses of $6.6
billion is available to absorb all probable credit losses inherent in the
portfolio. For analytical purposes only, Citigroup attributes a portion of this
reserve to its commercial loans. Reserves attributed to commercial loans totaled
$3.3 billion at both December 31, 1998 and 1997. In 1998 and 1997, asset quality
improved in the developed markets, but deteriorated in a number of emerging
markets. The commercial allowance for credit losses as a percentage of
commercial loans at December 31, 1998 and 1997 was 3.7% and 4.2%, respectively.
Credit costs and cash-basis loans may increase from the 1998 levels due to
global economic developments, particularly in Latin America and Asia Pacific.
At December 31, 1998, Global Corporate and Investment Bank had
mark-to-market exposure to hedge funds of $2.0 billion, fully collateralized by
cash and government securities. Within these amounts, certain hedge funds have
collateral in excess of the mark-to-market deficit, and others have deficits in
excess of collateral held. The total exposure to hedge funds with mark-to-market
deficits in excess of collateral held is $40 million. No single hedge fund had a
mark-to-market deficit of more than $14 million in excess of collateral held
from that hedge fund. Other outstandings and commitments to hedge funds totaled
$131 million, of which $129 million was secured and $2 million was unsecured.
Mark-to-market exposure includes those hedge funds that owe Global Corporate and
Investment Bank on foreign exchange and derivative contracts such as swaps, swap
options, and other over-the-counter options, and only the uncollateralized
portion of receivables on reverse repurchase and repurchase agreements. This
exposure can change significantly as a result of extreme market movements.
During 1998,
19
<PAGE>
Salomon Smith Barney made an investment of $300 million in Long-Term Capital
Management, LP, a hedge fund, in concert with a consortium of banks and
securities firms.
SALOMON SMITH BARNEY
The following data does not include the Asset Management division of Salomon
Smith Barney. The division's results are included in the Asset Management
segment.
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $ 8,333 $10,218 $10,107
Adjusted operating expenses(1) 7,702 7,895 7,418
- --------------------------------------------------------------------------------
Business income before taxes 631 2,323 2,689
Income taxes 223 885 1,051
- --------------------------------------------------------------------------------
Business income 408 1,438 1,638
Restructuring charges (credit), after-tax (163) 496 --
Loss on disposition of subsidiary, after-tax -- -- 290
- --------------------------------------------------------------------------------
Net income $ 571 $ 942 $ 1,348
================================================================================
(1) Excludes restructuring charges (credit).
Salomon Smith Barney's earnings include Salomon for all periods presented.
During the latter part of 1998 Salomon Smith Barney's performance was depressed
by extreme economic turmoil in much of the world. Volatility in the global
markets continued to negatively affect principal trading results, particularly
in fixed income trading, as well as in global arbitrage as Salomon Smith Barney
continued to scale back non-strategic positions. Revenues for the three years
ended December 31, 1998 by category were as follows:
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Commissions $ 3,203 $ 2,956 $ 2,600
Investment banking 2,281 2,082 1,975
Principal transactions (116) 2,501 3,024
Asset management and administration fees(1) 1,308 998 777
Net interest and dividends(2) 1,457 1,533 1,515
Other income 200 148 216
- --------------------------------------------------------------------------------
Total revenues, net of interest expense(2) $ 8,333 $10,218 $10,107
================================================================================
(1) Excludes the revenues of SSB Asset Management which are reported in the
Asset Management business segment.
(2) Net of interest expense of $11.432 billion, $10.496 billion and $8.137
billion in 1998, 1997 and 1996, respectively.
Revenues, net of interest expense in 1998 declined 18% to $8.333 billion,
due primarily to a decline in principal transaction revenue from fixed income
and global arbitrage offset to an extent by increases in commissions, asset
management and administration fees and investment banking revenues. Revenues,
net of interest expense in 1997 were $10.218 billion, a slight improvement over
the $10.107 billion in 1996 primarily reflecting increases in commissions and
asset management and administration fees offset by a decline in principal
transaction revenues from equities, fixed income and commodities trading.
Commissions revenue increased 8% in 1998 to $3.203 billion, from $2.956
billion in 1997 and $2.600 billion in 1996. The 1998 and 1997 increases reflect
growth in sales of listed and over-the-counter (OTC) securities. The 1997
increase also reflects higher commissions from mutual funds activity as well as
increased insurance and annuity sales.
Investment banking revenues were $2.281 billion in 1998 compared to
$2.082 billion in 1997 and $1.975 billion in 1996. The increases in 1998 and
1997 reflect revenue growth in unit trust, public finance and high grade debt
underwritings, and mergers and acquisitions. This was offset somewhat by a
decline in equity underwritings. Investment banking revenues in 1997 were also
favorably impacted by an increase in private placement fees offset by a decline
in high yield underwritings. Investment banking revenues in 1998 were also
favorably impacted by increased high yield underwriting revenues. For 1998,
Salomon Smith Barney was ranked #1 in the industry in municipal underwritings,
and #2 in domestic and #3 in global debt and equity underwriting, according to
Securities Data Corp.
Principal transactions revenues declined to a loss of $116 million in
1998. Decreases in fixed income trading results include losses due to risk
reductions in the U.S. fixed income arbitrage business, and losses in other
global arbitrage. These decreases were partially offset by an increase in equity
trading results. Fixed income trading results were adversely impacted by
significant dislocations in the global fixed income markets, including greatly
reduced liquidity and widening credit spreads. Included in these results are
Russian-related losses. In 1997, principal transaction revenues decreased to
$2.501 billion from $3.024 billion in 1996. This was the result of a decrease in
long-term fixed income trading strategies, partially offset by an increase in
customer sales and trading. Also contributing to the 1997 decline was increased
volatility in the global equity markets and a loss on a risk arbitrage position
in British Telecommunications PLC and MCI Communications Corporation, partially
offset by improved results in long-term equity strategies.
Salomon Smith Barney's assets at December 31, 1998 were approximately $211
billion, consisting primarily of highly liquid marketable securities and
collateralized receivables. Approximately 42% of these assets represent trading
securities, commodities and derivatives used for proprietary trading and to
facilitate customer transactions and approximately 42% of these assets were
related to collateralized financing transactions where securities are bought,
borrowed, sold and lent in generally offsetting amounts. A significant portion
of the remainder of the assets represented receivables from brokers, dealers,
clearing organizations and customers that relate to securities transactions in
the process of being settled.
Salomon Smith Barney's assets are financed through a number of sources
including long and short-term unsecured borrowings, the financing transactions
described above and payables to brokers, dealers and customers.
Asset management and administration fees were $1.308 billion in 1998
compared to $998 million in 1997 and $777 million in 1996. Total assets under
fee-based management at December 31, were as follows:
In Billions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Financial Consultant managed accounts $ 16.5 $ 11.6 $ 7.9
Consulting Group externally managed assets 71.9 59.7 44.1
- --------------------------------------------------------------------------------
Total assets under fee-based management(1) $ 88.4 $ 71.3 $ 52.0
================================================================================
(1) Excludes the assets under management of SSB Asset Management, which are
reported in the Asset Management business segment.
20
<PAGE>
Net interest and dividends were $1.457 billion in 1998 compared to $1.533
billion in 1997 and $1.515 billion in 1996.
Adjusted operating expenses were $7.702 billion in 1998 compared to $7.895
billion in 1997 and $7.418 billion in 1996. Adjusted operating expenses were
relatively unchanged in 1998 while the 6% increase in 1997 over 1996 primarily
reflects an increase in production-related compensation and employee benefits
expense, reflecting increased revenues, as well as higher floor brokerage and
other production-related costs. Salomon Smith Barney also continues to maintain
its focus on controlling fixed expenses.
EMERGING MARKETS
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $3,363 $3,168 $3,004
Net cost to carry cash-basis loans and OREO 59 15 3
- -------------------------------------------------------------------------------
Adjusted revenues 3,422 3,183 3,007
Adjusted operating expenses(1) 2,017 1,893 1,644
- -------------------------------------------------------------------------------
Operating margin 1,405 1,290 1,363
Adjusted credit costs(2) 480 135 76
- -------------------------------------------------------------------------------
Business income before taxes 925 1,155 1,287
Income taxes 235 246 287
- -------------------------------------------------------------------------------
Business income 690 909 1,000
Restructuring charges, after-tax 50 32 --
- -------------------------------------------------------------------------------
Net income $ 640 $ 877 $1,000
===============================================================================
Average assets (in billions of dollars) $ 81 $ 66 $ 54
Return on assets 0.79% 1.33% 1.85%
===============================================================================
Excluding restructuring charges
Return on assets 0.85% 1.38% 1.85%
===============================================================================
(1) Excludes restructuring charges and net OREO benefits.
(2) Represents provision for credit losses, net cost to carry, and net OREO
benefits.
Emerging Markets business income totaled $690 million in 1998, down $219
million or 24% from 1997. Net income was $640 million in 1998, down $237 million
or 27% from 1997. Included in 1998 and 1997 net income are net restructuring
charges of $73 million ($50 million after-tax) and $54 million ($32 million
after-tax), respectively. Business income in 1997 of $909 million declined $91
million or 9% from 1996.
Adjusted revenues of $3.422 billion grew $239 million or 8% (17% excluding
the effect of foreign currency translation) compared with 1997 reflecting a $245
million improvement in trading-related revenues to $1.051 billion (which
includes a $57 million loss attributable to Russia), double-digit growth in
transaction banking services and loan product revenues, and improved treasury
results. These increases were partially offset by a $248 million decline in
realized gains from sales of investments (which includes a $148 million
writedown of impaired Russian available-for-sale securities in 1998) and a $59
million decline in net asset gains. Adjusted revenues of $3.183 billion in 1997
grew $176 million or 6% (9% excluding the effect of foreign currency
translation) compared with 1996, reflecting a $70 million improvement in
realized gains from sales of investments, moderate growth in transaction banking
services revenues, and a $36 million improvement in trading-related revenues to
$806 million. Higher asset levels across the franchise mitigated the effect of
net interest spread compression on 1997 revenue growth.
Adjusted revenues in Asia Pacific (comprising 13 countries and territories
excluding Japan and the Indian subcontinent, but including Australia and New
Zealand) improved 14% in 1998 compared with 1997 and improved 15% in 1997
compared with 1996. The improvement in both periods resulted primarily from
higher trading-related revenues, while 1998 also benefited from improved
treasury results and 1997 reflects significantly improved transaction banking
results. Revenues attributed to Citigroup's plans to gain market share in
selected emerging market countries, together with new franchises, accounted for
7%, 5%, and 2% of the Emerging Markets business revenues in 1998, 1997, and
1996, respectively, and grew 63% from 1997 to 1998 and 119% from 1996 to 1997.
About 31%, 29%, and 27% of the revenue in the Emerging Markets business in 1998,
1997, and 1996 was attributable to business from multinational companies managed
jointly with Global Relationship Banking, with that revenue having grown 15%
from 1997 to 1998 and 15% from 1996 to 1997.
Adjusted operating expenses were $2.017 billion, $1.893 billion, and
$1.644 billion in 1998, 1997, and 1996, respectively. The growth in expenses in
the three-year period was primarily attributable to investment spending to build
the franchise, together with volume growth.
Adjusted credit costs were $480 million, $135 million, and $76 million in
1998, 1997, and 1996, respectively. The increase in 1998 was concentrated in
Indonesia and Russia, while the increase in 1997 was concentrated in Thailand,
in each case reflecting the effects of economic turmoil experienced in those
countries. Adjusted credit costs in 1998 and 1997 included $83 million and $35
million, respectively, related to foreign currency derivative contracts.
Cash-basis loans at December 31, 1998, 1997, and 1996 were $1.062 billion, $649
million, and $366 million. The increase in 1998 was concentrated in Indonesia
and several other Asian countries while the increase in 1997 was concentrated in
Thailand and several other Asian and Latin American countries. Cash-basis loans
at December 31, 1998 and 1997 include approximately $14 million and $59 million,
respectively, of balance sheet credit exposure related to foreign currency
derivative contracts for which the recognition of revaluation gains has been
suspended. See the table entitled "Cash-Basis, Renegotiated, and Past Due Loans"
on page 84.
The effective income tax rates on business income before taxes in 1998,
1997, and 1996 were 25%, 21%, and 22%, respectively. Fluctuations in the
effective income tax rates result from changes in the nature and geographic mix
of pretax earnings.
Average assets of $81 billion in 1998 rose $15 billion or 23% from 1997
reflecting growth across all geographic segments. The growth was concentrated in
the loan portfolio and trade finance products, together with treasury
initiatives. Average assets of $66 billion in 1997 rose $12 billion or 22% from
1996 reflecting growth in loan products and treasury initiatives.
21
<PAGE>
GLOBAL RELATIONSHIP BANKING
In Millions of Dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Total revenues, net of interest expense $ 3,542 $ 3,518 $ 3,220
Net cost to carry cash-basis loans and OREO (34) (18) (39)
- ------------------------------------------------------------------------------
Adjusted revenues 3,508 3,500 3,181
Adjusted operating expenses(1) 3,218 2,821 2,603
- ------------------------------------------------------------------------------
Operating margin 290 679 578
Adjusted credit benefits(2) (113) (170) (88)
- ------------------------------------------------------------------------------
Business income before taxes 403 849 666
Income taxes 183 290 156
- ------------------------------------------------------------------------------
Business income 220 559 510
Restructuring charges, after-tax 87 136 --
- ------------------------------------------------------------------------------
Net income $ 133 $ 423 $ 510
==============================================================================
Average assets (in billions of dollars) $ 89 $ 81 $ 76
Return on assets 0.15% 0.52% 0.67%
==============================================================================
Excluding restructuring charges
Return on assets 0.25% 0.69% 0.67%
==============================================================================
(1) Excludes restructuring charges and net OREO benefits.
(2) Represents provision for credit losses, net cost to carry, and net OREO
benefits.
Business income from Global Relationship Banking in North America, Europe,
and Japan was $220 million in 1998, down $339 million or 61% from 1997. Net
income was $133 million in 1998, down $290 million or 69% from 1997. Included in
1998 and 1997 net income are net restructuring charges of $141 million ($87
million after-tax) and $227 million ($136 million after-tax), respectively.
Business income in 1997 of $559 million improved $49 million or 10% from 1996.
Adjusted revenues in 1998 of $3.508 billion were essentially unchanged
from 1997. The 1998 results reflect double-digit growth in transaction banking
services revenues, a $37 million increase in realized gains from sales of
investments, and a $13 million increase in trading-related revenues to $999
million (which includes losses of $168 million attributable to the volatility
experienced in the global capital markets during the second half of the year).
The growth was essentially offset by an $86 million decline in asset sales and
lower corporate finance revenues. Adjusted revenues of $3.500 billion in 1997
grew $319 million or 10% from 1996. Revenue growth reflected improved
trading-related revenues totaling $986 million--up $101 million from 1996,
double-digit growth rates in transaction banking services and corporate finance
revenues, a $90 million increase in realized gains from sales of investments,
and a $44 million increase in net asset gains primarily from the real estate
portfolio, partially offset by net interest spread compression.
Adjusted operating expenses were $3.218 billion, $2.821 billion, and
$2.603 billion in 1998, 1997, and 1996, respectively. The growth in expenses in
the three-year period was primarily attributable to increased spending on
technology, including costs related to the Year 2000 and the European EMU,
volume-related expense growth and, in 1997, higher incentive compensation.
Adjusted credit benefits of $113 million in 1998 declined from a benefit
of $170 million in 1997, primarily reflecting the write-off of foreign currency
derivative contracts totaling $53 million attributable to the financial market
turmoil in Russia. Adjusted credit benefits of $170 million in 1997 improved $82
million from 1996 reflecting lower gross write-offs together with a continued
high level of recoveries.
Cash-basis loans at December 31, 1998, 1997 and 1996 were $268 million,
$401 million, and $521 million while the OREO portfolio totaled $235 million,
$440 million, and $587 million, respectively. The improvements in both
cash-basis loans and OREO in 1998 and 1997 are primarily related to the real
estate portfolio. See the tables entitled "Cash-Basis, Renegotiated, and Past
Due Loans" and "Other Real Estate Owned and Assets Pending Disposition" on pages
84 and 85.
The effective income tax rates on business income before taxes in 1998,
1997, and 1996 were 45%, 34%, and 23%, respectively. Fluctuations in the
effective income tax rates result from changes in the nature and geographic mix
of pretax earnings.
Average assets of $89 billion in 1998 grew $8 billion or 10% from 1997,
primarily reflecting an increase in the fair value of trading assets, including
derivative and foreign exchange contracts, higher lending to target market
clients, and higher volumes in transaction banking services. Average assets of
$81 billion in 1997 grew $5 billion or 7% from 1996 primarily in trading-related
activities and the loan portfolio.
COMMERCIAL LINES INSURANCE
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $6,481 $6,303 $5,424
Operating expenses(1) 1,575 1,628 1,537
Claims and claim adjustment expenses(1) 3,766 3,631 3,080
- --------------------------------------------------------------------------------
Business income before taxes and
minority interest 1,140 1,044 807
Income taxes 274 280 218
Minority interest 143 132 90
- --------------------------------------------------------------------------------
Business income(2) 723 632 499
Acquisition-related costs, after-tax and
minority interest -- -- 372
- --------------------------------------------------------------------------------
Net income $ 723 $ 632 $ 127
================================================================================
(1) Excludes acquisition-related costs.
(2) Excludes investment gains/losses included in Investment Activities segment
and acquisition-related costs.
Business income was $723 million in 1998 compared to $632 million in 1997
and $499 million in 1996. The 1998 increase compared to 1997 was due to
increased after-tax net investment income, continued expense reductions and
lower environmental and cumulative injury incurred losses, partially offset by
increased losses from catastrophes and other weather-related events. The
improvement in 1997 primarily resulted from the inclusion in 1997 of Aetna P&C
for the entire year compared to only nine months for 1996, higher net investment
income, lower catastrophe losses and expense savings associated with the
acquisition and integration of Aetna P&C. Operating results also reflected
market conditions characterized by difficult pricing and increased competition.
The impact of this trend in market conditions on 1998 and 1997 operating results
was offset by the factors previously indicated as well as a continued
disciplined approach to underwriting and risk management.
The Company incurred charges during 1996 related to the acquisition and
integration of Aetna P&C. These charges resulted primarily from costs of the
acquisition and the application of the Company's strategies, policies and
practices to Aetna P&C reserves. The charges related to Commercial Lines include
$261 million after-tax and minority interest ($490 million before tax and
minority interest) in reserve increases, net of reinsurance, related primarily
to cumulative injury claims other than asbestos (CIOTA); $45
22
<PAGE>
million after-tax and minority interest ($84 million before tax and minority
interest) in additional asbestos liabilities pursuant to an existing settlement
agreement with a customer of Aetna P&C; a $32 million after-tax and minority
interest ($60 million before tax and minority interest) charge related to
premium collection issues on loss sensitive programs, specifically large
deductible products; an $18 million after-tax and minority interest ($34 million
before tax and minority interest) provision for uncollectibility of reinsurance
recoverables of Aetna P&C determined by applying TAP's normal guidelines for
estimating collectibility of such accounts; and a $16 million after-tax and
minority interest ($30 million before tax and minority interest) provision for
lease and severance costs of Travelers P&C related to the restructuring plan for
the acquisition.
Net written premiums by market for the three years ended December 31, 1998
were as follows:
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
National accounts $ 625 $ 657 $ 714
Commercial accounts 1,800 1,986 1,485
Select accounts 1,494 1,432 1,191
Specialty accounts 695 682 605
- --------------------------------------------------------------------------------
$4,614 $4,757 $3,995
================================================================================
Certain production statistics related to Aetna P&C operations are provided
in the following narrative for comparative purposes for periods prior to April
2, 1996 and are not reflected in such prior period revenues or operating
results.
Commercial Lines net written premiums in 1998 totaled $4.614 billion, down
$143 million from $4.757 billion in 1997, reflecting a $142 million adjustment
in the first quarter of 1997 to net written premiums due to a change to conform
the Aetna P&C method of recording certain net written premiums to the method
employed by Travelers P&C. Without this adjustment, net written premiums were
level with the prior year reflecting the highly competitive marketplace and the
Company's continued disciplined approach to underwriting and risk management.
Commercial Lines net written premiums totaled $4.757 billion in 1997, up $673
million from $4.084 billion in 1996 (excluding an adjustment associated with a
reinsurance transaction), reflecting the inclusion in 1997 of Aetna P&C for the
entire year compared to only nine months in 1996 and the $142 million adjustment
noted above. This increase was offset in part by the highly competitive
conditions in the marketplace and the Company's continued disciplined approach
to underwriting and risk management. On a combined total basis including Aetna
P&C (for periods prior to April 2, 1996 for comparative purposes only),
Commercial Lines net written premiums totaled $4.757 billion in 1997, up $67
million from $4.690 billion in 1996. The 1997 increase was attributable to the
change to conform the Aetna P&C method with the Travelers P&C method of
recording net written premiums, partially offset by the highly competitive
marketplace and the Company's disciplined approach to underwriting and risk
management.
Fee income was $306 million in 1998 compared to $365 million in 1997 and
$392 million in 1996. The decreases in fee income were the result of the
depopulation of involuntary pools serviced by the Company as the loss experience
of workers' compensation improved and insureds moved to voluntary markets and
the Company's continued success in lowering workers' compensation losses of
service customers.
National Accounts works with national brokers and regional agents
providing insurance coverages and services, primarily workers' compensation,
mainly to large corporations. National Accounts also includes the alternative
market business, which sells claims and policy management services to workers'
compensation and automobile assigned risk plans, self-insurance pools throughout
the United States and to niche voluntary markets. National Accounts' net written
premiums were $625 million in 1998 compared to $657 million in 1997 and $803
million in 1996 (excluding a one-time adjustment associated with a reinsurance
transaction). On a combined total basis including Aetna P&C (for periods prior
to April 2, 1996 for comparative purposes only), National Accounts net written
premiums were $874 million in 1996. The 1998 decrease was primarily due to a
decrease in the Company's level of involuntary pool participation, the result of
pricing declines due to the highly competitive marketplace, and the Company's
continued disciplined approach to underwriting and risk management. The 1997
decrease was primarily due to a decrease in the Company's level of involuntary
pool participation, the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management.
National Accounts new business and business retention ratio were virtually
the same in 1998 as they were in 1997. National Accounts experienced an increase
in claim service-only business as well as favorable results from continued
product development efforts, especially in workers' compensation managed care
programs. National Accounts new business in 1997 was significantly higher than
in 1996 reflecting continued product development efforts, especially in workers'
compensation managed care programs. National Accounts business retention ratio
was also significantly higher in 1997 than in 1996, reflecting the Company's
continued focus on retaining profitable business.
Commercial Accounts serves mid-size businesses for casualty products and
both large and mid-size businesses for property products through a network of
independent agents and brokers. Commercial Accounts net written premiums were
$1.800 billion in 1998 compared to $1.986 billion in 1997 and $1.485 billion in
1996. On a combined total basis including Aetna P&C (for periods prior to April
2, 1996 for comparative purposes only), Commercial Accounts net written premiums
were $1.725 billion in 1996. The 1998 decrease reflected a $127 million
adjustment in the first quarter of 1997 to net written premiums due to the
change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums. Excluding this adjustment, net written
premiums decreased $59 million reflecting pricing declines due to the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. The increase in 1997 reflected a $127 million
adjustment due to the change to conform the Aetna P&C method with the Travelers
P&C method of recording certain net written premiums and the continued growth
through programs designed to leverage underwriting experience in specific
industries, partially offset by the highly competitive marketplace and the
Company's continued disciplined approach to underwriting and risk management.
For 1998, new premium business in Commercial Accounts significantly
declined compared to 1997, reflecting the Company's focus on obtaining new
accounts where it can maintain its selective underwriting policy. The Commercial
Accounts business retention ratio remained strong in 1998 and was virtually the
same as 1997, reflecting the Company's focus on retaining profitable business.
In 1997, new business in Commercial Accounts significantly improved compared to
1996, reflecting continued growth in programs designed to leverage underwriting
experience in specific industries. The Commercial Accounts business retention
ratio in 1997 significantly
23
<PAGE>
improved compared to 1996. Commercial Accounts continues to focus on the
retention of existing business while maintaining its product pricing standards
and its selective underwriting policy.
Select Accounts serves small businesses through a network of independent
agents. Select Accounts net written premiums were $1.494 billion in 1998
compared to $1.432 billion in 1997 and $1.191 billion in 1996. On a combined
total basis including Aetna P&C (for periods prior to April 2, 1996 for
comparative purposes only), Select Accounts net written premiums were $1.412
billion in 1996. The 1997 amount included a first quarter increase of $15
million to net written premiums due to the change to conform the Aetna P&C
method with the Travelers P&C method of recording certain net written premiums.
Excluding this adjustment, the increase in Select Accounts net written premiums
reflected lower ceded premiums, partially offset by the highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management. The increase in 1997 reflected the $15 million adjustment due
to the change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums and the continued benefit from the
broader industry and product line expertise of the combined company, partially
offset by the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management.
New premium business in Select Accounts was moderately lower in 1998
compared to 1997 reflecting the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. Select
Accounts business retention ratio remained strong in 1998 and was virtually the
same as 1997. New premium business in Select Accounts was moderately higher in
1997 than in 1996, reflecting an increase due to the acquisition of Aetna P&C,
partially offset by a decrease due to the competitive marketplace. The Select
Accounts business retention ratio remained strong in 1997 and was moderately
higher than in 1996, reflecting the Company's focus on retaining profitable
business.
Specialty Accounts markets products to national, midsize, and small
customers, and distributes them through both wholesale brokers and retail agents
and brokers throughout the United States. Specialty Accounts net written
premiums were $695 million in 1998 compared to $682 million in 1997 and $605
million in 1996. On a combined total basis including Aetna P&C (for periods
prior to April 2, 1996 for comparative purposes only), Specialty Accounts net
written premiums for 1996 were $679 million. The 1998 increase reflects strong
production in excess and surplus lines, partially offset by a highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management. The 1997 increase compared to 1996 was due to increased
writings of its excess and surplus lines business, partially offset by lower
directors' and officers' liability insurance writings due to the termination of
an exclusive arrangement with a managing general agent.
Catastrophe losses, net of tax and reinsurance, were $25 million in 1998
compared to $5 million in 1997 and $31 million in 1996. The 1998 catastrophe
losses were primarily due to Hurricane Georges in the third quarter and
tornadoes in Nashville, Tennessee in the second quarter. The 1997 catastrophe
losses were primarily due to tornadoes in the Midwest in the first quarter.
Catastrophe losses in 1996 were primarily due to Hurricane Fran and December
storms on the West Coast.
Statutory and GAAP combined ratios (before allocation of corporate
expenses) for Commercial Lines were as follows:
1998 1997 1996
- -------------------------------------------------------------------------------
Statutory
Loss and LAE ratio 78.5% 78.4% 95.6%
Underwriting expense ratio 29.7 30.6 32.5
Combined ratio before policyholder dividends 108.2 109.0 128.1
Combined ratio 109.1 111.0 128.8
- -------------------------------------------------------------------------------
GAAP
Loss and LAE ratio 78.4% 78.3% 92.4%
Underwriting expense ratio 31.1 30.4 35.9
Combined ratio before policyholder dividends 109.5 108.7 128.3
Combined ratio 110.4 109.9 129.3
===============================================================================
GAAP combined ratios for Commercial Lines differ from statutory combined
ratios primarily due to the deferral and amortization of certain expenses for
GAAP reporting purposes only. In addition, certain 1996 purchase accounting
adjustments recorded in connection with the Aetna P&C acquisition resulted in a
charge to statutory expenses. For purposes of computing GAAP combined ratios,
fee income is allocated as a reduction of losses and loss adjustment expenses
and other underwriting expenses.
The 1997 statutory and GAAP combined ratios for Commercial Lines included
an adjustment due to a change to conform the Aetna P&C method with the Travelers
P&C method of recording certain net written premiums. Excluding this adjustment,
the statutory and GAAP combined ratios before policyholder dividends for 1997
would have been 109.5% and 109.6%, respectively. The decrease in the 1998
statutory and GAAP combined ratios before policyholder dividends compared to the
1997 statutory and GAAP combined ratios before policyholder dividends excluding
this adjustment was due to continued expense reductions and lower environmental
and cumulative injury incurred losses, partially offset by higher catastrophe
and other weather-related losses and lower fee income.
The decrease in the 1997 statutory and GAAP combined ratios for Commercial
Lines, excluding the adjustment to conform the Aetna P&C method with the
Travelers P&C method of recording certain net written premiums, compared to 1996
were primarily attributable to the 1996 charges related to the acquisition and
integration of Aetna P&C. Excluding these amounts, the statutory and GAAP
combined ratios before policyholder dividends for 1996 would have been 109.3%
and 110.8%, respectively. The decrease in the 1997 statutory and GAAP combined
ratios, excluding the adjustment to conform the Aetna P&C method with the
Travelers P&C method of recording certain net written premiums, compared to the
1996 statutory and GAAP combined ratios excluding acquisition-related charges
was due to lower catastrophe losses and reduced expenses, partially offset by
the inclusion in 1997 of Aetna P&C's results for the entire year compared to
only nine months in 1996. Aetna P&C has historically had a higher underwriting
expense ratio, partially offset by a lower loss ratio, which reflected the mix
of business including the favorable effect of the lower loss ratio of the Bond
Specialty business.
Environmental Claims
As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly
24
<PAGE>
expanded in 1984. CERCLA enables private parties and the federal and state
governments to take action with respect to releases and threatened releases of
hazardous substances and to recover their response costs from certain liable
parties or such parties may be ordered to undertake remedial action directly.
Liability under CERCLA may be joint and several with other responsible persons.
In addition to the regulatory pressures, the Company believes that certain court
decisions have expanded insurance coverage beyond the original intent of the
insurers and insureds, frequently involving policies that were issued prior to
the mid-1970s. The results of court decisions affecting the industry's coverage
positions continue to be inconsistent. Accordingly, the ultimate responsibility
and liability for environmental remediation costs remain uncertain.
The Company continues to receive claims alleging liability exposures
arising out of insureds' alleged disposition of toxic substances. These claims
when submitted rarely indicate the monetary amount being sought by the claimant
from the insured and the Company does not keep track of the monetary amount
being sought in those few claims which indicated such a monetary amount.
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At December 31, 1998, approximately 19% of
the net environmental loss reserve (i.e., approximately $155 million) consists
of case reserves for resolved claims. The balance, approximately 81% of the net
aggregate reserve (i.e., approximately $677 million), is carried in a bulk
reserve and includes incurred but not reported environmental claims for which
the Company has not received any specific claims.
The Company's reserving methodology is preferable to one based on
"identified claims" since the resolution of environmental exposures by the
Company generally occurs on an insured-by-insured basis as opposed to a
claim-by-claim basis. The nature of the resolution often is through coverage
litigation, which often pertains to more than one claim, as well as through a
settlement with an insured. Generally, the settlement between the Company and
the insured extinguishes any obligation the Company may have under any policy
issued to the insured for past, present and future environmental liabilities.
This form of settlement is commonly referred to as a "buy-back" of policies for
future environmental liability. Additional provisions of these agreements
include appropriate indemnities and hold harmless provisions to protect the
Company. The Company's general purpose in executing such agreements is to reduce
its potential environmental exposure and eliminate both the risks presented by
coverage litigation with the insured and the cost of such litigation.
The reserving methodology includes an analysis by the Company of the
exposure presented by each insured and the anticipated cost of resolution, if
any, for each insured. This analysis is completed by the Company on a quarterly
basis. In the course of its analysis, an assessment of the probable liability,
available coverage, judicial interpretations and historical value of similar
exposures is considered by the Company. In addition, due consideration is given
to the many variables presented, such as the nature of the alleged activities of
the insured at each site; the allegations of environmental damage at each site;
the number of sites; the total number of potentially responsible parties at each
site; the nature of environmental harm and the corresponding remedy at a site;
the nature of government enforcement activities at each site; the ownership and
general use of each site; the overall nature of the insurance relationship
between the Company and the insured; the identification of other insurers; the
potential coverage available, if any, including the number of years of coverage,
if any; and the applicable law in each jurisdiction. Analysis of these and other
factors, including the potential for future claims, results in the establishment
of the bulk reserve.
The duration of the Company's investigation and review of such claims and
the extent of time necessary to determine an appropriate estimate, if any, of
the value of the claim to the Company, vary significantly and are dependent upon
a number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The property and casualty insurance industry does not have a standard
method of calculating claim activity for environmental losses. Generally for
Superfund remediation-type environmental claims, the Company establishes a claim
file for each insured on a per site, per claimant basis. If there is more than
one claimant such as a federal and a state agency, this method will result in
two claims being set up for a policyholder at that one site. The Company adheres
to this method of calculating claim activity on all environmental-related
claims, whether such claims are tendered on primary, excess or umbrella
policies. Since the implementation of the claim system conversion in 1997, the
Company's method of establishing claims in the foregoing manner now applies to
claims tendered under the Travelers P&C and Aetna P&C policies.
In addition, the Company establishes claim files for environmental claims
brought by individual claimants who allege injury or damage as a result of the
discharge of wastes or pollutants allegedly by the policyholder. As it pertains
to such claims tendered on policies issued by Travelers P&C, the Company
establishes a claim file on a per claim, per insured, per site basis. For
example, if one hundred claimants file a lawsuit against five policyholders
alleging bodily injury and property damage as a result of the discharge of
wastes or pollutants, one thousand claims (five hundred for the bodily injury
claims and five hundred for the property damage claims) would be established.
As it pertains to environmental claims brought by individual claimants and
tendered on Aetna P&C policies, the Company establishes claim files on a per
insured, per site basis due to current claim system limitations. For example, if
one hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims would be established for all the bodily injury claims and five
claims would be established for all of the property damage claims.
25
<PAGE>
As of December 31, 1998, calculated as described above, the Company had
approximately 43,400 pending environmental-related claims tendered by 1,185
active policyholders. Of the total pending environmental-related claims, 31,100
claims relate to Travelers P&C policies tendered by 470 policyholders and 12,300
claims relate to Aetna P&C policies tendered by 810 policyholders. Approximately
95 of these Aetna P&C policyholders are also included in the 470 Travelers P&C
policyholders' count. The pending environmental-related claims represent federal
or state EPA-type claims as well as plaintiffs' claims alleging bodily injury
and property damage due to the discharge of waste or pollutants allegedly by the
policyholder.
The following table displays activity for environmental losses and loss
expenses and reserves for the years ended December 31:
Environmental Losses
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Beginning reserves
Direct $ 1,193 $ 1,369 $ 454
Ceded (74) (127) (50)
- -------------------------------------------------------------------------------
Net 1,119 1,242 404
Acquisition of Aetna P&C
Direct -- -- 968
Ceded -- -- (39)
Incurred losses and loss expenses
Direct 123 79 114
Ceded (73) (14) (52)
Losses paid
Direct 388 271 167
Ceded (51) (67) (14)
Other(1)
Direct -- 16 --
Ceded -- -- --
- -------------------------------------------------------------------------------
Ending reserves
Direct 928 1,193 1,369
Ceded (96) (74) (127)
- -------------------------------------------------------------------------------
Net $ 832 $ 1,119 $ 1,242
===============================================================================
(1) Represents reallocation of general liability reserves to environmental
reserves.
As indicated by the preceding table, the Company experienced in 1998 an
increase in paid activity for environmental losses over the previous two years.
As anticipated, this paid activity resulted in a significant reduction in the
number of coverage litigation disputes pending at year end 1998, as well as a
further reduction in the number of policyholders with active environmental
claims.
As of December 31, 1998, the number of policyholders with pending coverage
litigation disputes pertaining to environmental claims was 404, approximately
24% less than the number pending as of December 31, 1997. The Company generally
has been successful in resolving its coverage litigation disputes and continues
to reduce its potential exposure through favorable settlements with certain
insureds. These settlement agreements with certain insureds are based on the
variables presented in each piece of coverage litigation. Generally the
settlement dollars paid in disputed coverage claims are a percentage of the
total coverage sought by such insureds. Based upon the Company's reserving
methodology and the experience of its historical resolution of environmental
exposures, it believes that the environmental reserve position is appropriate.
As of December 31, 1998, the Company, for approximately $1.44 billion, has
resolved the environmental liabilities presented by 4,475 of the 5,660
policyholders who have tendered environmental claims to the Company. This
resolution comprises 79% of the policyholders who have tendered such claims. The
Company has reserves of approximately $572 million included in its bulk reserve
relating to the remaining 1,185 policyholders (21% of the total) with unresolved
environmental claims, as well as for any other policyholder that may tender an
environmental claim in the future.
Asbestos Claims
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims that indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies, alleging exposure to
asbestos while working at these companies' premises. The Company continues to
receive this type of asbestos claim.
In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different liability and coverage issues, the Company evaluates
those issues on an insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from
which an average asbestos defense or indemnity payment may be determined. The
varying defense and indemnity payments made by the Company on behalf of its
insureds have also precluded the Company from deriving any meaningful data by
which it can predict whether its defense and indemnity payments for asbestos
claims (on average or in the aggregate) will remain the same or change in the
future. Based upon the Company's experience with asbestos claims, the duration
period of an asbestos claim from the date of submission to resolution is
approximately two years.
At December 31, 1998, approximately 21% of the net aggregate reserve
(i.e., approximately $210 million) is for pending asbestos claims. The balance,
approximately 79% (i.e., approximately $776 million) of the net asbestos
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending asbestos claims
within approximately 30 business days of receipt of such claims. The following
table displays activity for asbestos losses and loss expenses and reserves for
the years ended December 31:
26
<PAGE>
Asbestos Losses
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Beginning reserves
Direct $ 1,363 $ 1,443 $ 695
Ceded (249) (370) (293)
- -------------------------------------------------------------------------------
Net 1,114 1,073 402
Acquisition of Aetna P&C
Direct -- -- 801
Ceded -- -- (121)
Incurred losses and loss expenses
Direct 135 87 120
Ceded (69) (18) (35)
Losses paid
Direct 246 174 173
Ceded (52) (140) (79)
Other(1)
Direct -- 7 --
Ceded -- (1) --
- -------------------------------------------------------------------------------
Ending reserves
Direct 1,252 1,363 1,443
Ceded (266) (249) (370)
- -------------------------------------------------------------------------------
Net $ 986 $ 1,114 $ 1,073
===============================================================================
(1) Represents reallocation of reserves.
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance; and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance, and past ceded experience. In
addition, a similar review is conducted for asbestos property damage claims.
However, due to the relatively minor claim volume, these reserves have remained
relatively unchanged.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1998 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the conditions surrounding the final resolution of
these claims continue to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations, as well as changes in
legislation applicable to such claims. Because of these future unknowns,
additional liabilities may arise for amounts in excess of the current reserves.
These additional amounts, or a range of these additional amounts, cannot now be
reasonably estimated, and could result in a liability exceeding reserves by an
amount that would be material to the Company's operating results in a future
period. However, the Company believes that it is not likely that these claims
will have a material adverse effect on the Company's financial condition or
liquidity.
Cumulative Injury Other than Asbestos (CIOTA) Claims
CIOTA claims are generally submitted to the Company under general liability
policies and often involve an allegation by a claimant against an insured that
the claimant has suffered injuries as a result of long-term or continuous
exposure to potentially harmful products or substances. Such potentially harmful
products or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimants'
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, an assessment of a claimant's damages must be made, and the
law of the jurisdiction must be applied. In addition, the Company must review
the number of policies issued by it to the insured and whether such policies are
triggered by the allegations, the terms and limits of liability of such
policies, the obligations of other insurers to respond to the claim, and the
applicable law in each jurisdiction.
To the extent disputes exist between the Company and a policyholder
regarding the coverage available for CIOTA claims, the Company resolves the
disputes, where feasible, through settlements with the policyholder or through
coverage litigation. Generally, the terms of a settlement agreement set forth
the nature of the Company's participation in resolving CIOTA claims, the scope
of coverage to be provided by the Company and contain the appropriate
indemnities and hold harmless provisions to protect the Company. These
settlements generally eliminate uncertainties for the Company regarding the
risks extinguished, including the risk that losses would be greater than
anticipated due to evolving theories of tort liability or unfavorable coverage
determinations. The Company's approach also has the effect of determining losses
at a date earlier than would have occurred in the absence of such settlement
agreements. On the other hand, in cases where future developments are favorable
to insurers, this approach could have the effect of resolving claims for amounts
in excess of those that would ultimately have been paid had the claims not been
settled in this manner. No inference should be drawn that because of the
Company's method of dealing with CIOTA claims, its reserves for such claims are
more conservatively stated than those of other insurers.
Prior to the acquisition, Aetna P&C did not distinguish CIOTA from other
general liability claims or treat CIOTA claims as a special class of claims. In
addition, there were substantial differences in claim approach and resolution
between Travelers P&C and Aetna P&C regarding CIOTA claims. During the second
quarter of 1996, the Company completed its review of Aetna P&C's exposure to
CIOTA claims in order to determine an appropriate level of reserves using the
Company's approach as described above. Based on the results of that review, the
Company's general liability insurance reserves were
27
<PAGE>
increased in 1996 by $360 million, net of reinsurance ($192 million after-tax
and minority interest).
At December 31, 1998, approximately 17% of the net aggregate reserve
(i.e., approximately $163 million) is for pending CIOTA claims. The balance,
approximately 83% (i.e., approximately $791 million) of the net CIOTA reserve,
represents incurred but not reported losses for which the Company has not
received any specific claims.
In general, the Company posts case reserves for pending CIOTA claims
within approximately 30 business days of receipt of such claims. The following
table displays activity for CIOTA losses and loss expenses and reserves for the
years ended December 31:
CIOTA Losses
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Beginning reserves
Direct $ 1,520 $ 1,560 $ 374
Ceded (432) (446) --
- -------------------------------------------------------------------------------
Net 1,088 1,114 374
Acquisition of Aetna P&C
Direct -- -- 709
Ceded -- -- (293)
Incurred losses and loss expenses
Direct (31) 32 565
Ceded 29 (6) (155)
Losses paid
Direct 143 72 88
Ceded (11) (20) (2)
- -------------------------------------------------------------------------------
Ending reserves
Direct 1,346 1,520 1,560
Ceded (392) (432) (446)
- -------------------------------------------------------------------------------
Net $ 954 $ 1,088 $ 1,114
===============================================================================
GLOBAL CORPORATE AND INVESTMENT BANK OUTLOOK
During 1998, Global Corporate and Investment Bank announced a number of business
improvement and integration initiatives that are projected to yield expense
savings of approximately $260 million pretax in 1999, and to reach a run rate of
approximately $370 million in annual pretax savings beginning in 2000. In 1999,
these actions, together with tighter management of non-customer expenses and
realized savings from earlier efficiency initiatives still in progress, are
expected to yield gross annual pretax expense savings of approximately $1.1
billion. There can be no assurance that the projected cost savings will be
achieved.
Global Corporate Banking and Salomon Smith Barney. These businesses are
significantly affected by the levels of activity in the global capital markets
which, in turn, are influenced by macro-economic and political policies and
developments, among other factors, in the 99 countries in which the businesses
operate. During the last half of 1997 and throughout 1998, the global capital
markets experienced economic turmoil not seen in at least a decade, as currency
crises sparked economic turmoil that began in Asia Pacific and spread to Eastern
Europe and, in early 1999, to Latin America. The second largest economy in the
world--Japan--remains in a prolonged recession, and many economists continue to
be concerned about economic fundamentals in certain Asian countries, which could
precipitate a return of instability to the region. And, on January 1, 1999, a
common currency--the Euro--was introduced in 11 European nations, bringing
Europe closer to a single market as big as that of North America.
Global economic turmoil like that experienced during 1997 and 1998 can
have both positive and negative effects on the revenue performance of the
businesses and can negatively affect credit performance. In particular, levels
of principal transactions, realized gains from sales of investments, and net
asset gains may fluctuate in the future as a result of market and asset-specific
factors.
The businesses have undertaken a number of initiatives to mitigate the
negative effects of the current global instability. These initiatives include
significantly reducing the risk profile, particularly in Salomon Smith Barney's
global arbitrage operation, and making risk management a priority throughout the
global banking business, with the goal of deriving a higher percentage of
earnings from controllable business operations than has been the case in the
past.
Commercial Lines Insurance. A variety of factors continue to affect the property
and casualty insurance market and the Company's core business outlook, including
the competitive pressures affecting pricing and profitability, inflation in the
cost of medical care and litigation.
Operating results for 1998 reflected the negative impact of pricing
declines in all markets. This trend in market conditions, characterized by
difficult pricing and increased competition, continued from prior years.
In National Accounts, where programs include risk transfer and risk
service, such as claims settlement, loss control and risk management services
and are generally offered in connection with a large deductible or self-insured
program, or a guaranteed cost or retrospectively rated insurance policy, pricing
declines have continued. This business continues to reflect the negative impact
of price declines as evidenced by the decrease in premium and fee levels and,
more importantly, in the narrowing of profit margins earned on this business.
Additionally, there has been an increasing trend in this marketplace for
guaranteed cost products at what the Company believes are inadequate price
levels.
For Commercial Accounts and Select Accounts, the highly competitive
marketplace and soft underwriting cycle continue to pressure the pricing of
guaranteed cost products. Premiums on this business continue to reflect price
declines, and have not kept pace with loss cost inflation in recent years. The
impact of this negative trend in market conditions and resultant price declines
has been partially offset by a continued disciplined approach to underwriting
and risk management by the Company. The Company's focus is to retain existing
profitable business and obtain new accounts where it can maintain its selective
underwriting policy. The Company continues to adhere to strict guidelines to
maintain high quality underwriting and to focus on its core product lines and
markets, with particular emphasis on both product and industry specialization.
Specialty Accounts also operates within a highly competitive marketplace
characterized by pressure on both price and terms. The Company's focus in this
market is to sustain its emphasis on strict adherence to underwriting standards
and to increase its efforts to cross-sell its expanding array of specialty
products to existing customers of National Accounts, Commercial Accounts and
Select Accounts where it believes it has the greatest sales and profit
opportunities.
28
<PAGE>
The combination of price declines associated with the highly competitive
marketplace and the Company's selective underwriting criteria has had an adverse
impact on premium and fee levels during the past several years. If the
competitive pressures on pricing do not improve in 1999, these factors may
continue to affect premium and fee levels unfavorably. Although the Company
believes that pricing in the Commercial Lines marketplace will continue to be
very competitive in 1999, recent data has suggested that the pricing environment
may be improving.
In December 1998, TAP announced a global strategic relationship with
Winterthur International, called Travelers/Winterthur International, which
markets a variety of commercial lines products to multinational corporations.
The Company expects that Travelers/Winterthur International will allow it to
gain a global capability in international underwriting and insurance services.
The property and casualty insurance industry in the United States
continues to consolidate. The Company's strategic objectives are to enhance its
position as a consistently profitable market leader and to become a low-cost
provider of property and casualty insurance in the United States, as the
industry consolidates. In this regard, an emphasis on claim payout and
performance and enhanced productivity efforts are expected to continue.
Changes in the general interest rate environment affect the return
received by the insurance subsidiaries on newly invested and reinvested funds.
While a rising interest rate environment enhances the returns available, it
reduces the market value of existing fixed maturity investments and the
availability of gains on disposition. A decline in interest rates reduces the
return available on investment of funds but could create the opportunity for
realized investment gains on disposition of fixed maturity investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are subject to assessments from state-administered guaranty
associations, second injury funds and similar associations. Management believes
that such assessments will not have a material impact on the Company's results
of operations, financial condition or liquidity.
Certain social, economic and political issues have led to an increased
number of legislative and regulatory proposals aimed at addressing the cost and
availability of certain types of insurance. While most of these provisions have
failed to become law, these initiatives may continue as legislators and
regulators try to respond to public availability and affordability concerns and
the resulting laws, if any, could adversely affect the Company's ability to
write business with appropriate returns.
ASSET MANAGEMENT
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Total revenues, net of interest expense $1,244 $1,052 $ 880
Adjusted operating expenses(1) 820 685 574
- --------------------------------------------------------------------------------
Business income before taxes 424 367 306
Income taxes 151 124 98
- --------------------------------------------------------------------------------
Business income 273 243 208
Restructuring charges, after-tax 10 -- --
- --------------------------------------------------------------------------------
Net income $ 263 $ 243 $ 208
================================================================================
Assets under management(2) (in billions of dollars) $ 327 $ 261 $ 220
================================================================================
(1) Excludes restructuring charges.
(2) Includes $34 billion, $28 billion, and $25 billion in 1998, 1997, and
1996, respectively, for Global Private Banking clients.
Asset Management is comprised of the substantial resources that are
available through its three primary asset management business platforms: Salomon
Brothers Asset Management, Smith Barney Asset Management, and Citibank Global
Asset Management. Asset Management companies offer institutional, high net worth
and retail clients a broad range of investment disciplines from global
investment centers around the world. Products and services offered include
mutual funds, closed-end funds, separately managed accounts, unit investment
trusts, and variable annuities (through affiliated and third party insurance
companies). Aggregate assets under management totaled $327 billion as of
December 31, 1998.
Asset Management's assets under management grew 25% over the prior year
with strong growth in all major asset categories. Contributing to the year over
year increase was the acquisition of JP Morgan's Australian asset management
business with assets of $4.8 billion at acquisition date, cross-selling efforts
throughout the organization resulting in $10 billion of long-term, mutual fund
sales (up 67% from 1997), strong growth in institutional and private client
separately managed account assets, and the overall positive impact of market
performance on all asset management products.
Asset Management business income of $273 million in 1998 was up $30
million or 12% from 1997. Business income before taxes increased by $57 million,
or 16% over 1997. Revenues, net of interest expense, rose 18% to $1,244 million
in 1998 compared to $1,052 million in 1997 and $880 million in 1996. This
increase is predominantly in advisory fee revenues and reflects the broad growth
in assets under management.
Adjusted expenses were $820 million in 1998 compared to $685 million in
1997 and $574 million in 1996. The 20% expense growth in 1998 expenses over 1997
primarily reflected Asset Management's build-out of its fundamental research and
quantitative analysis investment teams, investment in marketing and wholesaler
support teams, incremental technology spending related to year 2000 and EMU, and
the acquisition of JP Morgan's Australian asset management business.
During 1998, Asset Management recorded a restructuring charge totaling $17
million ($10 million after-tax), primarily reflecting the costs of eliminating
redundancies.
29
<PAGE>
CORPORATE/OTHER
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $ 932 $ 838 $ 902
Adjusted operating expenses(1) 712 413 543
Provisions for benefits, claims, and
credit losses (2) (6) 34
- -------------------------------------------------------------------------------
Business income before taxes 222 431 325
Income taxes 381 801 776
- -------------------------------------------------------------------------------
Business loss (159) (370) (451)
Gain on disposition of subsidiary, after-tax -- -- 31
Gain on sale of stock by subsidiary -- -- 363
Restructuring charges and merger-
related costs, after-tax 105 31 --
- -------------------------------------------------------------------------------
Net loss $(264) $(401) $ (57)
===============================================================================
(1) Excludes restructuring charges and merger-related costs.
Corporate/Other includes net treasury results, revenues derived from
charging banking segments for funds employed, based upon a marginal cost of
funds concept, corporate staff and similar expenses, and the offset created by
attributing income taxes to core business activities on a local tax-rate basis
for Citicorp businesses. The effective tax rates for these businesses were 31%,
26%, and 26%, for 1998, 1997, and 1996, respectively, while Citicorp's effective
tax rate was 37% for 1998 and 1997 and 38% for 1996.
Revenues in 1998 included income from the disposition of a real estate
development property while 1996 included residual revenues from certain run-off
businesses.
Expense in 1998 included a $100 million contribution of appreciated
venture capital securities to the Company's Foundation, which had minimal impact
on Citigroup's earnings after related tax benefits and investment gains, as well
as increases in certain technology expense and other unallocated corporate
costs. Additionally, expense in 1998, 1997 and 1996 included $70 million, $72
million, and $113 million, respectively, associated with performance-based stock
options.
The 1998 amounts included a $69 million restructuring charge ($40 million
after-tax) to streamline and integrate corporate staff functions, as well as $65
million (before and after-tax) of one-time expenses associated with merging
Citigroup's predecessor organizations. The 1997 amounts include a $19 million
restructuring charge ($11 million after-tax), principally related to the
reorganization of various Citicorp corporate support functions. In addition,
income taxes in 1997 included a $20 million charge related to the offset created
by attributing income taxes to Citicorp's core business restructuring charges on
a local tax-rate basis.
The Company recognized a gain of $363 million (before and after-tax) in
1996 from the issuance of shares of Class A Common Stock by TAP (see Note 2 of
Notes to Consolidated Financial Statements).
INVESTMENT ACTIVITIES
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Total revenues, net of interest expense $ 1,298 $ 1,693 $ 715
Operating expenses 47 38 36
Credit benefits (10) (64) (80)
- -------------------------------------------------------------------------------
Income before taxes and minority interest 1,261 1,719 759
Income taxes 316 409 166
Minority interest 16 18 (1)
- -------------------------------------------------------------------------------
Net income $ 929 $ 1,292 $ 594
===============================================================================
Investment Activities comprises Citigroup's venture capital activities,
realized investment gains (losses) related to certain corporate- and
insurance-related investments, and the results of certain investments in
countries that refinanced debt under the 1989 Brady Plan or plans of a similar
nature.
Revenues in 1998 of $1.298 billion declined $395 million or 23% from 1997
primarily reflecting a $262 million decrease in venture capital revenues to $487
million. Net interest revenues declined $110 million from 1997 reflecting a
lower level of interest earning assets. Realized gains from sales of investments
of $778 million declined $45 million while net asset gains of $28 million
increased $29 million. Revenues in 1997 of $1.693 billion grew $978 million from
1996 primarily reflecting a $653 million improvement in realized gains from
sales of investments to $823 million, a $299 million increase in venture capital
results to $749 million, and a $60 million improvement in net asset gains. Net
asset gains in 1998, 1997, and 1996 include net gains (write-downs) of $29
million, $(39) million and $(100) million related to investments in Latin
America.
Credit benefits totaled $10 million, $64 million, and $80 million in 1998,
1997, and 1996, respectively. Credit benefits in 1997 included $50 million from
the refinancing agreement concluded with Peru while 1996 included $75 million
from the refinancing agreements concluded with Panama, Slovenia, and Croatia.
The effective income tax rates in 1998, 1997, and 1996 were 25%, 24%, and
22%, respectively. Fluctuations in the effective income tax rates result from
changes in the nature and geographic mix of pretax earnings.
Levels of venture capital revenues, realized gains from sales of
investments, and net asset gains may fluctuate in the future as a result of
market and asset-specific factors.
DISCONTINUED OPERATIONS
1996
- -------------------------------------------------------------------------------
In Millions of Dollars Net Loss
- -------------------------------------------------------------------------------
Operations $ (75)
Loss on disposition (259)
- -------------------------------------------------------------------------------
Total discontinued operations $(334)
===============================================================================
As discussed in Note 3 of Notes to Consolidated Financial Statements,
Basis Petroleum, Inc. (Basis), which was sold to Valero Energy Corporation
(Valero) was classified as discontinued operations.
The Company's 1996 loss on disposition of $259 million represents the $290
million after-tax loss on the sale of Basis to Valero, partially offset by a $31
million after-tax gain resulting from a contingency payment received from United
HealthCare Corporation related to the 1995 sale of The MetraHealth Companies,
Inc.
30
<PAGE>
YEAR 2000
The arrival of the year 2000 poses a unique worldwide challenge to the ability
of time sensitive computer systems to recognize the date change from December
31, 1999 to January 1, 2000. Citigroup has assessed and is modifying its
computer systems and business processes to provide for their continued
functionality and is also assessing the readiness of third parties with which it
interfaces.
Citigroup is highly dependent on computer systems and system applications
for conducting its ongoing business functions. The inability of systems to
recognize properly the year 2000 could result in major systems failure or
miscalculations that would disrupt Citigroup's ability to meet its customer and
other obligations on a timely basis, and Citigroup has engaged in a worldwide
process of identifying, assessing, and modifying its computer programs to
address this issue. As part of and following achievement of year 2000
compliance, systems are subjected to a process that validates the modified
programs before they can be used in production.
The pre-tax cost associated with the required modifications and
conversions is expected to total approximately $900 million through 1999, funded
from a combination of a reprioritization of technology development initiatives
and incremental costs. This is being expensed as incurred. Of the total,
approximately $660 million has been incurred to date, including approximately
$470 million in 1998.
Substantially all of the required modification and internal testing work
has been completed at year-end 1998, with the remainder scheduled for completion
early in 1999, leaving the rest of the year 1999 primarily for external testing,
full integration testing and production assurance. Citigroup is addressing other
technology-related matters including business applications to be sunset (that
is, removed from use in favor of replacement applications), end-user computing
applications, networks, data centers, and desktops, and these are similarly
progressing towards timely resolution.
Citigroup is also addressing year 2000 issues that may exist outside its
own global technology activities, including its facilities and business
processes, external service providers, and other third parties with which it
interfaces. Substantially all of Citigroup's facilities and related systems have
been investigated, and modification is under way. Other business processes are
likewise being addressed across the Company.
Significant third parties with which Citigroup interfaces with regard to
the year 2000 problem include customers and counterparties, external service
providers, technology vendors, the global financial market infrastructure
including payment and clearing systems, and the utility infrastructure on which
all corporations rely. Unreadiness by these third parties would expose Citigroup
to the potential for loss, impairment of business processes and activities, and
disruption of financial markets. Citigroup is addressing these risks worldwide
through bilateral and multiparty efforts and participation in industry, country,
and global initiatives. While significant third parties are generally engaged in
efforts intended to address and resolve their year 2000 issues on a timely
basis, it is possible that a series of failures by third parties could have a
material adverse effect on the Company's results of operations in future
periods.
Citigroup is creating contingency plans intended to address perceived
risks associated with its year 2000 effort. These activities include planning to
mitigate any remaining risks associated with remediation of critical systems,
business resumption planning to address the possibility of systems failure, and
market resumption planning to address the possibility of failure of systems or
processes outside Citigroup's control. Contingency planning, and preparations
for the management of the date change, will continue worldwide through 1999.
Notwithstanding these activities, the failure of efforts to address in a timely
manner, the year 2000 problem, could have a material adverse effect on the
Company's results of operations in future periods.
An additional year 2000 issue for TAP is the potential future impact of
claims for insurance coverage from customers who suffer year 2000 business
losses or claim coverage for their potential liability to third parties. TAP has
taken certain initiatives to mitigate this potential risk, including addressing
year 2000 issues, where applicable, in the underwriting of insurance policies.
Losses for year 2000 insurance claims and litigation costs related to such
claims are not reasonably estimable at this time.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Many of these statements appear under the heading "Global
Consumer Outlook" and "Global Corporate and Investment Bank Outlook". The
Company's actual results may differ materially from those included in the
forward-looking statements. Forward-looking statements are typically identified
by words or phrases such as "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," and similar expressions or future or conditional
verbs such as "will," "should," "would," and "could." These forward-looking
statements involve risks and uncertainties including, but not limited to, the
following: changes in general economic conditions, including the performance of
global financial markets, and risks associated with fluctuating currency values,
and interest rates, and the level of personal bankruptcies; customer
responsiveness to both new products and distribution channels; competitive,
regulatory, or tax changes that affect the cost of or demand for the Company's
products; the resolution of legal proceedings and related matters; and the
possibility that the Company will be unable to achieve anticipated levels of
operational efficiencies related to recent mergers, as well as achieving its
other cost-saving initiatives.
31
<PAGE>
MANAGING GLOBAL RISK
Risk management is the cornerstone of Citigroup's business. Risks arise from
lending, underwriting, trading, insurance and other activities routinely
undertaken on behalf of customers around the world. Outlined below is the
process that management employs to provide oversight and direction of risk
taking, followed by discussions of the credit and market risk management
processes in place across the corporation.
The Windows on Risk Committee is the most senior corporate forum for
reviewing the corporation's risk tolerance and practices. It provides top-down
examination and review of material corporate-wide risks. The Committee is
chaired by the Vice Chairman responsible for risk management, and includes the
Chairmen of Citigroup and other senior officers in the Company.
The Windows on Risk process has three major components: an assessment of
the global external environment, drawing on our own knowledge and understanding,
and often bringing in experts on identified subjects, including contrarion
views; an assessment of the Company's exposures in terms of different risk
windows, particularly looking for potentially large material risks to Citigroup;
and specific decisions and follow-ups are taken which are designed to adjust the
corporate exposure to identified risk.
The review of the external environment encompasses the outlook for major
country and regional economies, significant consumer markets and global
industries, potential near-term critical economic and political events, and the
implications of potential unfavorable developments as they relate to specific
businesses.
The review of the risk profile covers 18 windows, as described below:
o Credit risk ratings, including trends in client creditworthiness together
with a comparison of risk against return;
o Industry concentrations, globally and within regions;
o Limits assigned to relationship concentrations and consumer programs;
o Product concentrations in consumer managed receivables, by product and by
region;
o Global real estate limits and exposure, including commercial and consumer
portfolios;
o Country risk, encompassing political and cross-border risk;
o Counterparty risk, evaluating presettlement risk on foreign exchange,
derivative products, and securities trades;
o Dependency, linking and evaluating specific industry and consumer product
exposure to external environmental factors;
o Distribution and underwriting risk, capturing the risk that arises when
Citigroup commits to purchase an instrument from an issuer for subsequent
sale;
o Corporate Control and Risk Assessment, evaluating and measuring defects in
our business processes;
o Price risk, evaluating the earnings risk resulting from changing levels
and implied volatilities of interest rates, foreign exchange rates, and
commodity and security prices;
o Liquidity risk, evaluating funding exposure;
o Commodities risk, evaluating earnings risk resulting from changing levels
and volatilities of commodity prices;
o Life Insurance, evaluating the risks that result from the underwriting,
sale, and reinsurance of life insurance policies;
o Property & Casualty, evaluating the risks that result from the
underwriting, sale, and reinsurance of commercial, personal, and
performance bonds insurance policies;
o Equity and subordinated debt investment risk, monitored against portfolio
limits;
o Legal, evaluating vulnerability and business implications of legal issues;
o Technology, assessing the vulnerability to the electronic environment.
The review provides Citigroup with a view of the environment in which it
operates and of the risk inherent in its businesses. Based on this review, the
Windows on Risk Committee formulates recommendations and assigns responsibility
for recommended actions.
The following sections summarize the processes currently in place for
managing credit and market risks within Citigroup's major businesses. As
Citigroup's businesses become more closely integrated, it is expected that these
management processes will also be more closely integrated within the overall
framework provided by Windows on Risk.
The Credit Risk Management Process
Within Citicorp, line management conducts the day-to-day credit process in
accordance with core policies established by the Credit Policy Committee which
are guided by the overall risk appetite and portfolio targets set by senior
management. Line management initiates and approves all extensions of credit and
is responsible for credit quality. Line managers must also establish
supplementary credit policies specific to each business, deploy the credit
talent needed, and monitor portfolio and process quality. The managers are
required to identify problem credits or programs as they develop, and to correct
deficiencies as needed through remedial management. Business Risk Review
conducts independent periodic examinations of both portfolio quality and the
credit process at the individual business level.
Citicorp's credit policies are organized around two basic
approaches--Credit Programs and Credit Transactions. Credit Programs, used
primarily for the Consumer businesses, focus on the decision to extend credit to
sets of customers with similar characteristics and/or product needs. Approvals
under this approach cover the expected level of aggregate exposure, the terms,
risk acceptance criteria, operating systems, and reporting mechanisms. This is a
cost-effective way of handling high-volume, small-dollar amount transactions.
Credit Programs are reviewed annually, with approvals tiered on the basis of
projected outstandings as well as the maturity and performance of the product.
32
<PAGE>
Citicorp's Credit Transaction approach focuses on the decision to extend
credit to an individual customer or customer relationship. It starts with target
market definition and risk acceptance criteria, and requires detailed customized
financial analysis. Approval requirements for each decision are tiered based on
the transaction amount, the customer's aggregate facilities, credit risk
ratings, and the banking business serving the customer.
Credit Programs and Credit Transactions are approved by three line credit
officers, with one designated as responsible to ensure that all aspects of the
credit process are properly coordinated and executed. As the size or risk
increases, the three approvals may include one or two Senior Credit or
Securities Officers. These include over 500 of Citicorp's most experienced
lenders and underwriters appointed by the Credit Policy Committee, with their
designation reviewed annually. In addition, approvals from underwriting,
product, industry or functional specialists may be required. At certain higher
levels of risk, Credit Policy Committee members as well as senior management
review individual credit decisions.
Within Salomon Smith Barney, the office of the Chief Credit Officer,
through established credit policies and control procedures, assesses, approves,
monitors, and coordinates the extension of credit. The office evaluates the
risk/return trade-offs as well as current and potential credit exposures to a
counterparty or to groups of counterparties that are related because of
industry, geographic, or economic characteristics. At Phibro, the credit
department determines the credit limits for counterparties in its
commodities-related activities.
Both Citicorp and Salomon Smith Barney manage their credit exposure on
derivative and foreign exchange instruments as part of the overall extension of
credit to customers, subject to the same credit approvals, limits, and
monitoring procedures they use for other activities. The extension of credit in
a derivative or foreign exchange contract is equivalent to the loss that could
result if the counterparty were to default. The current replacement cost of a
derivative or foreign exchange contract is equal to the amount, if any, of
Citigroup's unrealized gain on the contract. In the aggregate, for all
contracts, this represents a balance sheet exposure of $37.4 billion at December
31, 1998, which is reflected in Trading Account Assets. See Note 23 of Notes to
Consolidated Financial Statements for additional details on the combined
Citigroup exposures. A substantial portion of the total balance sheet exposure
is to counterparties considered by Citigroup to be investment grade and under
three years tenor. In managing the credit risk associated with derivative and
foreign exchange contracts, the amount at risk is measured as the sum of the
current replacement cost (the balance sheet credit exposure) plus the potential
increase in the replacement cost over the remaining life of the instrument
should market rates change. The potential increase in replacement cost of a
contract is estimated based on a statistical simulation of values that would
result from changing market rates.
In the course of its insurance activities, TAP reinsures a portion of the
risks it underwrites in an effort to control its exposure to losses, stabilize
earnings and protect capital resources. TAP cedes to reinsurers a portion of
these risks and pays premiums based upon the risk and exposure of the policies
subject to such reinsurance. Reinsurance involves credit risk and is subject to
aggregate loss limits. Although the reinsurer is liable to TAP to the extent of
the reinsurance ceded, TAP remains primarily liable as the direct insurer on all
risks reinsured. TAP also holds collateral, including escrow funds and letters
of credit, under certain reinsurance agreements. TIC and Primerica also reinsure
a portion of their life insurance risks. The Company monitors the financial
condition of reinsurers on an ongoing basis, and reviews its reinsurance
arrangements periodically. Reinsurers are selected based on their financial
condition, business practices and the price of their product offerings. For
additional information concerning reinsurance, see Note 14 of Notes to
Consolidated Financial Statements.
The Market Risk Management Process
Market risk encompasses liquidity risk and price risk, both of which are
fundamental to the business of a financial intermediary. Liquidity risk, which
is discussed on pages 37-40, is the risk that some entity, in some location and
in some currency, may be unable to meet a financial commitment to a customer,
creditor, or investor when due. Price risk is the risk to earnings that arises
from changes in interest rates, foreign exchange rates, equity and commodity
prices, and in their implied volatilities. These exposures arise in the normal
course of business of a global financial intermediary.
Citigroup's business and corporate oversight groups have well-defined
market risk management responsibilities. Within each business, a process is in
place to control market risk exposure. The risk management process includes the
establishment of appropriate market controls, policies and procedures,
appropriate senior management risk oversight with thorough risk analysis and
reporting, and independent risk management with capabilities to evaluate and
monitor risk limits. Management of this process begins with the professionals
nearest to Citigroup's customers, products, and markets, and extends up to the
senior executives who manage these businesses and to the country level. Market
risk management is an evolutionary process that integrates changes in markets,
products, and technologies into policies and practices. Periodic reviews are
conducted by Audit and Risk Review to ensure compliance with institutional
policies and procedures for the assessment, management, and control of market
risk.
33
<PAGE>
Within Citicorp the Market Risk Policy Committee serves an oversight role
in the management of all market risks in Citicorp. The committee is a group of
Citicorp's most senior market risk professionals, chaired by the Corporate
Treasurer, and establishes and oversees corporate market risk policies and
standards to serve as a check and balance in the business risk management
process. Market risk positions are controlled by limits on exposure based on the
size and nature of a business. Risk limits are approved by the Finance and
Capital Committee, which is composed of senior management including the
Corporate Treasurer, and are overseen by the Market Risk Policy Committee.
Similarly, Salomon Smith Barney's risk management control framework is
based upon the ongoing participation of senior management, business unit
managers, and the coordinated efforts of various support units throughout the
firm. The Risk Management Committee, which is comprised of senior management,
recommends the appropriate levels of risk, reviews risk capital allocations,
balance sheet and regulatory capital usage by business units and recommends
overall risk policies and controls. An independent Global Risk Management Group
provides technical and quantitative analysis of the market risk to senior
management and the Risk Management Committee. Salomon Smith Barney's trading
businesses have implemented business unit limits on exposure to risk factors.
These limits, which are intended to enforce the discipline of communicating and
gaining approval for higher risk positions, are periodically reviewed by the
Global Risk Management Group. Business units may not exceed risk limits without
the approval of the appropriate member of the Risk Management Committee. Trading
positions are necessary for an active market maker, but can be a major source of
market liquidity risk. Monitoring the trading inventory levels and composition
and oversight for pricing is the responsibility of the Global Risk Management
Group and various support units, which monitor trading positions on a position
by position basis, and employ specific risk models to track inventory exposure
in credit markets, emerging markets and the mortgage market. Salomon Smith
Barney also provides for market liquidity risk by imposing markdowns as the age
of the inventory increases. Inventory event risk, both for issuer credit and
emerging markets, is analyzed with the involvement of senior traders, economists
and credit department personnel. Market scenarios for the major emerging markets
are maintained and updated to reflect event risk. In addition, Salomon Smith
Barney, as a dealer of securities in the global capital markets, has risk to
issuers of fixed income securities for the timely payment of principal and
interest. Principal risk is reviewed by the Global Risk Management Group, which
identifies and reports major risks undertaken by the trading businesses. The
Credit Department combines principal risk positions with credit risks resulting
from market and delivery risk to review aggregate exposures by counterparty,
industry and country.
Across Citigroup, price risk is measured using various tools, including
Earnings-at-Risk (EAR) and sensitivity analysis, which are applied to interest
rate risk in the non-trading portfolios and Value-at-Risk (VAR), stress and
scenario analysis which are applied to the trading portfolios.
Non-Trading Portfolios
Business units manage the potential earnings effect of interest rate movements
by managing the asset and liability mix, either directly or through the use of
derivative financial products. These include interest rate swaps and other
derivative instruments which are either designated and effective as hedges or
designated and effective in modifying the interest rate characteristics of
specified assets or liabilities. The utilization of derivatives is managed in
response to changing market conditions as well as to changes in the
characteristics and mix of the related assets and liabilities. Additional
information about non-trading derivatives is located in Note 23 of Notes to
Consolidated Financial Statements. Citigroup does not utilize instruments with
leverage features in connection with its risk management activities.
At Citicorp, Earnings-at-Risk measures the discounted pre-tax earnings
impact over a specified time horizon of a specified shift in the interest rate
yield curve for the appropriate currency. The yield curve shift is statistically
derived as a two standard deviation change in a short-term interest rate over
the period required to defease the position (usually four weeks).
Earnings-at-Risk is calculated separately for each currency and reflects the
repricing gaps in the position, as well as option positions, both explicit and
embedded. As part of the annual planning process, limits are set for
Earnings-at-Risk on a business, country and total Citicorp basis, with exposures
reviewed on a regular basis by the Finance and Capital Committee in relation to
limits and the current interest rate environment.
Citicorp's primary non-trading price risk exposure is to movements in U.S.
dollar interest rates. As of December 31, 1998, the rate shift over a four-week
defeasance period applied to the U.S. dollar yield curve for purposes of
calculating Earnings-at-Risk was 55 basis points. Citicorp also has
Earnings-at-Risk in various other currencies; however, there are no significant
risk concentrations in any individual non-U.S. dollar currency. As of December
31, 1998, the rate shifts applied to these currencies for purposes of
calculating Earnings-at-Risk over a one-to four-week defeasance period ranged
from 18 to 1,098 basis points, depending on the currency.
The following table illustrates that, as of December 31, 1998, a 55 basis
point increase in the U.S. dollar yield curve would have a potential negative
impact on Citicorp's pre-tax earnings of approximately $148 million for 1999,
and approximately $20 million for the total five-year period 1999-2003. A two
standard deviation increase in non-U.S. dollar interest rates would have a
potential negative impact on Citicorp's pre-tax earnings of approximately $93
million for 1999, and approximately $107 million for the five-year period
1999-2003.
34
<PAGE>
Citicorp Earnings-at-Risk (impact on pre-tax earnings)
<TABLE>
<CAPTION>
Assuming a U.S. Assuming a Non-U.S.
Dollar Rate Move of Dollar Rate Move of(1)
------------------- -------------------
Two Standard Two Standard
Deviations Deviations(2)
In Millions of ------------------- -------------------
Dollars at December 31, 1998 Increase Decrease Increase Decrease
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Overnight to three months $ (85) $ 87 $ (23) $ 23
Four to six months (34) 38 (30) 30
Seven to twelve months (29) 31 (40) 40
- ------------------------------------------------------------------------------------------------------------------
Total overnight
to twelve months (148) 156 (93) 93
- ------------------------------------------------------------------------------------------------------------------
Year two (28) 22 (51) 51
Year three 12 (22) 17 (16)
Year four 54 (64) 22 (21)
Year five 119 (152) 24 (23)
Effect of discounting (29) 39 (26) 26
- ------------------------------------------------------------------------------------------------------------------
Total $ (20) $ (21) $(107) $ 110
==================================================================================================================
</TABLE>
(1) Primarily results from Earnings-at-Risk in Thai baht, Singapore dollar and
Hong Kong dollar.
(2) Total assumes a two standard deviation increase or decrease for every
currency, not taking into account any covariance between currencies.
The following table summarizes Citicorp's worldwide Earnings-at-Risk over
the next 12 months from changes in interest rates and shows a relatively stable
trend over the three-year period.
Citicorp Twelve Month Earnings-at-Risk
(impact on pre-tax earnings)
U.S. Dollar Non-U.S. Dollar
In Millions of -------------------- --------------------
Dollars at December 31, 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Assuming a
two standard
deviation rate
Increase $(148) $(180) $(165) $ (93) $ (25) $ (22)
Decrease 156 211 191 93 25 17
- -------------------------------------------------------------------------------
The tables above illustrate that Citicorp's pre-tax earnings in its
non-trading activities over the next 12 months would be reduced by an increase
in interest rates and would benefit from a decrease.
Receive-fixed interest rate swaps and similar instruments effectively
modify the repricing characteristics of certain consumer and commercial loan
portfolios, deposits, and long-term debt. Excluding the effects of these
instruments, Citicorp's Earnings-at-Risk over the next twelve months in its
non-trading activities would be as follows:
Citicorp Twelve Month Earnings-at-Risk
(excluding effect of derivatives)
U.S. Dollar Non-U.S. Dollar
In Millions of -------------------- --------------------
Dollars at December 31, 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Assuming a
two standard
deviation rate
Increase $ 10 $ 64 $ 80 $(94) $(26) $(22)
Decrease (3) (44) (70) 94 27 17
- -------------------------------------------------------------------------------
During 1998, Citicorp's U.S. dollar Earnings-at-Risk for the following 12
months assuming a two standard deviation increase in rates would have had a
potential negative impact ranging from approximately $65 million to $173 million
in the aggregate at each month end, compared with a range from $142 million to
$209 million during 1997 and a range from $116 million to $204 million during
1996. The relatively lower U.S. dollar Earnings-at-Risk experienced during 1998
was primarily due to the reduction in the level of receive fixed swaps, offset
slightly by the acquisition of UCS. A two standard deviation increase in
non-U.S. dollar interest rates for the following twelve months would have had a
potential negative impact ranging from approximately $53 million to $98 million
in the aggregate at each month end during 1998, compared with a range from $15
million to $33 million during 1997 and a range from $17 million to $28 million
during 1996. The higher non-U.S. dollar Earnings-at-Risk experienced during 1998
primarily reflected the higher interest rate volatility seen across the Asia
Pacific region.
The table above also illustrates that Citicorp's risk profile in the
one- to two-year time horizon was directionally similar, but generally tends to
reverse in subsequent periods. This reflects the fact that the majority of the
derivative instruments utilized to modify repricing characteristics as described
above will mature within three years. Additional detail regarding these
derivative instruments may be found in Note 23 of Notes to Consolidated
Financial Statements.
The table below reflects the estimated decrease in the fair value of
financial instruments held in non-trading portfolios outside Citicorp, that
would result from a 100 basis point increase in interest rates (including the
effect of derivatives) at December 31:
In Millions of Dollars 1998
- --------------------------------------------------------------------------------
Assets
Investments $2,841
Net consumer finance receivables 256
- --------------------------------------------------------------------------------
Liabilities
Long-term debt $ 497
Contractholder funds 415
Redeemable securities of subsidiary trusts 127
================================================================================
A significant portion of the liabilities, e.g. insurance policy and claims
reserves, are not financial instruments and are excluded from the above
sensitivity analysis. Corresponding changes in fair value of these accounts,
based on the present value of estimated cash flows, would materially mitigate
the impact of the net decrease in values implied above. The analysis also
excludes all financial instruments, including long-term debt, identified with
trading activities. The analysis reflects the estimated gross change in value
resulting from a change in interest rates only and is not comparable to the
Earnings-at-Risk used for the Citicorp non-trading portfolios or the
Value-at-Risk used for the trading portfolios, described below. Changes in value
representing unrealized gains or losses on these non-trading financial
instruments are not reflected in earnings.
Trading Portfolios
The price risk of trading activities is primarily measured using the
Value-at-Risk method, which estimates, at a 99% confidence level, the potential
pretax loss in market value that could occur over a one day holding period. The
Value-at-Risk method incorporates the market factors to which the market value
of the trading position is exposed (interest rates, foreign exchange rates,
equity and commodity prices, and their implied volatilities), the sensitivity of
the position to changes in those market factors, and the volatilities and
correlation of those factors. The Value-at-Risk measurement includes the foreign
exchange risks that arise in traditional banking businesses as well as in
explicit trading positions. The volatility and correlation assumptions used in
the Value-at-Risk computations are based on historical experience. The
35
<PAGE>
Value-at-Risk method is not a predictor of future results or worst-case
scenarios, but rather a statistical estimate of potential risk.
The level of exposure taken depends on the market environment and
expectations of future price and market movements, and will vary from period to
period. For Citicorp's major trading centers, the aggregate pretax Value-at-Risk
in the trading portfolios was $15 million at December 31, 1998. Daily exposures
at Citicorp averaged $18 million in 1998 and ranged from $14 million to $22
million. At Salomon Smith Barney the aggregate pretax Value-at-Risk in the
trading portfolios was $71 million at December 31, 1998. Quarterly exposures at
Salomon Smith Barney averaged $70 million in 1998 and ranged from $66 million to
$73 million.
The following table summarizes Citigroup's Value-at-Risk in its trading
portfolio as of December 31, 1998 and 1997 along with the 1998 average.
<TABLE>
<CAPTION>
Citicorp Salomon Smith Barney
------------------------------ ------------------------------
Dec. 31, 1998 Dec. 31, Dec. 31, 1998 Dec. 31,
In Millions of Dollars 1998 Average 1997 1998 Average 1997(1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate $ 13 $ 16 $ 23 $ 75 $ 67 $ 57
Foreign exchange 7 8 8 3 17 12
Equity 5 7 8 15 9 11
All other (primarily
commodity) 1 1 -- 11 11 11
Covariance adjustment (11) (14) (14) (33) (34) (30)
- --------------------------------------------------------------------------------------
Total $ 15 $ 18 $ 25 $ 71 $ 70 $ 61
======================================================================================
</TABLE>
(1) In 1998, Salomon Smith Barney adopted the use of a 99% confidence level
rather than the previously used 95% confidence level, primarily for
consistency with capital guidelines issued by the Federal Reserve Board
and other U.S. Banking regulators. The amounts in the table above provide
the restated VAR at the 99% confidence level.
The table below provides the distribution of Value-at-Risk during 1998.
Citicorp Salomon Smith Barney
-------------- --------------------
In Millions of Dollars High Low High Low
- ---------------------------------------------------------------------------
Interest rate 25 10 75 62
Foreign exchange 16 3 26 3
Equity 13 4 15 5
All other (primarily commodity) 5 1 12 9
===========================================================================
In addition to Value-at-Risk, stress and scenario analysis are also
applied to the trading portfolios.
Stress analysis is performed by repricing inventory positions for
specified upward and downward moves in risk factors, and computing the revenue
implications of these repricings. Stress analysis is a useful tool for
identifying exposures that appear to be relatively small in the current
environment but grow more than proportionately with changes in risk factors.
Such risk is typical of a number of derivative instruments, including options
sold, many mortgage derivatives and a number of structured products. Stress
analysis provides for the measurement of the potential impact of extremely large
moves in risk factors, which, though infrequent, can be expected to occur from
time to time.
Scenario analysis is a tool that generates forward-looking "what-if"
simulations for specified changes in market factors. For example, the scenario
analysis simulates the impact of significant changes in domestic and foreign
interest rates. The revenue implications of the specified scenario are
quantified on a business unit and geographic basis.
Management of Cross-Border Risk at Citigroup
Cross-border risk is the risk that Citigroup will be unable to obtain payment
from customers on their contractual obligations as a result of actions taken by
foreign governments such as exchange controls, debt moratoria and restrictions
on the remittance of funds.
Citigroup manages cross-border risk as part of the Windows on Risk process
described on page 32. Management oversight of cross-border risk is performed
through a formal country risk review process that includes setting of
cross-border limits, at least annually, in each country in which Citigroup has
cross-border exposure, monitoring of economic conditions globally and within
individual countries with proactive action as warranted, and the establishment
of internal risk management policies. The Country Corporate Officer is required
to prepare an annual country risk review that is subject to approval by senior
management and the Windows on Risk Committee depending on the size of the
country limit, and may also be updated periodically on an as needed basis.
Cross-border limits are also established in the aggregate for certain products
that meet risk acceptance criteria.
The table on page 37 presents Citigroup's cross-border outstandings and
commitments at year-end 1998 and 1997 on a regulatory basis in accordance with
Federal Financial Institutions Examination Council (FFIEC) guidelines. Total
cross-border outstandings include cross-border claims on third parties as well
as investments in and funding of local franchises.
Cross-border claims on third parties (trade, short-term, and medium- and
long-term claims) include cross-border loans, securities, deposits at interest
with banks, investments in affiliates, and other monetary assets, as well as net
revaluation gains on foreign exchange and derivative products. Adjustments have
been made to assign externally guaranteed outstandings to the country of the
guarantor and outstandings for which tangible, liquid collateral is held outside
of the obligor's country to the country in which the collateral is held. For
securities received as collateral, outstandings are assigned to the domicile of
the issuer of the securities.
Investments in and funding of local franchises represents the excess of
local country assets over local country liabilities, as defined by the FFIEC.
Local country assets are claims on local residents recorded by branches and
majority-owned subsidiaries of Citigroup domiciled in the country, adjusted for
externally guaranteed outstandings and certain collateral. Local country
liabilities are obligations of branches and majority-owned subsidiaries of
Citigroup domiciled in the country for which no cross-border guarantee is issued
by Citigroup offices outside the country.
36
<PAGE>
The following table presents total cross-border outstandings and commitments on
a regulatory basis in accordance with Federal Financial Institutions Examination
Council (FFIEC) guidelines. Total cross-border outstandings include cross-border
claims on third parties as well as investments in and funding of local
franchises. Countries with outstandings greater than 0.75% of Citigroup assets
at December 31, 1998 and 1997 include:
<TABLE>
<CAPTION>
1998
- --------------------------------------------------------------------------------------------------
Investments
Trading and Short- in and
Cross-Border Claims on Third Parties Term Claims(1) Funding
In Billions of Dollars ------------------------------------ ------------------ of Local
at Year-End Banks Public Private Total SSB Citicorp Franchises
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Germany $ 4.8 $10.1 $ 2.2 $17.1 $12.0 $ 4.7 $ 0.3
United Kingdom 2.8 0.1 5.0 7.9 1.4 3.5 --
Italy 1.2 6.3 0.6 8.1 5.9 2.1 0.6
France 2.7 3.1 2.6 8.4 4.0 4.0 0.3
Japan 1.3 9.8 1.8 12.9 11.0 1.4 --
Mexico 0.1 4.0 1.2 5.3 2.1 1.3 0.6
Brazil 0.4 1.4 1.7 3.5 0.8 1.3 1.0
Spain 0.5 1.1 0.6 2.2 1.6 0.5 1.6
Sweden 1.0 1.6 1.0 3.6 2.1 1.1 0.1
==================================================================================================
<CAPTION>
1998 1997
- ----------------------------------------------------------- ----------------------------------
Total Total
In Billions of Dollars Cross-Border Cross-Border
at Year-End Outstandings Commitments(2) Outstandings Commitments(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Germany $17.4(3) $1.4 $15.1(3) $ 1.7
United Kingdom 7.9(3) 8.9 6.5(4) 7.8
Italy 8.7(3) 0.3 15.9(3) 0.5
France 8.7(3) 1.1 9.5(3) 0.6
Japan 12.9(3) 0.1 12.7(3) 1.1
Mexico 5.9(4) 0.2 6.4(4) 0.6
Brazil 4.5 0.1 7.3(3) 0.1
Spain 3.8 0.4 6.0(4) 0.4
Sweden 3.7 0.9 5.9(4) 0.7
====================================================================================================
</TABLE>
(1) Included in total cross-border claims on third parties. SSB refers to
Salomon Smith Barney.
(2) Commitments (not included in total cross-border outstandings) include
legally binding cross-border letters of credit and other commitments and
contingencies as defined by the FFIEC.
(3) Total cross-border outstandings were in excess of 1.0% of Citigroup's
total assets at the end of the respective period.
(4) Total cross-border outstandings were between 0.75% and 1.0% of Citigroup's
total assets at the end of the respective period.
Trading and short-term claims (included in total cross-border claims on
third parties) include cross-border debt and equity securities in the trading
account, resale agreements, trade finance receivables, net revaluation gains on
foreign exchange and derivative contracts, and other claims with a maturity of
less than one year. Under resale agreements, the counterparty has the legal
obligation for repayment; however, for purposes of the above table, resale
agreements are reported based on the domicile of the issuer of the securities
that are held as collateral, as required by FFIEC guidelines. A substantial
portion of resale agreements are with investment grade counterparties in the G-7
countries (Canada, France, Germany, Italy, Japan, United Kingdom, and the United
States).
LIQUIDITY AND CAPITAL RESOURCES
Citigroup services its obligations primarily with dividends and advances that it
receives from subsidiaries. The subsidiaries' dividend paying abilities are
limited by certain covenant restrictions in credit agreements and/or by
regulatory requirements. Citigroup believes it will have sufficient funds to
meet current and future commitments. Each of Citigroup's major operating
subsidiaries finances its operations on a basis consistent with its
capitalization and ratings.
Citigroup, Citicorp, Commercial Credit Company (CCC), TAP and The
Travelers Insurance Company (TIC) issue commercial paper directly to investors.
Citicorp and Citigroup, both of which are bank holding companies, maintain
combined liquidity reserves of cash and securities (at Citicorp) and unused bank
lines of credit (at Citigroup) at least equal to their combined outstanding
commercial paper. CCC, TAP, and TIC each maintains unused credit availability
under their bank lines of credit at least equal to the amount of its outstanding
commercial paper.
Borrowings under bank lines of credit may be at interest rates based on
LIBOR, CD rates, the prime rate or bids submitted by the banks. Each company
pays its banks commitment fees for its lines of credit.
Citicorp and some of its nonbank subsidiaries have credit facilities with
Citicorp's subsidiary banks, including Citibank, N.A. Borrowings under these
facilities would be secured in accordance with Section 23A of the Federal
Reserve Act.
Citigroup
Citigroup, CCC and TIC have an agreement with a syndicate of banks to provide
$1.0 billion of revolving credit, to be allocated to any of Citigroup, CCC or
TIC. The participation of TIC in this agreement is limited to $250 million. The
revolving credit facility consists of a five-year revolving credit facility that
expires in June 2001. At December 31, 1998, all of the facility was allocated to
Citigroup. Under this facility Citigroup is required to maintain a certain level
of consolidated stockholders' equity (as defined in the agreement). Citigroup
exceeded this requirement by approximately $27.2 billion at December 31, 1998.
Citigroup and CCC also have $450 million in 364-day facilities of which $200
million expires in August 1999 and $250 million expires in March 1999 and may be
allocated to either of Citigroup or CCC. At December 31, 1998 all $450 million
was allocated to Citigroup. At December 31, 1998 there were no borrowings
outstanding under either of these facilities.
Citigroup is subject to risk-based capital guidelines issued by the Board
of Governors of the FRB. These guidelines are used to evaluate capital adequacy
based primarily on the perceived credit risk associated with balance sheet
assets, as well as certain off-balance sheet exposures such as unused loan
commitments, letters of credit, and derivative and foreign exchange contracts.
The risk-based capital guidelines are supplemented by a leverage ratio
requirement.
37
<PAGE>
Citigroup Ratios
At Year-End 1998 1997
- -------------------------------------------------------------------------------
Tier 1 capital 8.68% 8.37%
Total capital (Tier 1 and Tier 2) 11.43 11.07
Leverage(1) 6.03 5.64
Common stockholders' equity 6.04 5.52
===============================================================================
(1) Tier 1 capital divided by adjusted average assets.
Citigroup maintained a strong capital position during 1998. Total capital
(Tier 1 and Tier 2) amounted to $55.0 billion at December 31, 1998, representing
11.43% of net risk-adjusted assets. This compares to $52.3 billion and 11.07% at
December 31, 1997. Tier 1 capital of $41.8 billion at December 31, 1998
represented 8.68% of net risk-adjusted assets, compared to $39.5 billion and
8.37% at December 31, 1997. Citigroup's leverage ratio was 6.03% at December 31,
1998 compared to 5.64% at December 31, 1997.
Components of Capital Under Regulatory Guidelines
In Millions of Dollars at Year-End 1998 1997
- -------------------------------------------------------------------------------
Tier 1 Capital
Common stockholders' equity $ 40,395 $ 38,498
Perpetual preferred stock 2,313 3,353
Mandatorily redeemable securities of
subsidiary trusts 4,320 2,995
Minority interest(1) 1,602 1,395
Less: Net unrealized gains on securities
available for sale(2) (1,359) (1,692)
Intangible assets:
Goodwill (3,764) (3,697)
Other intangible assets (1,620) (1,202)
50% investment in certain subsidiaries(3) (110) (129)
- -------------------------------------------------------------------------------
Total Tier 1 capital $ 41,777 $ 39,521
- -------------------------------------------------------------------------------
Tier 2 Capital
Allowance for credit losses(4) $ 6,024 $ 5,910
Qualifying debt(5) 7,296 6,977
Unrealized marketable equity securities gains(2) 21 --
Less: 50% investment in certain subsidiaries(3) (110) (129)
- -------------------------------------------------------------------------------
Total Tier 2 capital 13,231 12,758
- -------------------------------------------------------------------------------
Total capital (Tier 1 and Tier 2) $ 55,008 $ 52,279
===============================================================================
Net risk-adjusted assets(6) $ 481,208 $ 472,095
===============================================================================
(1) Primarily related to Travelers Property Casualty Corp.
(2) Tier 1 capital excludes unrealized gains and losses on debt securities
available for sale in accordance with regulatory risk-based capital
guidelines. During 1998, the federal bank regulatory agencies amended
their risk-based capital guidelines to permit institutions to include in
Tier 2 capital up to 45% of pretax net unrealized holding gains on
available-for-sale equity securities with readily determinable fair
values.
(3) Represents investment in certain overseas insurance activities and
unconsolidated banking and finance subsidiaries.
(4) Includable up to 1.25% of risk-adjusted assets. Any excess allowance is
deducted from risk-adjusted assets.
(5) Includes qualifying senior and subordinated debt in an amount not
exceeding 50% of Tier 1 capital, and subordinated capital notes subject to
certain limitations.
(6) Includes risk-weighted credit equivalent amounts, net of applicable
bilateral netting agreements, of $37.3 billion for interest rate,
commodity and equity derivative contracts and foreign exchange contracts,
as of December 31, 1998, compared with $35.2 billion as of December 31,
1997. Net risk-adjusted assets also includes the effect of other
off-balance sheet exposures such as unused loan commitments and letters of
credit and reflects deductions for intangible assets and any excess
allowance for credit losses.
Common stockholders' equity increased a net $1.9 billion during the year
to $40.4 billion at December 31, 1998, representing 6.04% of assets, compared to
$38.5 billion and 5.52% at year-end 1997. The increase in common stockholders'
equity during the year principally reflected net income of $5.8 billion, and
$1.3 billion related to the issuance of shares pursuant to employee benefit
plans, conversion of redeemable preferred stock, and the exercise of warrants,
partially offset by treasury stock acquired of $3.1 billion and dividends
declared on common and preferred stock of $1.8 billion. The increase in the
common stockholders' equity ratio during the year reflected the above items as
well as the decrease in total assets.
During 1998, preferred stock redemptions included 7.5% Noncumulative
Preferred Stock, Series 17 for $350 million, 8% Noncumulative Preferred Stock,
Series 16 for $325 million, Adjustable Rate Preferred Stock, Second and Third
Series for $303 million, and Graduated Rate Cumulative Preferred Stock, Series
8A for $62 million. In February 1999, Citigroup redeemed the $200 million Series
J Preferred Stock.
The $4,320 million of mandatorily redeemable securities of subsidiary
trusts (trust securities) outstanding at December 31, 1998 qualify as Tier 1
capital. The amount outstanding at year-end includes $1,700 million of
parent-obligated securities and $2,620 million of subsidiary-obligated
securities. The increase in trust securities outstanding during 1998 of $1,325
million includes $700 million of Citigroup (parent company)-obligated
securities, $400 million of Salomon Smith Barney Holdings Inc.-obligated
securities, and $225 million of Citicorp-obligated securities.
Effective January 1, 1998, Citigroup adopted the U.S. bank regulatory
agencies amendment to their risk-based capital guidelines to incorporate market
risk in the measurement of net risk-adjusted assets. Market risk-equivalent
assets included in net risk-adjusted assets amounted to $51.5 billion at
December 31, 1998.
Citigroup's subsidiary depository institutions are subject to the
risk-based capital guidelines issued by their respective primary federal bank
regulatory agencies, which are generally similar to the FRB's guidelines. At
December 31, 1998, all of Citigroup's subsidiary depository institutions were
"well capitalized" under the federal bank regulatory agencies' definitions.
From time-to-time, the FRB and the FFIEC propose amendments to, and issue
interpretations of, risk-based capital guidelines and reporting instructions.
Such proposals or interpretations could, if implemented in the future, affect
reported capital ratios and net risk-adjusted assets.
Citicorp
Management of liquidity at Citicorp is the responsibility of the Corporate
Treasurer. The Country Corporate Officer and the Country Treasurer ensure that
all funding obligations in each country are met when due. The Country Treasurer
is appointed by the Market Risk Policy Committee upon the recommendation of line
management and Regional Treasurers.
The in-country forum for liquidity issues is the Asset/Liability
Management Committee (ALCO), which includes senior executives within each
country. The ALCO reviews the current and prospective funding requirements for
all businesses and legal entities within the country, as well as the capital
position and balance sheet. All businesses within the country are represented on
the committee with the focal point being the Country Treasurer.
Each Country Treasurer must prepare a liquidity plan at least annually
that is approved by the Country Corporate Officer, the Regional Treasurer, and
the Market Risk Policy Committee. The liquidity profile is monitored on an
on-going basis and reported monthly. Limits are established on the extent to
which businesses in a country can take liquidity risk. The size of the limit
depends on the depth of the market, experience level of local management, the
stability of the liabilities, and liquidity of the assets.
Regional Treasurers generally have responsibility for monitoring liquidity
risk across a number of countries within a defined geography. They are also
38
<PAGE>
available for consultation and special approvals, especially in unusual or
volatile market conditions.
Citicorp's assets and liabilities are diversified across many currencies,
geographic areas, and businesses. Particular attention is paid to those
businesses which for tax, sovereign risk, or regulatory reasons cannot be freely
and readily funded in the international markets.
A diversity of funding sources, currencies, and maturities is used to gain
a broad access to the investor base. Citicorp's deposits, which represent 66%
and 64% of total funding at December 31, 1998 and 1997, respectively, are
broadly diversified by both geography and customer segments.
Stockholder's equity, which grew $1.5 billion during the year to $22.6
billion at year-end 1998, continues to be an important component of the overall
funding structure. In addition, long-term debt is issued by Citicorp and its
subsidiaries. Total Citicorp long-term debt outstanding at year-end 1998 was
$19.6 billion, compared with $19.0 billion at year-end 1997. Asset
securitization programs remain an important source of liquidity. Loans
securitized during 1998 included $17.5 billion of U.S. credit cards, $9.1
billion of U.S. consumer mortgages, and $0.3 billion of non-U.S. consumer loans.
As credit card securitization transactions amortize, newly originated
receivables are recorded on Citicorp's balance sheet and become available for
asset securitization. In 1998, the scheduled amortization of certain credit card
securitization transactions made available $7.8 billion of new receivables. In
addition, $3.8 billion of credit card securitization transactions are scheduled
to amortize during 1999.
Citicorp is a legal entity separate and distinct from Citibank, N.A. and
its other subsidiaries and affiliates. There are various legal limitations on
the extent to which Citicorp's banking subsidiaries may extend credit, pay
dividends or otherwise supply funds to Citicorp. The approval of the Office of
the Comptroller of the Currency is required if total dividends declared by a
national bank in any calendar year exceed net profits (as defined) for that year
combined with its retained net profits for the preceding two years. In addition,
dividends for such a bank may not be paid in excess of the bank's undivided
profits. State-chartered bank subsidiaries are subject to dividend limitations
imposed by applicable state law.
Citicorp's national and state-chartered bank subsidiaries can declare
dividends to their respective parent companies in 1999, without regulatory
approval, of approximately $3.0 billion, adjusted by the effect of their net
income (loss) for 1999 up to the date of any such dividend declaration. In
determining whether and to what extent to pay dividends, each bank subsidiary
must also consider the effect of dividend payments on applicable risk-based
capital and leverage ratio requirements as well as policy statements of the
federal regulatory agencies that indicate that banking organizations should
generally pay dividends out of current operating earnings. Consistent with these
considerations, Citicorp estimates that its bank subsidiaries can distribute
dividends to Citicorp of approximately $2.5 billion of the available $3.0
billion, adjusted by the effect of their net income (loss) up to the date of any
such dividend declaration.
Citicorp also receives dividends from its nonbank subsidiaries. These
nonbank subsidiaries are generally not subject to regulatory restrictions on
their payment of dividends except that the approval of the Office of Thrift
Supervision (OTS) may be required if total dividends declared by a savings
association in any calendar year exceed amounts specified by that agency's
regulations.
Citicorp is subject to risk-based capital and leverage guidelines issued
by the Board of Governors of the FRB.
Citicorp Ratios
At Year-End 1998 1997
- -------------------------------------------------------------------------------
Tier 1 capital 8.44% 8.27%
Total capital (Tier 1 and Tier 2) 12.38 12.25
Leverage(1) 6.68 6.95
Common stockholder's equity 6.57 6.15
===============================================================================
(1) Tier 1 capital divided by adjusted average assets.
Citicorp maintained a strong capital position during 1998. Total capital
(Tier 1 and Tier 2) amounted to $33.9 billion at December 31, 1998, representing
12.38% of net risk-adjusted assets. This compares with $31.0 billion and 12.25%
at December 31, 1997. Tier 1 capital of $23.1 billion at year-end 1998
represented 8.44% of net risk-adjusted assets, compared with $20.9 billion and
8.27% at year-end 1997. The Tier 1 capital ratio at year-end 1998 exceeded
Citicorp's target range of 8.00% to 8.30%.
Commercial Credit Company
At December 31, 1998, CCC, in addition to the bi-lateral agreements with
Citigroup, also had a committed and available revolving credit facility on a
stand-alone basis of $4.750 billion, consisting of $3.4 billion in five-year
facilities which expire in 2002 and $1.350 billion in a 364-day facility that
expires in July 1999. At December 31, 1998, there were no borrowings outstanding
under these facilities.
CCC is limited by covenants in its revolving credit agreements as to the
amount of dividends and advances that may be made to Citigroup or its affiliated
companies. At December 31, 1998, CCC would have been able to remit $819 million
under its most restrictive covenants.
Travelers Property Casualty Corp.
TAP has a five-year revolving credit facility in the amount of $250 million with
a syndicate of banks that expires in December 2001. Under this facility TAP is
required to maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At December 31, 1998, this requirement was exceeded
by approximately $4.2 billion. At December 31, 1998, there were no borrowings
outstanding under this facility.
TAP's insurance subsidiaries 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.
Dividend payments to TAP from its insurance subsidiaries are limited to $1
billion in 1999 without prior approval of the Connecticut Insurance Department.
Salomon Smith Barney Holdings Inc.
Salomon Smith Barney's total assets were $212 billion at December 31, 1998, down
from $277 billion at year-end 1997. Due to the nature of Salomon Smith Barney's
trading activities, including its matched book activities, it is not uncommon
for asset levels to fluctuate from period to period. A "matched book"
transaction involves a security purchased under an agreement to resell (i.e.,
reverse repurchase transaction) and simultaneously sold under an agreement to
repurchase (i.e., repurchase transaction). Salomon Smith Barney's balance sheet
is highly liquid, with the vast majority of its assets consisting of marketable
securities and collateralized short-term financing agreements arising from
securities transactions. The highly liquid nature of these assets provides
Salomon Smith Barney with flexibility in financing and managing its business.
Salomon Smith Barney monitors and evaluates the adequacy of its capital and
borrowing base on a daily basis in order to allow for flexibility in its
funding, to maintain liquidity, and to ensure that its capital base supports the
regulatory capital requirements of its subsidiaries.
39
<PAGE>
Salomon Smith Barney funds its operations through the use of secured
and unsecured short-term borrowings, long-term borrowings and
TruPS-Registered Trademark-. Secured short-term financing, including
repurchase agreements and secured loans, is Salomon Smith Barney's principal
funding source. Unsecured short-term borrowings provide a source of
short-term liquidity and are also utilized as an alternative to secured
financing when they represent a cheaper funding source. Sources of short-term
unsecured borrowings include commercial paper, unsecured bank borrowings and
letters of credit, deposit liabilities, promissory notes and corporate loans.
At December 31, 1998 Salomon Smith Barney had a $1.5 billion revolving
credit agreement with a bank syndicate that extends through May 2001, and a $3.5
billion, 364-day revolving credit agreement that extends through May 1999.
Salomon Smith Barney may borrow under its revolving credit facilities at various
interest rate options (LIBOR, CD or base rate) and compensates the banks for the
facilities through commitment fees. Under these facilities Salomon Smith Barney
is required to maintain a certain level of consolidated adjusted net worth (as
defined in the agreement). At December 31, 1998, this requirement was exceeded
by approximately $2.8 billion. At December 31, 1998, there were no borrowings
outstanding under either facility. Salomon Smith Barney also has substantial
borrowing arrangements consisting of facilities that it has been advised are
available, but where no contractual lending obligation exists. These
arrangements are reviewed on an ongoing basis to ensure flexibility in meeting
short-term requirements.
Unsecured term debt is a significant component of Salomon Smith Barney's
long-term capital. Long-term debt totaled $19.1 billion at December 31, 1998 and
1997. Salomon Smith Barney utilizes interest rate swaps to convert the majority
of its fixed rate long-term debt used to fund inventory-related working capital
requirements into variable rate obligations. Long-term debt issuances
denominated in currencies other than the U.S. dollar that are not used to
finance assets in the same currency are effectively converted to U.S. dollar
obligations through the use of cross-currency swaps and forward currency
contracts. The average remaining maturity of Salomon Smith Barney's long-term
debt was 4.0 years at December 31, 1998 and 3.7 years at December 31, 1997. See
Note 12 of Notes to the Consolidated Financial Statements for additional
information regarding debt and an analysis of the impact of interest rate swaps
on debt.
Salomon Smith Barney's borrowing relationships are with a broad range of
banks, financial institutions and other firms from which it draws funds. The
volume of borrowings generally fluctuates in response to changes in the level of
financial instruments, commodities and contractual commitments, customer
balances, the amount of reverse repurchase transactions outstanding and
securities borrowed transactions. As Salomon Smith Barney's activities increase,
borrowings generally increase to fund the additional activities. Availability of
financing can vary depending upon market conditions, credit ratings, and the
overall availability of credit to the securities industry. Salomon Smith Barney
seeks to expand and diversify its funding mix as well as its creditor sources.
Concentration levels for these sources, particularly for short-term lenders, are
closely monitored both in terms of single investor limits and daily maturities.
Salomon Smith Barney monitors liquidity by tracking asset levels,
collateral and funding availability to maintain flexibility to meet its
financial commitments. As a policy, Salomon Smith Barney attempts to maintain
sufficient capital and funding sources in order to have the capacity to finance
itself on a fully collateralized basis in the event that access to unsecured
financing was temporarily impaired. Salomon Smith Barney's liquidity management
process includes a contingency funding plan designed to ensure adequate
liquidity even if access to unsecured funding sources is severely restricted or
unavailable. This plan is reviewed periodically to keep the funding options
current and in line with market conditions. The management of this plan includes
an analysis that is utilized to determine the ability to withstand varying
levels of stress, which could impact Salomon Smith Barney's liquidation horizons
and required margins. In addition, Salomon Smith Barney monitors its leverage
and capital ratios on a daily basis.
The Travelers Insurance Company
At December 31, 1998, TIC had $25.7 billion of life and annuity product deposit
funds and reserves. Of that total, $13.8 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $11.9 billion is for life and
annuity products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal are $2.4 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.1 billion of the life
insurance and individual annuity liabilities which are subject to discretionary
withdrawals, and have an average surrender charge of 4.7%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$4.4 billion of liabilities are surrenderable without charge. More than 14.2% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding policy
loans and related accrued interest prior to payout.
Scheduled maturities of guaranteed investment contracts (GICs) in 1999,
2000, 2001, 2002 and 2003 are $2.61 billion, $463.4 million, $491.9 million,
$341.7 million and $188.1 million, respectively. At December 31, 1998, the
interest rates credited on GICs had a weighted average rate of 6.20%.
TIC is subject to various regulatory restrictions that limit the maximum
amount of dividends available to its parent without prior approval of the
Connecticut Insurance Department. A maximum of $504 million of statutory surplus
is available in 1999 for such dividends without Department approval.
Insurance Industry -- Risk Based Capital
The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for life insurance companies and for property and
casualty insurance companies. The RBC requirements are to be used as minimum
capital requirements by the NAIC and states to identify companies that merit
further regulatory action. The formulas have not been designed to differentiate
among adequately capitalized companies that operate with levels of capital
higher than RBC requirements. Therefore, it is inappropriate and ineffective to
use the formulas to rate or to rank such companies. At December 31, 1998 and
1997, all of the Company's life and property & casualty companies had adjusted
capital in excess of amounts requiring any regulatory action.
40
<PAGE>
REPORT OF MANAGEMENT
The management of Citigroup is responsible for the preparation and fair
presentation of the financial statements and other financial information
contained in this annual report. The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles appropriate
in the circumstances. Where amounts must be based on estimates and judgments,
they represent the best estimates and judgments of management. The financial
information appearing throughout this annual report is consistent with that in
the financial statements.
The management of Citigroup is also responsible for maintaining effective
internal control over financial reporting. Management establishes an environment
that fosters strong controls and it designs business processes to identify and
respond to risk. Management maintains a comprehensive system of controls
intended to ensure that transactions are executed in accordance with its
authorization, assets are safeguarded, and financial records are reliable. And
management takes steps to see that information and communication flows are
effective and to monitor performance, including performance of internal control.
Citigroup's accounting policies and internal control are under the general
oversight of the Board of Directors, acting through the Audit Committee of the
Board. The committee is composed entirely of directors who are not officers or
employees of Citigroup. The Committee reviews reports by internal audit covering
its extensive program of audits and business risk reviews worldwide. In
addition, KPMG LLP, independent auditors, are engaged to audit Citigroup's
financial statements.
KPMG LLP obtains and maintains an understanding of Citigroup's internal
control and procedures for financial reporting and conducts such tests and other
auditing procedures as it considers necessary in the circumstances to express
the opinion in its report that follows. KPMG LLP has free access to the Audit
Committee, with no members of management present, to discuss its audit and its
findings as to the integrity of Citigroup's financial reporting and the
effectiveness of internal control.
Management recognizes that there are inherent limitations in the
effectiveness of any system of internal control, and accordingly, even effective
internal control can provide only reasonable assurance with respect to financial
statement preparation. However, management believes that Citigroup maintained
effective internal control over financial reporting as of December 31, 1998.
/s/ John S. Reed /s/ Sanford I. Weill
John S. Reed Sanford I. Weill
Chairman and Co-Chief Chairman and Co-Chief
Executive Officer Executive Officer
/s/ Heidi G. Miller
Heidi G. Miller
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
[GRAPHIC OMITTED]
The Board of Directors and Stockholders
Citigroup Inc.
We have audited the accompanying consolidated statement of financial position of
Citigroup Inc. (formerly Travelers Group Inc.) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the separate consolidated statements of income, changes in
stockholders' equity and cash flows of Salomon Inc and subsidiaries for the year
ended December 31, 1996, which consolidated statements reflect total revenues of
$9,046 million for the year ended December 31, 1996. Those consolidated
financial statements, were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Salomon Inc and subsidiaries for such period, is based solely on the report
of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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 audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Citigroup Inc. and subsidiaries as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
January 25, 1999
41
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Citigroup Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Loan interest, including fees $ 22,543 $ 20,765 $ 20,090
Other interest and dividends 23,696 21,336 17,708
Insurance premiums 9,850 8,995 7,633
Commissions and fees 11,589 10,936 10,106
Principal transactions 1,780 4,231 4,528
Asset management and administration fees 2,292 1,715 1,390
Realized gains from sales of investments 840 995 276
Other income 3,841 3,333 3,370
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 76,431 72,306 65,101
Interest expense 27,495 24,524 21,336
- ----------------------------------------------------------------------------------------------------------------------
Total revenues, net of interest expense 48,936 47,782 43,765
- ----------------------------------------------------------------------------------------------------------------------
Provisions for benefits, claims, and credit losses
Policyholder benefits and claims 8,365 7,714 7,366
Provision for credit losses 2,751 2,197 2,200
- ----------------------------------------------------------------------------------------------------------------------
Total provisions for benefits, claims, and credit losses 11,116 9,911 9,566
- ----------------------------------------------------------------------------------------------------------------------
Operating expenses
Non-insurance compensation and benefits 13,336 12,942 12,028
Insurance underwriting, acquisition, and operating 3,274 3,236 3,013
Restructuring charges and merger-related costs 795 1,718 --
Other operating 11,146 9,225 8,434
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 28,551 27,121 23,475
- ----------------------------------------------------------------------------------------------------------------------
Gain on sale of stock by subsidiary -- -- 363
- ----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and minority interest 9,269 10,750 11,087
Provision for income taxes 3,234 3,833 3,967
Minority interest, net of income taxes 228 212 47
- ----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 5,807 6,705 7,073
- ----------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes
Loss from operations net of tax benefit of $(48) -- -- (75)
Loss on disposition net of tax benefit of $(198) -- -- (259)
- ----------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations -- -- (334)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 5,807 $ 6,705 $ 6,739
======================================================================================================================
Basic earnings per share
Income from continuing operations $ 2.49 $ 2.86 $ 2.97
Discontinued operations -- -- (0.14)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 2.49 $ 2.86 $ 2.83
======================================================================================================================
Weighted average common shares outstanding 2,242.4 2,247.9 2,271.6
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share
Income from continuing operations $ 2.43 $ 2.74 $ 2.84
Discontinued operations -- -- (0.13)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 2.43 $ 2.74 $ 2.71
======================================================================================================================
Adjusted weighted average common shares outstanding 2,315.2 2,357.7 2,393.9
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
42
<PAGE>
Citigroup Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------------------
In Millions of Dollars 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents (including segregated
cash and other deposits) $ 13,837 $ 12,618
Deposits at interest with banks 11,643 13,049
Investments 103,672 91,633
Federal funds sold and securities borrowed or
purchased under agreements to resell 94,831 119,967
Brokerage receivables 21,413 15,627
Trading account assets 119,845 180,088
Loans, net
Consumer 132,255 119,490
Commercial 89,703 79,116
- -------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 221,958 198,606
Allowance for credit losses (6,617) (6,137)
- -------------------------------------------------------------------------------------------------------------------------
Total loans, net 215,341 192,469
Reinsurance recoverables 9,492 9,579
Separate and variable accounts 15,820 11,319
Other assets 62,747 51,035
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 668,641 $ 697,384
=========================================================================================================================
Liabilities
Non-interest-bearing deposits in U.S. offices $ 17,058 $ 16,901
Interest-bearing deposits in U.S. offices 44,169 40,361
Non-interest-bearing deposits in offices outside the U.S. 10,856 9,627
Interest-bearing deposits in offices outside the U.S. 156,566 132,232
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 228,649 199,121
Federal funds purchased and securities loaned or sold
under agreements to repurchase 81,025 132,103
Brokerage payables 21,055 12,763
Trading account liabilities 94,584 127,152
Contractholder funds and separate and variable accounts 33,037 26,157
Insurance policy and claims reserves 43,990 43,782
Investment banking and brokerage borrowings 14,040 11,464
Short-term borrowings 16,112 14,028
Long-term debt 48,671 47,387
Other 40,310 38,301
Citigroup or subsidiary obligated mandatorily redeemable securities of
subsidiary trusts holding solely junior subordinated debt securities of -- Parent 1,700 1,000
-- Subsidiary 2,620 1,995
Redeemable preferred stock -- Series I 140 280
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value 2,313 3,353
Common stock ($.01 par value; authorized shares: 6.0 billion),
issued shares: 1998 -- 2,402,070,912 shares and 1997 -- 2,512,680,182 shares 24 25
Additional paid-in capital 8,905 12,471
Retained earnings 35,971 32,002
Treasury stock, at cost: 1998 -- 144,095,466 shares and 1997 -- 232,757,097 shares (4,789) (6,595)
Accumulated other changes in equity from nonowner sources 781 1,057
Unearned compensation (497) (462)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 42,708 41,851
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 668,641 $ 697,384
=========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
43
<PAGE>
Citigroup Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
Amounts
- ---------------------------------------------------------------------------------------------------------
In Millions of Dollars Except Shares in Thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred stock at aggregate liquidation value
Balance, beginning of year $ 3,353 $ 3,203 $ 4,183
Issuance of preferred stock -- 1,000 250
Redemption or retirement of preferred stock (1,040) (850) (112)
Conversion of preferred stock to common stock -- -- (1,118)
- ---------------------------------------------------------------------------------------------------------
Balance, end of year 2,313 3,353 3,203
- ---------------------------------------------------------------------------------------------------------
Common stock and additional paid-in capital
Balance, beginning of year 12,496 14,940 13,418
Conversion of preferred stock to common stock 293 140 855
Exercise of common stock warrants 131 14 --
Employee benefit plans 531 756 696
Retirement of treasury stock (4,497) (3,347) --
Other (25) (7) (29)
- ---------------------------------------------------------------------------------------------------------
Balance, end of year 8,929 12,496 14,940
- ---------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 32,002 26,989 22,443
Net income 5,807 6,705 6,739
Common dividends (1,622) (1,409) (1,205)
Preferred dividends (216) (283) (325)
Adjustment for treasury shares issued on conversion
of convertible preferred stock -- -- (663)
- ---------------------------------------------------------------------------------------------------------
Balance, end of year 35,971 32,002 26,989
- ---------------------------------------------------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (6,595) (7,073) (5,008)
Issuance of shares pursuant to employee benefit
plans and other 408 578 586
Treasury stock acquired (3,085) (3,447) (3,717)
Retirement of treasury stock 4,497 3,347 --
Issuance of shares on conversion of preferred stock -- -- 1,066
Other (14) -- --
- ---------------------------------------------------------------------------------------------------------
Balance, end of year (4,789) (6,595) (7,073)
- ---------------------------------------------------------------------------------------------------------
Accumulated other changes in equity from nonowner sources
Balance, beginning of year 1,057 662 348
Net change in unrealized gains and losses on investment
securities, net of tax (333) 547 257
Foreign currency translations adjustment, net of tax 57 (152) (57)
Adjustment for minimum pension liability, net of tax -- -- 114
- ---------------------------------------------------------------------------------------------------------
Balance, end of year 781 1,057 662
- ---------------------------------------------------------------------------------------------------------
Unearned compensation
Balance, beginning of year (462) (305) (201)
Net issuance of restricted stock (420) (467) (314)
Restricted stock amortization 385 310 210
- ---------------------------------------------------------------------------------------------------------
Balance, end of year (497) (462) (305)
- ---------------------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares outstanding 40,395 38,498 35,213
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 42,708 $ 41,851 $ 38,416
=========================================================================================================
Summary of changes in equity from nonowner sources
Net income $ 5,807 $ 6,705 $ 6,739
Other changes in equity from nonowner sources, net of tax (276) 395 314
- ---------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 5,531 $ 7,100 $ 7,053
=========================================================================================================
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------ -------------------------------------
In Millions of Dollars Except Shares in Thousands 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred stock at aggregate liquidation value
Balance, beginning of year 14,831 20,231 22,465
Issuance of preferred stock -- 4,000 500
Redemption or retirement of preferred stock (6,356) (9,400) (225)
Conversion of preferred stock to common stock -- -- (2,509)
- ---------------------------------------------------------------------------------------------------------
Balance, end of year 8,475 14,831 20,231
- ---------------------------------------------------------------------------------------------------------
Common stock and additional paid-in capital
Balance, beginning of year 2,512,680 2,663,141 2,534,255
Conversion of preferred stock to common stock 13,187 6,245 108,636
Exercise of common stock warrants 10,130 1,113 --
Employee benefit plans 22 -- 20,240
Retirement of treasury stock (133,925) (157,836) --
Other (23) 17 10
- ---------------------------------------------------------------------------------------------------------
Balance, end of year 2,402,071 2,512,680 2,663,141
- ---------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year
Net income
Common dividends
Preferred dividends
Adjustment for treasury shares issued on conversion
of convertible preferred stock
- ------------------------------------------------------------------
Balance, end of year
- ------------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (232,757) (364,077) (337,106)
Issuance of shares pursuant to employee benefit
plans and other 18,031 50,023 36,345
Treasury stock acquired (62,831) (76,539) (118,509)
Retirement of treasury stock 133,925 157,836 --
Issuance of shares on conversion of preferred stock -- -- 55,193
Other (464) -- --
- ---------------------------------------------------------------------------------------------------------
Balance, end of year (144,096) (232,757) (364,077)
- ---------------------------------------------------------------------------------------------------------
Accumulated other changes in equity from nonowner sources
Balance, beginning of year
Net change in unrealized gains and losses on investment
securities, net of tax
Foreign currency translations adjustment, net of tax
Adjustment for minimum pension liability, net of tax
- ------------------------------------------------------------------
Balance, end of year
- ------------------------------------------------------------------
Unearned compensation
Balance, beginning of year
Net issuance of restricted stock
Restricted stock amortization
- ---------------------------------------------------------------------------------------------------------
Balance, end of year
- ---------------------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares outstanding 2,257,975 2,279,923 2,299,064
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity
=========================================================================================================
Summary of changes in equity from nonowner sources
Net income
Other changes in equity from nonowner sources, net of tax
- ---------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources
=========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
44
<PAGE>
Citigroup Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
In Millions of Dollars 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Income from continuing operations $ 5,807 $ 6,705 $ 7,073
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Amortization of deferred policy acquisition costs
and value of insurance in force 1,509 1,424 1,192
Additions to deferred policy acquisition costs (1,784) (1,685) (1,388)
Depreciation and amortization 1,470 1,218 1,182
Deferred tax provision (benefit) (194) (1,430) 475
Provision for credit losses 2,751 2,197 2,200
Change in trading account assets 60,243 (22,730) (3,458)
Change in trading account liabilities (32,568) 13,008 33,521
Change in Federal funds sold and securities purchased under
agreements to resell 25,136 (10,849) (15,979)
Change in Federal funds purchased and securities
sold under agreements to repurchase (51,078) 18,536 (7,807)
Change in brokerage receivables net of brokerage payables 2,506 (1,291) (3,418)
Change in insurance policy and claims reserves 208 381 (309)
Net gain on sale of securities (840) (995) (276)
Venture capital activity (698) (475) (270)
Restructuring charges and merger-related costs 795 1,718 --
Other, net (8,418) 2,649 (2,343)
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments (962) 1,676 3,322
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,845 8,381 10,395
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Change in deposits at interest with banks 1,406 (1,401) (2,620)
Change in loans (165,237) (117,921) (120,776)
Proceeds from sales of loans and credit card receivables 146,477 104,119 109,821
Purchases of investments (88,229) (78,594) (68,989)
Proceeds from sales of investments 45,717 46,927 39,873
Proceeds from maturities of investments 33,819 23,026 20,248
Other investments, primarily short-term, net (427) (501) (325)
Capital expenditures on premises and equipment (1,805) (1,533) (1,596)
Proceeds from sales of premises and equipment, subsidiaries and
affiliates, and other real estate owned 764 1,164 1,723
Business acquisitions (3,890) (1,618) (4,160)
Other, net (214) (514) 267
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (31,619) (26,846) (26,534)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (1,846) (1,692) (1,530)
Issuance of common stock 418 434 537
Subsidiary's sale of Class A common stock -- -- 1,453
Issuance of preferred stock -- 1,000 250
Issuance of mandatorily redeemable securities of subsidiary trusts 1,325 450 2,545
Redemption of preferred stock (1,040) (850) (112)
Treasury stock acquired (3,085) (3,447) (3,711)
Stock tendered for payment of withholding taxes (520) (384) (201)
Issuance of long-term debt 14,295 15,333 11,975
Payments and redemptions of long-term debt (12,307) (10,713) (9,127)
Change in deposits 29,528 14,166 17,824
Change in short-term borrowings including investment
banking and brokerage borrowings (304) 6,636 (1,452)
Contractholder fund deposits 4,422 3,544 2,493
Contractholder fund withdrawals (2,579) (2,757) (3,262)
Other, net (345) (114) (422)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,962 21,606 17,260
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 31 (688) (170)
- -----------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 1,219 2,453 951
Cash and cash equivalents at beginning of period 12,618 10,165 9,214
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,837 $ 12,618 $ 10,165
===================================================================================================================================
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes $ 2,860 $ 3,917 $ 3,441
Cash paid during the period for interest 26,292 23,016 20,286
Non-cash investing activities -- Transfers from loans
to other real estate owned 265 336 632
===================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Citigroup Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the
accounts of Citigroup Inc. and its subsidiaries (the Company). Twenty percent to
50%-owned affiliates, other than investments of designated venture capital
subsidiaries, are accounted for under the equity method, and the pro rata share
of their income (loss) is included in other income. Income from investments in
less than 20%-owned companies is generally recognized when dividends are
received. Gains and losses on disposition of branches, subsidiaries, affiliates,
and other investments and charges for management's estimate of impairment in
value that is other than temporary, such that recovery of the carrying amount is
deemed unlikely, are included in other income. Minority interest principally
represents the interest in Travelers Property Casualty Corp. (TAP) not held by
the Company. The Company recognizes a gain or loss in the statement of income
when a subsidiary issues its own stock at a price higher or lower than the
Company's proportionate carrying amount.
Foreign currency translation. Assets and liabilities denominated in non-U.S.
dollar currencies are translated into U.S. dollar equivalents using year-end
spot foreign exchange rates. Revenues and expenses are translated monthly at
amounts which approximate weighted average exchange rates, with resulting gains
and losses included in income. The effects of translating operations with a
functional currency other than the U.S. dollar are included in stockholders'
equity along with related hedge and tax effects. The effects of translating
operations with the U.S. dollar as the functional currency, including those in
highly inflationary environments, are included in other income along with
related hedge effects. Hedges of foreign currency exposures include forward
currency contracts and designated issues of non-U.S. dollar debt.
Risks and uncertainties. The preparation of the consolidated financial
statements 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents include cash on hand and due from banks, cash
segregated under federal and brokerage regulations, cash deposited with clearing
organizations and short-term highly liquid investments with maturities of three
months or less when purchased, other than those held for sale in the ordinary
course of business. Cash flows from risk management activities are classified in
the same category as the related assets and liabilities.
Investments include fixed maturity and equity securities. Fixed maturities
includes bonds, notes and redeemable preferred stocks, as well as certain
loan-backed and structured securities subject to prepayment risk. Equity
securities include common and non-redeemable preferred stocks. Fixed maturities
classified as "held to maturity" represent securities that the Company has both
the ability and the intent to hold until maturity and are carried at amortized
cost. Fixed maturity securities classified as "available for sale" and
marketable equity securities are carried at fair values, based primarily on
quoted market prices or if quoted market prices are not available, discounted
expected cash flows using market rates commensurate with the credit quality and
maturity of the investment, with unrealized gains and losses and related hedge
effects reported in a separate component of stockholders' equity, net of
applicable income taxes. Accrual of income is suspended on fixed maturities that
are in default, or on which it is likely that future interest payments will not
be made as scheduled. Fixed maturities subject to prepayment risk are accounted
for using the retrospective method, where the principal amortization and
effective yield are recalculated each period based on actual historical and
projected future cash flows. Realized gains and losses on sales of investments
are included in earnings on a specific identified cost basis.
Citigroup's venture capital subsidiaries include subsidiaries registered
as Small Business Investment Companies and other subsidiaries that engage
exclusively in venture capital activities. Venture capital investments are
carried at fair value, with changes in fair value recognized in other income.
The fair values of publicly-traded securities held by these subsidiaries are
generally based upon quoted market prices. In certain situations, including
thinly-traded securities, large-block holdings, restricted shares or other
special situations, the quoted market price is adjusted to produce an estimate
of the attainable fair value for the securities. For securities that are not
publicly traded, estimates of fair value are made based upon review of the
investee's financial results, condition, and prospects.
Securities borrowed and securities loaned are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company receives
cash collateral in an amount in excess of the market value of securities loaned.
The Company monitors the market value of securities borrowed and loaned on a
daily basis with additional collateral obtained as necessary.
Repurchase and resale agreements are treated as collateralized financing
transactions and are carried at the amounts at which the securities will be
subsequently reacquired or resold, including accrued interest, as specified in
the respective agreements. The Company's policy is to take possession of
securities purchased under agreements to resell. The market value of securities
to be repurchased and resold is monitored, and additional collateral is obtained
where appropriate to protect against credit exposure.
Trading account assets and liabilities include securities, commodities and
derivatives and are recorded at either market value or, when market prices are
not readily available, fair value, which is determined under an alternative
approach, such as matrix or model pricing. Obligations to deliver securities
sold but not yet purchased are also valued at market and included in trading
account liabilities. The determination of market or fair value considers various
factors, including: closing exchange or over-the-counter market price
quotations; time value and volatility factors underlying options, warrants and
derivatives; price activity for equivalent or synthetic instruments in markets
located in different time zones; counterparty credit quality; and the potential
impact on market prices or fair value of liquidating the Company's positions in
an orderly manner over a reasonable period of time under current market
conditions. Interest expense on trading account liabilities is reported as a
reduction of interest revenues.
Commodities include physical quantities of commodities involving future
settlement or delivery and related gains or losses are reported as "Principal
transactions."
Derivatives used for trading purposes include interest rate, currency,
equity, and commodity swap agreements, swap options, caps and floors, options,
warrants and financial and commodity futures and forward contracts. The fair
values (unrealized gains and losses) associated with derivatives are reported
net by counterparty, provided a legally enforceable master netting
46
<PAGE>
agreement exists, and are netted across products and against cash collateral
when such provisions are stated in the master netting agreement. Derivatives in
a net receivable position, as well as options owned and warrants held, are
reported as Trading account assets. Similarly, derivatives in a net payable
position, as well as options written and warrants issued, are reported as
Trading account liabilities. The recognition of unrealized gains on these
contracts is subject to management's assessment as to collectibility. At the
inception of certain derivative and foreign exchange contracts the Company
defers an appropriate portion of the initial fair value attributable to ongoing
costs, and amortizes this amount into revenue over the life of the contract.
Revenues generated from derivative instruments used for trading purposes are
reported as "Principal transactions" and include realized gains and losses as
well as unrealized gains and losses resulting from changes in the market or fair
value of such instruments.
Commissions, underwriting and principal transaction revenues and related
expenses are recognized in income on a trade date basis. Customer security
transactions are recorded on a settlement date basis.
Consumer loans includes loans managed by the Global Consumer business. Consumer
loans are generally written off not later than a predetermined number of days
past due on a contractual basis, or earlier in the event of bankruptcy. The
number of days is set at an appropriate level by loan product and by country.
The policy for suspending accruals of interest on consumer loans varies
depending on the terms, security and loan loss experience characteristics of
each product, and in consideration of write-off criteria in place.
Commercial loans represent loans managed by the Global Corporate and
Investment Bank business. Commercial loans are identified as impaired and
placed on a cash (nonaccrual) basis when it is determined that the payment of
interest or principal is doubtful of collection, or when interest or
principal is past due for 90 days or more, except when the loan is well
secured and in the process of collection. Any interest accrued is reversed
and charged against current earnings, and interest is thereafter included in
earnings only to the extent actually received in cash. When there is doubt
regarding the ultimate collectibility of principal, all cash receipts are
thereafter applied to reduce the recorded investment in the loan. Impaired
commercial loans are written down to the extent that principal is judged to
be uncollectible. Impaired collateral-dependent loans where repayment is
expected to be provided solely by the underlying collateral and there are no
other available and reliable sources of repayment are written down to the
lower of cost or collateral value. Cash-basis loans are returned to an
accrual status when all contractual principal and interest amounts are
reasonably assured of repayment and there is a sustained period of repayment
performance in accordance with the contractual terms.
Lease financing transactions. Loans include the Company's share of aggregate
rentals on lease financing transactions and residual values net of related
unearned income. Lease financing transactions substantially represent direct
financing leases and also include leveraged leases. Unearned income is amortized
under a method which substantially results in an approximate level rate of
return when related to the unrecovered lease investment. Gains and losses from
sales of residual values of leased equipment are included in other income.
Loans held for sale. Credit card receivables and consumer mortgage loans
originated for sale are classified as loans held for sale, which are accounted
for at the lower of aggregate cost or fair value in Other assets with net credit
losses charged to other income.
Allowance for credit losses. Additions to the allowance are made by means of the
provision for credit losses. Credit losses are deducted from the allowance, and
subsequent recoveries are added. Securities received in exchange for loan claims
in debt restructurings are initially recorded at fair value, with any gain or
loss reflected as a recovery or charge-off to the allowance, and are
subsequently accounted for as securities available for sale.
The amount of the provision is determined based on management's assessment
of historical and expected net credit losses, business and economic conditions,
the character, quality and performance of the portfolios, and other pertinent
indicators. This evaluation encompasses all activities involving the extension
of credit and also includes an assessment of the ability of borrowers with
foreign currency obligations to obtain the foreign exchange necessary for
orderly debt servicing. Larger-balance, non-homogenous exposures representing
significant individual credit exposures are evaluated based upon the borrower's
character, overall financial condition, resources, and payment record; the
prospects for support from any financially responsible guarantors; and, if
appropriate, the realizable value of any collateral. Impairment of
larger-balance, non-homogenous loans is measured by comparing the net carrying
amount of the loan to the present value of the expected future cash flows
discounted at the loan's effective rate, the secondary market value of the loan,
or the fair value of the collateral for collateral-dependent loans. A valuation
allowance is established if necessary within the portion of the allowance
deducted from loans. The evaluation of smaller balance, homogenous loans,
including consumer mortgage, installment, revolving credit and most other
consumer loans, are collectively evaluated for impairment based upon historical
loss experience, adjusted for changes in trends and conditions including
delinquencies and nonaccruals; trends in volume and terms of loans; the effects
of any changes in lending policies and procedures; national and local economic
trends and conditions; and concentrations of credit. Based upon these analyses,
the resulting allowance is deemed adequate to absorb all probable credit losses
inherent in the portfolio.
Other real estate owned. Upon repossession, loans are adjusted if necessary to
the estimated fair value of the underlying collateral and transferred to Other
Real Estate Owned, which is reported in Other assets net of a valuation
allowance for selling costs and net declines in value as appropriate.
Risk management activities--derivatives used for non-trading purposes. The
Company manages its exposures to market rate movements outside of its trading
activities by modifying the asset and liability mix, either directly or through
the use of derivative financial products including interest rate swaps, futures,
forwards, and purchased option positions such as interest rate caps, floors, and
collars. These end-user derivative contracts include qualifying hedges and
qualifying positions that modify the interest rate characteristics of specified
financial instruments. Derivative instruments not qualifying as end-user
positions are treated as trading positions and carried at fair value.
To qualify as a hedge, the swap, futures, forward, or purchased option
position must be designated as a hedge and effective in reducing the market risk
of an existing asset, liability, firm commitment, or identified anticipated
47
<PAGE>
transaction which is probable to occur. To qualify as a position modifying the
interest rate characteristics of an instrument, there must be a documented and
approved objective to synthetically alter the market risk characteristics of an
existing asset, liability, firm commitment or identified anticipated transaction
which is probable to occur, and the swap, forward or purchased option position
must be designated as such a position and effective in accomplishing the
underlying objective.
The foregoing criteria are applied on a decentralized basis, consistent
with the level at which market risk is managed, but are subject to various
limits and controls. The underlying asset, liability, firm commitment or
anticipated transaction may be an individual item or a portfolio of similar
items.
The effectiveness of these contracts is evaluated on an initial and
ongoing basis using quantitative measures of correlation. If a contract is found
to be ineffective, it no longer qualifies as an end-user position and any excess
gains and losses attributable to such ineffectiveness as well as subsequent
changes in fair value are recognized in earnings.
End-user contracts are primarily employed in association with on-balance
sheet instruments accounted for at amortized cost, including loans, deposits,
and long-term debt, and with credit card securitizations. These qualifying
end-user contracts are accounted for consistent with the risk management
strategy as follows. Amounts payable and receivable on interest rate swaps and
options are accrued according to the contractual terms and included currently in
the related revenue and expense category as an element of the yield on the
associated instrument (including the amortization of option premiums). Amounts
paid or received over the life of futures contracts are deferred until the
contract is closed; accumulated deferred amounts on futures contracts and
amounts paid or received at settlement of forward contracts are accounted for as
elements of the carrying value of the associated instrument, affecting the
resulting yield.
End-user contracts related to instruments that are carried at fair value
are also carried at fair value, with amounts payable and receivable accounted
for as an element of the yield on the associated instrument. When related to
securities available for sale, fair value adjustments are reported in
stockholders' equity, net of tax.
If an end-user derivative contract is terminated, any resulting gain or
loss is deferred and amortized over the original term of the agreement provided
that the effectiveness criteria have been met. If the underlying designated
items are no longer held, or if an anticipated transaction is no longer likely
to occur, any previously unrecognized gain or loss on the derivative contract is
recognized in earnings and the contract is accounted for at fair value with
subsequent changes recognized in earnings.
Foreign exchange contracts which qualify under applicable accounting
guidelines as hedges of foreign currency exposures, including net capital
investments outside the U.S., are revalued at the spot rate with any forward
premium or discount recognized over the life of the contract in net interest
revenue. Gains and losses on foreign exchange contracts which qualify as a hedge
of a firm commitment are deferred and recognized as part of the measurement of
the related transaction, unless deferral of a loss would lead to recognizing
losses on the transaction in later periods.
Insurance premiums from long-duration contracts, principally life insurance, are
earned when due. Premiums from short-duration insurance contracts are earned
over the related contract period. Short-duration contracts include primarily
property and casualty, credit life and accident and health policies, including
estimated ultimate premiums on retrospectively rated policies. Benefits and
expenses are associated with premiums by means of the provision for future
policy benefits, unearned premiums and the deferral and amortization of policy
acquisition costs. Receivables related to retrospectively rated policies on
property-casualty business are reported in Other assets.
Value of insurance in force, included in Other assets, represents the
actuarially determined present value of anticipated profits to be realized from
life and accident and health business on insurance in force at the date of the
Company's acquisition of its insurance subsidiaries using the same assumptions
that were used for computing related liabilities where appropriate. The value of
insurance in force acquired prior to December 31, 1993 is amortized over the
premium paying periods in relation to anticipated premiums. The value of
insurance in force relating to the 1993 acquisition of The Travelers Corporation
(old Travelers) was the actuarially determined present value of the projected
future profits discounted at interest rates ranging from 14% to 18% for the
business acquired. The value of insurance in force is amortized over the
contract period using current interest crediting rates to accrete interest and
using amortization methods based on the specified products. Traditional life
insurance is amortized over the period of anticipated premiums; universal life
in relation to estimated gross profits; and annuity contracts employing a level
yield method. The value of insurance in force is reviewed periodically for
recoverability to determine if any adjustment is required.
Deferred policy acquisition costs, included in Other assets, for the life
business represent the costs of acquiring new business, principally commissions,
certain underwriting and agency expenses and the cost of issuing policies.
Deferred policy acquisition costs for traditional life business are amortized
over the premium-paying periods of the related policies, in proportion to the
ratio of the annual premium revenue to the total anticipated premium revenue.
Deferred policy acquisition costs of other business lines are generally
amortized over the life of the insurance contract or at a constant rate based
upon the present value of estimated gross profits expected to be realized. For
certain property and casualty lines, acquisition costs (primarily commissions
and premium taxes) have been deferred to the extent recoverable from future
earned premiums and are amortized ratably over the terms of the related
policies. Deferred policy acquisition costs are reviewed to determine if they
are recoverable from future income, including investment income, and, if not
recoverable, are charged to expense. All other acquisition expenses are charged
to operations as incurred.
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 Company. The
assets of these accounts are generally carried at market value. Amounts assessed
to the 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.
Insurance policy and claims reserves represent liabilities for future insurance
policy benefits. Insurance reserves for traditional life insurance, annuities,
and accident and health policies have been computed based upon mortality,
morbidity, persistency and interest assumptions applicable to these coverages,
which range from 2.5% to 10%, including
48
<PAGE>
adverse deviation. These assumptions consider Company experience and industry
standards and may be revised if it is determined that future experience will
differ substantially from that previously assumed. Property-casualty reserves
include (1) unearned premiums representing the unexpired portion of policy
premiums, and (2) estimated provisions for both reported and unreported claims
incurred and related expenses. The reserves are adjusted regularly based on
experience.
In determining insurance policy and claims reserves, the Company carries
on a continuing review of its overall position, its reserving techniques and its
reinsurance. Reserves for property-casualty insurance losses represent the
estimated ultimate cost of all incurred claims and claim adjustment expenses.
Since the reserves are based on estimates, the ultimate liability may be more or
less than such reserves. The effects of changes in such estimated reserves are
included in the results of operations in the period in which the estimates are
changed. Such changes may be material to the results of operations and could
occur in a future period.
Contractholder funds represent receipts from the issuance of universal life,
pension investment and certain individual annuity contracts. Such receipts are
considered deposits on investment contracts that do not have substantial
mortality or morbidity risk. Account balances are increased by deposits received
and interest credited and are reduced by withdrawals, mortality charges and
administrative expenses charged to the contractholders. Calculations of
contractholder account balances for investment contracts reflect lapse,
withdrawal and interest rate assumptions (ranging from 3.8% to 8.6%) based on
contract provisions, the Company's experience and industry standards.
Contractholder funds also include other funds that policyholders leave on
deposit with the Company.
Employee benefits expense includes prior and current service costs of pension
and other postretirement benefit plans, which are accrued on a current basis,
contributions and unrestricted awards under other employee plans, the
amortization of restricted stock awards, and costs of other employee benefits.
There are no charges to earnings upon the grant or exercise of fixed stock
options or the subscription for or purchase of stock under stock purchase
agreements. Compensation expense related to performance-based stock options is
recorded over the period to the estimated vesting dates. Upon issuance of
previously unissued shares under employee plans, proceeds received in excess of
par value are credited to additional paid-in capital. Upon issuance of treasury
shares, the difference between the proceeds received and the average cost of
treasury shares is recorded in additional paid-in capital.
Income taxes. Deferred taxes are recorded for the future tax consequences of
events that have been recognized in the financial statements or tax returns,
based upon enacted tax laws and rates. Deferred tax assets are recognized
subject to management's judgment that realization is more likely than not. The
Company and its domestic non-life insurance subsidiaries file a consolidated
federal income tax return. The major life insurance subsidiaries are included in
their own consolidated federal income tax return. Citicorp and its domestic
subsidiaries and Salomon Inc and its domestic subsidiaries each filed their own
consolidated federal income tax returns prior to the respective mergers.
Earnings per common share is computed after recognition of preferred stock
dividend requirements. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised and has been computed after giving consideration to the dilutive
effect of the Company's convertible securities, common stock warrants, stock
options and the incremental shares assumed issued under the Company's Capital
Accumulation Plan and other restricted stock plans.
Future Application of Accounting Standards
Insurance-related assessments. In December 1997, the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants
(AcSEC) issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides
guidance for determining when an entity should recognize a liability for
guaranty-fund and other insurance-related assessments, how to measure that
liability, and when an asset may be recognized for the recovery of such
assessments through premium tax offsets or policy surcharges. This SOP is
effective for fiscal years beginning after December 15, 1998, and the effect of
initial adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed. The
Company estimates that the cumulative catch-up adjustment associated with the
adoption of SOP 97-3 in the first quarter of 1999 will be a charge of
approximately $135 million after-tax and minority interest, with no material
ongoing impact.
Deposit Accounting. In October 1998, AcSEC issued Statement of Position 98-7,
"Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do
Not Transfer Insurance Risk" (SOP 98-7). SOP 98-7 provides guidance on how to
account for insurance and reinsurance contracts that do not transfer insurance
risk and applies to all entities and all such contracts, except for
long-duration life and health insurance contracts. The method used to account
for such contracts is referred to as deposit accounting. SOP 98-7 does not
address in what circumstances deposit accounting should be applied. SOP 98-7
identifies several methods of deposit accounting for insurance and reinsurance
contracts that do not transfer insurance risk and provides guidance on the
application of each method. SOP 98-7 is effective for financial statements for
fiscal years beginning after June 15, 1999, with earlier adoption encouraged.
Restatement of previously issued financial statements is not permitted. The
effect of initially adopting SOP 98-7 should be reported as a cumulative
catch-up adjustment. The Company does not expect the adoption of SOP 98-7 to
have a material impact on results of operations, financial condition, or
liquidity.
Start-up costs. In April 1998, AcSEC issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred
and is effective for fiscal years beginning after December 15, 1998. The Company
expects the impact of adopting SOP 98-5 to be immaterial.
Derivatives and hedge accounting. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133), which becomes effective on January 1, 2000 for calendar year companies
such as the Company. The new standard will significantly change the accounting
treatment of end-user derivative and foreign exchange contracts used by the
Company and its customers. Depending on the underlying risk management strategy,
these
49
<PAGE>
accounting changes could affect reported earnings, assets, liabilities, and
stockholders' equity. As a result, the Company and the customers to which it
provides derivatives and foreign exchange products will have to reconsider their
risk management strategies, since the new standard will not reflect the results
of many of those strategies in the same manner as current accounting practice.
The Company is in the process of evaluating the potential impact of the new
accounting standard.
2. BUSINESS COMBINATIONS
Merger with Citicorp
On October 8, 1998, Citicorp merged with and into a newly formed, wholly owned
subsidiary of Travelers Group, Inc. (TRV) (the Merger). Following the Merger,
TRV changed its name to Citigroup Inc. (Citigroup). Under the terms of the
Merger, 1.13 billion shares of Citigroup common stock were issued in exchange
for all of the outstanding shares of Citicorp common stock based on an exchange
ratio of 2.5 shares of Citigroup common stock for each share of Citicorp common
stock. Each share of TRV common stock automatically represents one share of
Citigroup common stock. Following the exchange, former shareholders of Citicorp
and TRV each owned approximately 50% of the outstanding common stock of
Citigroup. Each outstanding share of Citicorp preferred stock was converted into
one share of a corresponding series of preferred stock of Citigroup having
identical terms. The consolidated financial statements give retroactive effect
to the Merger in a transaction accounted for as a pooling of interests, with all
periods presented as if TRV and Citicorp had always been combined. Certain
reclassifications and adjustments have been recorded to conform the accounting
policies and presentations of Citicorp and Travelers.
Upon consummation of the Merger, Citigroup became a bank holding company
subject to the provisions of the Bank Holding Company Act of 1956 (the BHCA).
The BHCA precludes a bank holding company and its affiliates from engaging in
certain activities, generally including insurance underwriting. Under the BHCA
in its current form, the Company has two years from the date it became a bank
holding company to comply with all applicable provisions (the BHCA Compliance
Period). The BHCA Compliance Period may be extended, at the discretion of the
Federal Reserve Board, for three additional one-year periods so long as the
extension is not deemed to be detrimental to the public interest. At this time,
the Company believes that its compliance with applicable laws associated with
the Merger will not have a material adverse effect on the Company's financial
condition or results of operations. At the expiration of the BHCA Compliance
Period, the Company will evaluate its alternatives in order to comply with
whatever laws are then applicable.
The following table sets forth the results of operations for the separate
companies and the combined amounts for periods prior to the Merger.
Nine Months
Ended Year Ended
September 30, December 31,
- -------------------------------------------------------------------------------
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Revenues
TRV $28,686 $37,609 $32,414
Citicorp 28,306 34,697 32,605
Reclassifications(1) -- -- 82
- -------------------------------------------------------------------------------
Citigroup $56,992 $72,306 $65,101
================================================================================
Net Income
TRV $ 2,433 $ 3,104 $ 2,948
Citicorp 2,692 3,591 3,788
SFAS No. 106 Adjustment(2) 8 18 12
Other(3) (3) (8) (9)
- -------------------------------------------------------------------------------
Citigroup $ 5,130 $ 6,705 $ 6,739
===============================================================================
(1) Reclassifications have been made to conform to the Company's post-merger
presentation.
(2) Adjusted to reflect the adoption by Citicorp of the immediate recognition
of the transition obligation under SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" effective January 1,
1993, to conform to the method used by TRV.
(3) Other adjustments have been made to conform the accounting policies of the
companies and to record the related tax effects of these adjustments.
Acquisition of Universal Card Services
On April 2, 1998, Citicorp completed its acquisition of Universal Card Services
from AT&T for $3.5 billion in cash. This purchase added $15 billion in customer
receivables and 13.5 million accounts. In addition, Citicorp entered into a
ten-year cobranding and joint marketing agreement with AT&T.
Merger with Salomon
On November 28, 1997, a newly formed, wholly owned subsidiary of TRV merged with
and into Salomon (the Salomon Merger). Under the terms of the Salomon Merger,
approximately 188.5 million shares of TRV common stock were issued in exchange
for all of the outstanding shares of Salomon common stock, based on an exchange
ratio of 1.695 shares of TRV common stock for each share of Salomon common
stock, for a total value of approximately $9 billion. Each of Salomon's series
of preferred stock outstanding was exchanged for a corresponding series of TRV
preferred stock having substantially identical terms, except that the TRV
preferred stock issued in conjunction with the Salomon Merger has certain voting
rights (see Note 18). Thereafter, Smith Barney Holdings Inc. (Smith Barney) was
merged with and into Salomon to form Salomon Smith Barney Holdings Inc. (Salomon
Smith Barney). As a result of the Salomon Merger, Salomon Smith Barney recorded
in the fourth quarter of 1997 a restructuring charge of $838 million ($496
million after-tax) (See Note 15).
Acquisition of Aetna P&C
On April 2, 1996, TAP, an indirect majority-owned subsidiary of the Company,
purchased from Aetna Services, Inc. (Aetna), all of the outstanding capital
stock of Travelers Casualty and Surety Company (formerly The Aetna Casualty and
Surety Company) and The Standard Fire Insurance Company (collectively, Aetna
P&C) for approximately $4.2 billion in cash. The acquisition was financed in
part by the sale by TAP of approximately 33 million shares of its Class A Common
Stock, representing approximately 9% of its outstanding common stock (at that
time) to four private investors, including Aetna, for an aggregate of $525
million and the sale in a public offering of approximately 39 million shares of
its Class A Common Stock,
50
<PAGE>
representing approximately 9.75% of its outstanding common stock, for total
proceeds of $928 million. The Travelers Insurance Group Inc. (TIGI), a wholly
owned subsidiary of the Company, acquired approximately 328 million shares of
Class B Common Stock of TAP in exchange for contributing the outstanding capital
stock of The Travelers Indemnity Company (Travelers Indemnity) and a capital
contribution of approximately $1.1 billion.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the consolidated financial statements include the results of
Aetna P&C's operations from the date of acquisition. The excess of the purchase
price over the estimated fair value of net assets acquired was approximately
$1.2 billion and is being amortized over 40 years. TAP also owns Travelers
Indemnity and its subsidiaries (Travelers P&C). Travelers P&C along with Aetna
P&C are the primary vehicles through which the Company engages in the property
and casualty insurance business.
During 1996, TAP recorded charges related to the acquisition and
integration of Aetna P&C. These charges resulted primarily from costs of the
acquisition and the application of TAP's strategies, policies and practices to
Aetna P&C reserves and include: $229 million after-tax and minority interest
($430 million before tax and minority interest) in reserve increases, net of
reinsurance, related primarily to cumulative injury claims other than asbestos
(CIOTA); a $45 million after-tax and minority interest ($84 million before tax
and minority interest) provision for an additional asbestos liability related to
an existing settlement agreement with a customer of Aetna P&C; a $32 million
after-tax and minority interest ($60 million before tax and minority interest)
charge related to premium collection issues; a $22 million after-tax and
minority interest ($41 million before tax and minority interest) provision for
uncollectibility of reinsurance recoverables; and an $18 million after-tax and
minority interest ($35 million before tax and minority interest) provision for
lease and severance costs of Travelers Indemnity related to the restructuring
plan for the acquisition. In addition, the Company recognized a gain in 1996 of
$363 million (before and after-tax) from the issuance of shares of Class A
Common Stock by TAP.
Supplemental Information to the Consolidated Statement of Cash Flows Relating to
the Acquisition of Aetna P&C
Year Ended
December 31,
- -------------------------------------------------------------------------------
In Millions of Dollars 1996
- -------------------------------------------------------------------------------
Assets and liabilities of business acquired
Invested assets $ 13,969
Reinsurance recoverables and other assets 10,386
Insurance policy and claim reserves (18,302)
Other liabilities (1,893)
- -------------------------------------------------------------------------------
Cash payment related to business acquisition $ 4,160
===============================================================================
3. DISCONTINUED OPERATIONS
In March 1997, the Company entered into a non-binding letter of intent to
sell all of the outstanding stock of Basis Petroleum, Inc. (Basis), a wholly
owned subsidiary that owns and operates oil refineries in the U.S. Gulf Coast
area, to Valero Energy Corporation (Valero). This transaction resulted in the
recognition in 1996 in the Consolidated Financial Statements of a pre-tax
loss of approximately $505 million ($290 million after-tax). The sale was
completed on May 1, 1997. Proceeds from the sale included cash of $365
million, Valero common stock with a market value of $120 million and
participation payments based on a fixed notional throughput and the
difference, if any, between an average market crackspread, as defined, and a
base crackspread, as defined, over each of the next ten years. The total of
the participation payments is capped at $200 million, with a maximum of $35
million per year. During 1998, the Company received $11 million in
participation payments from Valero. In addition, as a result of Valero's
merger agreement with PG&E Corporation (PG&E), Valero's common stock was
exchanged for stock of PG&E and a new stock of the spin-off company (New
Valero), representing Valero's refining assets. In the third quarter of 1997,
the Company liquidated its interest in the PG&E and New Valero common stock.
In July 1997, the Company paid Valero $3 million in connection with the final
determination of working capital. The estimated loss includes severance costs
and anticipated operating losses to be incurred prior to the completion of
the sale, and reflects other estimates of value at the time of closing.
Revenues of Basis for the year ended December 31, 1996 were immaterial.
4. BUSINESS SEGMENT INFORMATION
Citigroup is a diversified financial services holding company whose businesses
provide a broad range of financial services to consumer and corporate customers
around the world. The Company's activities are conducted through Global
Consumer, Global Corporate and Investment Bank, Asset Management, and Investment
Activities.
The Global Consumer segment includes a global, full-service consumer
franchise encompassing, among other things, branch and electronic banking,
consumer lending services and credit and charge card services, personalized
wealth management services for high net-worth clients, and life, auto and
homeowners insurance. The businesses included in the Global Corporate and
Investment Bank segment serve corporations, financial institutions,
governments, and other participants in developed and emerging markets
throughout the world providing, among other things, investment banking,
retail brokerage, corporate banking and cash management products and
services, and commercial insurance. The Asset Management segment includes
asset management services provided to mutual funds and institutional and
individual investors. Investment Activities include the Company's venture
capital activities, the realized investment gains and losses related to
certain corporate- and insurance-related investments and the results of
certain investments in countries that refinanced debt under the 1989 Brady
Plan or plans of a similar nature. Corporate/Other includes net treasury
results, revenues derived from charging banking segments for funds employed,
based upon a marginal cost of funds concept, corporate staff and similar
expenses, and the offset created by attributing income taxes to core business
activities on a local tax-rate basis for Citicorp.
51
<PAGE>
The following table presents certain information regarding these industry
segments:
<TABLE>
<CAPTION>
Total Revenues, Net Provision for Identifiable
of Interest Expense(1) Income Taxes Net Income (Loss)(2) Assets at Year-End
In Millions of Dollars, Except ------------------------- ---------------------- ------------------------ --------------------
Identifiable Assets in Billions 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Global Consumer(3) $23,743 $20,992 $19,513 $1,471 $1,241 $1,412 $2,812 $2,697 $3,009 $237 $202 $192
Global Corporate and
Investment Bank(3)(4) 21,719 23,207 21,755 951 1,246 1,515 2,067 2,874 2,985 416 478 418
Asset Management 1,244 1,052 880 144 124 98 263 243 208 2 2 1
Investment Activities 1,298 1,693 715 316 409 166 929 1,292 594 8 9 9
Corporate/Other(5) 932 838 902 352 813 776 (264) (401) (57) 6 6 7
- -----------------------------------------------------------------------------------------------------------------------------------
Total $48,936 $47,782 $43,765 $3,234 $3,833 $3,967 $5,807 $6,705 $6,739 $669 $697 $627
===================================================================================================================================
</TABLE>
(1) Includes total revenues, net of interest expense in the United States of
$37.3 billion, $34.4 billion, and $31.9 billion in 1998, 1997, and 1996,
respectively. Total revenues, net of interest expense attributable to
individual foreign countries are not material to the total.
(2) For the 1998 period, Global Consumer, Global Corporate and Investment
Bank, Asset Management, and Corporate/Other results reflect after-tax
restructuring charges (credit) and merger-related costs of $446 million,
($26) million, $10 million, and $105 million, respectively. For the 1997
period, Global Consumer, Global Corporate and Investment Bank, and
Corporate/Other results reflect after-tax restructuring charges of $351
million, $664 million, and $31 million, respectively.
(3) Includes provisions for benefits, claims, and credit losses in the Global
Consumer results of $7.0 billion, $6.3 billion, and $5.9 billion, and in
the Global Corporate and Investment Bank results of $4.2 billion, $3.7
billion, and $3.7 billion for 1998, 1997, and 1996, respectively.
(4) Included in the 1996 results is a $365 million loss on discontinued
operations, net of tax related to SSB. Additionally, in 1996, Commercial
Lines Insurance recorded a $372 million after-tax charge related to the
acquisition of Aetna P&C.
(5) Included in the 1996 results is a $31 million gain on discontinued
operations, net of tax.
5. INVESTMENTS
In Millions of Dollars at Year-End 1998 1997
- --------------------------------------------------------------------------------
Fixed maturities, primarily available for sale at fair value $ 90,414 $77,920
Equity securities, at fair value 4,203 3,928
Venture capital, at fair value 3,297 2,599
Short-term and other 5,758 7,186
- --------------------------------------------------------------------------------
$103,672 $91,633
================================================================================
The fair value of investments for which a quoted market price or dealer
quote are not available amounted to $6.0 billion and $6.6 billion at December
31, 1998 and 1997, respectively.
The amortized cost and fair value of investments in fixed maturities and equity
securities at December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
In Millions of Dollars at Year-End Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity securities held to maturity,
principally mortgage-backed securities $ 30 $ 6 $ -- $ 36 $ 41 $ 9 $ -- $ 50
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale
Mortgage-backed securities, principally
obligations of U.S. Federal agencies $12,646 $ 350 $ 14 $12,982 $ 9,795 $ 310 $ 6 $10,099
U.S. Treasury and Federal agency 5,250 455 4 5,701 6,816 312 -- 7,128
State and municipal 13,714 799 227 14,286 10,351 583 117 10,817
Foreign government 26,444 424 600 26,268 19,381 883 268 19,996
U.S. corporate 23,424 1,213 302 24,335 23,306 958 127 24,137
Other debt securities 6,642 248 78 6,812 5,625 168 91 5,702
- ----------------------------------------------------------------------------------------------------------------------------------
$88,120 $3,489 $1,225 $90,384 $75,274 $3,214 $ 609 $77,879
==================================================================================================================================
Equity securities(1) $ 4,060 $ 310 $ 167 $ 4,203 $ 3,661 $ 363 $ 96 $ 3,928
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available for
sale include:
Government of Brazil Brady Bonds $ 660 $ 26 $ -- $ 686 $ 1,436 $ 612 $-- $ 2,048
Government of Venezuela Brady Bonds 478 -- 174 304 535 -- 55 480
==================================================================================================================================
</TABLE>
(1) Includes non-marketable equity securities carried at cost which are
reported in both the amortized cost and fair value columns.
52
<PAGE>
The accompanying table shows components of interest and dividends on
investments, realized gains and losses from sales of investments, and net
gains on investments held by venture capital subsidiaries.
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Taxable interest $6,000 $5,486 $4,595
Interest exempt from U.S. federal income tax 636 496 377
Dividends 159 144 121
- --------------------------------------------------------------------------------
Gross realized investments gains $1,507 $1,414 $ 771
Gross realized investments losses 667 419 495
- --------------------------------------------------------------------------------
Net realized and unrealized venture capital gains $ 487 $ 749 $ 450
which included:
Gross unrealized gains 709 612 416
Gross unrealized losses 412 82 150
================================================================================
The following table presents the amortized cost, fair value, and average
yield on amortized cost of fixed maturity securities by contractual maturity
dates as of December 31, 1998:
Amortized Fair
In Millions of Dollars Cost Value Yield
- -------------------------------------------------------------------------------
U.S. Treasury and Federal agency(1)
Due within 1 year $ 1,045 $ 1,045 4.95%
After 1 but within 5 years 934 956 5.69
After 5 but within 10 years 2,241 2,459 6.76
After 10 years(2) 11,017 11,516 6.95
- -------------------------------------------------------------------------------
Total $15,237 $15,976 6.71
===============================================================================
State and municipal
Due within 1 year $ 105 $ 106 5.29%
After 1 but within 5 years 436 429 5.69
After 5 but within 10 years 2,649 2,733 5.28
After 10 years(2) 10,524 11,018 5.59
- -------------------------------------------------------------------------------
Total $13,714 $14,286 5.53
===============================================================================
All other(3)
Due within 1 year $13,041 $13,021 8.22%
After 1 but within 5 years 20,814 21,178 6.74
After 5 but within 10 years 13,211 13,428 12.30
After 10 years(2) 12,133 12,531 9.36
- -------------------------------------------------------------------------------
Total $59,199 $60,158 8.84
===============================================================================
(1) Includes mortgage-backed securities of U.S. Federal agencies.
(2) Investments with no stated maturities are included as contractual
maturities of greater than 10 years. Actual maturities may differ due to
call or prepayment rights.
(3) Includes foreign government, U.S. corporate, mortgage-backed securities
issued by U.S. corporations, and other debt securities. Yields reflect the
impact of local interest rates prevailing in countries outside the U.S.
6. FEDERAL FUNDS, SECURITIES BORROWED, LOANED AND SUBJECT TO REPURCHASE
AGREEMENTS
Federal funds sold and securities borrowed or purchased under agreements to
resell, at their respective carrying values, consisted of the following at
December 31:
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Federal funds sold and resale agreements $ 45,439 $ 86,035
Deposits paid for securities borrowed 49,392 33,932
- --------------------------------------------------------------------------------
$ 94,831 $119,967
================================================================================
Federal funds purchased and securities loaned or sold under agreements to
repurchase, at their respective carrying values, consisted of the following at
December 31:
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Federal funds purchased and repurchase agreements $ 71,399 $124,775
Deposits received for securities loaned 9,626 7,328
- --------------------------------------------------------------------------------
$ 81,025 $132,103
================================================================================
The resale and repurchase agreements represent collateralized financing
transactions used to generate net interest income and facilitate trading
activity. These instruments are collateralized principally by government and
government agency securities and generally have terms ranging from overnight to
up to a year. It is the Company's policy to take possession of the underlying
collateral, monitor its market value relative to the amounts due under the
agreements, and, when necessary, require prompt transfer of additional
collateral or reduction in the loan balance in order to maintain contractual
margin protection. In the event of counterparty default, the financing agreement
provides the Company with the right to liquidate the collateral held. Resale
agreements and repurchase agreements are reported net by counterparty, when
applicable, pursuant to FASB Interpretation 41, "Offsetting of Amounts Related
to Certain Repurchase and Reverse Repurchase Agreements" (FIN 41). Excluding the
impact of FIN 41, resale agreements totaled $100.2 billion and $129.1 billion at
December 31, 1998 and 1997, respectively.
Deposits paid for securities borrowed (securities borrowed) and deposits
received for securities loaned (securities loaned) are recorded at the amount of
cash advanced or received and are collateralized principally by government and
government agency securities, corporate debt and equity securities. Securities
borrowed transactions require the Company to deposit cash with the lender. With
respect to securities loaned, the Company receives cash collateral in an amount
generally in excess of the market value of securities loaned. The Company
monitors the market value of securities borrowed and securities loaned daily,
and additional collateral is obtained as necessary. Securities borrowed and
securities loaned are reported net by counterparty, when applicable, pursuant to
FIN 41. Excluding the impact of FIN 41, securities borrowed totaled $50.2
billion and $40.5 billion at December 31, 1998 and 1997, respectively.
7. BROKERAGE RECEIVABLES AND BROKERAGE PAYABLES
The Company has receivables and payables for financial instruments purchased
from and sold to brokers and dealers and customers. The Company is exposed to
risk of loss from the inability of brokers and dealers or customers to pay for
purchases or to deliver the financial instrument sold, in which case the Company
would have to sell or purchase the financial instruments at prevailing market
prices. Credit risk is reduced to the extent that an exchange or clearing
organization acts as a counterparty to the transaction.
The Company seeks to protect itself from the risks associated with
customer activities by requiring customers to maintain margin collateral in
compliance with regulatory and internal guidelines. Margin levels are monitored
daily, and customers deposit additional collateral as required. Where customers
cannot meet collateral requirements, the Company will liquidate sufficient
underlying financial instruments to bring the customer into compliance with the
required margin level.
53
<PAGE>
Exposure to credit risk is impacted by market volatility, which may impair
the ability of clients to satisfy their obligations to the Company. Credit
limits are established and closely monitored for customers and brokers and
dealers engaged in forward and futures and other transactions deemed to be
credit-sensitive.
Brokerage receivables and brokerage payables, which arise in the normal
course of business, consisted of the following at December 31:
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Receivables from customers $14,075 $12,415
Receivables from brokers,
dealers and clearing organizations 7,338 3,212
- --------------------------------------------------------------------------------
Total brokerage receivables $21,413 $15,627
================================================================================
Payables to customers $13,153 $ 9,791
Payables to brokers,
dealers, and clearing organizations 7,902 2,972
- --------------------------------------------------------------------------------
Total brokerage payables $21,055 $12,763
================================================================================
8. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and liabilities consisted of the following at December
31:
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Trading Account Assets
U.S. Treasury and Federal agency securities $ 24,729 $ 56,007
State and municipal securities 3,165 3,255
Foreign government securities 21,240 50,924
Corporate and other debt securities 12,595 16,637
Derivative and other
contractual commitments(1) 37,431 34,585
Equity securities 7,291 9,236
Mortgage loans and
collateralized mortgage securities 6,082 3,160
Commodities 245 1,274
Other 7,067 5,010
- --------------------------------------------------------------------------------
$119,845 $180,088
================================================================================
Trading Account Liabilities
Securities sold, not yet purchased $ 53,228 $ 90,247
Derivative and other contractual commitments(1) 41,356 36,905
- --------------------------------------------------------------------------------
$ 94,584 $127,152
================================================================================
(1) Net of master netting agreements and securitization.
The average fair value of derivative and other contractual commitments in
trading account assets during 1998 and 1997 was $39.6 billion and $28.8 billion,
respectively. The average fair value of contractual commitments in trading
account liabilities during 1998 and 1997 was $39.4 billion and $32.6 billion,
respectively.
Deferred revenue on derivative and other contractual commitments
attributable to ongoing costs totaled $472 million and $391 million at December
31, 1998 and 1997, respectively, which is reported in other liabilities.
See Note 23 for a discussion of trading securities, commodities,
derivatives and related risks.
9. PRINCIPAL TRANSACTION REVENUES
Principal transaction revenues, consisting of realized and unrealized gains and
losses from trading activities, were as follows for the years ended December 31:
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Salomon Smith Barney
Fixed income(1) $ (869) $1,882 $2,049
Equities(2) 536 397 576
Commodities(3) 205 218 393
Other 15 7 9
- --------------------------------------------------------------------------------
(113) 2,504 3,027
- --------------------------------------------------------------------------------
Citicorp
Foreign exchange(4) 1,409 1,063 765
Derivative(5) 658 354 485
Fixed income(6) (162) 102 12
Other (12) 208 239
- --------------------------------------------------------------------------------
1,893 1,727 1,501
- --------------------------------------------------------------------------------
Total principal transaction revenues $ 1,780 $4,231 $4,528
================================================================================
(1) Includes revenues from government securities and corporate debt, municipal
securities, preferred stock, mortgage securities, and other debt
instruments. Also includes spot and forward trading of currencies and
exchange-traded and over-the-counter (OTC) currency options, options on
fixed income securities, interest rate swaps, currency swaps, swap
options, caps and floors, financial futures, and OTC options and forward
contracts on fixed income securities.
(2) Includes revenues from common and convertible preferred stock, convertible
corporate debt, equity-linked notes, and exchange-traded and OTC equity
options and warrants.
(3) Includes revenues from the results of Phibro Inc. (Phibro), which trades
crude oil, refined oil products, natural gas, electricity, metals, and
various soft commodities and related derivative instruments. During 1998,
Phibro continued its downsizing effort to significantly reduce the scope
of some of its activities.
(4) Includes revenues from foreign exchange spot, forward, and option
contracts.
(5) Includes revenues from interest rate and currency swaps, options,
financial futures, and equity and commodity contracts.
(6) Includes revenues from government and corporate debt, mortgage assets, and
other debt instruments.
54
<PAGE>
10. LOANS
In Millions of Dollars at Year-End 1998 1997
- -------------------------------------------------------------------------------
Consumer
In U.S. offices
Mortgage and real estate(1)(2) $ 29,962 $ 28,084
Installment, revolving credit, and other 47,869 42,415
- -------------------------------------------------------------------------------
77,831 70,499
- -------------------------------------------------------------------------------
In offices outside the U.S.
Mortgage and real estate(1)(3) 19,456 17,685
Installment, revolving credit, and other 36,048 32,179
Lease financing 484 544
- -------------------------------------------------------------------------------
55,988 50,408
- -------------------------------------------------------------------------------
133,819 120,907
Unearned income (1,564) (1,417)
- -------------------------------------------------------------------------------
Consumer loans, net of unearned income $ 132,255 $ 119,490
===============================================================================
Commercial
In U.S. offices
Commercial and industrial(4) $ 12,279 $ 10,841
Mortgage and real estate(1) 5,344 5,960
Loans to financial institutions 173 371
Lease financing 2,951 3,087
- -------------------------------------------------------------------------------
20,747 20,259
- -------------------------------------------------------------------------------
In offices outside the U.S.
Commercial and industrial(4) 55,828 47,417
Mortgage and real estate(1) 1,792 1,651
Loans to financial institutions 8,008 6,480
Governments and official institutions 2,132 2,376
Lease financing 1,386 1,092
- -------------------------------------------------------------------------------
69,146 59,016
- -------------------------------------------------------------------------------
89,893 79,275
Unearned income (190) (159)
- -------------------------------------------------------------------------------
Commercial loans, net of unearned income $ 89,703 $ 79,116
===============================================================================
(1) Loans secured primarily by real estate.
(2) Includes $3.3 billion in 1998 and $3.4 billion in 1997 of commercial real
estate loans related to community banking and private banking activities.
(3) Includes $2.4 billion in 1998 and $2.3 billion in 1997 of loans secured by
commercial real estate.
(4) Includes loans not otherwise separately categorized.
The following table presents information about impaired loans. Impaired
loans are those on which Citigroup believes it is not probable that it will be
able to collect all amounts due according to the contractual terms of the loan,
excluding smaller-balance homogeneous loans that are evaluated collectively for
impairment, and are carried on a cash basis:
In Millions of Dollars at Year-End 1998 1997
- --------------------------------------------------------------------------------
Impaired commercial loans $1,536 $ 971
Other impaired loans(1) 218 241
- --------------------------------------------------------------------------------
Total impaired loans(2) $1,754 $1,212
================================================================================
Impaired loans with valuation allowances $ 257 $ 98
Total valuation allowances(3) 24 16
================================================================================
During the year(4):
Average balance of impaired loans $1,498 $1,188
Interest income recognized on impaired loans 68 62
================================================================================
(1) Primarily commercial real estate loans related to community and private
banking activities.
(2) At year-end 1998, approximately 31% of these loans were measured for
impairment using the fair value of the collateral, with the remaining 69%
measured using the present value of the expected future cash flows,
discounted at the loan's effective interest rate, compared with
approximately 39% and 61%, respectively, at year-end 1997.
(3) Included in the allowance for credit losses.
(4) For the year ended December 31, 1996, the average balance of impaired
loans was $1.7 billion and interest income recognized on impaired loans
was $116 million.
11. ALLOWANCE FOR CREDIT LOSSES
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Allowance for credit losses
at beginning of year $ 6,137 $ 5,743 $ 5,561
Additions
Provision for credit losses 2,751 2,197 2,200
Deductions
Consumer credit losses(1) 2,735 2,604 2,438
Consumer credit recoveries(1) (497) (507) (473)
- -------------------------------------------------------------------------------
Net consumer credit losses(1) 2,238 2,097 1,965
- -------------------------------------------------------------------------------
Commercial credit losses 576 191 259
Commercial credit recoveries (170) (219) (266)
- -------------------------------------------------------------------------------
Net commercial credit losses (recoveries) 406 (28) (7)
- -------------------------------------------------------------------------------
Other -- net(2) 373 266 (60)
- -------------------------------------------------------------------------------
Allowance for credit losses at end of year $ 6,617 $ 6,137 $ 5,743
===============================================================================
(1) Commencing in 1997, reflects the classification of credit card receivables
intended for sale as loans held for sale (included in other assets) with
net credit losses charged to other income.
(2) Primarily includes net transfers from (to) the reserves for securitization
activities and foreign currency translation effects. In 1998, reflects the
addition of $320 million of credit loss reserves related to the
acquisition of the Universal Card portfolio. In 1997, $373 million was
restored to the allowance for credit losses that had previously been
attributed to credit card securitization transactions where the exposure
to credit losses is contractually limited to the cash flows from the
securitized receivables, $50 million attributable to standby letters of
credit and guarantees was reclassified to other liabilities, and $50
million attributable to derivative and foreign exchange contracts was
reclassified as a deduction from trading account assets.
55
<PAGE>
12. DEBT
Investment Banking and Brokerage Borrowings
Investment banking and brokerage borrowings and the corresponding weighted
average interest rates at December 31 are as follows:
1998 1997
- ---------------------------------------------------- -------------------
Interest Interest
In Millions of Dollars Balance Rate Balance Rate
- -------------------------------------------------------------------------------
Bank borrowings $ 556 5.1% $ 2,415 5.9%
Commercial paper 10,493 5.3% 7,110 5.8%
Other 2,991 1,939
- -------------------------------------------------------------------------------
$14,040 $11,464
================================================================================
Investment banking and brokerage borrowings are short-term in nature and
include commercial paper, bank borrowings and other borrowings, used to finance
Salomon Smith Barney's operations, including the securities settlement process.
Outstanding bank borrowings include both U.S. dollar and non-U.S. dollar
denominated loans. The non-U.S. dollar loans are denominated in multiple
currencies including Japanese yen and U.K. sterling. All commercial paper
outstanding at December 31, 1998 and 1997 was U.S. dollar denominated.
At December 31, 1998, Salomon Smith Barney had a $1.5 billion revolving
credit agreement with a bank syndicate that extends through May 2001, and a $3.5
billion, 364-day revolving credit agreement that extends through May 1999.
Salomon Smith Barney may borrow under its revolving credit facilities at various
interest rate options (LIBOR, CD or base rate) and compensates the banks for the
facilities through commitment fees. Under these facilities Salomon Smith Barney
is required to maintain a certain level of consolidated adjusted net worth (as
defined in the agreements). At December 31, 1998, this requirement was exceeded
by approximately $2.8 billion. At December 31, 1998, there were no borrowings
outstanding under either facility.
Salomon Smith Barney also has substantial borrowing arrangements
consisting of facilities that it has been advised are available, but where no
contractual lending obligation exists.
Short-Term Borrowings
At December 31, short-term borrowings consisted of commercial paper and other
short-term borrowings with weighted average interest rates as follows:
1998 1997
- ------------------------------------------------------- ------------------
Out- Interest Out- Interest
In Millions of Dollars standing Rate standing Rate
- -------------------------------------------------------------------------------
Commercial paper
Citigroup $ 991 5.40% $ -- --%
Commercial Credit Company 2,908 5.35 3,871 5.83
Citicorp 132 5.53 1,941 5.46
Travelers Property Casualty Corp. -- -- 108 6.11
- -------------------------------------------------------------------------------
4,031 5,920
Other short-term borrowings 12,081 12.14 8,108 9.04
- -------------------------------------------------------------------------------
$16,112 $14,028
===============================================================================
Citigroup, Citicorp, Commercial Credit Company (CCC), TAP and The
Travelers Insurance Company (TIC) issue commercial paper directly to investors.
Citicorp and Citigroup, both of which are bank holding companies, maintain
combined liquidity reserves of cash and securities (at Citicorp) and unused bank
lines of credit (at Citigroup) at least equal to their combined outstanding
commercial paper. CCC, TAP, and TIC each maintains unused credit availability
under its bank lines of credit at least equal to the amount of its outstanding
commercial paper.
Borrowings under bank lines of credit may be at interest rates based on
LIBOR, CD rates, the prime rate or bids submitted by the banks. Each company
pays its banks commitment fees for its lines of credit.
Citicorp and some of its nonbank subsidiaries have credit facilities with
Citicorp's subsidiary banks, including Citibank, N.A. Borrowings under these
facilities would be secured in accordance with Section 23A of the Federal
Reserve Act.
Citigroup, CCC and TIC have a five-year revolving credit facility which
expires in June 2001 with a syndicate of banks to provide $1.0 billion of
revolving credit, to be allocated to any of Citigroup, CCC or TIC. The
participation of TIC in this facility is limited to $250 million. At December
31, 1998, all of the facility was allocated to Citigroup. Under this facility,
the Company is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1998, the
Company exceeded the requirement by approximately $27.2 billion. Citigroup and
CCC also have $450 million in 364-day facilities, $200 million which expires in
August 1999 and $250 million which expires in March 1999 and may be allocated to
either of Citigroup or CCC. At December 31, 1998, all $450 million was allocated
to Citigroup. At December 31, 1998, there were no borrowings outstanding under
either facility.
At December 31, 1998, CCC also had a committed and available revolving
credit facility on a stand-alone basis of $4.750 billion, consisting of $3.4
billion in five-year facilities which expire in 2002 and $1.350 billion in a
364-day facility that expires in July 1999.
CCC is limited by covenants in its revolving credit agreements as to the
amount of dividends and advances that may be made to its parent or its
affiliated companies. At December 31, 1998, CCC would have been able to remit
$819 million under its most restrictive covenants.
TAP has a five-year revolving credit facility in the amount of $250
million with a syndicate of banks that expires in December 2001. Under this
facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1998, this
requirement was exceeded by approximately $4.2 billion. At December 31, 1998,
there were no borrowings outstanding under this facility.
56
<PAGE>
Long-Term Debt
At December 31, long-term debt was as follows:
Weighted
Average
In Millions of Dollars Coupon Maturities 1998 1997
- -------------------------------------------------------------------------------
Citigroup Inc.
Senior Notes(1) 6.97% 1999-2028 $ 2,412 $ 1,662
Other(2) 10 33
Salomon Smith Barney
Holdings Inc.
Senior Notes 6.25% 1999-2023 19,092 19,064
Citicorp
Senior Notes 7.20% 1999-2012 11,265 11,372
Subordinated Notes 7.18% 1999-2035 8,359 7,663
Commercial Credit
Company
Senior Notes 6.99% 1999-2025 6,250 6,300
Travelers Property
Casualty Corp.
Senior Notes 6.83% 1999-2026 1,250 1,250
Other(3) -- (1)
The Travelers Insurance
Group Inc.
Other(4) 33 44
- -------------------------------------------------------------------------------
Total
Senior Notes 40,269 39,648
Subordinated Notes 8,359 7,663
Other 43 76
- -------------------------------------------------------------------------------
$48,671 $47,387
===============================================================================
(1) Includes $250 million of notes maturing in 2098.
(2) Unamortized premium of $10 million in 1998 and $15 million in 1997; and an
ESOP note guarantee of $18 million in 1997.
(3) Unamortized discount.
(4) Principally 12% GNMA/FNMA-collateralized obligations.
Salomon Smith Barney and Citicorp issue both U.S. dollar and non-U.S.
dollar denominated fixed and variable rate debt. Both companies also utilize
derivative contracts, primarily interest rate swaps, to effectively convert most
of their fixed rate debt to variable rate debt. The maturity structure of the
derivatives generally corresponds with the maturity structure of the debt being
hedged. At December 31, 1998, Salomon Smith Barney had entered into interest
rate swaps to convert $11.5 billion of its $13.6 billion of fixed rate debt to
variable rate obligations. The contractual weighted average fixed rate on
swapped fixed rate debt versus the weighted average variable rate on swapped
debt (Salomon Smith Barney's actual borrowing cost) was 6.6% and 5.5% at
December 31,1998.
At December 31, 1998, Citicorp had converted, through the use of
derivative contracts, $10.0 billion of its $11.7 billion of fixed rate debt into
variable rate obligations. In addition, Citicorp utilizes other derivative
contracts to manage the foreign exchange impact of certain debt issuances. At
year-end 1998, Citicorp's overall weighted average interest rate for long-term
debt was 7.2% on a contractual basis and 6.5% after including the effects of
derivative contracts.
Aggregate annual maturities on long-term debt obligations (based on final
maturity dates), excluding principal payments on the 12%
GNMA/FNMA-collateralized obligations, are as follows:
<TABLE>
<CAPTION>
In Millions of Dollars 1999 2000 2001 2002 2003 Thereafter
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Citigroup Inc. $ 100 $ 650 $ -- $ 300 $ -- $ 1,362
Salomon Smith Barney Holdings Inc. 2,784 3,417 2,099 2,428 2,845 5,519
Citicorp 2,844 2,569 1,963 2,667 2,093 7,488
Commercial Credit Company 350 750 700 900 400 3,150(1)
Travelers Property Casualty Corp. 400 -- 500 -- -- 350
- -------------------------------------------------------------------------------------------------
$6,478 $7,386 $5,262 $6,295 $5,338 $17,869
=================================================================================================
</TABLE>
(1) Includes $450 million redeemable at option of holders during 1999 at face
amount and $200 million redeemable at option of holders during 2002 at
face amount.
57
<PAGE>
13. INSURANCE POLICY AND CLAIMS RESERVES
At December 31, insurance policy and claims reserves consisted of the following:
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Benefit and loss reserves:
Property-casualty(1) $28,624 $29,343
Accident and health 803 1,080
Life and annuity 9,398 8,660
Unearned premiums 4,702 4,267
Policy and contract claims 463 432
- --------------------------------------------------------------------------------
$43,990 $43,782
================================================================================
(1) Included at December 31, 1998 and 1997 are $1.3 billion and $1.5 billion,
respectively, of reserves related to workers' compensation that have been
discounted using an interest rate of 5%.
The following table is a reconciliation of beginning and ending
property-casualty reserve balances for claims and claim adjustment expenses for
the years ended December 31:
In Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
Claims and claim adjustment expense
reserves at beginning of year $ 29,343 $ 29,967 $14,715
Less reinsurance recoverables on
unpaid losses 7,937 8,151 4,613
- --------------------------------------------------------------------------------
Net balance at beginning of year 21,406 21,816 10,102
- --------------------------------------------------------------------------------
Provision for claims and claim adjustment
expense for claims arising in current year 6,057 5,730 4,827
Estimated claims and claim adjustment
expense for claims arising in prior years (323) (492) 192
Increase for purchase of Aetna P&C -- -- 11,752
- --------------------------------------------------------------------------------
Total increases 5,734 5,238 16,771
- --------------------------------------------------------------------------------
Claims and claim adjustment expense
payments for claims arising in:
Current year 2,352 1,944 1,858
Prior years 4,025 3,704 3,199
- --------------------------------------------------------------------------------
Total payments 6,377 5,648 5,057
- --------------------------------------------------------------------------------
Net balance at end of year 20,763 21,406 21,816
Plus reinsurance recoverables on
unpaid losses 7,861 7,937 8,151
- --------------------------------------------------------------------------------
Claims and claim adjustment expense
reserves at end of year $ 28,624 $ 29,343 $29,967
================================================================================
The decrease in the claims and claim adjustment expense reserves in 1998
primarily was attributable to net payments of $663 million of environmental,
asbestos, and other cumulative injury claims.
In 1998, estimated claims and claim adjustment expenses for claims arising
in prior years includes approximately $176 million primarily relating to net
favorable development in certain Personal Lines coverages, predominantly
automobile coverages. In addition, in 1998 Commercial Lines experienced
favorable prior year loss development on loss sensitive policies in the workers'
compensation line; however, since the business to which it relates is subject to
premium adjustments, there was no impact on results of operations.
In 1997, estimated claims and claim adjustment expenses for claims arising
in prior years included $154 million of net favorable development in certain
Personal Lines coverages and Commercial Lines coverages, predominantly
automobile coverages. In addition, in 1997 Commercial Lines experienced $122
million of favorable prior year loss development in the workers' compensation
line; however, since the business to which it relates is subject to premium
adjustments, there was no impact on results of operations. Also in 1997, the
Company adopted newly prescribed statutory allocations of certain claim
adjustment expenses. The new allocations resulted in favorable prior year loss
development of $216 million offset by an increase in the current accident year
provision of the same amount.
In 1996 estimated claims and claim adjustment expenses for claims arising
in prior years included $238 million of net favorable development in certain
Commercial Lines and Personal Lines coverages. Also in 1996, estimated claims
and claim adjustment expenses for claims arising in prior years included $430
million within Commercial Lines related to acquisition-related charges,
primarily related to Cumulative Injury Other Than Asbestos (CIOTA), insurance
products involving financial guarantees, and assumed reinsurance.
The property-casualty claims and claim adjustment expense reserves include
$1.818 billion and $2.233 billion for asbestos and environmental-related claims
net of reinsurance at December 31, 1998 and 1997, respectively.
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are not
used to estimate such reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance, and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance and past ceded experience. In
addition, a similar review is conducted for asbestos property damage claims.
However, due to the relatively minor claim volume, these reserves have remained
at a constant level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1998 are the Company's best
estimate of ultimate claims and claim adjustment expenses, based upon known
facts and current law. However, the conditions surrounding the final resolution
of these claims continue to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
impacted by future court decisions and interpretations as well as changes in
legislation applicable to such claims. Because of these future unknowns,
additional liabilities may arise for amounts in excess of the current reserves.
These additional amounts, or a range of these additional amounts, cannot now be
reasonably estimated, and could result in a liability exceeding reserves by an
amount that would be material to the Company's operating results in a future
period. However, the Company believes that it is
58
<PAGE>
not likely that these claims will have a material adverse effect on the
Company's financial condition or liquidity.
The Company has a geographic exposure to catastrophe losses in certain
areas of the country. Catastrophes can be caused by various events including
hurricanes, windstorms, earthquakes, hail, severe winter weather, explosions and
fires, and the incidence and severity of catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a function of both the
total amount of insured exposure in the area affected by the event and the
severity of the event. Most catastrophes are restricted to small geographic
areas; however, hurricanes and earthquakes may produce significant damage in
large, heavily populated areas. The Company generally seeks to reduce its
exposure to catastrophes through individual risk selection and the purchase of
catastrophe reinsurance.
14. REINSURANCE
The Company's insurance operations participate in reinsurance in order to limit
losses, minimize exposure to large risks, provide additional capacity for future
growth and effect business-sharing arrangements. Life reinsurance is
accomplished through various plans of reinsurance, primarily coinsurance,
modified coinsurance and yearly renewable term. Property-casualty reinsurance is
placed on both a quota-share and excess of loss basis. The property-casualty
insurance subsidiaries also participate as a servicing carrier for, and a member
of, several pools and associations. Reinsurance ceded arrangements do not
discharge the insurance subsidiaries as the primary insurer, except for cases
involving a novation.
Reinsurance amounts included in the Consolidated Statement of Income for
the year ended December 31 were as follows:
Gross Net
In Millions of Dollars Amount Ceded Amount
- --------------------------------------------------------------------------------
1998
Premiums
Property-casualty insurance $ 9,579 $(1,689) $7,890
Life insurance 1,915 (304) 1,611
Accident and health insurance 410 (61) 349
- --------------------------------------------------------------------------------
$11,904 $(2,054) $9,850
================================================================================
Claims incurred $ 9,024 $(1,560) $7,464
================================================================================
1997
Premiums
Property-casualty insurance $ 9,045 $(1,751) $7,294
Life insurance 1,669 (279) 1,390
Accident and health insurance 373 (62) 311
- --------------------------------------------------------------------------------
$11,087 $(2,092) $8,995
================================================================================
Claims incurred $ 8,226 $(1,357) $6,869
================================================================================
1996
Premiums
Property-casualty insurance $ 7,902 $(1,806) $6,096
Life insurance 1,529 (296) 1,233
Accident and health insurance 402 (98) 304
- --------------------------------------------------------------------------------
$ 9,833 $(2,200) $7,633
================================================================================
Claims incurred $ 8,389 $(1,892) $6,497
================================================================================
Reinsurance recoverables, net of valuation allowance, at December 31
include amounts recoverable on unpaid and paid losses and were as follows:
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Life business $1,303 $1,372
Property-casualty business:
Pools and associations 3,070 3,378
Other reinsurance 5,119 4,829
- --------------------------------------------------------------------------------
$9,492 $9,579
================================================================================
15. RESTRUCTURING CHARGES AND MERGER-RELATED COSTS
In Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
Restructuring charges $ 1,122 $1,718
Changes in 1997 estimates (392) --
Merger-related costs 65 --
- --------------------------------------------------------------------------------
Total $ 795 $1,718
================================================================================
In December 1998 Citigroup recorded a restructuring charge of $1.122
billion, reflecting exit costs associated with business improvement and
integration initiatives to be implemented over a 12 to 18 month period. The
charge included $760 million related to employee severance, $327 million related
to exiting leasehold and other contractual obligations, and $35 million related
to the write-down to estimated salvage value of assets that are available for
immediate disposal.
In addition, the implementation of these restructuring initiatives will
cause some related premises and equipment assets to become redundant. In
accordance with recent SEC guidelines, the remaining depreciable lives of these
assets have been shortened, and accelerated depreciation charges of $262 million
(in addition to normal scheduled depreciation on these assets) will be
recognized in subsequent periods. Additional implementation costs associated
with these restructuring initiatives will be expensed as incurred but are not
expected to be material.
Of the $1.122 billion charge, $712 million in the Global Consumer business
includes regional consolidation of call centers and other back office functions
worldwide, reduction of management layers, sales force restructuring and
integration of overlapping marketing and product management groups, and exiting
several non-strategic operations; $324 million in the Global Corporate and
Investment Bank business includes rationalization of operations in countries
with multiple operations, consolidation of Citibank and Salomon Smith Barney
locations, integration of trading platforms, and exiting non-strategic
businesses; $17 million in the Asset Management business includes elimination of
redundancies; and the remaining $69 million includes streamlining and
integration of Corporate and other staff functions. Approximately $507 million
of the $1.122 billion charge relates to operations in the United States. Because
the charge was recorded near the end of the year, there was no significant
utilization during 1998.
The $760 million portion of the charge related to employee severance
reflects the costs of eliminating approximately 11,900 positions, after
considering attrition and redeployment within the Company, including
approximately 8,000 in the Global Consumer business, 3,100 in the Global
Corporate and Investment Bank business, 200 in the Asset Management business and
600 in Corporate and other staff functions
59
<PAGE>
(costs associated with corporate and staff functions have been allocated to
businesses as appropriate). Approximately 4,200 of these positions relate to the
United States. The overall workforce reduction, net of anticipated rehires to
fill relocated positions, is expected to be approximately 10,400 positions
worldwide.
Changes in 1997 estimates are attributable to facts and circumstances
arising subsequent to the original restructuring charge. The most significant
item is a $324 million reduction to the Salomon Smith Barney charge related to
the Seven World Trade Center lease, which resulted from negotiations on a
sub-lease which indicated that excess space could be disposed of on terms more
favorable than originally estimated. In addition, the reassessment of space
requirements as a result of the Citicorp merger could indicate that space
previously considered to be excess may be needed, which could result in a
further reduction to the restructuring reserve. Changes in 1997 estimates are
also attributable to lower severance costs due to higher than anticipated levels
of attrition and redeployment within the Company, and other unforeseen changes
including those resulting from the Citicorp merger.
Merger-related costs include the direct and incremental costs of
administratively closing the Citicorp merger and primarily reflect legal,
regulatory, accounting and similar one-time transaction costs.
In 1997, Citigroup recorded restructuring charges of $1.718 billion,
consisting of a $880 million restructuring charge related to cost-management
programs and customer service initiatives to improve operational efficiency and
productivity in the Citicorp businesses, and a $838 million charge related to
the Salomon Smith Barney merger. The Citicorp charge included $487 million for
severance benefits (associated with approximately 9,000 positions to be
reduced), $245 million related to writedowns of equipment and premises which
management committed to dispose of, and $148 million of lease termination and
other exit costs. The Salomon Smith Barney charge included $161 million for
severance benefits (associated with approximately 1,900 positions to be
reduced), $663 million of costs associated with the planned abandonment of
certain facilities, premises and other assets, principally those related to the
Seven World Trade Center lease and $14 million of other costs related directly
to the Salomon Smith Barney merger. The status of these 1997 restructuring
initiatives is summarized in the following table.
Activity in 1997 Restructuring Reserve
In Millions of Dollars Citicorp SSB Total
- -------------------------------------------------------------------------------
1997 restructuring charges $ 880 $ 838 $ 1,718
Utilization (641) (171) (812)
Changes in 1997 estimates (38) (354) (392)
- -------------------------------------------------------------------------------
Balance at December 31, 1998 $ 201 $ 313 $ 514
===============================================================================
Utilization includes $271 million of non-cash charges (including $245
million of equipment and premises write-downs at Citicorp and $26 million at
SSB) as well as $544 million of severance and other exit costs (of which $354
million related to employee severance and $129 million related to leasehold and
other exit costs have been paid in cash and $61 million is legally obligated),
together with translation effects. Through December 31, 1998, approximately
5,600 gross staff positions have been eliminated under these programs.
16. INCOME TAXES
In Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------
Current
Federal $ 2,081 $ 3,259 $ 1,833
Foreign 1,022 1,539 1,128
State 325 465 531
- -------------------------------------------------------------------------------
3,428 5,263 3,492
- -------------------------------------------------------------------------------
Deferred
Federal (149) (1,095) 450
Foreign 104 (109) 67
State (149) (226) (42)
- -------------------------------------------------------------------------------
(194) (1,430) 475
- -------------------------------------------------------------------------------
Provision for income tax on continuing
operations before minority interest(1) 3,234 3,833 3,967
Provision for income tax on discontinued
operations -- -- (246)
Income tax expense (benefit) reported in
stockholders' equity related to:
Foreign currency translation 11 26 28
Securities available for sale (175) 370 186
Employee stock plans (701) (728) (430)
Minimum pension liability -- -- 61
Other (1) 9 15
- -------------------------------------------------------------------------------
Income taxes before minority interest $ 2,368 $ 3,510 $ 3,581
===============================================================================
(1) Includes the effect of securities transactions resulting in a provision of
$270 million in 1998, $376 million in 1997, and $93 million in 1996.
60
<PAGE>
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate applicable to income from continuing
operations (before minority interest) for the years ended December 31 was as
follows:
1998 1997 1996
- -------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
Limited taxability of investment income (2.4) (1.7) (1.4)
State income taxes, net of federal benefit 1.2 1.4 2.9
Other, net 1.1 1.0 (0.7)
- -------------------------------------------------------------------------------
Effective income tax rate 34.9% 35.7% 35.8%
===============================================================================
Deferred income taxes at December 31 related to the following:
In Millions of Dollars 1998 1997
- -------------------------------------------------------------------------------
Deferred tax assets
Credit loss deduction $ 2,327 $ 2,205
Differences in computing policy reserves 2,066 2,042
Unremitted foreign earnings 1,257 1,019
Deferred compensation 1,222 1,035
Employee benefits 865 628
Interest-related items 412 508
Foreign and state loss carryforwards 256 316
Other deferred tax assets 1,094 941
- -------------------------------------------------------------------------------
Gross deferred tax assets 9,499 8,694
Valuation allowance 394 424
- -------------------------------------------------------------------------------
Deferred tax assets after valuation allowance 9,105 8,270
- -------------------------------------------------------------------------------
Deferred tax liabilities
Investments (1,244) (1,549)
Deferred policy acquisition costs and value of
insurance in force (858) (786)
Leases (648) (496)
Investment management contracts (218) (236)
Other deferred tax liabilities (1,116) (819)
- -------------------------------------------------------------------------------
Gross deferred tax liabilities (4,084) (3,886)
- -------------------------------------------------------------------------------
Net deferred tax asset $ 5,021 $ 4,384
===============================================================================
Foreign pre-tax earnings approximated $2.4 billion in 1998, $4.8 billion
in 1997, and $4.2 billion in 1996. As a U.S. corporation, Citigroup is subject
to U.S. taxation currently on all of its foreign pre-tax earnings if earned by a
foreign branch or when earnings are effectively repatriated if earned by a
foreign subsidiary or affiliate. In addition, certain of Citigroup's U.S. income
is subject to foreign income tax where the payor of such income is domiciled
outside the United States. The Company provides income taxes on the
undistributed earnings of non-U.S. subsidiaries except to the extent that such
earnings are indefinitely invested outside the United States. At December 31,
1998, $1.3 billion of accumulated undistributed earnings of non-U.S.
subsidiaries was indefinitely invested. At the existing U.S. federal income tax
rate, additional taxes of $376 million would have to be provided if such
earnings were remitted.
Income taxes are not provided for on the Company's life insurance
subsidiaries' "policyholders' surplus account" because under current U.S. tax
rules such taxes will become payable only to the extent such amounts are
distributed as a dividend or exceed limits prescribed by federal law.
Distributions are not contemplated from this account, which aggregated $982
million (subject to a tax effect of $344 million) at December 31, 1998.
The 1998 net change in the valuation allowance related to deferred tax
assets was a decrease of $30 million primarily relating to an increased
utilization of certain foreign tax credits. The valuation allowance of $394
million includes $100 million to cover any capital losses on investments that
may exceed the capital gains able to be generated in the life insurance group's
consolidated federal income tax return based upon management's best estimate of
the character of the reversing temporary differences. Reversal of the valuation
allowance is contingent upon the recognition of future capital gains or a change
in circumstances that causes the recognition of the benefits to become more
likely than not. The initial recognition of any benefit produced by the reversal
of this portion of the valuation allowance will be recognized by reducing
goodwill. The remaining valuation allowance of $294 million at December 31, 1998
is primarily reserved for specific state and local, and foreign tax
carryforwards or tax law restrictions on benefit recognition in the U.S. federal
and the above jurisdictions.
Management believes that the realization of the recognized net deferred
tax asset of $5.021 billion is more likely than not based on existing carryback
ability and expectations as to future taxable income. The Company has reported
pre-tax financial statement income from continuing operations exceeding $10
billion on average over the last three years and has generated federal taxable
income exceeding $8 billion, on average, each year during this same period.
61
<PAGE>
17. MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS
The Company formed statutory business trusts under the laws of the state of
Delaware, which exist for the exclusive purposes of (i) issuing Trust Securities
representing undivided beneficial interests in the assets of the Trust; (ii)
investing the gross proceeds of the Trust securities in junior subordinated
deferrable interest debentures (subordinated debentures) of its parent; and
(iii) engaging in only those activities necessary or incidental thereto. These
subordinated debentures and the related income effects are eliminated in the
consolidated financial statements. Distributions on the mandatorily redeemable
securities of subsidiary trusts below have been classified as interest expense
in the Consolidated Statement of Income. The following tables summarize the
financial structure of each of the Company's subsidiary trusts at December 31,
1998:
<TABLE>
<CAPTION>
Citigroup Citigroup Citigroup
Capital I Capital II Capital III
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Securities
Issuance date October 1996 December 1996 December 1996
Securities issued 16,000,000 400,000 200,000
Liquidation preference per security $25 $1,000 $1,000
Liquidation value
(in millions of dollars) $400 $400 $200
Coupon rate 8% 7.75% 7.625%
Distributions payable Quarterly Semi-annually Semi-annually
Distributions guaranteed by(1) Citigroup Citigroup Citigroup
Common shares issued to parent 494,880 12,372 6,186
- ---------------------------------------------------------------------------------------------
Junior Subordinated Debentures
Amount owned
(in millions of dollars) $412 $412 $206
Coupon rate 8% 7.75% 7.625%
Interest payable Quarterly Semi-annually Semi-annually
Maturity date September 30, 2036 December 1, 2036 December 1, 2036
Redeemable by issuer on or after October 7, 2001 December 1, 2006 Not redeemable
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Citigroup Citigroup Travelers P&C
Capital IV Capital V Capital I
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Securities
Issuance date January 1998 November 1998 April 1996
Securities issued 8,000,000 20,000,000 32,000,000
Liquidation preference per security $25 $25 $25
Liquidation value
(in millions of dollars) $200 $500 $800
Coupon rate 6.85% 7.00% 8.08%
Distributions payable Quarterly Quarterly Quarterly
Distributions guaranteed by(1) Citigroup Citigroup TAP
Common shares issued to parent 247,440 618,557 989,720
- ------------------------------------------------------------------------------------------
Junior Subordinated Debentures
Amount owned
(in millions of dollars) $206 $515 $825
Coupon rate 6.85% 7.00% 8.08%
Interest payable Quarterly Quarterly Quarterly
Maturity date January 22, 2038 November 15, 2028 April 30, 2036
Redeemable by issuer on or after January 22, 2003 November 15, 2003 April 30, 2001
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Travelers P&C SI Financing SSBH
Capital II Trust I Capital I
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Securities
Issuance date May 1996 July 1996 January 1998
Securities issued 4,000,000 13,800,000 16,000,000
Liquidation preference per security $25 $25 $25
Liquidation value
(in millions of dollars) $100 $345 $400
Coupon rate 8% 9.25% 7.20%
Distributions payable Quarterly Quarterly Quarterly
Distributions guaranteed by(1) TAP Salomon Smith Salomon Smith
Barney Barney
Common shares issued to parent 123,720 426,800 494,880
- --------------------------------------------------------------------------------------
Junior Subordinated Debentures
Amount owned
(in millions of dollars) $103 $356 $412
Coupon rate 8% 9.25% 7.20%
Interest payable Quarterly Quarterly Quarterly
Maturity date May 15, 2036 June 30, 2026 January 28, 2038
Redeemable by issuer on or after May 15, 2001 June 30, 2001 January 28, 2003
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Citicorp Citicorp Citicorp
Capital I Capital II Capital III
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Securities
Issuance date December 1996 January 1997 June 1998
Securities issued 300,000 450,000 9,000,000
Liquidation preference per security $1,000 $1,000 $25
Liquidation value
(in millions of dollars) $300 $450 $225
Coupon rate 7.933% 8.015% 7.10%
Distributions payable Semi-annually Semi-annually Quarterly
Distributions guaranteed by(1) Citicorp Citicorp Citicorp
Common shares issued to parent 9,000 13,500 270,000
- --------------------------------------------------------------------------------------------
Junior Subordinated Debentures
Amount owned
(in millions of dollars) $309 $464 $232
Coupon rate 7.933% 8.015 7.10%
Interest payable Semi-annually Semi-annually Quarterly
Maturity date February 15, 2027 February 15, 2027 August 15, 2028
Redeemable by issuer on or after February 15, 2007 February 15, 2007 August 15, 2003
============================================================================================
</TABLE>
(1) Under the arrangements, taken as a whole, payments due are fully and
unconditionally guaranteed on a subordinated basis.
SI Financing Trust I, a wholly owned subsidiary of Salomon Smith
Barney, issued TRUPS-Registered Trademark- units to the public. Each
TRUPS-Registered Trademark- unit includes a security of SI Financing Trust I,
and a purchase contract that requires the holder to purchase, in 2021 (or
earlier if Salomon Smith Barney elects to accelerate the contract), one
depositary share representing a one-twentieth interest in a share of the
Company's 9.50% Cumulative Preferred Stock, Series L. Salomon Smith Barney is
obligated under the terms of each purchase contract to pay contract fees of
0.25% per annum.
62
<PAGE>
18. PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Redeemable Preferred Stock
At December 31, 1997 there were 2,866,689 shares of Series C Preferred
outstanding with a carrying value of $135 million included in Other
Liabilities. In January, 1998 all of the outstanding shares of Series C
Preferred were converted into 6,941,859 shares of common stock.
In 1987, the Company issued 700,000 shares of Series I Cumulative
Convertible Preferred Stock (Series I Preferred) to affiliates of Berkshire
Hathaway Inc. at $1,000 per share. Annual cumulative dividends on the Series I
Preferred are $90 per share and payable quarterly. Each share of Series I
Preferred has a redemption value of $1,000 and is convertible into 44.60526
shares of Citigroup common stock (subject to antidilution adjustments in certain
circumstances). Series I Preferred shareholders are entitled to vote on all
matters on which the Company's common stockholders vote, and are entitled to one
vote per common share into which it is convertible. Commencing October 31, 1995,
140,000 Series I Preferred shares must be redeemed annually (if not previously
converted) at $1,000 per share plus any accrued and unpaid dividends. The first
tranche of 140,000 Series I Preferred shares was redeemed in October 1995, while
the second, third and forth tranches of 140,000 shares were converted into 6.2
million shares of common stock each in October 1996, 1997 and October 1998,
respectively. The Company had 6.2 million shares reserved for future conversions
at December 31, 1998.
Perpetual Preferred Stock
The following table sets forth the Company's perpetual preferred stock
outstanding at December 31:
<TABLE>
<CAPTION>
Redeemable, in Redemption
whole or in part Price Number of Carrying Value (In Millions)
Rate on or after(1) Per Share(2) Shares 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series F(3) 6.365% June 16, 2007 $250 1,600,000 $ 400 $ 400
Series G(3) 6.213% July 11, 2007 $250 800,000 200 200
Series H(3) 6.231% September 8, 2007 $250 800,000 200 200
Series J(4) 8.08% March 31, 1998 $500 400,000 200 200
Series K(4) 8.40% March 31, 2001 $500 500,000 250 250
Series M(3) 5.864% October 8, 2007 $250 800,000 200 200
Series O(5) Graduated August 15, 2004 $100 625,000 63 63
Series Q(6) Adjustable May 31, 1999 $250 700,000 175 175
Series R(6) Adjustable August 31, 1999 $250 400,000 100 100
Series S(6) 8.30% November 15, 1999 $250 500,000 125 125
Series T(6) 8.50% February 15, 2000 $250 600,000 150 150
Series U(6) 7.75% May 15, 2000 $250 500,000 125 125
Series V(6) Fixed/Adjustable February 15, 2006 $500 250,000 125 125
Second Series Adjustable At any time $100 2,195,636 -- 220
Third Series Adjustable At any time $100 834,867 -- 83
Series 8A(5) Graduated August 15, 2004 $100 625,000 -- 62
Series 16 8.00% June 1, 1998 $250 1,300,000 -- 325
Series 17 7.50% September 1, 1998 $250 1,400,000 -- 350
- -------------------------------------------------------------------------------------------------------------------------
$2,313 $3,353
=========================================================================================================================
</TABLE>
(1) Under various circumstances, the Company may redeem certain series of
preferred stock at times other than described above.
(2) Liquidation preference per share equals redemption price per share.
(3) Issued as depositary shares each representing a one-fifth interest in the
corresponding series of preferred stock.
(4) Issued as depositary shares each representing a one-twentieth interest in
the corresponding series of preferred stock.
(5) Also redeemable on any of the dividend repricing dates through August 15,
2004.
(6) Issued as depositary shares each representing a one-tenth interest in the
corresponding series of preferred stock.
63
<PAGE>
All dividends on the Company's perpetual preferred stock are payable
quarterly and, with the exception of the Series 16, 17, S, and T Preferred
Stock, all dividends are cumulative. Only the holders of Series J and K
Preferred Stock have voting rights. Holders of Series J and K Preferred Stock
are entitled to three votes per share when voting together as a class with the
Citigroup common stock on all matters submitted to a vote of the Company's
stockholders.
Dividends on the Series O Preferred Stock are payable at 8.25% through
August 15, 1999 and thereafter at a rate equal to the five-year treasury rate
plus an amount equal to 2.25% and increasing to 3% for all dividend periods
ending after August 15, 2004. The dividend rate through August 15, 2004 on the
Series O Preferred Stock cannot be less than 7% or greater than 14%, and
thereafter cannot be less than 8% or greater than 16%.
Dividends on Series Q and R Preferred Stock are payable at rates
determined quarterly by formulas based on interest rates of certain U.S.
Treasury obligations, subject to certain minimum and maximum rates as specified
in the certificates of designation. The weighted-average dividend rate on the
Series Q and R Preferred Stock was 5.0% for 1998.
Dividends on the Series V Preferred Stock are payable at 5.86% through
February 15, 2006 and thereafter at rates determined quarterly by a formula
based on certain interest rate indices, subject to a minimum rate of 6% and a
maximum rate of 12%. The rate of dividends on the Series V Preferred Stock is
subject to adjustment based upon the applicable percentage of the dividends
received deduction.
The Second and Third Series as well as the Series 16 Preferred Stock were
redeemed by the Company in the first half of 1998. The Series 8A and 17
Preferred Stock were redeemed on August 15, 1998 and September 1, 1998,
respectively.
In February 1999, Citigroup redeemed the Series J Preferred Stock.
Regulatory Capital
Citigroup and Citicorp are subject to risk-based capital and leverage guidelines
issued by the Board of Governors of the Federal Reserve System (FRB), and their
U.S. insured depository institution subsidiaries, including Citibank, N.A., are
subject to similar guidelines issued by their respective primary regulators.
These guidelines are used to evaluate capital adequacy and include the required
minimums shown below.
To be "well capitalized" under federal bank regulatory agency definitions,
a depository institution must have a Tier 1 ratio of at least 6%, a combined
Tier 1 and Tier 2 ratio of at least 10%, and a leverage ratio of at least 5% and
not be subject to a directive, order, or written agreement to meet and maintain
specific capital levels. The regulatory agencies are required by law to take
specific prompt actions with respect to institutions that do not meet minimum
capital standards. As of December 31, 1998 and 1997, all of Citigroup's U.S.
insured subsidiary depository institutions were "well capitalized." At December
31, 1998, regulatory capital as set forth in guidelines issued by the U.S.
federal bank regulators is as follows:
Minimum Citibank,
In Millions of Dollars Requirement Citigroup Citicorp N.A.
- -------------------------------------------------------------------------------
Tier 1 capital $41,777 $23,084 $19,291
Total capital(1) 55,008 33,858 28,783
Tier 1 capital ratio 4.00% 8.68% 8.44% 8.41%
Total capital ratio(1) 8.00% 11.43% 12.38% 12.55%
Leverage ratio(2) 3.00%+ 6.03% 6.68% 6.32%
===============================================================================
(1) Total capital includes Tier 1 and Tier 2.
(2) Tier 1 capital divided by adjusted average assets.
The combined insurance subsidiaries' statutory capital and surplus at
December 31, 1998 and 1997 was $12.843 billion (including Citicorp Life
Insurance Company) and $10.505 billion, respectively, and are subject to certain
restrictions imposed by state insurance departments as to the transfer of funds
and payment of dividends. The combined insurance subsidiaries' net income,
determined in accordance with statutory accounting practices, for the years
ended December 31, 1998, 1997, and 1996 was $2.255 billion (including Citicorp
Life Insurance Company), $1.794 billion, and $843 million (which includes $285
million for Aetna P&C in the first quarter of 1996), respectively.
TIC is subject to various regulatory restrictions that limit the maximum
amount of dividends available to its parent without prior approval of the
Connecticut Insurance Department. A maximum of $504 million of statutory surplus
is available in 1999 for such dividends without the prior approval of the
Connecticut Insurance Department.
TAP's insurance subsidiaries 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.
Dividend payments to TAP from its insurance subsidiaries are limited to $1.0
billion in 1999 without prior approval of the Connecticut Insurance Department.
Certain of the Company's U.S. and non-U.S. broker-dealer subsidiaries are
subject to various securities and commodities regulations and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. The principal regulated subsidiaries, their net
capital requirement or equivalent and excess over the minimum requirement as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
In Millions of Dollars
Excess over
Net Capital minimum
Subsidiary Jurisdiction or equivalent requirement
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salomon Smith Barney Inc(1) U.S. Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1) $3,195 $2,841
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority 4,972 1,090
Salomon Smith Barney Japan Limited(2) Japan's Ministry of Finance 688 375
Salomon Brothers AG Germany's Banking Supervisory Authority 236 150
The Robinson-Humphrey Company LLC U.S. Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1) 79 78
====================================================================================================================================
</TABLE>
(1) On September 1, 1998, Salomon Brothers Inc and Smith Barney Inc. merged to
form Salomon Smith Barney Inc.
(2) Prior to April 1, 1998, this entity was known as Salomon Brothers Asia
Limited.
See Note 12 for additional restrictions on stockholders' equity.
64
<PAGE>
19. CHANGES IN EQUITY FROM NONOWNER SOURCES
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), which established standards for the
reporting and display of equity from nonowner sources and its components in a
full set of general purpose financial statements. Equity from nonowner sources
and its components have been reported, net of tax, in the Consolidated Statement
of Changes in Stockholders' Equity with all earlier periods restated to reflect
the adoption of SFAS No. 130.
Changes in each component of Accumulated Other Changes in Equity from
Nonowner Sources for the three-year period ended December 31, 1998 are as
follows:
Accumulated
Net Adjustment Other
Unrealized Foreign for Changes in
Gains on Currency Minimum Equity from
Investment Translation Pension Nonowner
In Millions of Dollars Securities Adjustment Liability Sources
- --------------------------------------------------------------------------------
Balance, Jan. 1, 1996 $ 888 $(426) $(114) $ 348
Unrealized gains on investment
securities, net of tax of $279 440 440
Less: Reclassification adjustment
for gains included in net
income, net of tax of ($93) (183) (183)
Foreign currency translation
adjustment, net of tax of $28 (57) (57)
Adjustment for minimum
pension liability, net of
tax of $61 114 114
- -------------------------------------------------------------------------------
Current period change 257 (57) 114 314
- -------------------------------------------------------------------------------
Balance, Dec. 31, 1996 1,145 (483) -- 662
Unrealized gains on investment
securities, net of tax of $746 1,166 1,166
Less: Reclassification adjustment
for gains included in net
income, net of tax of ($376) (619) (619)
Foreign currency translation
adjustment, net of tax of $26 (152) (152)
- -------------------------------------------------------------------------------
Current period change 547 (152) -- 395
- -------------------------------------------------------------------------------
Balance, Dec. 31, 1997 1,692 (635) -- 1,057
Unrealized gains on investment
securities, net of tax of $95 237 237
Less: Reclassification adjustment
for gains included in net
income, net of tax of ($270) (570) (570)
Foreign currency translation
adjustment, net of tax of $11 57 57
- -------------------------------------------------------------------------------
Current period change (333) 57 -- (276)
- -------------------------------------------------------------------------------
Balance, Dec. 31, 1998 $1,359 $(578) -- $ 781
===============================================================================
20. EARNINGS PER SHARE
The following reflects the income and share data used in the basic and diluted
earnings per share computations for the years ended December 31:
In Millions, Except Per Share Amounts 1998 1997 1996
- -------------------------------------------------------------------------------
Income from continuing operations $ 5,807 $ 6,705 $ 7,073
Discontinued operations -- -- (334)
Preferred dividends (216) (279) (319)
- -------------------------------------------------------------------------------
Income available to common stockholders
for basic EPS 5,591 6,426 6,420
Effect of dilutive securities 24 36 56
- -------------------------------------------------------------------------------
Income available to common stockholders
for diluted EPS $ 5,615 $ 6,462 $ 6,476
===============================================================================
Weighted average common shares
outstanding applicable to basic EPS 2,242.4 2,247.9 2,271.6
- -------------------------------------------------------------------------------
Effect of dilutive securities:
Convertible securities 11.8 25.2 44.9
Options 40.2 52.4 52.6
Warrants 2.3 7.0 5.0
Restricted stock 18.5 25.2 19.8
- -------------------------------------------------------------------------------
Adjusted weighted average common shares
outstanding applicable to diluted EPS 2,315.2 2,357.7 2,393.9
===============================================================================
Basic earnings per share
Continuing operations $ 2.49 $ 2.86 $ 2.97
Discontinued operations -- -- (0.14)
- -------------------------------------------------------------------------------
$ 2.49 $ 2.86 $ 2.83
===============================================================================
Diluted earnings per share
Continuing operations $ 2.43 $ 2.74 $ 2.84
Discontinued operations -- -- (0.13)
- -------------------------------------------------------------------------------
$ 2.43 $ 2.74 $ 2.71
===============================================================================
During 1998, 1997 and 1996, weighted average options of 19.1 million
shares, 8.5 million shares and 4.1 million shares with weighted average exercise
prices of $62.57 per share, $45.79 per share and $25.83 per share, respectively,
were excluded from the computation of diluted EPS because the options' exercise
price was greater than the average market price of the Company's common stock.
65
<PAGE>
21. INCENTIVE PLANS
The Company has adopted a number of compensation plans to attract, retain and
motivate officers and employees, to compensate them for their contributions to
the growth and profits of the Company and to encourage employee stock ownership.
At December 31, 1998, 166,005,302 shares were available for grant under
Citigroup's stock option and restricted stock plans.
Stock Option Plans
The Company has a number of stock option plans that provide for the granting of
stock options to officers and employees. Options are granted at the fair market
value of Citigroup common stock at the time of grant for a period of ten years.
Generally, options granted under Travelers predecessor plans and options granted
since the date of the merger vest over a five-year period and are exercisable
only if the optionee is employed by the Company. Generally, 50% of the options
granted under Citicorp predecessor plans prior to 1995 are exercisable beginning
on the first anniversary and 50% beginning on the second anniversary of the date
of grant, and, generally, 50% of the options granted under Citicorp predecessor
plans during the period from 1995 until the date of the merger are exercisable
beginning on the third anniversary and 50% beginning on the fourth anniversary
of the date of grant. Certain of the plans also permit an employee exercising an
option to be granted new options (reload options) in an amount equal to the
number of common shares used to satisfy the exercise price and the withholding
taxes due upon exercise. The reload options are granted for the remaining term
of the related original option and vest after six months.
To further encourage employee stock ownership, during 1997 the
WealthBuilder stock option program was introduced. Under this program, eligible
Travelers employees meeting certain requirements were granted stock options.
These options vest over a five-year period and do not carry a reload feature.
Options granted in 1995 and 1996 included five-year performance-based
stock options granted to key Citicorp employees. Performance-based options
granted in 1995 and 1996 were at prices ranging from equivalent Citigroup stock
prices of $25.95 to $28.05, equal to Citicorp market prices on the respective
dates of grant, and expire in 2000 and 2001. One-half vested in 1996 when
Citicorp's stock price reached an equivalent Citigroup stock price of $40 per
share, and the balance vested in 1997 when such price reached $46 per share.
During 1998, a group of key Citicorp employees was granted 6,340,000
performance-based stock options at an equivalent Citigroup strike price of
$48.25. The performance-based options will vest when Citigroup's common stock
price reaches $80 per share, provided that the price remains at or above $80 for
ten of thirty consecutive trading days. The performance-based options expire in
January 2003.
Vesting and expense related to performance-based options are summarized in
the following table (all options are equivalent Citigroup options).
1998 1997 1996
- -----------------------------------------------------------------------------
Options vested during the year -- 5,984,375(1) 6,068,750(1)
After-tax expense recognized for
all grants (in millions of dollars) $43 $45 $70
Options unvested at year-end 6,050,000(2) -- 6,059,375(1)
=============================================================================
(1) Relates to 1995 and 1996 grants.
(2) Relates to 1998 grants.
The cost of performance-based options is measured as the difference
between the exercise price and market price required for vesting, and this
expense is recognized over the period to the estimated vesting dates and in full
for options that have vested, by a charge to expense with an offsetting increase
in common stockholders' equity. All of the expense related to vested grants has
been recognized.
Information with respect to stock options granted under Citigroup stock option
plans is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 135,209,280 $27.97 144,844,309 $17.38 167,538,127 $13.35
Granted-original 97,520,913 48.90 34,986,547 43.92 25,612,348 25.74
Granted-reload 20,048,464 62.04 33,958,262 41.11 30,770,388 24.17
Forfeited (8,655,070) 35.75 (3,312,603) 27.48 (6,290,001) 14.98
Exercised (39,427,536) 30.30 (75,267,235) 20.97 (72,786,553) 14.12
- -----------------------------------------------------------------------------------------------------------------
Outstanding, end of year 204,696,051 40.46 135,209,280 27.97 144,844,309 17.38
- -----------------------------------------------------------------------------------------------------------------
Exercisable at year end 48,557,341 44,631,411 66,594,479
=================================================================================================================
</TABLE>
66
<PAGE>
The following table summarizes information about stock options outstanding under
Citigroup stock option plans at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding Remaining Price Exercisable Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.48--$ 9.99 8,692,019 3.0 years $ 7.92 8,484,432 $ 7.94
$10.00--$19.99 26,869,225 5.2 years 14.26 16,902,712 14.13
$20.00--$29.99 21,121,814 5.4 years 25.14 6,496,106 25.50
$30.00--$39.99 5,727,682 7.5 years 32.74 392,639 33.82
$40.00--$49.99 110,229,906 9.0 years 46.