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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000912057-02-009629.txt : 20020415
<SEC-HEADER>0000912057-02-009629.hdr.sgml : 20020415
ACCESSION NUMBER: 0000912057-02-009629
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020312
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CITIGROUP INC
CENTRAL INDEX KEY: 0000831001
STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021]
IRS NUMBER: 521568099
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-09924
FILM NUMBER: 02573628
BUSINESS ADDRESS:
STREET 1: 399 PARK AVENUE
CITY: NEW YORK
STATE: NY
ZIP: 10043
BUSINESS PHONE: 2125591000
MAIL ADDRESS:
STREET 1: 399 PARK AVENUE
CITY: NEW YORK
STATE: NY
ZIP: 10043
FORMER COMPANY:
FORMER CONFORMED NAME: TRAVELERS INC
DATE OF NAME CHANGE: 19940103
FORMER COMPANY:
FORMER CONFORMED NAME: TRAVELERS GROUP INC
DATE OF NAME CHANGE: 19950519
FORMER COMPANY:
FORMER CONFORMED NAME: PRIMERICA CORP /NEW/
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>a2072503z10-k405.txt
<DESCRIPTION>FORM 10K/405
<TEXT>
<Page>
FINANCIAL INFORMATION
<Table>
<S> <C>
THE COMPANY 1
Global Consumer 1
Global Corporate 1
Global Investment Management and Private Banking 2
Investment Activities 2
Corporate/Other 2
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 4
Significant Accounting Policies 5
Future Application of Accounting Standards 6
Results of Operations 8
GLOBAL CONSUMER 9
Banking/Lending 10
Citibanking North America 10
Mortgage Banking 10
North America Cards 11
CitiFinancial 12
Insurance 13
Primerica Financial Services 13
Personal Lines 13
International Consumer 14
Western Europe 14
Japan 15
Asia 15
Latin America 16
Mexico 17
Central & Eastern Europe, Middle East & Africa 17
e-Consumer 18
Other Consumer 18
Global Consumer Outlook 19
GLOBAL CORPORATE 21
Corporate and Investment Bank 21
Emerging Markets Corporate Banking and Global Transaction Services 23
Commercial Lines 23
Global Corporate Outlook 27
GLOBAL INVESTMENT MANAGEMENT AND PRIVATE BANKING 29
Travelers Life and Annuity 29
The Citigroup Private Bank 30
Citigroup Asset Management 31
Global Investment Management and Private Banking Outlook 32
INVESTMENT ACTIVITIES 32
CORPORATE/OTHER 33
FORWARD-LOOKING STATEMENTS 33
MANAGING GLOBAL RISK 34
The Credit Risk Management Process 34
Consumer Credit Risk 34
Consumer Portfolio Review 35
Corporate Credit Risk 36
Global Corporate Portfolio Review 37
Reinsurance Risk 38
The Market Risk Management Process 38
Management of Cross-Border Risk 40
LIQUIDITY AND CAPITAL RESOURCES 41
Off-Balance Sheet Arrangements 42
Capital 44
GLOSSARY OF TERMS 48
REPORT OF MANAGEMENT 50
INDEPENDENT AUDITORS' REPORT 50
CONSOLIDATED FINANCIAL STATEMENTS 51
Consolidated Statement of Income 51
Consolidated Statement of Financial Position 52
Consolidated Statement of Changes in Stockholders' Equity 53
Consolidated Statement of Cash Flows 54
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 55
FINANCIAL DATA SUPPLEMENT 87
Average Balances and Interest Rates,
Taxable Equivalent Basis-Assets 87
Average Balances and Interest Rates,
Taxable Equivalent Basis-Liabilities and
Stockholders' Equity 88
Analysis of Changes in Net Interest Revenue 89
Ratios 90
Foregone Interest Revenue on Loans 90
Loan Maturities and Sensitivity to Changes in Interest Rates 90
Loans Outstanding 90
Cash-Basis, Renegotiated, and Past Due Loans 91
Other Real Estate Owned and Other Repossessed Assets 91
Details of Credit Loss Experience 91
Average Deposit Liabilities in Offices Outside the U.S. 92
Maturity Profile of Time Deposits ($100,000 or more)
in U.S. Offices 92
Short-Term and Other Borrowings 92
10-K CROSS-REFERENCE INDEX 100
Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 101
CITIGROUP BOARD OF DIRECTORS 103
</Table>
(i)
<Page>
THE COMPANY
Citigroup Inc. (Citigroup and, together with its subsidiaries, the Company) is a
diversified global financial services holding company whose businesses provide a
board range of financial services to consumer and corporate customers with 192
million customer accounts in over 100 countries and territories. Citigroup was
incorporated in 1988 under the laws of the State of Delaware.
The Company's activities are conducted through Global Consumer, Global
Corporate, Global Investment Management and Private Banking, and Investment
Activities.
The Company has completed certain strategic business acquisitions during
the past three years, details of which can be found in Note 2 to the
Consolidated Financial Statements.
The Company is a bank holding company within the meaning of the U.S. Bank
Holding Company Act of 1956 (BHC Act) registered with, and subject to
examination by, the Federal Reserve Board (FRB). Certain of the Company's
subsidiaries are subject to supervision and examination by their respective
federal and state authorities. Additional information on the Company's
regulation and supervision can be found within the Regulation and Supervision
section beginning on page 95.
At December 31, 2001, the Company had approximately 145,000 full-time and
4,000 part-time employees in the United States and approximately 123,000
employees outside of the United States.
The periodic reports of Citicorp, Salomon Smith Barney Holdings Inc.,
Travelers Insurance Group Holdings Inc., The Student Loan Corporation (STU), The
Travelers Insurance Company (TIC), and 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 399 Park
Avenue, New York, New York 10043, telephone number 212-559-1000. Additional
information is available on the Company's web site at
(http://www.citigroup.com).
GLOBAL CONSUMER
Global Consumer delivers a wide array of banking, lending, insurance and
investment services through a network of local branches, offices and electronic
delivery systems, including ATMs, unmanned kiosks and the World Wide Web. The
businesses of Global Consumer serve individual consumers as well as small
businesses.
CITIBANKING NORTH AMERICA delivers banking, lending, and investment
services through 445 branches and through Citibank Online, an enhanced Internet
banking site on the World Wide Web.
The MORTGAGE BANKING business originates and services mortgages and student
loans for customers across North America.
The NORTH AMERICA CARDS unit combines the operations of Citi Cards and
Diners Club, whose products include MasterCard, VISA and private label credit
and charge cards issued to customers across North America. At December 31, 2001,
Citi Cards had 93 million accounts and $109 billion of managed receivables,
which represented approximately 20% of the U.S. credit card receivables market.
New accounts are acquired through multiple channels including direct marketing
efforts, the Internet, and portfolio acquisitions.
CITIFINANCIAL provides community-based lending services through its branch
network system, regional sales offices and cross-selling initiatives with other
Citigroup businesses. As of December 31, 2001, CitiFinancial maintained 2,221
loan offices in North America that offer real estate-secured loans, unsecured
and partially secured personal loans, auto loans and loans to finance consumer
goods purchases. In addition, CitiFinancial, through certain subsidiaries and
third parties, makes available various credit-related and other insurance
products to its U.S. consumer finance customers.
The business operations of Primerica Financial Services (Primerica) involve
the sale in North America of life insurance and other products manufactured by
its affiliates, including Smith Barney mutual funds, CitiFinancial mortgages and
personal loans and TIC annuity products. The Primerica sales force is composed
of over 100,000 independent representatives. A great majority of the sales force
works on a part-time basis.
Through Travelers Property Casualty Corp. (TPC), Global Consumer writes
virtually all types of property and casualty insurance covering personal risks.
The Personal Lines unit of TPC had approximately 5.4 million policies in force
at December 31, 2001. The primary coverages are personal automobile and
homeowners insurance sold to individuals, and are distributed through
approximately 7,600 independent agencies located throughout the United States.
Personal Lines also uses additional distribution channels, including sponsoring
organizations such as employers' and consumer associations, and joint marketing
arrangements with other insurers.
The INTERNATIONAL unit of Global Consumer provides full-service banking and
community-based lending, including credit and charge cards, and investment
services in Western Europe, Japan, Asia (excluding Japan), CEEMEA (Central &
Eastern Europe, Middle East, & Africa), Latin America and Mexico, which includes
the results of all operations of Banamex and Citibank Mexico, through more than
3,000 branches and offices in 52 countries and territories.
e-CONSUMER is the business responsible for developing and implementing
Citigroup's Internet financial services products and e-commerce solutions.
e-Consumer's mission is to build and deliver new forms of financial services
that meet the changing needs of customers and to facilitate all aspects of
e-commerce as it grows with the new digital economy.
GLOBAL CORPORATE
Global Corporate provides corporations, governments, institutions and investors
in 100 countries and territories with a broad range of financial products and
services, including investment advice, financial planning and retail brokerage
services, banking and financial services and commercial insurance products.
Global Corporate, through the CORPORATE AND INVESTMENT BANK (CIB), delivers
investment banking and commercial banking services in North America, Western
Europe and Japan, and also includes investment banking services in the emerging
markets. CIB delivers 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. CIB 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. CIB also offers
foreign exchange, structured products, derivatives, loans, leasing, and
equipment finance products. CIB trades for its own account in various markets
throughout the world and uses many different strategies involving a broad
spectrum of financial instruments and derivative products.
1
<Page>
Global Corporate 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 includes
all locations outside North America, Western Europe and Japan. Citigroup's
EMERGING MARKETS CORPORATE BANKING AND GLOBAL TRANSACTION SERVICES (EM CORPORATE
& GTS) business offers a wide array of banking and financial services products
and services that help multinational and local companies fulfill their financial
goals or needs. Citigroup's strategies focus on its plans to gain market share
in selected priority emerging market countries and to establish Citibank as a
local bank as well as a leading international bank. Citibank typically enters a
country to serve global customers, providing them with cash management, trade
services, short-term loans and foreign-exchange services. Then, Citibank offers
project finance, fixed-income issuance and trading and, later, introduces
securities custody, loan syndications and derivatives services. Finally, as a
brand image is established and services for locally headquartered companies
become significant, consumer banking services may be offered. The EM Corporate &
GTS segment also includes the global results of cash management, securities
custody and trade services.
TPC's COMMERCIAL LINES unit offers a broad array of property and casualty
insurance and insurance-related services, which it distributes through
approximately 6,300 brokers and independent agencies located throughout the
United States. TPC is the third largest writer of commercial lines insurance in
the U.S. based on 2000 direct written premiums published by A.M. Best Company.
Commercial Lines is organized into five marketing and underwriting groups, each
of which focuses on a particular client base or product grouping to provide
products and services that specifically address clients' needs: National
Accounts, primarily serving large national corporations; Commercial Accounts,
serving mid-size businesses; Select Accounts, serving small businesses; Bond,
providing specialty products which include surety bonds and executive liability;
and Gulf, providing a variety of specialty coverages. Environmental, asbestos
and other cumulative injury claims are segregated from other claims and are
handled separately by TPC's Special Liability Group, a separate unit staffed by
dedicated legal, claim, finance, and engineering professionals.
GLOBAL INVESTMENT MANAGEMENT AND PRIVATE BANKING
Global Investment Management and Private Banking is composed of TRAVELERS LIFE
AND ANNUITY, THE CITIGROUP PRIVATE BANK and CITIGROUP ASSET MANAGEMENT.
These businesses offer a broad range of life insurance, annuities, and
asset management products and services from global investment centers around the
world, including individual annuities, group annuities, individual life
insurance products, corporate owned life insurance (COLI), mutual funds,
closed-end funds, managed accounts, unit investment trusts, variable annuities,
alternative investments, pension administration and personalized wealth
management services distributed to institutional, high net worth and retail
clients.
TRAVELERS LIFE AND ANNUITY (TLA) offers individual annuity, group annuity,
individual life insurance and COLI products. The individual products include
fixed and variable deferred annuities, payout annuities, and term and universal
life insurance. These products are primarily distributed through Citigroup
businesses, a nationwide network of independent agents and unaffiliated broker
dealers. The COLI product is a variable universal life product distributed
through independent specialty brokers. The group annuity products offered
include institutional pension products, including guaranteed investment
contracts, payout annuities, structured finance, and group annuities to U.S.
employer-sponsored retirement and savings plans through direct sales and various
intermediaries.
THE CITIGROUP PRIVATE BANK provides personalized wealth management services
for high net worth clients through 90 offices in 31 countries and territories,
generating fee and interest income from investment funds management and customer
trading activity, trust and fiduciary services, custody services, and
traditional banking and lending activities. Through its Private Bankers and
Product Specialists, The Citigroup Private Bank leverages its extensive
experience with clients' needs and its access to the breadth and depth of
Citigroup to provide clients with comprehensive investment and banking services
tailored to the way they create and manage their wealth and lifestyles in
today's economy.
CITIGROUP ASSET MANAGEMENT includes Smith Barney Asset Management, Salomon
Brothers Asset Management, and Citibank Asset Management along with the pension
administration and insurance businesses of Global Retirement Services. Clients
include private and public retirement plans, endowments, foundations, banks,
central banks, insurance companies, other corporations, government agencies and
high net worth and other individuals. Client relationships may be introduced
through the cross marketing and distribution channels within Citigroup, through
Citigroup Asset Management's own sales force or through independent sources.
INVESTMENT ACTIVITIES
The Company's INVESTMENT ACTIVITIES segment consists primarily of its venture
capital activities, realized investment gains and losses from certain insurance
related investments, results from certain proprietary investments, the results
of certain investments in countries that refinanced debt under the 1989 Brady
Plan or plans of a similar nature and since August 2001, the investment
portfolio related to Banamex.
CORPORATE/OTHER
CORPORATE/OTHER includes net corporate treasury results, corporate staff and
other corporate expenses, certain intersegment eliminations, and the remainder
of Internet-related development activities not allocated to the individual
businesses.
2
<Page>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA CITIGROUP INC. AND SUBSIDIARIES
<Table>
<Caption>
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUES $ 112,022 $111,826 $ 94,396 $ 85,925 $ 80,530
Total revenues, net of interest expense 80,057 75,188 65,722 55,233 53,231
Benefits, claims and credit losses 18,559 15,486 13,880 12,788 11,455
Operating expenses(1) 39,601 38,559 33,691 31,360 29,471
Income before cumulative effect of accounting 14,284 13,519 11,370 6,950 7,682
changes(1)
Cumulative effect of accounting changes (2) (158) -- (127) -- --
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 14,126 $ 13,519 $ 11,243 $ 6,950 $ 7,682
=====================================================================================================================
EARNINGS PER SHARE(3)
Basic earnings per share:
Income before cumulative effect of
accounting changes $ 2.82 $ 2.69 $ 2.26 $ 1.35 $ 1.48
Net income 2.79 2.69 2.23 1.35 1.48
Diluted earnings per share:
Income before cumulative effect of
accounting changes 2.75 2.62 2.19 1.31 1.42
Net income 2.72 2.62 2.17 1.31 1.42
Dividends declared per common share (3)(4) 0.600 0.520 0.405 0.277 0.200
- ---------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
Total assets $1,051,450 $902,210 $795,584 $740,336 $755,167
Total deposits 374,525 300,586 261,573 229,413 199,867
Long-Term debt 121,631 111,778 88,481 86,250 75,605
Mandatorily redeemable securities of subsidiary
trusts 7,125 4,920 4,920 4,320 2,995
Redeemable preferred stock -- -- -- 140 280
Common stockholders' equity 79,722 64,461 56,395 48,761 44,610
Total stockholders' equity 81,247 66,206 58,290 51,035 47,956
- ---------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges and
preferred stock dividends 1.67x 1.56x 1.61x 1.34x 1.42x
Return on average common stockholders' equity(5) 19.7% 22.4% 21.5% 14.4% 17.5%
Common stockholders' equity to assets 7.58% 7.14% 7.09% 6.59% 5.91%
Total stockholders' equity to assets 7.73% 7.34% 7.33% 6.89% 6.35%
=====================================================================================================================
INCOME ANALYSIS(6)
Total revenues, net of interest expense $ 80,057 $ 75,188 $ 65,722 $ 55,233 $ 53,231
Effect of securitization activities 3,568 2,459 2,707 2,364 1,734
Housing Finance unit charge(7) -- 47 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
ADJUSTED REVENUES, NET OF INTEREST EXPENSE 83,625 77,694 68,429 57,597 54,965
- ---------------------------------------------------------------------------------------------------------------------
ADJUSTED OPERATING EXPENSES(8) 39,143 37,775 33,744 30,565 27,753
- ---------------------------------------------------------------------------------------------------------------------
Benefits, claims and credit losses 18,559 15,486 13,880 12,788 11,455
Effect of securitization activities 3,568 2,459 2,707 2,364 1,734
Housing Finance unit charge(7) -- (40) -- -- --
- ---------------------------------------------------------------------------------------------------------------------
ADJUSTED BENEFITS, CLAIMS AND CREDIT LOSSES 22,127 17,905 16,587 15,152 13,189
- ---------------------------------------------------------------------------------------------------------------------
Restructuring- and merger-related items (458) (759) 53 (795) (1,718)
Housing Finance unit charge(7) -- (112) -- -- --
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES, MINORITY INTEREST AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 21,897 21,143 18,151 11,085 12,305
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes 7,526 7,525 6,530 3,907 4,411
Minority interest, net of income taxes 87 99 251 228 212
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 14,284 13,519 11,370 6,950 7,682
Cumulative effect of accounting changes(2) (158) -- (127) -- --
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 14,126 $ 13,519 $ 11,243 $ 6,950 $ 7,682
=====================================================================================================================
</Table>
(1) The years ended December 31, 2000, 1999, 1998 and 1997 include net
restructuring-related items (and in 2000 and 1998 merger related items) of
$458 million ($285 million after-tax), $759 million ($550 million
after-tax), ($53) million (($25) million after-tax), $795 million ($535
million after-tax) and $1,718 million ($1,046 million after-tax),
respectively. See Note 15 to the Consolidated Financial Statements.
(2) Accounting changes in 2001 include the adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative instruments and
Hedging Activities," as amended (SFAS 133), of ($42) million and Emerging
issues Task Force (EITF) issue No. 99-20. "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets" (EITF 99-20) of ($116) million. Accounting
changes in 1999 include the adoption of Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" of ($135) million; SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance
Risk" of $23 million; and SOP 98-5, "Reporting on the Costs of Start-Up
Activities" of ($15) million. See Note 1 to the Consolidated Financial
Statements.
(3) All amounts have been adjusted to reflect stock splits.
(4) Amounts prior to 1999 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.
(6) The income analysis reconciles amounts shown in the Consolidated Statement
of Income on page 51 to the basis presented in the Management's Discussion
and Analysis of Financial Condition and Results of Operations section.
(7) The 2000 period includes charges associated with the discontinuation of
the loan origination operations of the Associates Housing Finance unit.
(8) Excludes restructuring- and merger-related items and the discontinuation of
Associates Housing Finance loan originations in 2000.
3
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS CITIGROUP INC. AND SUBSIDIARIES
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The year ended December 31, 2001 presented the Company with a challenging
economic environment, a continued global recession, the September 11th terrorist
attack, Enron's bankruptcy and severe economic turmoil in Argentina.
IMPACT FROM ARGENTINA'S POLITICAL AND ECONOMIC CHANGES
During the fourth quarter of 2001, Argentina underwent significant political and
economic changes. The government of Argentina implemented substantial economic
changes, including abandoning the country's fixed U.S. dollar-to-peso exchange
rate, as well as converting certain U.S. dollar-denominated consumer loans into
pesos. The Company recognized charges in the 2001 fourth quarter of $235 million
(pretax) related to write-downs of Argentine credit exposures and $235 million
(pretax) in losses related to the foreign exchange revaluation of the consumer
loan portfolio. Since year-end, the government announced additional steps,
including redenomination of substantially all of the remaining dollar
denominated loans and dollar denominated deposits into pesos, and new government
bonds, which in part are designed to compensate for the redenomination of
assets and liabilities into pesos. The Argentine government is attempting to
stabilize the economic environment. As these financial regulations and
implementation issues remain fluid, we are working with the Argentine government
and our customers and will continue to monitor conditions closely and assess the
financial impact. Financial results in 2002 are likely to be impacted. This
statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 33.
IMPACT FROM ENRON
As a result of the financial deterioration and eventual bankruptcy of Enron
Corporation in the fourth quarter of 2001, Citigroup's results were reduced by
$228 million (pretax) as a result of the write-down of Enron-related credit
exposure and trading positions, and the impairment of Enron-related investments.
We will continue to monitor this situation and its impact. This statement is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 33.
SEPTEMBER 11TH EVENTS
The September 11, 2001 terrorist attack financially impacted the Company in
several areas. After-tax losses recorded in the third quarter of 2001 related to
insurance claims (net of reinsurance impact) totaled $502 million. Revenues were
reduced due to the disruption to Citigroup's businesses and additional expenses
incurred as a result of the attack resulted in after-tax losses of approximately
$200 million. The Company also experienced significant property loss, for which
it is insured. The Company has recorded insurance recoveries up to the net book
value of the assets written off. Additional insurance recoveries will be booked
when they are realized. Losses attributable to insurance claims are based in
part on estimates by the Company of insurance losses and related reinsurance
recoverables. The associated reserves and related reinsurance recoverables
represent the estimated ultimate net costs of all incurred claims and claim
adjustment expenses. Since the reserve and related reinsurance recoverables are
based on estimates, the ultimate net liability may be more or less than such
amounts. This statement is a forward-looking statement within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 33.
ACQUISITION OF BANAMEX
On August 6, 2001, Citicorp, an indirect wholly-owned subsidiary of Citigroup,
completed its acquisition of 99.86% of the issued and outstanding ordinary
shares of Grupo Financiero Banamex-Accival (Banamex), a leading Mexican
financial institution, for approximately $12.5 billion in cash and Citigroup
stock. Citicorp completed the acquisition by settling transactions that were
conducted on the Mexican Stock Exchange. On September 24, 2001, Citicorp became
the holder of 100% of the issued and outstanding ordinary shares of Banamex
following a share redemption by Banamex. The results of Banamex are included
from August 2001 forward within the Global Consumer-Mexico and Investment
Activities segments. Banamex's and Citicorp's banking operations in Mexico have
been integrated and conduct business under the "Banamex" brand name.
PLANNED INITIAL PUBLIC OFFERING AND TAX-FREE DISTRIBUTION OF TRAVELERS PROPERTY
CASUALTY CORP.
Citigroup announced that its wholly-owned subsidiary, Travelers Property
Casualty Corp. (TPC), intends to sell a minority interest in TPC in an
initial public offering and Citigroup intends to make a tax-free distribution
to its stockholders of such amount of the remainder of its interest in TPC so
that it will hold approximately 9.9% of the outstanding voting securities of TPC
following the initial public offering and tax-free distribution. The
distribution is expected to be concluded by year-end 2002.
Citigroup business units will continue to offer certain TPC products and
the two companies plan to enter into an agreement under which a Citigroup
subsidiary will provide investment advisory as well as certain back office and
data processing services to TPC during a transition period.
The distribution is subject to various regulatory approvals as well as a
private letter ruling from the Internal Revenue Service that the distribution
will be tax-free to Citigroup and its stockholders. Citigroup has no obligation
to consummate the distribution by the end of 2002 or at all, whether or not
these conditions are satisfied.
In February 2002, TPC declared two dividends of $1 billion and $3.7
billion.
Citigroup has offered to enter into an agreement that will provide that, in
the event that in any fiscal year TPC records asbestos-related income statement
charges in excess of $150 million (pretax), net of any reinsurance, Citigroup
will pay to TPC the amount of any such excess up to a cumulative aggregate of
$800 million, reduced by the tax effect of the highest Federal income tax rate
as applied to TPC. A portion of the gain expected to be realized as a result of
the offering will be deferred to offset any payments arising in connection with
this agreement.
These statements are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-looking Statements" on
page 33.
MANAGED BASIS REPORTING
The business segment discussions that follow include amounts reported in the
financial statements (owned basis) adjusted to reflect certain effects of
securitization activities, receivables held for securitization, and
receivables sold with servicing retained (managed basis). On a managed basis,
these earnings are reclassified and presented as if the receivables had
neither been held for securitization nor sold.
4
<Page>
The income analysis on page 3 reconciles amounts shown in the Consolidated
Statement of Income on page 51 to the basis presented in the business segment
discussions.
SIGNIFICANT ACCOUNTING POLICIES
The Notes to the Consolidated Financial Statements contain a summary of
Citigroup's significant accounting policies, including a discussion of
recently-issued accounting pronouncements. Certain of these policies are
considered to be important to the portrayal of the Company's financial
condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. These policies include valuation of financial instruments where no
ready market exists, determining the level of the allowance for credit losses
and insurance policy and claims reserves, and accounting for securitizations.
Additional information about these policies can be found in Note 1 to the
Consolidated Financial Statements.
The statements below contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on page 33.
VALUATION OF FINANCIAL INSTRUMENTS WITH NO READY MARKETS
Investments include fixed maturity and equity securities, derivatives,
investments in venture capital activities and other financial instruments.
Citigroup carries its investments at fair value if they are considered to be
available-for-sale or trading securities. For the substantial majority of our
portfolios, fair values are determined based upon externally verifiable model
inputs and quoted prices. All financial models which are used for updating the
firm's published financial statements, or for independent risk monitoring, must
be validated and periodically reviewed by qualified personnel independent of the
area that created the model. Changes in value of available-for-sale securities
are recognized in a component of stockholders' equity, unless the value is
impaired and the impairment is not considered to be temporary. Impairment losses
that are not considered temporary are recognized in earnings. The Company
conducts regular reviews to assess whether other-than-temporary impairment
exists. Deteriorating economic conditions--global, regional, or related to
specific issuers--could adversely affect these values. Changes in the fair value
of trading account assets and liabilities are recognized in earnings. Venture
capital subsidiaries also carry their investments at fair value with changes in
value recognized in earnings.
If available, quoted market prices provide the best indication of value. If
quoted market prices are not available for fixed maturity securities,
derivatives or commodities, the Company discounts the expected cash flows using
market interest rates commensurate with the credit quality and maturity of the
investment. Alternatively, matrix or model pricing may be used to determine an
appropriate fair value. The determination of market or fair value considers
various factors, including time value and volatility factors, underlying
options, warrants, and derivatives; price activity for equivalent synthetic
instruments; counterparty credit quality; 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; and derivative
transaction maintenance costs during the period. Changes in assumptions could
affect the fair values of investments.
For venture capital investments in publicly traded securities, fair
value is 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 investments
that are not publicly traded, estimates of fair value are made based upon a
review of the investee's financial results, condition and prospects and
discounted cash flows, together with comparisons to similar companies for
which quoted market prices are available. See discussion of trading account
assets and liabilities, and investments in Summary of Significant Accounting
Policies in Note 1 to the Consolidated Financial Statements.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents management's estimate of probable
losses inherent in the portfolio. This evaluation process is subject to numerous
estimates and judgments. The frequency of default, risk ratings, and the loss
recovery rates, among other things, are considered in making this evaluation, as
are the size and diversity of individual large credits. Changes in these
estimates could have a direct impact on the provision and could result in a
change in the allowance.
Larger balance, non-homogeneous exposures representing significant
individual credit exposures are evaluated based upon the borrower's 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. The allowance for credit losses attributed to these
loans is established via a process that begins with estimates of probable loss
inherent in the portfolio based upon various statistical analyses. These
analyses consider historical and projected default rates and loss severities;
internal risk ratings; geographic, industry, and other environmental factors;
and model imprecision. Management also considers overall portfolio indicators,
including trends in internally risk-rated exposures, classified exposures,
cash-basis loans, and historical and forecasted write-offs; and a review of
industry, geographic, and portfolio concentrations, including current
developments within those segments. In addition, management considers the
current business strategy and credit process, including credit limit setting and
compliance, credit approvals, loan underwriting criteria, and loan workout
procedures.
Within the allowance for credit losses, amounts are specified for
larger-balance, non-homogeneous loans that have been individually determined to
be impaired. These reserves consider all available evidence, including, as
appropriate, the present value of the expected future cash flows discounted at
the loan's contractual effective rate, the secondary market value of the loan
and the fair value of collateral.
Each portfolio of smaller balance, homogeneous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, is
collectively evaluated for impairment. The allowance for credit losses is
established via a process that begins with estimates of probable losses inherent
in the portfolio, based upon various statistical analyses. These include
migration analysis, in which historical delinquency and credit loss experience
is applied to the current aging of the portfolio, together with analyses that
reflect current trends and conditions. Management also considers overall
portfolio indicators including historical credit losses, delinquent,
non-performing and classified loans, and trends in volumes and terms of loans;
an evaluation of overall credit quality and the credit process, including
lending policies and procedures; economic, geographical, product, and other
environmental factors; and model imprecision.
5
<Page>
This evaluation includes an assessment of the ability of borrowers with
foreign currency obligations to obtain the foreign currency necessary for
orderly debt servicing.
During the year-ended December 31, 2001, there were increases in net credit
losses, cash-basis loans and delinquency rates. If such experience continues,
higher loss experience could result in the future. See discussions of Consumer
Credit Risk and Corporate Credit Risk in Management's Discussion and Analysis
for additional information.
INSURANCE POLICY AND CLAIMS RESERVES
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 rate assumptions (ranging from 2.5% to 8.1%)
applicable to these coverages, including 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.
In determining insurance policy and claims reserves, the Company performs a
continuing review of its overall position, its reserving techniques and its
reinsurance. The reserves are also reviewed periodically by a qualified actuary
employed by the Company. The Company maintains property and casualty loss
reserves to cover the estimated ultimate unpaid liability for losses and loss
adjustment expenses with respect to reported and unreported claims incurred as
of the end of each accounting period. Reserves do not represent an exact
calculation of liability, but instead represent estimates, generally utilizing
actuarial projection techniques at a given accounting date. These reserve
estimates are expectations of what the ultimate settlement and administration of
claims will cost based on an assessment of facts and circumstances then known,
review of historical settlement patterns, estimates of trends in claims
severity, frequency, legal theories of liability and other factors. Variables in
the reserve estimation process can be affected by both internal and external
events, such as changes in claims handling procedures, economic inflation, legal
trends and legislative changes. Many of these items are not directly
quantifiable, particularly on a prospective basis. Additionally, there may be
significant reporting lags between the occurrence of the insured event and the
time it is actually reported to the insurer. Reserve estimates are continually
refined in a regular ongoing process as historical loss experience develops and
additional claims are reported and settled. Adjustments to reserves are
reflected in the results of operations in the periods in which the estimates are
changed. Because establishment of reserves is an inherently uncertain process
involving estimates, currently established reserves may not be sufficient. If
estimated reserves are insufficient, the Company will incur additional income
statement charges, which could be material to our operating results in future
periods.
Additional information on the uncertainties relating to environmental and
asbestos claims and litigation can be found in the Commercial Lines section of
Management's Discussion and Analysis. Additional information about Citigroup's
insurance policy and claims reserves can be found in Note 13 to the Consolidated
Financial Statements.
SECURITIZATIONS
Securitization is a process by which a legal entity issues certain securities
to investors, which securities pay a return based on the principal and interest
cash flows from a pool of loans or other financial assets. Citigroup securitizes
credit card receivables, mortgages, home equity loans, and auto loans that it
originated and/or purchased and certain other financial assets. After
receivables or loans are securitized, the Company continues to maintain account
relationships with credit card holders and certain mortgage and home equity and
auto loan customers. As a result, the Company continues to consider these
securitized assets to be part of the business it manages. Citigroup also assists
its clients in securitizing the clients' financial assets. Citigroup may provide
administrative, underwriting, liquidity facilities and/or other services to the
resulting securitization entities, and may continue to service the financial
assets sold to the securitization entity.
There are two key accounting determinations that must be made relating to
securitizations. In the case where Citigroup originated or previously owned the
financial assets transferred to the securitization entity, a decision must be
made as to whether that transfer would be considered a sale for generally
accepted accounting purposes. The second key determination to be made is whether
the securitization entity should be considered a subsidiary of the Company and
be consolidated into the Company's financial statements or whether the entity is
sufficiently independent that it does not need to be consolidated. If the
securitization entity's activities are sufficiently restricted to meet certain
accounting requirements, the securitization entity is not consolidated by the
seller of the transferred assets. Most of the Company's securitization
transactions meet the criteria for sale accounting and nonconsolidation.
Additional information on the Company's securitization activities can be
found in the Off-Balance Sheet Arrangements section on page 42 and Note 11 to
the Consolidated Financial Statements.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted the provisions of the Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations," and certain provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" as required for goodwill and intangible
assets resulting from business combinations consummated after June 30, 2001. The
new rules require that all business combinations initiated after June 30, 2001
be accounted for under the purchase method. The nonamortization provisions of
the new rules affecting goodwill and intangible assets deemed to have indefinite
lives are effective for all purchase business combinations completed after June
30, 2001.
On January 1, 2002, Citigroup adopted the remaining provisions of SFAS 142
when the rules became effective for calendar year companies. Under the new
rules, effective January 1, 2002, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives.
Based on current levels of goodwill and an evaluation of the Company's
intangible assets, which determined that certain intangible assets should be
reclassified as goodwill and identified other intangible assets that have
6
<Page>
indefinite lives, the nonamortization provisions of the new standards will
reduce other expense by approximately $570 million and increase net income by
approximately $450 million in 2002.
During 2002, the Company will perform the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002. It is not
expected that the adoption of the remaining provisions of SFAS 142 will have a
material effect on the financial statements as a result of these impairment
tests.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125" (SFAS 140). In July 2001, FASB issued Technical
Bulletin No. 01-1, "Effective Date for Certain Financial Institutions of Certain
Provisions of Statement 140 Related to the Isolation of Transferred Assets."
Certain provisions of SFAS 140 require that the structure for transfers of
financial assets to certain securitization vehicles be modified to comply with
revised isolation guidance for institutions subject to receivership by the
Federal Deposit Insurance Corporation. These provisions will become effective
for transfers taking place after December 31, 2001, with an additional
transition period ending no later than September 30, 2006 for transfers to
certain master trusts. It is not expected that these provisions will materially
affect the financial statements. SFAS 140 also provides revised guidance for an
entity to be considered a qualifying special purpose entity.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
On January 1, 2002, Citigroup adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), when the rule became
effective for calendar year companies. SFAS 144 establishes additional
criteria as compared to existing generally accepted accounting principles to
determine when a long-lived asset is held for sale. It also broadens the
definition of "discontinued operations," but does not allow for the accrual
of future operating losses, as was previously permitted.
The provisions of the new standard are generally to be applied
prospectively. The provisions of SFAS 144 will affect the timing of discontinued
operations treatment for the planned initial public offering and tax-free
distribution of Travelers Property Casualty Corp.
BUSINESS FOCUS
The table below shows the core income (loss) for each of Citigroup's businesses
for the three years ended December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA 2001 2000(1) 1999(1)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL CONSUMER
Citibanking North America $ 605 $ 496 $ 373
Mortgage Banking 353 297 249
North America Cards 2,133 1,787 1,436
CitiFinancial 1,126 810 761
- -----------------------------------------------------------------------------------------------------
Total Banking/Lending 4,217 3,390 2,819
- -----------------------------------------------------------------------------------------------------
Primerica Financial Services 512 492 452
Personal Lines 208 307 280
- -----------------------------------------------------------------------------------------------------
Total Insurance 720 799 732
- -----------------------------------------------------------------------------------------------------
Western Europe 483 384 312
Japan 928 729 494
Asia 611 550 352
Latin America 120 250 193
Mexico 346 56 83
Central & Eastern Europe,
Middle East & Africa 89 50 38
- -----------------------------------------------------------------------------------------------------
Total Emerging Markets Consumer Banking 1,166 906 666
- -----------------------------------------------------------------------------------------------------
Total International 2,577 2,019 1,472
- -----------------------------------------------------------------------------------------------------
e-Consumer (77) (160) (110)
Other (71) (44) 62
- -----------------------------------------------------------------------------------------------------
TOTAL GLOBAL CONSUMER 7,366 6,004 4,975
- -----------------------------------------------------------------------------------------------------
GLOBAL CORPORATE
Corporate and Investment Bank 3,509 3,670 3,372
Emerging Markets Corporate Banking
and Global Transaction Services 1,644 1,403 882
Commercial Lines 691 1,093 884
- -----------------------------------------------------------------------------------------------------
TOTAL GLOBAL CORPORATE 5,844 6,166 5,138
- -----------------------------------------------------------------------------------------------------
GLOBAL INVESTMENT MANAGEMENT
AND PRIVATE BANKING
Travelers life and Annuity 821 777 623
The Citigroup Private Bank 378 323 269
Citigroup Asset Management 336 345 327
- -----------------------------------------------------------------------------------------------------
TOTAL GLOBAL INVESTMENT MANAGEMENT AND
PRIVATE BANKING 1,535 1,445 1,219
- -----------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES 530 1,383 650
- -----------------------------------------------------------------------------------------------------
CORPORATE/OTHER (706) (858) (637)
- -----------------------------------------------------------------------------------------------------
CORE INCOME 14,569 14,140 11,345
Restructuring- and merger-related
items, after-tax (285) (550) 25
Housing Finance unit charge, after-tax -- (71) --
Cumulative effect of accounting changes (158) -- (127)
- -----------------------------------------------------------------------------------------------------
NET INCOME $ 14,126 $ 13,519 $ 11,243
=====================================================================================================
DILUTED EARNINGS PER SHARE
Core income $ 2.81 $ 2.74 $ 2.19
Net income $ 2.72 $ 2.62 $ 2.17
=====================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
7
<Page>
RESULTS OF OPERATIONS
INCOME AND EARNINGS PER SHARE
Citigroup reported 2001 core income of $14.569 billion or $2.81 per diluted
share, both up 3% from $14.140 billion or $2.74 per diluted share in 2000. Core
income in 2001 excluded $285 million in after-tax restructuring-related items
and $158 million in after-tax charges reflecting the cumulative effect of
adopting SFAS 133 and EITF 99-20, as described in Notes 1 and 15 to the
Consolidated Financial Statements. Core income in 2000 excluded $621 million in
after-tax restructuring- and merger-related items. Core income of $11.345
billion or $2.19 per diluted share in 1999 excluded a release of $25 million
after-tax in restructuring-related items and an after-tax charge of $127 million
reflecting the cumulative effect of adopting several new accounting standards as
described in Notes 1 and 15 to the Consolidated Financial Statements.
Net income in 2001 was $14.126 billion or $2.72 per diluted share, both up
4% from $13.519 billion or $2.62 per diluted share in 2000. Net income in 2000
was up $2.276 billion or 20% from 1999. Core income return on common equity was
20.4% in 2001 compared to 23.5% for 2000 and 21.7% for 1999.
Global Consumer core income increased $1.4 billion or 23% in 2001 led by
increases of $346 million or 19% in North America Cards, $316 million or 39%
in CitiFinancial, $290 million in Mexico reflecting the August acquisition of
Banamex, and $199 million or 27% in Japan. Global Corporate decreased $322
million or 5% in 2001 reflecting decreases in Commercial Lines and Corporate
and Investment Bank, partially offset by 17% increase in EM Corporate & GTS.
Global Investment Management and Private Banking improved $90 million or 6%
in 2001, while Investment Activities decreased $853 million or 6.2% primarily
due to lower venture capital results.
Core income growth of $2.8 billion or 25% in 2000 was led by Global
Corporate which improved $1.0 billion or 20% from 1999, Global Consumer which
increased $1.0 billion or 21%, Investment Activities which was up $733
million and Global Investment Management and Private Banking which improved
$226 million or 19%.
REVENUES, NET OF INTEREST EXPENSE
Adjusted revenues, net of interest expense of $83.6 billion in 2001 were up $5.9
billion or 8% from 2000. Revenues in 2000 were up $9.3 billion or 14% from 1999.
Global Consumer revenues in 2001 were up $5.8 billion or 16% from 2000 to $41.3
billion, including increases of $3.4 billion or 18% in Banking/Lending $2.2
billion or 22% in International and $298 million or 5% in Insurance. Global
Consumer revenues in 2000 increased $2.9 billion or 9% from 1999 to $35.5
billion, led by Banking/Lending up $1.6 billion or 9% and the International
businesses, up $1.2 billion or 14%.
Global Corporate revenues of $34.3 billion in 2001 were up $818 million or
2% from 2000, led by increases of 11% in EM Corporate & GTS and 6% in Commercial
Lines, partially offset by a 2% decrease in Corporate and Investment Bank. In
2000. Global Corporate revenues of $33.5 billion were up to $4.8 billion or 17%
from 1999 reflecting increases in Corporate and Investment Bank of $3.3 billion
or 20%, 16% in EM Corporate & GTS, and 10% in Commercial Lines.
Global Investment Management and Private Banking revenues increased $408
million or 6% in 2001, and $1.0 billion or 17% in 2000 reflecting continued
growth in assets under management and business volumes for both years and the
impact of acquisitions in 2000.
SELECTED REVENUE ITEMS
Net interest revenue as calculated from the Consolidated Statement of Income was
$34.6 billion in 2001, up $6.3 billion or 22% from 2000, which was up $2.0
billion or 8% from 1999 reflecting business volume growth in most markets and
the impact of acquisitions. Net interest revenue, adjusted for the effect of
securitization activity, of $40.7 billion was up $7.0 billion or 21% in 2001
and $1.6 billion or 5% in 2000.
Total commissions, asset management and administration fees, and other fee
revenues of $21.3 billion were down $368 million or 2% in 2001 primarily
reflecting decreases in over-the-counter securities and mutual fund commissions
due to depressed market conditions, partially offset by the impact of
acquisitions. Insurance premiums of $13.5 billion in 2001 were up $1.0 billion
or 8% from year-ago levels and up $925 million or 8% in 2000 reflecting strong
growth in Travelers Life & Annuity in both 2001 and 2000 and Commercial Lines in
2001.
Principal transactions revenues decreased in 2001, from $6.0 billion in
2000 and $5.2 billion in 1999 reflecting results in Corporate and Investment
Bank. Realized gains from sales of investments of $578 million in 2001 were down
from $806 million in 2000, but were up from $541 million in 1999. The increase
in 2000 resulted from gains on the exchange of certain Latin America bonds,
partially offset by losses in insurance-related investments. Other income of
$4.5 billion in 2001 decreased $1.4 billion from 2000, which was up $1.2
billion from 1999. The 2001 decrease primarily reflected venture capital
activity.
OPERATING EXPENSES
Adjusted operating expenses, which exclude restructuring- and merger-related
costs, grew $1.4 billion or 4% to $39.1 billion in 2001, and increased $4.0
billion or 12% from 1999 to 2000.
Global Corporate expenses were up $57 million in 2001, primarily
attributable to higher expenses in Commercial Lines and EM Corporate & GTS, as a
result of acquisitions, and other volume-related increases, and partially offset
by lower production-related compensation and expense control initiatives in the
Corporate and Investment Bank. Expenses increased in Global Consumer by 7% in
2001 and 8% in 2000 reflecting higher business volumes including acquisitions,
partially offset in 2001 by savings resulting from the integration of
Associates. Global Investment Management and Private Banking expenses increased
1% in 2001 and 16% in 2000, driven by acquisitions in 2001 and investments in
sales and marketing activities, technology, and product development in both
years.
RESTRUCTURING- AND MERGER-RELATED ITEMS
Restructuring-related items of $458 million ($285 million after-tax) in 2001
related primarily to severance and costs associated with the reduction of staff
primarily in the Global Corporate and Global Consumer businesses and the
acquisition of Banamex in the 2001 third quarter.
Restructuring-related items of $759 million ($550 million after-tax) in
2000 primarily related to the acquisition of Associates. Restructuring charges
included the reconfiguration of branch operations, the exiting of certain
activities, and the consolidation and integration of certain middle and back
office functions. Also included in the costs were $177 million of merger-related
items, which included legal, advisory and SEC filing fees, as well as other
costs of administratively closing the acquisition.
8
<Page>
HOUSING FINANCE UNIT CHARGE
Included in other operating expenses for 2000 is $71 million (after-tax) charge
associated with the discontinuation of the loan origination operations of the
Associates Housing Finance unit.
BENEFITS, CLAIMS AND CREDIT LOSSES
Adjusted benefits, claims and credit losses were $22.1 billion in 2001, up $4.2
billion or 24% from 2000, which was up $1.3 billion or 8% from 1999.
Policyholder benefits and claims increased 16% to $11.8 billion in 2001 and 11%
to $10.1 billion in 2000 primarily as a result of higher loss levels in
Commercial and Personal Lines and increased volume in Travelers Life & Annuity.
The adjusted provision for credit losses increased 34% to $10.4 billion in 2001
and 4% to $7.8 billion in 2000.
Global Consumer adjusted benefits, claims and credit losses of $13.0
billion were up 25% in 2001 and 3% in 2000. Managed net credit losses in 2001
were $8.9 billion and the related loss ratio was 2.89% compared with $6.8
billion and 2.48% in 2000 and $6.7 billion and 2.80% in 1999. The managed
consumer loan delinquency ratio (90 days or more past due) was 2.37% at the
end of 2001, up from 1.75% and 1.95% at the end of 2000 and 1999.
Global Corporate benefits, claims and credit losses increased to $6.5
billion from $5.2 billion in 2000, which was up from $4.3 billion in 1999,
resulting from increases in Commercial Lines of $873 million and $362 million in
Corporate and Investment Bank and $136 million in EM Corporate & GTS, primarily
in Asia.
Commercial cash basis loans at December 31, 2001 and 2000 were $4.0 billion
and $2.0 billion, respectively, while the commercial Other Real Estate Owned
(OREO) portfolio totaled $220 million and $291 million, respectively. The
increase in cash-basis loans was primarily related to the acquisition of
Banamex, the transportation portfolio, and increases attributable to borrowers
in the retail, telecommunication, energy and utility industries. The
improvements in OREO were primarily related to the North America real estate
portfolio.
CAPITAL
Total capital (Tier 1 and Tier 2) was $75.8 billion or 10.92% of risk-adjusted
assets, and Tier 1 capital was $58.4 billion or 8.42% at December 31, 2001,
compared to $73.0 billion or 11.23% and $54.5 billion or 8.38% at December 31,
2000.
- --------------------------------------------------------------------------------
The Income line in each of the following business discussions excludes the
cumulative effect of adopting accounting changes in 2001 and 1999. See Notes 1
and 23 to the Consolidated Financial Statements.
GLOBAL CONSUMER
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 37,697 $ 32,999 $ 29,816
Effect of securitization activities 3,568 2,459 2,707
- ------------------------------------------------------------------------------------------------
ADJUSTED REVENUES, NET OF
INTEREST EXPENSE 41,265 35,458 32,523
- ------------------------------------------------------------------------------------------------
Adjusted Operating expenses(2) 16,793 15,668 14,471
- ------------------------------------------------------------------------------------------------
Provisions for benefits, claims
and credit losses 9,382 7,895 7,346
Effect of securitization activities 3,568 2,459 2,707
- ------------------------------------------------------------------------------------------------
Adjusted provisions for benefits, claims
and credit losses 12,950 10,354 10,053
- ------------------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES AND
MINORITY INTEREST 11,522 9,436 7,999
Income taxes 4,102 3,394 2,953
Minority interest, after-tax 54 38 71
- ------------------------------------------------------------------------------------------------
CORE INCOME 7,366 6,004 4,975
Restructuring-related
items, after-tax (144) (144) (78)
- ------------------------------------------------------------------------------------------------
INCOME $ 7,222 $ 5,860 $ 4,897
================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
GLOBAL CONSUMER--which provides banking, lending, including credit and charge
cards, and investment and personal insurance products and services to customers
around the world--reported core income of $7.366 billion in 2001, up $1.362
billion or 23% from 2000, which, in turn, increased $1.029 billion or 21% from
1999. Banking/Lending core income increased $827 million or 24% in 2001
reflecting double-digit earnings growth in all businesses. Banking/Lending core
income increased $571 million or 20% in 2000 marked by strong performances in
North America Cards, Citibanking North America and Mortgage Banking. For the
insurance businesses of Global Consumer, which include Primerica Financial
Services and Personal Lines, core income decreased $79 million or 10% in 2001
primarily driven by catastrophe losses in Personal Lines associated with the
terrorist attack of September 11th. For the insurance businesses of Global
Consumer, core income grew $67 million or 9% in 2000 reflecting strong mutual
fund sales and net investment income in Primerica Financial Services. The
developed markets of Western Europe and Japan reported core income of $1.411
billion in 2001, up $298 million or 27% from 2000, which, in turn, grew $307
million or 38% from 1999 primarily reflecting the impact of acquisitions and
higher business volumes. Core income in Emerging Markets Consumer increased $260
million or 29% in 2001 primarily reflecting the acquisition of Banamex,
partially offset by translation losses in Latin America resulting from the
re-denomination of certain consumer loans in Argentina. In 2000, core income in
Emerging Markets Consumer increased $240 million or 36% reflecting strong
performance in Asia and Latin America.
Income of $7.222 billion in 2001, $5.860 billion in 2000, and $4.897
billion in 1999 included restructuring-related charges of $144 million ($223
million pretax), $144 million ($223 million pretax) and $78 million ($120
million pretax), respectively. See Note 15 to the Consolidated Financial
Statements for a discussion of restructuring-related items.
9
<Page>
In 2000, Citigroup adopted the Federal Financial Institutions Examination
Council's (FFIEC) revised Uniform Retail Classification and Account Management
Policy, which provided guidance on the reporting of delinquent consumer loans
and the timing of associated charge-offs for Citigroup's depository institution
subsidiaries. The adoption of the policy resulted in additional net credit
losses of approximately $90 million which were charged against the allowance for
credit losses.
BANKING/LENDING
CITIBANKING NORTH AMERICA
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 2,714 $ 2,273 $ 2,121
Adjusted operating expenses(2) 1,651 1,423 1,417
Provision for credit losses 70 29 64
- -----------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 993 821 640
Income taxes 388 325 267
- -----------------------------------------------------------------------------------------
CORE INCOME 605 496 373
Restructuring-related
items, after-tax (3) 9 1
- -----------------------------------------------------------------------------------------
INCOME $ 602 $ 505 $ 374
=========================================================================================
Average assets (in
billions of dollars) $ 13 $ 9 $ 9
Return on assets 4.63% 5.61% 4.16%
=========================================================================================
EXCLUDING RESTRUCTURING-RELATED ITEMS
Return on assets 4.65% 5.51% 4.14%
=========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
CITIBANKING NORTH AMERICA--which delivers banking, lending and investment
services to customers through Citibank's branches and electronic delivery
systems--reported core income of $605 million in 2001, up $109 million or 22%
from 2000 primarily reflecting revenue growth, as well as the acquisition of the
European America Bank (EAB). In July 2001, Citibanking North America completed
the acquisition of EAB, as state-chartered bank that added $8.4 billion to
end-of-period deposits, $4.4 billion to end-of-period loans and 78 branches at
December 31, 2001. Core income of $496 million in 2000 grew $123 million or 33%
from 1999 due to revenue growth and lower net credit losses. Income of $602
million in 2001, $505 million in 2000 and $374 million in 1999 included
restructuring-related charges of $3 million ($5 million pretax) in 2001 and
restructuring-related credits of $9 million ($15 million pretax) and $1 million
($2 million pretax) in 2000 and 1999 respectively.
As shown in the following table, Citibanking grew accounts, customer
deposits and loans in both 2001 and 2000 reflecting, in part, the acquisition of
EAB which added $4.0 billion to average customer deposits, $2.3 billion to
average loan and 0.8 million to accounts in 2001.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- -----------------------------------------------------------------
<S> <C> <C> <C>
Accounts (IN MILLIONS) 7.7 6.7 6.3
Average customer deposits $ 52.4 $ 44.8 $ 42.4
Average loans $ 9.3 $ 7.0 $ 7.3
=================================================================
</Table>
Revenues, net of interest expense, of $2.714 billion in 2001 increased $441
million or 19% from 2000 reflecting improved net funding and positioning
spreads, the benefit of strong customer deposit growth and increased debit card
fees, as well as the acquisition of EAB in July and a realized investment gain
resulting from the disposition of an equity investment. Revenue growth in 2001
was partially offset by reduced investment product fees reflecting market
conditions throughout the year. Revenues of $2.273 billion in 2000 grew $152
million or 7% from 1999 reflecting growth in deposits and spreads combined with
increased investment product fees.
Adjusted operating expenses of $1.651 billion in 2001 increased $228
million or 16% from 2000 primarily due to the acquisition of EAB, higher
advertising and marketing costs and investments in technology and staff.
Expenses in 2000 were up slightly compared to 1999 primarily reflecting the
impact of expense management initiatives.
The provision for credit losses was $70 million in 2001, up from $29
million in 2000 and $64 million in 1999. The net credit loss ratio was 1.03% in
2001 compared to 0.91% in 2000 and 1.22% in 1999. Loans delinquent 90 days or
more were $96 million or 0.82% at December 31, 2001, compared to $35 million or
0.48% at December 31, 2000 and $55 million or 0.78% at December 31, 1999. The
increases in the provision for credit losses and delinquencies in 2001 were
mainly due to the acquisition of EAB and increases related to commercial market
loans. Net credit losses are expected to increase from 2001 due to the inclusion
of a full year's credit losses for EAB. This statement is a forward-looking
statement within the meaning of the Private Securities Litigation Reform Act See
"Forward-Looking Statements" on page 33.
Average assets of $13 billion in 2001 increased $4 billion from 2000
primarily reflecting the acquisition of EAB. Return on assets was 4.65% in
2001 down from 5.51% in 2000. The decline in return on assets reflects the
increase in loans associated with the addition of EAB.
MORTGAGE BANKING
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 1,037 $ 912 $ 819
Adjusted Operating expenses(2) 431 395 354
(Benefit) Provision for credit losses (12) 2 28
- ------------------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES AND
MINORITY INTEREST 618 515 437
Income taxes 238 196 169
Minority interest, after tax 27 22 19
- ------------------------------------------------------------------------------------------------
CORE INCOME 353 297 249
Restructuring-related items, after tax (2) -- --
- ------------------------------------------------------------------------------------------------
INCOME $ 351 $ 297 $ 249
================================================================================================
Average assets (IN BILLIONS OF DOLLARS) $ 48 $ 40 $ 30
Return on assets 0.73% 0.74% 0.83%
================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
10
<Page>
MORTGAGE BANKING--which originates and services mortgages and student loans for
customers across the United States--reported core income of $353 million in
2001, up $56 million or 19% from 2000 which, in turn, increased $48 million or
19% from 1999 reflecting growth in both the student loan and mortgage
businesses. Income of $351 million in 2001 included restructuring-related items
of $2 million ($3 million pretax).
As shown in the following table, accounts grew 7% in 2001 and 29% in
2000 primarily reflecting strong growth in student loans. Average on balance
sheet loans grew 23% and 29% in 2001 and 2000, respectively. Growth in 2001
was driven by increases in student loans and mortgage loans held for sale.
Growth in 2000 was driven by increases in variable rate mortgage loans, which
are typically held in the portfolio rather than securitized, and student
loans. Other serviced loans increased 13% in 2001 and 25% in 2000 primarily
reflecting growth in originations and servicing portfolio acquisitions. Total
originations were up significantly from 2000 reflecting increased mortgage
refinancing activity due to lower interest rates.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Average loans-on balance sheet(1) $ 45.1 $ 36.8 $ 28.6
Other serviced loans 67.5 59.6 47.6
- ----------------------------------------------------------------------
Total owned and serviced loans $ 112.6 $ 96.4 $ 76.2
Total originations $ 38.5 $ 25.5 $ 22.1
Accounts (IN MILLIONS) 4.8 4.5 3.5
======================================================================
</Table>
(1) Includes loans held for sale.
Revenues, net of interest expense, of $1.037 billion in 2001 grew $125
million or 14% from 2000 mainly due to higher mortgage securitization income and
spread improvements in student loans, partially offset by lower servicing
revenue. The decline in servicing revenue primarily reflected increased
prepayment activity that was driven by lower interest rates. Revenues in 2000
increased $93 million or 11% from 1999 as loan growth and higher servicing
income was partially offset by reduced spreads and lower securitization
activity. Adjusted operating expenses increased $36 million or 9% in 2001 and
grew $41 million or 12% in 2000 primarily reflecting additional business
volumes.
The (benefit) provision for credit losses was ($12) million in 2001
compared to $2 million in 2000 and $28 million in 1999. The declines in the
provision for credit losses in 2001 and 2000 principally reflect improvements in
the quality of the mortgage portfolio. The adoption of revised FFIEC write-off
policies in 2000 added $17 million to net credit losses, which were charged
against the allowance for credit losses, and 4 basis points to the 2000 net
credit loss ratio. The net credit loss ratio was 0.09% in 2001 compared to 0.16%
(0.12% excluding the effect of FFIEC policy revision) in 2000 and 0.18% in 1999.
Loans delinquent 90 days or more were $1.157 billion or 2.53% of loans at
December 31, 2001, up from $846 million or 2.01% at December 31, 2000 and $707
million or 2.26% at December 31, 1999. The increase in delinquencies from 2000
mainly reflects a higher level of buybacks from GNMA pools where the credit risk
is maintained by government agencies.
NORTH AMERICA CARDS
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues, net of interest expense $ 9,574 $ 8,346 $ 7,157
Effect of securitization activities 3,454 2,410 2,707
- ---------------------------------------------------------------------------------------
ADJUSTED REVENUES, NET OF 13,028 10,756 9,864
INTEREST EXPENSE
- ---------------------------------------------------------------------------------------
Adjusted operating expenses(2) 4,069 3,954 3,607
Adjusted provision for credit losses(3) 5,593 3,973 3,979
- ---------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 3,366 2,829 2,278
Income taxes 1,233 1,042 842
- ---------------------------------------------------------------------------------------
CORE INCOME 2,133 1,787 1,436
Restructuring-related items after-tax 16 (57) 12
- ---------------------------------------------------------------------------------------
INCOME $ 2,149 $ 1,730 $ 1,448
=======================================================================================
Average assets (IN BILLIONS OF DOLLARS)(4) $ 48 $ 45 $ 35
Return on assets 4.48% 3.84% 4.14%
=======================================================================================
EXCLUDING RESTRUCTURING-RELATED ITEMS
Return on assets(4) 4.44% 3.97% 4.10%
=======================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
(3) Adjusted for the effect of credit card securitization activities.
(4) Adjusted for the effect of securitization activities, managed average
assets, and the related return on assets, excluding restructuring-related
items for North America Cards were $108 billion and $1.98% in 2001,
compared to $98 billion and 1.82% and $86 billion and 1.67% in 2000 and
1999, respectively.
NORTH AMERICA CARDS--which includes Citi Cards (bankcards and private-label
cards) and Diners Club--reported core income of $2.133 billion in 2001, up $346
million or 19% from 2000 which, in turn, increased $351 million or 24% from
1999, driven buy strong revenue growth that was partially offset by higher
credit costs. Income of $2.149 billion in 2001, $1.730 billion in 2000 and
$1.448 billion in 1999 included restructuring-related credits of $16 million
($26 million pretax) and $12 million ($19 million pretax) in 2001 and 1999,
respectively, and restructuring-related charges of $57 million ($91 million
pretax) in 2000.
As shown in the following table, on a managed basis, the Citi Cards
portfolio experienced growth in 2001 of 6% in end-of-period receivables, 2% in
accounts, 1% in cards in force and 1% in total sales. Growth in sales, accounts
and cards in force in 2001 was negatively impacted by current economic
conditions, as well as the impact of the events of September 11th. Increases in
2000 primarily reflect the impact of portfolio acquisitions.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts (IN MILLIONS) 92.9 90.8 76.7
Cards in force (IN MILLIONS) 142 140 124
Total sales $ 218.5 $ 215.7 $ 183.1
End-of-period managed receivables $ 108.9 $ 103.2 $ 85.6
=========================================================================
</Table>
Adjusted revenues, net of interest expense, of $13.028 billion in 2001
increased $2.272 billion or 21% from 2000 reflecting spread improvement due to
lower cost of funds and repricing actions, combined with the benefit of
receivable growth. Adjusted revenues of $10.756 billion in 2000 increased $892
million or 9% from 1999 primarily reflecting receivable growth, including
portfolio acquisitions, and higher interchange fee revenues due to sales volume
growth, partially offset by lower spreads.
11
<Page>
Risk adjusted margin is a measure of profitability calculated as adjusted
revenues less managed net credit losses divided by average managed loans. This
measure is consistent with the goal of matching the revenues generated by the
loan portfolio with the credit risk undertaken. As shown in the following table,
Citi Cards risk adjusted margin of 6.98% decreased 6 basis points from 2000 as
higher spreads were more than offset by higher net credit losses.
<Table>
<Caption>
(IN BILLIONS OF DOLLARS) 2001 2000 1999
- --------------------------------------------------------------------
<S> <C> <C> <C>
Risk adjusted revenues (1) $ 7.1 $ 6.5 $ 5.6
Risk adjusted margin % (2) 6.98% 7.04% 7.06%
====================================================================
</Table>
(1) Citi Cards adjusted revenues less managed net credit losses.
(2) Risk Adjusted revenues as a percentage of average managed loans.
Adjusted operating expenses of $4.069 billion in 2001 increased $115
million or 3% from 2000 as volume-related increases were partially offset by
disciplined expense management. In 2000, adjusted operating expenses grew $347
million or 10% from 1999 reflecting acquisitions and increased target-marketing
efforts in Citi Cards. Citi Cards adjusted operating expenses as a percentage of
average managed loans were 3.69%, 4.00% and 4.20% in 2001, 2000 and 1999
respectively.
The adjusted provision for credit losses in 2001 was $5.593 billion
compared with $3.973 billion in 2000 and $3.979 billion in 1999. Citi Cards
managed net credit losses in 2001 were $5.556 billion and the related loss
ratio was 5.44% compared with $3.921 billion and 4.28% in 2000 and $3.903
billion and 4.91% in 1999. The increase in net credit losses from the prior
year reflects current U.S. economic conditions as well as a rise in
bankruptcy filings. Citi Cards managed loans delinquent 90 days or more were
$2.135 billion or 1.98% of loans at December 31, 2001 compared with $1.497
billion or 1.46% at December 31, 2000 and $1.285 billion or 1.51% at December
31, 1999. Net credit losses and the related ratio are expected to increase
from 2001 as a result of continued economic weakness including rising
bankruptcy filings, and delinquent loans. This statement is a forward-looking
statement within the meaning of the Private Securities Litigation Reform Act
See "Forward-Looking Statements" on page 33.
CITIFINANCIAL
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADJUSTED REVENUES, NET OF INTEREST EXPENSE $ 5,634 $ 5,071 $ 4,600
Adjusted operating expenses(2) 2,006 2,256 1,980
Adjusted provisions for benefits, claims
and credit losses 1,830 1,546 1,414
- -----------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 1,798 1,269 1,206
Income taxes 672 459 445
- -----------------------------------------------------------------------------------------
CORE INCOME 1,126 810 761
Restructuring-related items, after-tax (19) (68) (2)
- -----------------------------------------------------------------------------------------
INCOME $ 1,107 $ 742 $ 759
=========================================================================================
Average managed assets (IN BILLIONS OF DOLLARS) $ 65 $ 56 $ 48
Return on managed assets 1.70% 1.33% 1.58%
=========================================================================================
EXCLUDING RESTRUCTURING-RELATED ITEMS
Return on managed assets 1.73% 1.45% 1.59%
=========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items
CITIFINANCIAL--which provides community-based lending services through its
branch network, regional sales offices and cross-selling initiatives with other
Citigroup businesses--reported core income of $1.126 billion in 2001, up $316
million or 39% from 2000 primarily reflecting strong growth in receivables,
efficiencies resulting from the integration of Associates and lower cost of
funds. Core income of $810 million in 2000 increased $49 million or 6% from 1999
primarily reflecting strong growth in receivables including the effects of
acquisitions. Income of $1.107 billion in 2001, $742 million in 2000 and $759
million in 1999 included restructuring-related items of $19 million ($32 million
pretax), $68 million ($105 million pretax) and $2 million ($3 million pretax),
respectively.
As shown in the following table, managed receivables grew 9% in 2001 and
15% in 2000 resulting from higher volumes from CitiFinancial locations, the
cross-selling of products through other Citigroup distribution channels, and in
2000, the impact of acquisitions. At December 31, 2001 and 2000, the portfolio
consisted of 69% real estate-secured loans, compared with 68% at December 31,
1999. The average net interest margin of 7.99% in 2001 increased 20 basis points
compared to 2000 as lower cost of funds was partially offset by continued growth
in lower-risk real estate loans that have lower yields. The average net interest
margin of 7.79% in 2000 decreased 54 basis points compared to 1999 due to growth
in lower-risk real estate loans and higher cost of funds.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
END-OF-PERIOD MANAGED RECEIVABLES(1)
Real estate secured loans--other $ 33.5 $ 32.9 $ 28.9
Real estate secured loans PFS sourced 7.8 5.2 3.8
Personal loans 9.7 9.9 10.0
Auto 6.5 4.6 2.5
Sales finance and other 2.7 2.7 2.9
- --------------------------------------------------------------------------------
TOTAL $ 60.2 $ 55.3 $ 48.1
================================================================================
Average net interest margin % 7.99% 7.79% 8.33%
================================================================================
</Table>
(1) Excludes loans held for sale.
Adjusted revenues, net of interest expense, of $5.634 billion in 2001
increased $563 million or 11% from 2000 reflecting strong growth in receivables
and lower cost of funds which was mainly due to a lower interest rate
environment, partially offset by lower yields. Adjusted revenues in 2000
increased $471 million or 10% from 1999 primarily reflecting strong growth in
receivables. Adjusted operating expenses of $2.006 billion in 2001 decreased
$250 million or 11% from 2000 primarily reflecting efficiencies resulting from
the integration of Associates, partially offset by volume-related increases. In
2000, adjusted operating expenses increased $276 million or 14% from 1999
reflecting higher business volumes, including the effects of acquisitions.
Adjusted provisions for benefits, claims and credit losses were $1.830
billion in 2001, up from $1.546 billion in 2000 and $1.414 billion in 1999. The
net credit loss ratio of 2.70% in 2001 was up from 2.57% in 2000 and 2.66% in
1999. Net credit losses in 2001 include losses of $76 million from the sales of
certain underperforming loans, which were charged against the allowance for
credit losses and resulted in a 12 basis point increase in the net credit loss
ratio. Loans delinquent 90 days or more were $2.002 billion or 3.32% of loans at
December 31, 2001 up from $1.272 billion or 2.23% of loans at December 31, 2000
and $943 million or 1.96% at December 31, 1999. The increase in delinquencies in
2001 was primarily due to the alignment of
12
<Page>
credit and collection policies in the Associates real estate portfolio to those
at CitiFinancial combined with the impact of current U.S. economic conditions.
Net credit losses and the related loss ratio are expected to increase from 2001
as a result of economic conditions and credit performance of the portfolios,
including bankruptcy filings. This statement is a forward-looking statement
within the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" on page 33.
INSURANCE
PRIMERICA FINANCIAL SERVICES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $1,979 $1,915 $1,775
Provision for benefits and claims 506 496 487
Adjusted operating expenses(1) 683 659 586
- -----------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 790 760 702
Income taxes 278 268 250
- -----------------------------------------------------------------------------
CORE INCOME(2) 512 492 452
Restructuring-related items, after tax -- 1 --
- -----------------------------------------------------------------------------
INCOME $ 512 $ 493 $ 452
=============================================================================
</Table>
(1) Excludes restructuring-related items.
(2) Excludes investment gains/losses included in Investment Activities segment.
PRIMERICA FINANCIAL SERVICES--which sells life insurance as well as other
products manufactured by the Company, including Salomon Smith Barney mutual
funds, CitiFinancial mortgages and personal loans and Travelers Insurance
Company annuity products--reported core income of $512 million in 2001
compared to $492 million in 2000 and $452 million in 1999. The 4% improvement
in 2001 reflects strong net investment income and $.M.A.R.T.loan(R) sales,
partially offset by lower mutual fund sales. The 9% improvement in 2000
reflects strong mutual fund sales and net investment income partially of
offset by increased infrastructure investment including international
expansion. Results in all periods continue in reflect success at
cross-selling a range of products (particularly mutual funds, variable
annuities and debt consolidation loans), growth in life insurance in force,
improved investment income, and disciplined expense management.
Increases in production and cross-selling initiatives were achieved during
2001. Earned premiums net of reinsurance were $1.145 billion, $1.106 billion,
and $1.071 billion in 2001, 2000, and 1999, respectively. Total face amount of
issued term life insurance was $71.5 billion in 2001 compared to $67.4 billion
in 2000 and $56.2 billion in 1999. The number of policies issued was 244,700 in
2001, compared to 234,700 in 2000 and 209,900 in 1999. The average face value
per policy issued was $250,400 in 2001 compared to $245,000 in 2000 and $229,000
in 1999. Life insurance in force at year-end 2001 reached $434.8 billion, up
from $412.7 billion at year-end 2000 and $394.9 billion at year-end 1999, and
continued to reflect good policy persistency.
Primerica leverages its cross-selling efforts through the Financial Needs
Analysis (FNA)--the diagnostic tool that enhances the ability of the Personal
Financial Analysts to address client needs--to expand its business beyond life
insurance by offering its clients a greater array of financial products and
services, delivered personally through its sales force. During 2001, 470,000
FNAs were submitted. In addition, Primerica has traditionally offered mutual
funds to clients as a means to invest the relative savings realized through the
purchase of term life insurance as compared to traditional whole life insurance.
Primerica sales of variable annuities, predominately underwritten by Travelers
Life and Annuity, generated net written premiums and deposits of $924 million in
2001 compared to $1.057 billion in 2000 and $990 million in 1999. Cash advanced
on loan products primarily underwritten by CitiFinancial was $3.87 billion in
2001 compared to $2.09 billion in 2000 and $1.92 billion in 1999. The increase
in cash advanced reflects rate reductions implemented during 2001. Sales of
mutual funds were $3.409 billion in 2001 compared to $4.220 billion in 2000 and
$3.124 billion in 1999 reflecting a difficult market environment during 2001.
During 2001, proprietary mutual funds accounted for 67% of Primerica's U.S.
sales and 58% of Primerica's total sales, compared to 50% and 43% in 2000.
PERSONAL LINES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $4,464 $4,230 $4,071
Claims and claim adjustment expenses 3,099 2,767 2,572
Adjusted operating expenses(2) 1,079 1,002 1,021
- -----------------------------------------------------------------------------
INCOME BEFORE TAXES AND MINORITY INTEREST 286 461 478
Income taxes 78 138 144
Minority Interest, after-tax(3) -- 16 54
- -----------------------------------------------------------------------------
CORE INCOME(4) 208 307 280
Restructuring-related items, after-tax (3) -- --
- -----------------------------------------------------------------------------
INCOME $ 205 $ 307 $ 280
=============================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Includes restructuring-related items.
(3) See Note 2 to the Consolidated Financial Statements.
(4) Excludes investment gains/losses included in Investment Activities segment.
PERSONAL LINES- which writes property and casualty insurance covering
personal risks--reported core income of $208 million in 2001 compared to $307
million in 2000 and $280 million 1999. The 2001 decrease reflects the impact
of catastrophe losses of $42 million associated with the terrorist attack on
September 11th, increased loss cost trends, including increased medical costs
and auto repair costs, lower favorable prior-year reserve development and
lower net investment income, partially offset by premium growth driven by
improving rates. Also reflected in the 2001 results are the incremental
earnings from the minority interest buyback. The 2000 results reflect
increased net investment income, lower catastrophe losses, and the
incremental earnings from the minority interest buyback, partially offset by
increased loss cost trends and lower favorable prior-year reserve
development. Included in the 1999 results is a charge related to curtailing
the sale of TRAVELERS SECURE(R) auto and homeowners products.
The following table shows net written premiums by product line for the
three years ended December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Personal automobile $2,642 $2,408 $2,388
Homeowners and other 1,524 1,456 1,444
- --------------------------------------------------------------------------
TOTAL NET WRITTEN PREMIUMS $4,166 $3,864 $3,832
==========================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
Personal Lines net written premiums for 2001 were $4.166 billion compared
to $3.864 billion in 2000 and $3.832 billion in 1999. Net written premiums in
1999 included an adjustment associated with the termination
13
<Page>
of a quota share reinsurance arrangement, which increased homeowners'
premiums written by independent agents by $72 million. The increase in net
written premiums in 2001 compared to 2000 reflects growth in target markets
served by independent agents and growth in affinity group marketing and joint
marketing arrangements, partially offset by continued emphasis on disciplined
underwriting and risk management. Rate increases implemented in both the
automobile and homeowners product lines were the primary contributors to the
growth in net written premiums. The business retention ratio for 2001 was
comparable to the 2000 ratio. The increase in net written premiums in 2000
compared to 1999, excluding the reinsurance adjustment, primarily reflects
growth in target markets served by independent agents and growth in affinity
group marketing and joint marketing arrangements and is partially offset by
planned reductions in the TRAVELERS SECURE(R) auto and homeowners business, a
mandated rate decrease in New Jersey and continued emphasis on disciplined
underwriting and risk management. The business retention ratio for 2000 was
moderately lower compared to the 1999 ratio reflecting planned reductions in
the TRAVELERS SECURE(R) auto and homeowners business.
Catastrophe losses, net of taxes and reinsurance, were $86 million in
2001 compared to $54 million in 2000 and $79 million in 1999. Catastrophe
losses in 2001 were primarily due to the terrorist attack on September 11th,
Tropical Storm Allison and windstorms and hailstorms in Texas and the
Midwest. Catastrophe losses in 2000 were primarily due to Texas, Midwest and
Northeast windstorms and hailstorms and hailstorms in Louisiana and Texas.
Catastrophe losses in 1999 were primarily due to Hurricane Floyd, windstorms
and hailstorms on the East Coast and tornadoes in the Midwest and windstorms
and ice storms in the Midwest and Northeast.
The Company, along with others in the industry, uses the combined ratio,
which measures the total cost per $100 of premium production, as a measure of
performance for Personal Lines. The statutory combined ratio for Personal
Lines was 102.7% in 2001 compared to 99.8% in 2000 and 96.7% in 1999. The
U.S. generally accepted accounting principles (GAAP) combined ratio for
Personal Lines was 103.1% in 2001 compared to 99.5% in 2000 and 96.8% in
1999. 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.
The 2001 statutory and GAAP combined ratios include the impact of the
terrorist attack September 11th. Excluding the impact of this event, the 2001
statutory and GAAP combined ratios would have been 101.2% and 101.6%,
respectively. The 1999 statutory and GAAP combined ratios for Personal Lines
include an adjustment associated with the termination of a quota share
reinsurance arrangement. Excluding this adjustment, the 1999 statutory and GAAP
combined ratios were 96.5% and 97.3%, respectively.
The increase in the 2001 statutory and GAAP combined ratios, excluding the
related adjustment above, compared to the statutory and GAAP combined ratios for
2000 reflects increased loss cost trends and lower favorable prior-year reserve
development, partially offset by the growth in premiums due to rate increases.
The increase in the 2000 statutory and GAAP combined ratios compared to the
statutory and GAAP combined ratios (excluding the premium adjustment) for 1999
was primarily due to increased loss cost trends and lower favorable prior-year
reserve development, offset in part by the TRAVELERS SECURE(R) charge taken in
1999 and lower catastrophe losses.
INTERNATIONAL CONSUMER
WESTERN EUROPE
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 2,555 $ 2,388 $ 2,424
Adjusted operating expenses(2) 1,392 1,396 1,474
Provision for benefits, claims and credit losses 414 390 453
- -----------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 749 602 497
Income taxes 266 218 185
- -----------------------------------------------------------------------------------
CORE INCOME 483 384 312
Restructuring-related items, after-tax (1) -- 2
- -----------------------------------------------------------------------------------
INCOME $ 482 $ 384 $ 314
===================================================================================
Average assets (IN BILLIONS OF DOLLARS) $ 22 $ 21 $ 23
Return on assets 2.19% 1.83% 1.37%
===================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
WESTERN EUROPE--Which provides banking, community-based lending, including
credit and charge cards, and investment products and services--reported core
income of $483 million in 2001, up $99 million or 26% from 2000 which, in turn,
increased $72 million or 23% from 1999 primarily reflecting growth in the
consumer finance, branch lending and credit card businesses, particularly in
Germany, the U.K. and Spain. Income of $482 million in 2001 and $314 million in
1999 included a restructuring-related charge of $1 million ($2 million pretax)
in 2001 and a restructuring-related credit of $2 million ($4 million pretax) in
1999.
As shown in the following table, the Western Europe business experienced
growth of 7% in both average loans and customer deposits in 2001. Accounts were
unchanged from 2000 as loan and deposit growth and the impact of acquisitions
was offset by the sale of Diners Club franchises in the region. In 2000,
customer deposit and loan volumes were reduced by the effect of foreign currency
translation.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts (IN MILLIONS) 10.1 10.1 9.6
Average customer deposits $ 13.3 $ 12.4 $ 13.7
Average loans $ 18.0 $ 16.8 $ 17.3
=============================================================================
</Table>
Revenues, net of interest expense, of $2.555 billion in 2001 increased
$167 million or 7% from 2000 principally due to growth in consumer finance,
branch lending and bankcard revenues, reflecting increased volumes and
spreads, partially offset by the effects of the Diners Club sale and foreign
currency translation as well as reduced investment product fees. Revenues in
2000 decreased $36 million as loan growth and higher investment product fees
were more than offset by the adverse effect of foreign currency translation.
Adjusted operating expenses of $1.392 billion in 2001 declined $4 million
from 2000 as costs associated with higher business volumes were more than offset
by the effects of the Diners Club sale, foreign currency translation and
management expense initiatives. Expenses in 2000 decreased $78 million or 5%
from 1999 primarily reflecting lower regional office and technology expenses and
the effect of foreign currency translation.
14
<Page>
The provisions for benefits, claims and credit losses were $414 million in
2001, compared with $390 million in 2000 and $453 million in 1999. The adoption
of revised FFIEC write-off policies in 2000 added $10 million to net credit
losses, which were charged against the allowance for credit losses, and added 6
basis points to the net credit loss ratio. The net credit loss ratio was 1.88%
in 2001, compared with 2.05% (1.99% excluding the effects of FFIEC policy
revisions) in 2000 and 2.00% in 1999. Loans delinquent 90 days or more were $800
million or 4.21% of loans at December 31, 2001 down from $835 million or 4.78%
at December 31, 2000 and $928 million or 5.39% at December 31, 1999. Net credit
losses and the related loss ratio may increase from 2001 as a result of economic
conditions, statutory changes in the region and future credit performance of the
portfolios. This statement is a forward-looking statement within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 33.
JAPAN
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 3,382 $ 2,781 $ 1,930
Adjusted operating expenses(2) 1,282 1,151 817
Provision for credit losses 649 500 315
- ----------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 1,451 1,130 798
Income taxes 523 401 304
- ----------------------------------------------------------------------------------------
CORE INCOME 928 729 494
Restructuring-related items, after tax (6) -- --
- ----------------------------------------------------------------------------------------
INCOME $ 922 $ 729 $ 494
========================================================================================
Average assets (IN BILLIONS OF DOLLARS) $ 20 $ 17 $ 13
Return on assets 4.61% 4.29% 3.80%
========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
JAPAN--which provides banking, community-based lending, including credit
cards, and investment products and services--reported core income of $928
million in 2001, up $199 million or 27% from 2000 which, in turn, increased
$235 million or 48% from 1999 reflecting growth in the consumer finance
business, including the impact of the acquisition of Unimat in September
2000. Income of $922 million in 2001 included a restructuring-related charge
of $6 million ($12 million pretax).
As shown in the following table, the Japan business experienced strong
growth in loans, customer deposits and accounts in both 2001 and 2000. Growth
in 2000 benefited from the acquisitions of Diners Club and Unimat, which
added approximately 0.6 million and 0.4 million to accounts and $0.5 billion
and $0.4 billion to average loans, respectively. In 2001, average loans for
Unimat were $1.5 billion.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts (IN MILLIONS) 5.2 4.8 3.3
Average customer deposits $ 14.9 $ 13.6 $ 11.4
Average loans $ 14.4 $ 11.6 $ 7.8
============================================================================
</Table>
Revenues, net of interest expense, of $3.382 billion in 2001 grew $601
million or 22% from 2000 which, in turn, were up $851 million or 44% from 1999
reflecting growth in business volumes, including the impact of acquisitions, and
increased foreign exchange fees, partially offset by the impact of foreign
currency translation, and, in 2001, reduced spreads. Adjusted operating expenses
increased $131 million or 11% in 2001 and grew $334 million or 41% in 2000
reflecting costs associated with expansion efforts, including the impact of
acquisitions and higher business volumes, partially offset by the effect of
foreign currency translation.
The provision for credit losses in 2001 was $649 million, up from $500
million in 2000 and $315 million in 1999. The net credit loss ratio of 4.10%
in 2001 increased from 3.50% in 2000 and 3.49% in 1999. The increases in net
credit losses in 2001 and 2000 were primarily due to higher loan volumes,
including the impact of acquisitions, and, in 2001 were primarily due to
higher loan volumes, including the impact of acquisitions, and, in 2001,
increased bankruptcy filings and deteriorating credit quality. Loans
delinquent 90 days or more were $178 million or 1.24% of loans at December
31, 2001 up from $101 million or 0.73% at December 31, 2000 and $112 million
or 1.19% at December 31, 1999. Net credit losses and the related ratio are
expected to increase from 2001 as a result of continued increases in
bankruptcy filings and higher unemployment rates in Japan. This is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 33.
ASIA
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 2,201 $ 2,096 $ 1,847
Adjusted operating expenses(2) 969 971 944
Provision for benefits, claims and credit losses 268 273 341
- -----------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 964 852 562
Income taxes 353 302 210
- -----------------------------------------------------------------------------------------
CORE INCOME 611 550 352
Restructuring related items, after-tax (3) (4) (13)
- -----------------------------------------------------------------------------------------
INCOME $ 608 $ 546 $ 339
=========================================================================================
Average assets (IN BILLIONS OF DOLLARS) $ 25 $ 27 $ 26
Return on assets 2.43% 2.02% 1.30%
=========================================================================================
EXCLUDING RESTRUCTURING-RELATED ITEMS
Return on assets 2.44% 2.04% 1.35%
=========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
ASIA (excluding Japan)--which provides banking, lending, including credit
and charge cards, and investment services to customers throughout the region--
reported core income of $611 million in 2001, up $61 million or 11% from 2000
reflecting growth across the region especially in deposits, investment product
fees and cards. Core income in 2000 was up $198 million or 56% from 1999
reflecting growth across the region especially in deposits, investment product
fees and cards, as well as lower credit costs. Income of $608 million in 2001,
$546 million in 2000 and $339 million in 1999 included restructuring-related
charges of $3 million ($4 million pretax), $4 million ($5 million pretax) and
$13 million ($21 million pretax), respectively.
As shown in the following table, Asia accounts grew 20% in 2001 and 14% in
2000 primarily reflecting growth in the cards business across the region.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts (IN MILLIONS) 9.8 8.2 7.2
Average customer deposits $ 35.5 $ 34.7 $ 30.7
Average loans $ 21.3 $ 22.2 $ 21.7
===============================================================================
</Table>
15
<Page>
Revenues, net of interest expense, of $2.201 billion in 2001 increased $105
million or 5% from 2000 and in 2000 increased $249 million or 13% from 1999
reflecting continued growth across the region especially in deposits, investment
product fees and cards.
Adjusted operating expenses in 2001 of $969 million decreased $2 million
from 2000 reflecting expense control initiatives across the region, partially
offset by increased costs associated with volume growth. Expenses in 2000
increased $27 million or 3% from 1999 reflecting increased variable
compensation and increased marketing costs, partially offset by lower
expenses in certain countries resulting from previously implemented
restructuring initiatives.
The provisions for benefits, claims and credit losses in 2001 were $268
million compared with $273 million in 2000 and $341 million in 1999. The net
credit loss ratio was 1.21% in 2001, compared with 1.16% in 2000 and 1.32% in
1999. Loans delinquent 90 days or more were $367 million or 1.73% of loans at
December 31, 2001, compared with $335 million or 1.51% at December 31, 2000 and
$442 million or 1.93% at December 31, 1999. The increases in the net credit loss
ratio and delinquencies from 2000 reflect the weakening economic conditions in
most countries across the region. Net credit losses and loans delinquent 90 days
or more may increase from 2001 levels due to economic weakness in Asia, whose
exporting economies have been impacted by the recession in the U.S. This
statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 33.
LATIN AMERICA
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 1,380 $ 1,656 $ 1,638
Adjusted operating expenses(2) 938 1,007 916
Provisions for benefits, claims and credit losses 299 298 436
- ------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 143 351 286
Income taxes 23 101 93
- ------------------------------------------------------------------------------------
CORE INCOME 120 250 193
Restructuring related items, after-tax (19) (31) (27)
- ------------------------------------------------------------------------------------
INCOME $ 101 $ 219 $ 166
====================================================================================
Average assets (IN BILLIONS OF DOLLARS) $ 8 $ 9 $ 10
Return on assets 1.26% 2.43% 1.66%
====================================================================================
EXCLUDING RESTRUCTURING-RELATED ITEMS
Return on assets 1.50% 2.78% 1.93%
====================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
LATIN AMERICA (excluding Mexico)--which provides banking, lending including
credit and charge cards, and investment services to customers throughout the
region--reported core income of $120 million in 2001, down $130 million or
52% from 2000 primarily reflecting translation losses associated with the
re-denomination of certain consumer loans in Argentina. Core income in 2000
was up $57 million or 30% primarily reflecting lower credit costs and an
increase in earnings from Creditcard, a 33%-owned Brazilian Card affiliate.
Income of $101 million in 2001, $219 million in 2000, and $166 million in
1999 included restructuring-related charges of $19 million ($28 million
pretax), $31 million ($45 million pretax), and $27 million ($40 million
pretax), respectively.
As shown in the following table, Latin America accounts declined as
decreases in deposits and loan products were partially offset by growth in
banking-related insurance products and cards. Average customer deposits declined
in 2001 reflecting continued weak economic conditions in Argentina and foreign
currency translation effects. Average loans declined 13% in 2001 reflecting
continued credit risk management initiatives and foreign currency translation
effects. In 2000, the decline in average loans reflects the 2000 first quarter
auto loan portfolio sale in Puerto Rico and credit risk management initiatives.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts (IN MILLIONS) 7.1 7.2 7.6
Average customer deposits $ 10.4 $ 10.6 $ 10.7
Average loans $ 6.0 $ 6.9 $ 7.7
================================================================================
</Table>
Revenues, net of interest expense, of $1.380 billion in 2001 decreased $276
million or 17% from 2000 primarily reflecting estimated translation losses of
$235 million associated with the re-denomination of certain consumer loans in
Argentina. In 2000, revenues of $1.656 billion increased $18 million from 1999
as higher Creditcard earnings were partially offset by business volume declines,
including the effect of the auto loan portfolio sale in Puerto Rico.
Adjusted operating expenses of $938 million decreased $69 million or 7%
from 2000 primarily reflecting expense rationalization initiatives across the
region. Adjusted operating expenses of $1.007 billion in 2000 were up $91
million or 10% from 1999 primarily due to costs associated with new business
initiatives and acquisitions in the region.
The provisions for benefits, claims and credit losses were $299 million in
2001 compared to $298 million in 2000 and $436 million in 1999. The adoption of
revised FFIEC write-off policies in 2000 added $41 million to net credit losses,
which were charged against the allowance for credit losses, and 61 basis points
to the net credit loss ratio. The net credit loss ratio was 4.63% in 2001, as
compared to 4.67% (4.06% excluding the effect of FFIEC policy revisions) in
2000, and 5.32% in 1999. The increase in the net credit loss ratio in 2001
primarily reflects deteriorating economic conditions in Argentina. The
improvement in the net credit loss ratio in 2000, as compared to 1999,
primarily reflects high write-offs in Argentina in 1999. Loans delinquent 90
days or more of $248 millions or 4.71% loans at December 31, 2001 increased
from $235 million or 3.59% at December 31, 2000 and $303 million or 3.99% at
December 31, 1999. The increase in loans delinquent 90 days or more primarily
reflects deteriorating economic conditions in Argentina, partially offset by
Puerto Rico's gradual liquidation of its auto loan portfolio. The decline in
delinquent loans in 2000 from 1999 reflects additional write-offs related to
the adoption of revised FFIEC policies as well as temporary improvements in
Argentina during 2000. Net credit losses and loans delinquent 90 days or more
are expected to increase from 2001 levels due to the economic crisis in
Argentina and will be impacted by unemployment and the instability of prices.
This statement is a forward-looking statement within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 33.
16
<Page>
MEXICO
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 2,117 $ 603 $ 531
Adjusted operating expenses(2) 1,399 461 369
Provision for benefits, claims and credit losses 254 40 32
- ----------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES AND MINORITY INTEREST 464 102 130
Income taxes 91 46 47
Minority interest, after-tax 27 -- --
- ----------------------------------------------------------------------------------------
CORE INCOME 346 56 83
Restructuring-related items, after-tax (90) --
- ----------------------------------------------------------------------------------------
INCOME $ 256 $ 56 $ 83
========================================================================================
Average assets (IN BILLIONS OF DOLLARS) $ 35 $ 9 $ 10
Return on assets 0.73% 0.62% 0.83%
========================================================================================
EXCLUDING RESTRUCTURING-RELATED ITEMS
Return on assets 0.99% 0.62% 0.83%
========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
MEXICO--which includes the results of Banamex from August 2001, as well as
Citigroup's legacy consumer banking corporate banking, and retirement services
businesses in Mexico and provides a wide array of banking, insurance, and
financial services products--reported core income of $346 million in 2001, up
$290 million compared to 2000 primarily reflecting the acquisition of Banamex.
Core income in 2000 was $56 million, down $27 million or 33% from 1999
primarily due to the loss of a subsidy from the Mexican government related to
the Confia acquisition. Income of $256 million in 2001 includes a
restructuring-related charge of $90 million ($139 million pretax).
On August 7, 2001, Citicorp completed its acquisition of Banamex. The
transaction was accounted for as a purchase, therefore, five months of Banamex
results are included in the Mexico results. Subsequently, Citibank Mexico's
banking operations merged into Banamex with Banamex being the surviving entity.
The business also successfully merged the Citibank branches onto the Banamex
operating platform without customer disruption.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- ---------------------------------------------------------------
<S> <C> <C> <C>
Accounts (IN MILLIONS) 16.1 1.7 1.4
Average customer deposits $ 14.3 $ 3.2 $ 4.0
Average loans:
Consumer 2.6 0.3 0.3
Corporate 7.2 3.2 3.4
Government/government agencies 1.5 0.2 0.2
- ---------------------------------------------------------------
Total Average Loans $ 11.3 $ 3.7 $ 3.9
===============================================================
</Table>
Revenues, net of interest expense, of $2.117 billion in 2001 increased
$1.514 billion from 2000 primarily reflecting the acquisition of Banamex.
Revenues reflect strong volume growth form the underlying customer deposit
business combined with improvements in trading revenue primarily due to
interest rate positioning, partially offset by declining spreads. The
consumer business was impacted by lower interest rates that reduced spreads
on deposits. In 2000, revenues, net of interest expense, increased $72
million or 14% from 1999 reflecting the Garante acquisition and strong
trading revenues, partially offset by the loss of a subsidy from the Mexican
government related to Confia.
Adjusted operating expenses of $1.399 billion in 2001 increased $938
million primarily reflecting the acquisition of Banamex. The business has
initiated actions to rationalize headcount, branches, and systems. Since August
2001, headcount has been reduced by 4,079 and 77 branches have been closed. In
2000, adjusted operating expenses increased $92 million or 25% from 1999
primarily due to Confia systems consolidation expenses and the acquisition of
Garante.
The provisions for benefits, claims and credit losses in 2001 were $254
million compared with $40 million in 2000 and $32 million in 1999. The
consumer net credit loss ratio was 3.72% in 2001, compared with 3.67% in 2000
and 4.89% in 1999. Consumer loans delinquent 90 days or more were $523
million or 8.75% of loans in 2001 compared with $15 million or 5.17% of loans
in 2000 and $17 million or 6.78% of loans in 1999 reflecting the acquisition
of Banamex. Consumer loans delinquent 90 days or more primarily include
mortgages.
Commercial cash-basis loans were $1.030 billion, $79 million, and $55
million at December 31, 2001, 2000 and 1999, respectively. The increase in 2001
reflects the acquisition of Banamex whose commercial cash-basis loans include
exposures in steel, textile, food products and other industries.
Net credit losses, cash-basis loans, and loans delinquent 90 days or more
may increase from 2001 levels, due to economic weakness in Mexico, whose exports
have been impacted by the slowdown in the U.S. This statement is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 33.
CENTRAL & EASTERN EUROPE, MIDDLE EAST & AFRICA
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 548 $ 438 $ 350
Adjusted operating expenses (2) 369 332 253
Provision for credit losses 39 33 35
- ----------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 140 73 62
Income taxes 51 23 24
- ----------------------------------------------------------------------------------
CORE INCOME 89 50 38
Restructuring-related items after tax (1) 4 (17)
- ----------------------------------------------------------------------------------
INCOME $ 88 $ 54 $ 21
==================================================================================
Average assets (IN BILLIONS OF DOLLARS) $ 4 $ 3 $ 3
Return on assets 2.20% 1.80% 0.70%
==================================================================================
EXCLUDING RESTRUCTURING-RELATED ITEMS
Return on assets 2.23% 1.67% 1.27%
==================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
CENTRAL & EASTERN EUROPE, MIDDLE EAST & AFRICA (CEEMEA--including India and
Pakistan)--which provides banking, lending, including credit and charge cards,
and investment services to customers throughout the region--reported core
income of $89 million in 2001, up $39 million or 78% from 2000, and in 2000 core
income was up $12 million or 32% from 1999 reflecting continued growth in
deposits, branch lending and cards across the region, including the impact of
acquisitions. Income of $88 million in 2001 included restructuring-related
charges of $1 million ($2 million pretax). Income of $54 million in 2000
included restructuring-related credits of $4 million ($5 million pretax). Income
of $21 million in 1999 included restructuring-related charges of $17 million
($28 million pretax).
17
<Page>
In June 2000, CEEMEA completed the acquisition of a majority interest in
Bank Handlowy in Poland, whose consumer businesses are reported in this segment.
In August 2000, CEEMEA completed the acquisition of ING's retails branches in
Hungary.
As shown in the following table, CEEMEA reported 39% account growth in 2001
and 33% in 2000 primarily reflecting growth in customer deposits, cards and
other lending, including the impact of acquisitions, as franchise growth efforts
continue across the region.
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts (IN MILLIONS) 3.9 2.8 2.1
Average customer deposits $ 5.9 $ 3.9 $ 3.5
Average loans $ 2.3 $ 1.9 $ 1.6
==============================================================================
</Table>
Revenues, net of interest expense, of $548 million in 2001 increased $110
million or 25% from 2000 and in 2000 increased $88 million or 25% primarily
reflecting growth in deposits, branch lending and cards across the region,
including the impact of acquisitions, partially offset by weakness in Turkey.
Adjusted operating expenses of $369 million increased $37 million or 11%
from 2000 and in 2000 increased $79 million or 31% from 1999 reflecting higher
business volumes, acquisitions and franchise growth in the region.
The provision for credit losses was $39 million in 2001 compared with
$33 million in 2000 and $35 million in 1999. The adoption of revised FFIEC
write-off policies in 2000 added $3 million to net credit losses, which were
charged against the allowance for credit losses, and 14 basis points to the
net credit loss ratio. The net credit loss ratio was 1.70% in 2001, as
compared to 1.95% in 2000 (1.81% excluding the effect of FFIEC policy
revisions) and 1.96% in 1999 primarily due to lower net credit losses in
Pakistan and India. Loans delinquent 90 days or more of $36 million or 1.41%
of loans at December 31, 2001 increased from $32 million or 1.37% at December
31, 2000 primarily due to higher delinquent loans in Poland. Loans delinquent
90 days or more of $32 million or 1.37% at December 31, 2000 decreased from
$46 million or 2.25% at December 31, 1999 primarily due to lower delinquent
loans in Pakistan. Net credit losses and loans delinquent 90 days or more may
increase from 2001 levels due to weakening global economic conditions. This
statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 33.
e-CONSUMER
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 176 $ 170 $ 108
Adjusted operating expenses(2) 305 426 285
- -----------------------------------------------------------------------------
CORE LOSS BEFORE TAX BENEFITS (129) (256) (177)
Income tax benefits (52) (96) (67)
- -----------------------------------------------------------------------------
CORE LOSS (77) (160) (110)
Restructuring-related items, after-tax (8) -- --
- -----------------------------------------------------------------------------
Loss $ (85) $(160) $(110)
=============================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
e-CONSUMER--the business responsible for developing and implementing Global
Consumer Internet financial services products and e-commerce solutions--reported
a loss before restructuring-related items of $77 million in 2001, compared to
losses of $160 million in 2000 and $110 million in 1999. The loss of $85 million
in 2001 included restructuring-related items of $8 million ($13 million pretax).
Revenues, net of interest expense, in 2001 increased $6 million or 4% from
2000 primarily due to growth associated with both new and established product
offerings, partially offset by lower realized investment gains. Revenues of $170
million in 2000 included gains related to the sale of Internet/e-commerce
investments.
Adjusted operating expenses in 2001 declined $121 million or 28% from 2000
primarily due to the effect of initiatives discontinued in 2001 and 2000,
partially offset by continued investment spending on Internet financial services
and products. Expenses in 2000 increased $141 million or 49% from 1999
reflecting investment spending combined with charges related to the termination
of certain contracts and other initiatives.
OTHER CONSUMER
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 50 $ 169 $ 445
Adjusted operating expenses (2) 220 235 448
Provisions for benefits, claims and credit losses (59) 7 (103)
- ----------------------------------------------------------------------------------
CORE INCOME (LOSS) BEFORE TAX BENEFITS (111) (73) 100
Income tax (benefits) (40) (29) 40
Minority interest, after-tax -- -- (2)
- ----------------------------------------------------------------------------------
CORE INCOME (LOSS) (71) (44) 62
Restructuring-related terms after tax (5) 2 (34)
- ----------------------------------------------------------------------------------
INCOME (LOSS) $ (76) $ (42) $ (28)
==================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
OTHER CONSUMER--which includes certain treasury and unallocated staff
functions, global marketing and other programs--reported losses before
restructuring-related items of $71 million and $44 million in 2001 and 2000,
respectively, compared to core income of $62 million in 1999. The increase in
losses from 2000 was primarily due to lower treasury results, primarily
reflecting a change in internal transfer pricing methodology, and lower
foreign currency hedge gains. Income in 1999 was primarily due to gains
resulting from the disposition of the Associates recreational vehicle finance
operations (Fleetwood Credit Corporation) and the sale of certain
non-strategic operations.
Losses of $76 million and $42 million in 2001 and 2000, respectively,
included a restructuring-related charge of $5 million ($7 million pretax) in
2001 and a restructuring-related credit of $2 million ($3 million pretax) in
2000. Income of $28 million in 1999 included a restructuring-related charge of
$34 million ($53 million pretax).
Revenues, expenses, and the provisions for benefits, claims and credit
losses reflect offsets to certain line-item reclassifications reported in
other Global Consumer operating segments. The 1999 revenues, expenses and
provisions for benefits, claims and credit losses also include the results of
certain private label cards and other businesses that were discontinued in
1999 and 2000.
18
<Page>
GLOBAL CONSUMER OUTLOOK
The statements below are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 33.
BANKING/LENDING
CITIBANKING NORTH AMERICA. The year ended December 31, 2001 was a year of
continued success in both our core business momentum and the successful
integration of EAB. Citibanking invested in programs and staff to improve
operations and customer service while continuing to control overall expenses.
In addition, Citibanking continues to emphasize its needs-based sales
approach through Citipro, a complimentary financial analysis that assesses
customers' needs and recommends appropriate financial products to meet those
needs. The key elements to grow our earnings will be increasing sales
productivity in the Financial Centers; increasing customer retention through
focused marketing, cross selling and technology; streamlining processes and
investing in appropriate technology to improve productivity and cost
efficiency, which, in turn, will enhance price flexibility; and improving
customer service and satisfaction.
MORTGAGE BANKING. In 2001, Mortgage Banking increased core income by 19% over
2000. Heavy refinancing activity in 2001 drove CitiMortgage origination volumes
to a record $32.3 billion, 62% increase over 2000. Student Loans benefited in
2001 from lower cost of funds while growing its number one market share position
by expanding sales capabilities and increasing Internet distribution. In 2002,
core income should reflect continued improvement compared to 2001. With an
expected decrease in refinance activity, CitiMortgage anticipates focusing on
increasing market share in the stable purchase market, with a special emphasis
on Citigroup referrals. CitiMortgage should also benefit from higher net
servicing income as mortgage prepayment rates decline. Student Loans expects to
benefit from its strengthened sales platform and continued low funding costs.
Credit costs are anticipated to be comparable to 2001.
NORTH AMERICA CARDS. In 2001, the Cards business reported a record core income
of $2.1 billion. Core income increased 19% for the year, driven by improved
spreads, resulting from lower interest rates and repricing actions and contained
expense levels, partially offset by higher credit costs. National bankruptcy
filings increased 20% in 2001, due to the combination of pending legislative
reform, higher unemployment and a weakened economy. In 2002, the Cards business
is expected to deliver continued growth and consistent risk-adjusted revenue
performance, despite the presence of a challenging environment which is
expected to continue in 2002. Credit costs and delinquencies are expected to
increase from 2001 levels as a result of economic conditions and credit
performance of the portfolios.
CITIFINANCIAL. During 2001, CitiFinancial focused on the integration of the
Associates businesses, including eliminating redundant, unprofitable branches or
centers and conforming all underwriting and collection practices. The results of
these efforts contributed to significant expense reductions and improved
profitability. Real estate volume increased significantly primarily due to the
success of the PFS-sourced business, which increased 50% to $7.8 billion in
outstandings as of December 31, 2001. CitiFinancial continues to improve its
cost structure and plans to pursue growth by expanding and developing new sales
channels and diversifying its product offerings. As in the past, cross-selling
opportunities among Citigroup affiliates will continue. Net credit losses and
the related loss ratio are expected to increase from 2001 as a result of
economic conditions and credit performance of the portfolios, including
bankruptcy filings.
INTERNATIONAL
WESTERN EUROPE. The Western Europe region experienced strong growth in 2001
with expanded margins resulting from improved spreads and continued cost
management. Business volumes in 2001 benefited from organic growth and
acquisitions in the home equity and credit card businesses. Our strategic
priorities - consumer finance, cards and wealth management - continue to show
excellent growth opportunities in the markets in which we operate. Continued
focus on distribution channels will ensure that customers can access our
products in ways that are most convenient and comfortable for their
individual needs. We expect that with continued product innovation and
focused customer support we will continue to enhance our performance. Credit
costs may increase from 2001 as result of economic conditions and statutory
changes in the region.
JAPAN. Japan's increase in core income in 2001 reflected the impact of
acquisitions and continued organic growth with over 500,000 new customers
generated. The business began to experience deteriorating credit quality as
unemployment rates and bankruptcy levels reached record highs in late 2001. We
expected this deterioration to continue in 2002 as the Japanese economy
continues to weaken.
ASIA. The region recorded improved financial performance in 2001, driven by
growth in deposits, investment product fees and cards, combined with expense
control initiatives. Credit costs may increase in 2002 reflecting the delayed
effect of weak economic conditions in the region. The business focus in 2002
will be on continuing the revenue momentum to expand deposits, investment
product fees and cards, combined with expense control initiatives and tight
credit underwriting and collections.
MEXICO. Mexico experienced an increase in core income in 2001 primarily due to
the acquisition of Banamex. In 2002, the business expects to continue its
initiatives for significant expense rationalization combined with market share
expansion. The Mexican economy has been negatively impacted by the slowdown of
exports to the U.S. and the credit portfolio continues to be closely monitored.
LATIN AMERICA. In 2001, Argentina experienced continued recession ending the
year in an economical and political crisis. The business was able to generate
core income growth in its other countries through modest revenue growth combined
with expense reduction initiatives and disciplined credit management. In 2002
delinquencies and net credit losses may increase due to continuing weak global
economic conditions. We will continue to manage for moderate growth and cost
management in the rest of our businesses across Latin America.
19
<Page>
CENTRAL & EASTERN EUROPE, MIDDLE EAST & AFRICA. The business experienced strong
growth in 2001 driven by growth in deposits, branch lending and cards across
most countries in the region, including the impact of acquisitions. In 2002, the
business expects continued market share expansion in established markets, build-
out of new franchises in the Czech Republic and in Israel and continued focus on
disciplined credit management.
e-CONSUMER. In 2001, the business entered into a strategic alliance with the
Microsoft Network and continued to develop and refine existing product offerings
including Citibank Online, C2it, MyCiti, and a strategic alliance with America
Online. These efforts will continue in 2002 as the business seeks to extend
Citigroup's ability to deliver financial services via the internet and improve
cross-selling opportunities among Citigroup businesses. These activities should
position Citigroup to grow with the digital economy and improve the performance
and cost effectiveness of our customer service capabilities.
INSURANCE INDUSTRY
A variety of factors continue to affect the property and casualty insurance
market and the Company's core business outlook, including improvement in pricing
in the commercial lines marketplace as evidenced by price increases, a
continuing highly competitive personal lines marketplace, inflationary pressures
on loss cost trends including medical inflation and increasing auto loss costs,
asbestos-related developments and rising reinsurance and litigation costs.
The property and casualty insurance industry continues to be reshaped by
consolidation and globalization. With respect to globalization, Citigroup formed
CitiInsurance, the international arm of Citigroup's insurance activities, to
capitalize on the strength of the Citigroup branch franchise and the extensive
distribution strength of the Citigroup consumer business around the world. This
unit expects to build on the progress already made in Southeast Asia during the
last several years with the strategic alliance with Fubon Group, a diversified
financial services company based in Taiwan.
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 creates 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.
Certain social, economic, political, and litigation issues have led to an
increased number of legislative and regulatory proposals aimed at addressing the
cost and availability of certain types of insurance, as well as the claim and
coverage obligations of insurers. While most of these provisions have failed to
become law, these initiatives may continue as legislators and regulators try to
respond to the public availability, affordability, and claim concerns. The
resulting laws, if any, could adversely affect the Company's ability to write
business with appropriate returns.
PRIMERICA. During the last few years, Primerica 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 continues to grow. A continuation
of these trends could positively influence future operations. Primerica
continues to expand cross selling with other Company subsidiaries.
PERSONAL LINES. Personal Lines strategy includes control of operating expenses
to improve competitiveness and profitability, growth in sales primarily through
independent agents and selective expansion of additional marketing channels to
broaden distribution to a wider customer base. 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, and non-renewing policies in some hurricane-prone
areas where acceptable returns are not being achieved, subject to restrictions
imposed by insurance regulatory authorities.
The personal auto insurance marketplace remains highly competitive as
some personal auto carriers have been reluctant to increase prices despite
increases in loss cost trends due to inflationary pressures in medical costs
and auto repair costs. These trends are expected to continue into 2002.
Personal Lines will continue to emphasize underwriting discipline in this
competitive marketplace and continue to pursue its strategy of increases in
auto rates to offset increases in loss cost trends. Market conditions for
homeowners insurance have remained stable with the industry experiencing
modest rate increases. Personal Lines expects homeowners rate increases to
continue in 2002. Homeowners loss cost trends continue to increase at modest
levels reflecting inflationary pressures and the increased frequency of
weather-related losses.
The Personal Lines insurance market shows indications of contraction as a
result of the terrorist attack on September 11th. Several Personal Lines
carriers have ceased writing new polices and are not renewing existing policies.
As carriers exit markets and fail to renew policies, Personal Lines is well
positioned within the independent agent's office to take advantage of this
opportunity to properly underwrite and bind this new business.
20
<Page>
GLOBAL CORPORATE
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $34,297 $33,479 $28,688
Adjusted operating expenses(2) 18,869 18,812 16,233
Provisions for benefits, claims and credit losses 6,544 5,173 4,317
- ---------------------------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES AND MINORITY INTEREST 8,884 9,494 8,138
Income taxes 3,014 3,260 2,831
Minority interest, after-tax 26 68 169
- ---------------------------------------------------------------------------------------------------------
CORE INCOME 5,844 6,166 5,138
Restructuring-related items, after-tax (137) (146) 121
- ---------------------------------------------------------------------------------------------------------
INCOME $ 5,707 $ 6,020 $ 5,259
=========================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
Global Corporate serves corporations, financial institutions, governments,
investors and other participants in capital markets throughout the world. It
consists of the Corporate and Investment Bank (CIB), Emerging Markets Corporate
Banking & Global Transaction Services (EM Corporate & GTS), and the Commercial
Lines business of TPC. The CIB delivers a full range of financial services and
products including investment banking, brokerage, research and advisory
services, foreign exchange, structured products, derivatives, loans, leasing and
equipment finance. EM Corporate & GTS offers a wide array of banking and
financial services products in the emerging markets (excluding Mexico) and also
includes the global operations of Transaction Services. TPC 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.
Global Corporate reported core income of $5.844 billion in 2001, down $322
million or 5% from 2000. The decrease reflects declines in Commercial Lines,
down $402 million to $691 million, and the CIB, down $161 million to $3.509
billion, partially offset by increases in EM Corporate & GTS, up $241 million to
$1.644 billion. Commercial Lines decreased primarily due to the catastrophe
losses associated with the terrorist attack of September 11th, increased loss
costs trends including increased medical costs, auto repair costs and
reinsurance costs and lower net investment income, partially offset by the
benefit of rate increases, higher fee income and higher favorable prior-year
reserve development. Also reflected in the 2001 results are the incremental
earnings from the minority interest buyback. The decrease in the CIB was
primarily due to lower income in global equities and private client, lower
earnings from the investment in Nikko Cordial and higher credit losses,
partially offset by strong growth in fixed income and expense control
initiatives. The increase in EM Corporate & GTS primarily reflects higher
trading-related revenues across all regions and expense control initiatives,
partially offset by write-downs in Argentina.
Income of $5.707 billion in 2001 and $6.020 billion in 2000 included
restructuring-related charges of $137 million ($222 million pretax) and $146
million ($172 million pretax), respectively. Income of $5.259 billion in 1999
included net restructuring-related credits of $121 million ($192 million
pretax). See Note 15 to the Consolidated Financial Statements for a discussion
of the restructuring-related items.
The businesses of Global Corporate 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 100 countries in which the businesses operate. Global economic and market
events can have both positive and negative effects on the revenue performance of
the businesses and can affect credit performance. Losses on commercial lending
activities and the level of cash-basis loans can vary widely with respect to
timing and amount, particularly within any narrowly-defined business or loan
type. Net credit losses and cash-basis loans may increase from the 2001 levels
due to weak global economic conditions, sovereign or regulatory actions and
other factors. The property and casualty insurance market will benefit from
improvements in pricing, offset in part by competitive pressures, inflation in
the cost of medical care, and litigation. This paragraph contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 33.
CORPORATE AND INVESTMENT BANK
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 19,406 $ 19,746 $ 16,500
Adjusted operating expenses(2) 12,846 13,268 10,990
Provision for and credit losses 1,117 755 193
- ---------------------------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES AND MINORITY INTEREST 5,443 5,723 5,317
Income taxes 1,932 2,051 1,943
Minority interest, after-tax 2 2 2
- ---------------------------------------------------------------------------------------------------------
CORE INCOME 3,509 3,670 3,372
Restructuring-related items, after-tax (105) (94) 131
- ---------------------------------------------------------------------------------------------------------
INCOME $ 3,404 $ 3,576 $ 3,503
=========================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring related items.
The CIB delivers a full range of financial services and products including
investment banking, brokerage, research and advisory services, foreign exchange,
structured products, derivatives, loans, leasing and equipment finance.
Core income was $3.509 billion in 2001 compared to $3.670 billion in 2000
and $3.372 billion in 1999. CIB core income decreased $161 million during 2001
primarily due to lower income in global equities and private client, lower
earnings from the investment in Nikko Cordial and higher credit losses,
partially offset by strong growth in fixed income and expense control
initiatives. Core income of $3.670 billion in 2000 increased $298 million
compared to 1999 primarily reflecting double-digit growth across most
businesses, partially offset by increases in production-related expenses and the
provision for credit losses, including the impact of acquisitions in 2000.
Income of $3.404 billion in 2001 and $3.576 billion in 2000 included net
restructuring-related charges of $105 million ($176 million pretax) and $94
million ($111 million pretax), respectively. Income of $3.503 billion in 1999
included net restructuring-related credits of $131 million ($208 million
pretax).
21
<Page>
On May 1, 2000, the CIB completed the acquisition of the global investment
banking business and related net assets of Schroders PLC (Schroders), including
all corporate finance, financial markets and securities activities. During the
second quarter of 2000, the CIB strengthened its position in the U.S. leasing
market through the purchase of Copelco.
Revenues, net of interest expense, decreased 2% in 2001 to $19.406 billion
from $19.746 billion in 2000 primarily reflecting decreases in global equities
and private client and lower earnings from the investment in Nikko Cordial,
partially offset by strong growth in fixed income. Revenues increased 20% to
$19.746 billion in 2000 from 1999 reflecting strong growth across all
businesses.
Revenues by category were as follows:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions and fees $ 3,702 $ 4,471 $ 3,721
Investment banking 4,519 4,098 3,353
Principal transactions 3,248 4,238 3,609
Asset management and administration fees(2) 2,035 2,169 1,641
Interest and dividend income, net 5,009 3,801 3,600
Other income 893 969 576
- ---------------------------------------------------------------------------------------------------------
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 19,406 $ 19,746 $ 16,500
=========================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes the revenues of SSB Asset Management which are reported in the
Citigroup Asset Management segment.
Commissions and fees were $3.702 billion, $4.471 billion and $3.721 billion
in 2001, 2000 and 1999, respectively. The 2001 decline primarily reflects
decreases in over-the-counter securities and mutual fund commissions due to
depressed market conditions. The 2000 increase reflects growth in sales of
listed and over-the-counter securities along with increased mutual fund
commissions and transaction services fees.
Investment banking revenues were $4.519 billion in 2001 compared to $4.098
billion in 2000 and $3.353 billion in 1999. Growth in 2001 was primarily due to
increases in high-grade debt, structured products and high yield underwritings,
partially offset by decreases in equity and unit trust underwriting and lower
merger and acquisition fees. Growth in 2000 was primarily due to increases in
equity and high-grade debt underwriting and in merger and acquisition fees,
partially offset by a decline in high yield underwriting.
Principal transactions revenues were $3.248 billion in 2001, down $990
million or 23% from 2000 primarily reflecting decreases in global equities.
Principal transactions revenues were $4.238 billion in 2000 compared to $3.609
billion in 1999 primarily reflecting increases in global equities, fixed income
and foreign exchange.
Asset management and administration fees decreased $134 million in 2001 to
$2.035 billion from $2.169 billion in 2000 primarily due to a decrease in
average balances of assets under fee based management. Asset management and
administration fees increased $528 million in 2000 from $1.641 billion in 1999
primarily due to strong growth in assets under fee-based management. These fees
include results from assets managed by the Financial Consultants and other
internally managed assets as well as those that are managed through the
Consulting Group.
Net interest and divided income was $5.009 billion in 2001 compared to
$3.801 billion in 2000 and $3.600 billion in 1999. The increase in 2001 was
primarily due to wider spreads in fixed income, treasury and loans. The increase
in 2000 was primarily due to the addition of Copelco.
Other income was $893 million in 2001 compared to $969 million in 2000 and
$576 million in 1999. The 2001 decrease is primarily due to lower earnings from
the investment in Nikko Cordial and the effect of a change in the presentation
of intercompany balances that had the effect of reducing other income and other
expense, partially offset by gains on the sale of the Associates Relocation and
Canadian Fleet businesses and gains on sale of municipal bonds from the
available-for-sale portfolio. Other income of $969 million in 2000 increased
$393 million from 1999 primarily due to an increase in ownership in Nikko
Cordial along with higher income from the Nikko SSB joint venture which began
operations during the 1999 first quarter.
Total assets under fee-based management at December 31, were as follows:
<Table>
<Caption>
IN BILLIONS OF DOLLARS 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial consultant managed $ 54.9 $ 56.2 $ 43.6
Consulting group and internally managed 150.2 145.6 126.2
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS UNDER FEE-BASED MANAGEMENT(1) $ 205.1 $ 201.8 $ 169.8
=========================================================================================================
</Table>
(1) Includes assets managed jointly with Citigroup Asset Management.
Adjusted operating expenses were $12.846 billion in 2001 compared to
$13.268 billion in 2000 and $10.990 billion in 1999. Adjusted operating expenses
decreased 3% in 2001 compared to 2000 primarily due to lower compensation and
benefits and other operating and administrative expenses. Compensation and
benefits decreased primarily as a result of declines in production-related
compensation and savings from restructuring actions initiated in 2001. Other
operating and administrative expenses declined $374 million primarily due to
tight expense controls and a change in the presentation of intercompany balances
that had the effect of reducing other income and other expense. Adjusted
operating expenses increased 21% in 2000 compared to 1999 primarily due to
higher production-related compensation and benefits expense, including the
impact of the acquisitions of Schroders and Copelco in the 2000 second quarter.
The provision for credit losses was $1.117 billion in 2001 compared to
$755 million in 2000 and $193 million in 1999. The increase in 2001 was
primarily due to higher net credit losses in the transportation leasing
portfolio combined with higher net credit losses in the telecommunication,
energy, retail and airline industries. The increase in 2000 compared to 1999
was due to losses on exposures to North American health care borrowers,
additional provisions for the transportation portfolio, recoveries on real
estate loans in 1999 and the inclusion of losses for Copelco, which was
acquired in the second quarter of 2000.
Cash-basis loans were $1.525 billion, $776 million and $481 million at
December 31, 2001, 2000 and 1999, respectively, reflecting increases in the
transportation portfolio and borrowers in the telecommunication, energy,
utility, and retail industries. The OREO portfolio totaled $64 million, $115
million and $156 million at December 31, 2001, 2000 and 1999, respectively. The
improvements in OREO in 2001 and 2000 were primarily related to the North
America real estate portfolio. Losses on commercial lending activities and the
level of cash-basis loans can vary widely with respect to timing and amount,
particularly within any narrowly-defined business or loan type. Net credit
losses and cash-basis loans may increase from 2001 levels due to weak economic
conditions in the U.S., Japan and Europe. This statement is a forward-looking
statement within the meaning of the Private Securities Litigation Reform Act.
See "Forward-Looking Statements" on page 33.
22
<Page>
EMERGING MARKETS CORPORATE BANKING AND GLOBAL TRANSACTION SERVICES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 6,928 $ 6,236 $ 5,373
Adjusted operating expenses(2) 4,037 3,845 3,612
Provisions for credit losses 300 164 329
- ---------------------------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES AND MINORITY INTEREST 2,591 2,227 1,432
Income taxes 923 808 544
Minority interest, after-tax 24 16 6
- ---------------------------------------------------------------------------------------------------------
CORE INCOME 1,644 1,403 882
Restructuring-related items, after-tax (32) (11) (10)
- ---------------------------------------------------------------------------------------------------------
INCOME $ 1,612 $ 1,392 $ 872
=========================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
Citigroup's EM Corporate & GTS business offers a wide array of banking and
financial services products in the emerging markets (excluding Mexico) and also
includes the global operations of Transaction Services.
EM Corporate & GTS core income totaled $1.644 billion in 2001, up $241
million or 17% from 2000 primarily reflecting higher trading-related revenues
across all regions and expense control initiatives, partially offset by
write-downs in Argentina. The improvement in core income was driven by growth in
Asia up 23% to $674 million, CEEMEA up 31% to $519 million and Latin America up
10% to $521 million. Core income in 2000 of $1.403 billion increased $521
million or 59% from 1999 primarily reflecting broad-based revenue growth, tight
expense control management and improved credit in Asia. Income of $1.612
billion, $1.392 billion and $872 million in 2001, 2000 and 1999, respectively,
included restructuring-related charges of $32 million ($46 million pretax), $11
million ($18 million pretax) and $10 million ($16 million pretax), respectively.
In June 2000, EM Corporate & GTS completed the acquisition of a majority
interest in Bank Handlowy, a leading bank in Poland.
Revenues, net of interest expense, were $6.928 billion in 2001 compared to
$6.236 billion in 2000. Revenue growth in 2001 was led by CEEMEA, up 22% from
2000, primarily due to the acquisition of Bank Handlowy along with growth in
trading-related revenues and benefits from capital hedging activities. Asia
revenues were up 13% in 2001 primarily due to growth in trading-related revenues
and the impact of a building sale. Latin America revenues were up 14% in 2001
primarily reflecting growth in trading-related revenues and benefits from
capital hedging activities, partially offset by fourth quarter write-downs in
Argentina. Revenues of $6.236 billion in 2000 grew $863 million or 16% compared
to 1999 primarily due to the acquisition of Bank Handlowy and growth in
transaction services revenues in all regions.
Adjusted operating expenses increased 5% in 2001 to $4.037 billion from
$3.845 billion in 2000 which, in turn, increased 6% from $3.612 billion in 1999
primarily reflecting the acquisition of Bank Handlowy and volume-related
increases, partially offset by cost controls in all regions.
The provision for credit losses totaled $300 million, $164 million and $329
million in 2001, 2000 and 1999, respectively. The increase in 2001 is primarily
due to fourth quarter write-downs in Argentina reflecting the deteriorating
economic situation in that country. The decrease in 2000 primarily reflects
improvements in Asia, mainly China, Indonesia, Australia and Thailand, and in
CEEMEA.
Cash-basis loans (excluding Mexico, which is included in the Mexico
Consumer segment) were $1.465 billion, $1.069 billion and $989 million at
December 31, 2001, 2000 and 1999, respectively. The increase in 2001 primarily
reflects increases in Latin America, mainly Argentina, and increases in Asia,
mainly Australia and New Zealand. The increase in 2000 was primarily due to the
acquisition of Bank Handlowy along with increases in Latin America, partially
offset by improvements in Asia. Losses on commercial lending activities and the
level of cash-basis loans can vary widely with respect to timing and amount,
particularly within any narrowly defined business or loan type. Net credit
losses and cash-basis loans may increase from the 2001 levels due to weakening
global economic conditions, the economic crisis in Argentina, sovereign or
regulatory actions and other factors. This statement is a forward-looking
statement within the meaning of the Private Securities Litigation Reform Act.
See "Forward-Looking Statements" on page 33.
COMMERCIAL LINES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 7,963 $ 7,497 $ 6,815
Claims and claim adjustment expenses 5,127 4,254 3,795
Adjusted operating expenses(2) 1,986 1,699 1,631
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES AND MINORITY INTEREST 850 1,544 1,389
Income taxes 159 401 344
Minority interest, after-tax(3) -- 50 161
- -------------------------------------------------------------------------------------------------------
CORE INCOME(4) 691 1,093 884
Restructuring-related items, after-tax -- (41) --
- -------------------------------------------------------------------------------------------------------
INCOME $ 691 $ 1,052 $ 884
=======================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Includes restructuring-related items.
(3) See Note 2 to the Consolidated Financial Statements.
(4) Excludes investment gains/losses included in Investment Activities segment.
COMMERCIAL LINES--which offers a broad array of property and casualty insurance
and insurance-related services through brokers and independent
agencies--reported core income of $691 million in 2001 compared to $1.093
billion in 2000 and $884 million in 1999. The 2001 decrease compared to 2000
primarily reflects the impact of catastrophe losses of $448 million associated
with the terrorist attack on September 11th, increased loss cost trends
including increased medical costs, auto repair costs and reinsurance costs and
lower net investment income, partially offset by the benefit of rate increases,
higher fee income and higher favorable prior-year reserve development. Also
reflected in the 2001 results are the incremental earnings from the minority
interest buyback. The improvements in 2000 over 1999 reflect the incremental
earnings from the minority interest buyback, rate increases, higher fee income,
lower catastrophe losses, and higher net investment income and were partially
offset by increased loss cost trends and lower favorable prior-year reserve
development. Results for 2000 and 1999 also reflect benefits resulting from
legislative actions that changed the manner in which certain states finance
their workers' compensation second-injury funds, principally in the states of
New York and Pennsylvania.
On May 31, 2000, the Company completed the acquisition of the surety
business of Reliance Group Holdings, Inc. (Reliance Surety). In the third
quarter of 2000, the Company purchased the renewal rights to a portion of
Reliance Group Holdings, Inc.'s commercial lines middle-market book of business
(Reliance Middle Market) and also acquired the renewal rights to
23
<Page>
Frontier Insurance Group, Inc.'s (Frontier) environmental, excess and surplus
lines casualty businesses and certain classes of surety business.
The following table shows net written premiums by market for the three
years ended December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
National accounts $ 419 $ 352 $ 488
Commercial accounts 2,947 2,851 2,373
Select accounts 1,713 1,575 1,494
Bond 590 487 207
Gulf 608 517 403
- ---------------------------------------------------------------------------------------------------------
TOTAL NET WRITTEN PREMIUMS $ 6,277 $ 5,782 $ 4,965
=========================================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
Commercial Lines net written premiums were $6.277 billion in 2001 compared
to $5.782 billion in 2000 and $4.965 billion in 1999. Included in Bond net
written premiums in 2000 is an adjustment of $131 million due to a reinsurance
transaction associated with the acquisition of the Reliance Surety business. The
trend in net written premiums reflects the impact of an improving rate
environment as evidenced by the continued favorable pricing on new and renewal
business. Also contributing to the net written premium increases in 2001 were
the full year impacts of the acquisition of the renewal rights for the Reliance
Middle Market business in Commercial Accounts, the Reliance Surety acquisition
in Bond and the acquisition of the renewal rights for the Frontier business in
Gulf. The 2001 increase in National Accounts net written premiums is due to the
purchase of less reinsurance reflecting the shift in business mix from
guaranteed cost products to loss-sensitive products combined with the
re-population of the involuntary pools. Also contributing to the net written
premium increases in 2000 was the new business associated with the acquisition
of the renewal rights from the Reliance Middle Market business in Commercial
Accounts, the Reliance surety acquisition in Bond and the new business
associated with the acquisition of the renewal rights for the Frontier business
in Gulf. The net written premium decrease in National Accounts was primarily due
to a shift of business mix from premium-based products to fee-based products.
National Accounts works with national and regional brokers providing
insurance coverages and services, primarily workers' compensation, mainly to
large corporations. National Accounts also includes the residual market
business, which sells claims and policy management services to workers'
compensation and automobile assigned risk plans and to self-insurance pools
throughout the United States. New business in National Accounts for 2001 was
marginally lower than in 2000 reflecting a disciplined approach to market
opportunities. New business in 2000 was marginally lower than in 1999 reflecting
the Company's disciplined approach to underwriting and risk management. National
Accounts business retention ratio for 2001 was moderately lower than in 2000
primarily reflecting a focus on account profitability and an increase in lost
business due to the renewal price increases in 2001. National Accounts business
retention ratio for 2000 was moderately lower than 1999 reflecting an increase
in lost business due to the renewal price increases in 2000.
Commercial Accounts serves primarily mid-sized businesses for casualty
products and both large and mid-sized businesses for property products
through a network of independent agents and brokers. Within Commercial
Accounts, a dedicated construction unit exists as well as a unit which
primarily writes coverages for the trucking industry. New premium business in
Commercial Accounts for 2001 was moderately lower than in 2000 reflecting the
acquisition of the renewal rights for the Reliance Middle Market business in
2000. New business in 2000 was significantly higher than in 1999 reflecting
the impact of the acquisition of the Reliance Middle-Market renewal business.
Commercial Accounts business retention ratio for 2001 was significantly lower
than 2000 reflecting the continued disciplined approach to achieving
acceptable levels of account profitability and an increase in lost business
due to the renewal price increases in 2001. Commercial Accounts business
retention ratio for 2000 was moderately lower than 1999 reflecting an
increase in lost business due to the renewal price increases in 2000.
Select Accounts serves small businesses through a network of independent
agents. For 2001, new business in Select Accounts was marginally lower than in
2000, while for 2000, new business was moderately higher than in 1999 reflecting
the unusually low new business in 1999 resulting from the Company's selective
underwriting policy in the highly competitive marketplace. The business
retention ratio in 2001 was virtually the same as in 2000. Select Accounts
business retention ratio for 2000 was moderately lower than in 1999 reflecting
an increase in lost business due to renewal price increases in 2000.
Bond provides a variety of fidelity and surety bonds and executive
liability coverages to clients of all sizes through independent agents and
brokers.
Gulf markets products to national, mid-size and small customers and
distributes them through both wholesale brokers and retail agents and brokers
throughout the United States.
Catastrophe losses, net of tax and reinsurance, were $471 million in 2001
and $27 million in 1999. There were no catastrophe losses in 2000. Catastrophe
losses in 2001 were primarily due to the terrorist attack on September 11th,
Tropical Storm Allison and the Seattle earthquake. The 1999 catastrophe losses
were primarily due to Hurricane Floyd and tornadoes in Oklahoma.
The Company, along with others in the industry, uses the combined ratio,
which measures the total cost per $100 of premium production, as a measure of
performance for Commercial Lines. The statutory combined ratio before
policyholder dividends for Commercial Lines was 111.7% in 2001 compared to
104.1% in 2000 and 106.8% in 1999. The GAAP combined ratio before policyholder
dividends for Commercial Lines was 110.9% in 2001 compared to 100.9% in 2000 and
103.8% in 1999. 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.
The 2001 statutory and GAAP combined ratios include the impact of the
terrorist attack on September 11th. Excluding the impact of this event, the 2001
statutory and GAAP combined ratio before policyholder dividends would have been
100.2% and 99.4%, respectively. The 2000 statutory and GAAP combined ratios
include an adjustment associated with the acquisition of the Reliance Surety
business. Excluding this adjustment, the 2000 statutory and GAAP combined ratios
before policyholder dividends would have been 103.8% and 101.5%, respectively.
The 1999 statutory combined ratio for Commercial Lines reflected the treatment
of the commutation of an asbestos liability to an insured. Excluding this
commutation, the statutory combined ratio before policyholder dividends for 1999
would have been 104.6%.
The decrease in the 2001 statutory and GAAP combined ratios before
policyholder dividends, excluding the related adjustment above, compared to the
2000 statutory and GAAP combined ratios before policyholder dividends,
24
<Page>
excluding the related adjustment above, was primarily due to premium growth
related to rate increases, the full year impact of the ongoing business
associated with the Reliance Surety acquisition, the purchase of the renewal
rights for the Reliance Middle Market and Frontier businesses and higher
favorable prior-year reserve development, partially offset by increased loss
cost trends and catastrophe losses due to Tropical Storm Allison in the 2001
second quarter and the Seattle earthquake in the 2001 first quarter.
The improvement in the 2000 statutory and GAAP combined ratios before
policyholder dividends, excluding the adjustments above, compared to the 1999
statutory and GAAP combined ratios before policyholder dividends, excluding the
adjustments above, was primarily due to premium growth related to rate increases
as well as the impact of the Reliance Surety acquisition and the purchase of the
renewal rights for the Reliance Middle Market and Frontier businesses and lower
catastrophe losses, partially offset by increased loss cost trends and lower
favorable prior-year reserve development and a disproportionately smaller
increase in expenses associated with the growth in premiums.
ENVIRONMENTAL CLAIMS
The Company continues to receive claims from insureds which allege that they are
liable for injury or damage arising out of their alleged disposition of toxic
substances. Mostly, these claims are due to various legislative as well as
regulatory efforts aimed an environmental remediation. For instance, the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
enacted in 1980 and later modified, enables private parties as well as federal
and state governments to take action with respect to releases and threatened
releases of hazardous substances. This Federal statute permits the recovery of
response costs from some liable parties and may require liable parties to
undertake their own remedial action. Liability under CERCLA may be joint and
several with other responsible parties.
The Company has been, and continues to be, involved in litigation involving
insurance coverage issues pertaining to environmental claims. The Company
believes that certain court decisions have interpreted the insurance coverage to
be broader than the original intent of the insurers and insureds. These
decisions often pertain to insurance policies that were issued by the Company
prior to the mid-1970s. These decisions continue to be inconsistent and vary
from jurisdiction to jurisdiction. Environmental 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 indicate a monetary amount.
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. The Company carries an aggregate bulk reserve for all of
the Company's environmental claims that are in dispute, until the dispute is
resolved. This bulk reserves is established and adjusted based upon the
aggregate volume of in-process environmental claims and the Company's experience
in resolving those claims. At December 31, 2001, approximately 75% of the net
environmental reserve, approximately $298 million, is carried in a bulk reserve
and includes unresolved and incurred but not reported environmental claims for
which the Company has not received any specific claims as well as for the
anticipated cost of average litigation disputes relating to these claims. The
balance, approximately 25% of the net environmental reserve, or approximately
$98 million, consists of case reserves for resolved claims.
The Company's reserving methodology is preferable to one based on
"identified claims" because the resolution of environmental exposures by the
Company generally occurs by settlement on an insured-by-insured basis as opposed
to a claim-by-claim basis. 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 as well as
extinguishes any pending coverage litigation dispute with the insured. This form
of settlement is commonly referred to as a "buy-back" of policies for future
environmental liability. In addition, many of the agreements have also
extinguished any insurance obligation which the Company may have for other
claims, including but not limited to asbestos and other cumulative injury
claims. Provisions of these agreements also include appropriate indemnities and
hold harmless provisions to protect the Company. The Company's general purpose
in executing these agreements is to reduce its potential environmental exposure
and eliminate the risks presented by coverage litigation with the insured and
related costs.
In establishing environmental reserves, the Company evaluates the exposure
presented by each insured and the anticipated cost of resolution, if any, for
each insured on a quarterly basis. In the course of this analysis, the Company
considers the probable liability, available coverage, relevant judicial
interpretations and historical value of similar exposures. In addition, the
Company considers the many variables presented, such as the nature of the
alleged activities of the insured at each site; the allegations of environmental
harm at each site; the number of sites; the total number of potentially
responsible parties at each site; the nature of environmental harm and
corresponding remedy at each 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,
including the role of any umbrella or excess insurance the Company has issued to
the insured; the involvement of other insurers; the potential for other
available coverage, including the number of years of coverage; the role, if any,
of non-environmental claims or potential non-environmental claims, in any
resolution process; and the applicable law in each jurisdiction.
The following table displays activity for environmental losses and loss
expenses and reserves for the years ended December 31:
ENVIRONMENTAL LOSSES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BEGINNING RESERVES
Direct $ 669 $ 801 $ 928
Ceded (111) (125) (96)
- -------------------------------------------------------------------------------------------------------
Net 558 676 832
INCURRED LOSSES AND LOSS EXPENSES
Direct 58 75 139
Ceded (12) (11) (82)
LOSSES PAID
Direct 248 207 266
Ceded (40) (25) (53)
- -------------------------------------------------------------------------------------------------------
ENDING RESERVES
Direct 479 669 801
Ceded (83) (111) (125)
- -------------------------------------------------------------------------------------------------------
Net $ 396 $ 558 $ 676
=======================================================================================================
</Table>
25
<Page>
Over the past three years, the Company has experienced a substantial
reduction in the number of policyholders with pending coverage litigation
disputes, a continued reduction in the number of policyholders tendering for the
first time an environmental remediation-type claim to the company as well as a
continued reduction in the number of policyholders with active environmental
claims.
As of December 31, 2001, the number of policyholders with pending
coverage litigation disputes pertaining to environmental claims was 216,
approximately 11% less than the number pending as of December 31, 2000, and
approximately 20% less than the number pending as of December 31, 1999. Also,
in 2001, there were 134 policyholders tendering for the first time an
environmental remediation-type claim to the company. This compares to 158
policyholders doing so in 2000 and 256 policyholders in 1999.
As of December 31, 2001, the Company has resolved the environmental
liabilities presented by 5,595 of the 6,214 policyholders who have tendered
environmental claims to the Company for approximately $1.88 billion (before
reinsurance). This resolution comprises 90% of the policyholders who have
tendered these claims. The Company generally has been successful in resolving
its coverage litigation disputes and continues to reduce its potential exposure
through favourable settlements with some insureds.
ASBESTOS CLAIMS AND LITIGATION
The Company believes that the property and casualty insurance industry has
suffered from judicial interpretations that have attempted to maximize insurance
availability for asbestos claims from both a coverage and liability standpoint
far beyond the intent of the contracting parties. These policies generally were
issued prior to 1980. The Company continues to receive asbestos claims alleging
insureds' liability from claimants' asbestos-related injuries. Since the
beginning of 2000, the Company has experienced an increase over prior years in
the number of asbestos claims being tendered to the Company and the Company
expects this trend to continue. This statement is a forward-looking statement
within the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" on page 33. Factors leading to these increases
include more intensive advertising by lawyers seeking asbestos claimants, the
increasing focus by plaintiffs on new and previously peripheral defendants and
an increase in the number of entities seeking bankruptcy protection as a result
of asbestos-related liabilities. In addition to contributing to the increase in
claims, the bankruptcy proceedings may have the effect of significantly
accelerating and increasing loss payments by insurers, including the Company.
Particularly during the last few months of 2001 and continuing into 2002, these
trends have both accelerated and become more visible.
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.
In establishing the Company's asbestos reserve, the Company evaluates the
exposure presented by each insured. In the course of the evaluation, the Company
considers available insurance coverage, including the role of any umbrella or
excess insurance the Company has issued to the insured; limits and deductibles;
an analysis of each insured's potential liability; the jurisdictions involved;
past and anticipated future claim activity; past settlement values of similar
claims; allocated claim adjustment expense; potential role of other insurance;
the role, if any, of non-asbestos claims or potential non-asbestos claims in any
resolution process; and applicable coverage defenses or determinations, if any,
including the determination as to whether or not an asbestos claim is a
product/completed operation claim subject to an aggregate limit and the
available coverage, if any, for that claim. Once the gross ultimate exposure for
indemnity and allocated claim adjustment expense is determined for each insured
by each policy year, the Company calculates a ceded reinsurance projection based
on any applicable facultative and treaty reinsurance, as well as past ceded
experience. Adjustments to the ceded projections also occur due to actual ceded
claim experience and reinsurance collections.
The Company also compares its historical direct and net loss and expense
paid experience, year-by-year, to assess any emerging trends, fluctuations or
characteristics suggested by the aggregate paid activity. The comparison
includes a review of the ratio of the ending direct and net reserves by last
year's direct and net paid activity, also known as the survival ratio.
At December 31, 2001, approximately 81% or approximately $665 million,
of the net asbestos reserve, represents incurred but not reported losses for
which the Company has not received any specific claims. The balance,
approximately 19% of the net asbestos reserve, or approximately $155 million,
is for pending asbestos claims. As in the past, asbestos 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 a monetary amount. 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.
In general, the Company posts case reserves for pending asbestos claims
within approximately thirty business days of receipt of these claims.
The following table displays activity for asbestos losses and loss expenses
and reserves for the years ended December 31:
ASBESTOS LOSSES
<Table>
<Caption>
IN MILLION OF DOLLARS 2001 2000 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BEGINNING RESERVES
Direct $ 1,005 $ 1,050 $ 1,252
Ceded (199) (223) (266)
- -------------------------------------------------------------------------------------------------------
Net 806 827 986
INCURRED LOSSES AND LOSS EXPENSES
Direct 283 187 128
Ceded (94) (137) (71)
LOSSES PAID
Direct 242 232 330
Ceded (67) (161) (114)
- -------------------------------------------------------------------------------------------------------
ENDING RESERVES
Direct 1,046 1,005 1,050
Ceded (226) (199) (223)
- -------------------------------------------------------------------------------------------------------
Net $ 820 $ 806 $ 827
=======================================================================================================
</Table>
UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the factors described above. Conventional actuarial techniques are
not used to estimate these reserves.
26
<Page>
As a result of the processes and procedures described above, the
reserves carried for environmental and asbestos claims at December 31, 2001
are the Company's best estimate of ultimate claims and claim adjustment
expenses based upon known facts and current law. However, the uncertainties
surrounding the final resolution of these claims continue. These include,
without limitation, the risks inherent in major litigation, any impact from
the bankruptcy protection sought by various asbestos producers and other
asbestos defendants, a further increase or decrease in asbestos and
environmental claims which cannot now be anticipated, the role of any
umbrella or excess policies the Company has issued for these claims, the
resolution or adjudication of some disputes pertaining to the amount of
available coverage for asbestos claims in a manner inconsistent with the
Company's previous assessment of these claims, the number and outcome of
direct actions against the Company, and unanticipated developments pertaining
to the company's ability to recover reinsurance for environmental and
asbestos claims. It is also not possible to predict changes in the legal and
legislative environment and their impact on the future development of
asbestos and environmental claims. This development will be affected by
future court decisions and interpretations, as well as changes in applicable
legislation.
Because of the uncertainties set forth above, additional liabilities may
arise for amounts in excess of the current related reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated and could result in liability exceeding those reserves by an amount
that could be material to the Company's operating results in future periods.
However, in the opinion of the Company's management, 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. These potentially
harmful products or substances include, but are not limited to, lead paint,
pesticides, pharmaceutical products, silicone-based personal products, solvents,
latex gloves, silica, mold and other potentially harmful substances.
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 settlement with the policyholder or through
coverage litigation. Historically, the Company's experience has indicated that
insureds with potentially significant environmental and/or asbestos exposures,
may often have other CIOTA exposures or CIOTA claims pending with the Company.
Due to this experience and the fact that settlement agreements with insureds may
extinguish the Company's obligations for all claims, the Company evaluates and
considers the environmental and asbestos reserves in conjunction with the CIOTA
reserve. Generally, the terms of a settlement agreement set forth the nature of
the Company's participation in resolving CIOTA claims and 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 these 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
the Company ultimately would have paid had the claims not been settled in this
manner.
At December 31, 2001, approximately 80%, or approximately $569 million, of
the net CIOTA reserve, represents incurred but not reported losses for which the
Company has not received any specific claims. The balance, approximately 20% of
the net CIOTA reserve, or approximately $141 million, is for pending CIOTA
claims.
The following table displays activity for CIOTA losses and loss expenses
and reserves for the years ended December 31:
CIOTA LOSSES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
BEGINNING RESERVES
Direct $ 1,079 $ 1,184 $ 1,346
Ceded (280) (313) (392)
- ----------------------------------------------------------------------------
Net 799 871 954
INCURRED LOSSES AND LOSS EXPENSES
Direct (115) 27 (36)
Ceded 70 (11) 28
LOSSES PAID
Direct 71 132 126
Ceded (27) (44) (51)
- ----------------------------------------------------------------------------
ENDING RESERVES
Direct 893 1,079 1,184
Ceded (183) (280) (313)
- ----------------------------------------------------------------------------
Net $ 710 $ 799 $ 871
============================================================================
</Table>
GLOBAL CORPORATE OUTLOOK
The statements below are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 33.
Global Corporate is significantly affected by the levels of activity the
global capital markets which, in turn, are influenced by macro-economic and
political policies and developments, among other factors, in the 100 countries
in which the businesses operate. Global economic and market events can have both
positive and negative effects on the revenue and credit performance of the
businesses.
Losses on commercial lending activities and the level of cash-basis loans
can vary widely with respect to timing and amount, particularly within any
narrowly defined business or loan type.
THE CORPORATE AND INVESTMENT BANK. In 2001, the Corporate and Investment Bank
was impacted by the slowdown in capital markets activity combined with higher
net credit losses from weakening economic conditions. Strong growth in fixed
income and market share improvements mitigated weakness in global equities and
private client. The business initiated several expense reduction initiatives.
In 2002, focus will continue on identifying problem credits early and
taking appropriate remedial actions. Net credit losses and cash-basis loans may
increase from 2001 levels due to weak economic conditions. Expense management
initiatives may continue across the business. While initiatives
27
<Page>
will continue to expend market share, revenue performance is dependent upon the
timing and strength of a recovery in U.S. and global economic conditions.
EM CORPORATE & GTS. In 2001, EM Corporate & GTS reflected higher trading-related
revenues across all regions and expense control initiatives, partially offset by
write-downs in Argentina.
In 2001, Argentina experienced continued weakness ending the year in an
economic and political crisis. The remaining countries were able to generate
core income growth through modest revenue growth combined with expense reduction
initiatives and disciplined credit management. In 2002, the business expects to
focus on containing the negative fallout from Argentina's economic crisis. The
remaining countries continue to be closely monitored for possible contagion.
In 2002, EM Corporate & GTS expects to continue to work on strategies to
increase market share in priority countries through organic growth and
selective acquisitions, combined with continued focus on expense control
initiatives and disciplined credit management. The EM Corporate & GTS
portfolio remains diversified across a number of geographies and industry
groups. Citigroup continues to monitor the economic situation in emerging
market countries closely and, where appropriate, adjusts exposures and
strengthens risk management oversight. 2002 net credit losses and cash-basis
loans may increase from the 2001 levels due to continuing weak global
economic conditions, the economic crisis in Argentina, sovereign or
regulatory actions and other factors.
COMMERCIAL LINES. In 2001, the trend of higher rates continued in Commercial
Lines. Prices generally rose throughout the year, although some of the increases
varied significantly by region and business segment. These increases were
necessary to offset the impact of rising loss cost trends and the decline in
profitability from the competitive pressures of the last several years. Since
the terrorist attack on September 11th, there has been greater concern over the
availability, terms and conditions, and pricing of reinsurance. As a result, the
primary insurance market is expected to continue to see significant rate
increases for some coverages.
In National Accounts, where programs include risk management services,
such as claims settlement, loss control and risk management information
services, generally offered in connection with a large deductible or
self-insured program, and risk transfer, typically provided through a
guaranteed cost or retrospectively rated insurance policy, pricing improved
during 2001 and 2000. National Accounts has benefited from higher rates on
both new and renewal business as evidenced by the improving profit margins
earned on this business. National Accounts believes that pricing will
continue to firm into 2002. However, National Accounts will continue to
reject business that is not expected to produce acceptable returns. Included
in National Accounts is service fee income for policy and claim
administration of several states' Workers' Compensation Residual Market
pools. After several years of depopulation, these pools are growing
significantly as the primary market is firming. Premiums the Company services
for these pools grew 76% in 2001 compared to 2000 and is expected to continue
to grow significantly.
Commercial Accounts achieved double-digit price increases on renewal
business during 2001 and 2000, improving the overall profit margin in this
business and offsetting the impacts of rising loss cost inflation, medical
inflation and reinsurance costs. Commercial Accounts will continue to seek
significant rate increases in 2002, as pricing in some areas and business
segments still has not improved to the point of producing acceptable returns.
In Select Accounts, the trends toward increased pricing on renewal
business that started in late 1999 gained momentum in 2000 and continued to
improve during 2001. Prices generally rose during this time frame while
customer retention remained consistent with prior periods. Price increases
varied significantly by region, industry and product. However, the ability of
Select Accounts to achieve future rate increases is subject to regulatory
constraints in some jurisdictions. Loss cost trends in Select Accounts also
worsened in 2001, especially workers' compensation and property. The impact
of these negative loss cost trends has been partially offset by a continued
disciplined approach to underwriting and risk selection by the Company. The
Company will continue to pursue business based on its ability to achieve
acceptable returns.
Bond achieved significant growth in 2001 and 2000 with the acquisition
of Reliance Surety, cementing a leadership position in the surety bond
marketplace by broadening product and service capabilities. In addition, the
expanding array of products and recognized expertise in the executive
liability marketplace has enabled Bond to further enhance its product and
customer diversification and profit opportunities. Bond's focus remains on
underwriting and selling its products to customers that provide the greatest
opportunity for profit. Bond is also focused on its efforts to cross-sell its
expanding array of specialty products to existing customers of Commercial
Lines and Personal Lines. In Bond, prices in both of its markets began to
modestly increase in late 2001. In 2001, Bond and the industry have
experienced an increase in claim frequency and severity in the recent
accident years. This increase in claim frequency and severity has impacted
the primary insurer and reinsurance capacity in the Company's marketplace.
This decrease in capacity is expected to create opportunities for further
price increases for all products in 2002, although the worsening loss cost
trends and increased cost of reinsurance will offset some of the positive
impact.
In Gulf, rate increases began in most lines of business in 2001 although
specific increases varied significantly by region, industry and product.
Improvement was most evident in the umbrella and excess and surplus lines of
business, with lesser increases achieved in the professional liability lines of
business. In most areas of the business, capacity has dissipated due to
reinsurance constriction, which should lead to further rate increases throughout
2002. The favorable impact from rate improvement continues to be offset by
rising loss costs.
Insurers generally, including the Company, are experiencing an increase in
the number of asbestos-related claims due to, among other things, more intensive
advertising by lawyers seeking asbestos claimants, the increasing focus by
plaintiffs on new and previously peripheral defendants and an increase in the
number of entities seeking bankruptcy protection as a result of asbestos-related
liabilities. In addition to contributing to the increase in claims, the
bankruptcy proceedings may have the effect of significantly accelerating and
increasing loss payments by insurers, including the Company. Increasingly,
policyholders have been asserting that their claims for asbestos-related
insurance are not subject to aggregate limits on coverage and that each
individual bodily injury claim should be treated as a separate occurrence under
the policy. Particularly during the last few months of 2001 and continuing into
2002, the asbestos-related trends described above have both accelerated and
become more visible. In addition, these claims and the related litigation could
result in liability exceeding these reserves by an amount that could be material
to our operating results in future periods.
28
<Page>
GLOBAL INVESTMENT MANAGEMENT AND PRIVATE BANKING
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 7,553 $ 7,145 $ 6,099
Adjusted operating expenses(2) 2,562 2,529 2,171
Provision for benefits, claims and credit losses 2,632 2,375 2,009
- -------------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES
AND MINORITY INTEREST 2,359 2,241 1,919
Income taxes 823 793 700
Minority interest, after-tax 1 3 --
- -------------------------------------------------------------------------------------------
CORE INCOME 1,535 1,445 1,219
Restructuring-related items, after-tax (7) (11) 2
- -------------------------------------------------------------------------------------------
INCOME $ 1,528 $ 1,434 $ 1,221
===========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Exclude restructuring-retained items.
Global Investment Management and Private Banking is comprised of
Travelers Life and Annuity (TLA), The Citigroup Private Bank and Citigroup
Asset Management. These businesses offer a broad range of life insurance,
annuity and asset management products and services, including individual
annuity, group annuity, individual life insurance products, COLI products,
mutual funds, closed-end funds, managed accounts, unit investment trusts,
variable annuities, pension administration and personalized wealth management
services distributed to institutional, high net worth and retail clients.
Global Investment Management and Private Banking core income in 2001
increased to $1.535 billion, up $90 million or 6% from 2000. The 2001 increase
in core income reflected increased customer activity across most products within
The Citigroup Private Bank and higher business volumes and premiums within TLA,
partially offset by lower core income in Asset Management primarily due to the
impact of a charge in Argentina related to the exchange of Argentine debt for
loans. Core income of $1.445 billion in 2000 was up $226 million or 19% from
1999. The 2000 increase in core income reflected increased business volumes, a
strong capital base and strong investment income at TLA, continued customer
revenue momentum within The Citigroup Private Bank along with the impact of the
acquisitions of Siembra, Colfondos and Confia in Citigroup Asset Management.
Income of $1.528 billion in 2001, $1.434 billion in 2000 and $1.221 billion in
1999 included restructuring charges of $7 million ($13 million pretax) and $11
million ($18 million pretax) in 2001 and 2000, respectively, and a restructuring
credit of $2 million ($4 million pretax) in 1999.
TRAVELERS LIFE AND ANNUITY
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 4,088 $ 3,891 $ 3,394
Provision for benefits and claims 2,552 2,325 1,997
Total operating expenses 329 409 451
- --------------------------------------------------------------------------------
INCOME BEFORE TAXES 1,207 1,157 946
Income taxes 386 380 323
- --------------------------------------------------------------------------------
INCOME(2) $ 821 $ 777 $ 623
================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes investments gains/losses included in Investment Activities segment.
Travelers Life and Annuity offers individual annuity, group annuity, and
individual life insurance products and COLI products marketed by TIC and its
wholly-owned subsidiary TLAC under the Travelers name. Among the range of
individual products offered are fixed and variable deferred annuities, payout
annuities and term, universal and variable life insurance. These products are
primarily distributed through CitiStreet Retirement Services (CitiStreet)
(formerly The Copeland Companies (Copeland)), a joint venture, Salomon Smith
Barney Financial Consultants, Primerica, Citibank, and a nationwide network of
independent agents and the growing outside broker dealer channel. The COLI
product is a variable universal life product distributed through independent
specialty brokers. The group products include institutional pensions, including
guaranteed investment contracts (GICs), payout annuities, group annuities to
employer-sponsored retirement and savings plans and structured finance
transactions.
Income was $821 million in 2001 compared to $777 million in 2000 and $623
million in 1999. The improvement in 2001 compared to 2000 reflects operating
expense reductions and a 3% net investment income growth, despite the declining
markets. During 2001, TLA also achieved double-digit growth in individual life
direct periodic premiums, group annuity net written premiums and deposits and
account balances versus the prior year. The 25% improvement in 2000 reflects
increased business volume, a strong capital base and particularly strong
investment income versus the prior-year period. During 2000, this business
continued strong individual annuity sales and achieved double-digit business
volume growth in group annuity account balances and individual life net written
premiums, reflecting growth in retirement savings and estate planning products
and strong momentum from cross-selling initiatives. The continued growth in 2001
and 2000 reflects both greater popularity of these products with an aging
American population and strong momentum from cross-selling initiatives. Total
operating expenses decreased in 2001 compared to the prior-year period due to
continued expense management and the absence of expenses related to the
long-term care insurance business which was sold during the third quarter of
2000. The long-term care transaction also reduced the amount of premium revenue
reported in 2001. Total operating expenses decreased in 2000 compared to the
prior-year period due to the contribution of Copeland to the CitiStreet joint
venture and the absence of certain one-time technology expenses in 1999. The
increases in revenues was also mitigated by the contribution of Copeland.
The cross-selling initiatives of TLA products through Primerica,
Citibank, Salomon Smith Barney Financial Consultants, and CitiStreet, as well
as strong sales through various intermediaries, a nationwide network of
independent agents and outside broker dealers, reflect the ongoing effort to
build market share by strengthening relationships in key distribution
channels.
On July 31, 2000, TIC sold 90% of its individual long-term care insurance
business to General Electric Capital Assurance Company in the form of an
indemnity reinsurance arrangement. Proceeds from the sale were $410 million,
resulting in a deferred gain of approximately $150 million after-tax.
29
<Page>
The following table shows net written premiums and deposits by product
line, excluding long-term care insurance written premiums for the three years
ended December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
INDIVIDUAL ANNUITIES
Fixed $ 2,120 $ 1,267 $ 1,008
Variable 4,000 5,025 4,265
Individual payout 59 80 78
GICs AND OTHER GROUP ANNUITIES 7,068 5,528 5,619
INDIVIDUAL LIFE INSURANCE
Direct periodic premiums and deposits 652 511 409
Single premium deposits 208 98 84
Reinsurance (96) (83) (71)
- -----------------------------------------------------------------------------
Total $14,011 $ 12,426 $ 11,392
=============================================================================
</Table>
The majority of the annuity business and a substantial portion of the life
business written by TLA are accounted for as investment contracts, with the
result that the premiums are considered deposits and are not included in
revenues.
Individual annuity account balances and benefit reserves reached $30.0
billion at December 31, 2001, up from $29.4 billion at year-end 2000 and $27.9
billion at year-end 1999. Net written premiums and deposits decreased in 2001 to
$6.179 billion from $6.372 billion in 2000 (down 3%). The decrease in individual
annuity net written premiums and deposits was driven by a decline in variable
annuity sales due to current market conditions, but was partially offset by
significant fixed annuity sales increases over the prior-year period.
Non-affiliated sales channels increased 32% allowing this business to increase
market share despite lower sales. Net written premiums and deposits increased in
2000 to $6.372 billion from $5.351 billion in 1999 (up 19%). Both 2001 and 2000
continue to reflect the cross-selling initiatives at all of the Citigroup
affiliates, and also reflect continued penetration of outside broker-dealer
channels.
Group annuity account balances and benefit reserves reached $21.0 billion
at December 31, 2001, up from $17.5 billion at year-end 2000 (up 20%), and $15.1
billion at year-end 1999. During both 2001 and 2000 the group annuity business
experienced continued strong sales momentum in all products, particularly
long-term liability and guaranteed investment contracts. Net written premiums
and deposits (excluding the Company's employee pension plan deposits) in 2001
were $7.068 billion, compared to $5.528 billion in 2000 reflecting fixed GIC
growth through structured finance transactions and long-term liability growth
through the extension of structured settlement broker relationships and large
case employer pension sales. Net written premiums and deposits were $5.619
billion in 1999 and reflected particularly strong structured finance
transactions.
Direct periodic premiums and deposits for individual life insurance were
$652 million in 2001 compared to $511 million in 2000 (up 28%), driven by
independent agent high end estate planning and COLI sales, and $409 million in
1999. Life insurance in force was $75.0 billion at December 31, 2001, up from
$66.9 billion at year-end and $60.6 billion at year-end 1999.
THE CITIGROUP PRIVATE BANK
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 1,536 $ 1,409 $ 1,212
Adjusted operating expenses(2) 924 874 770
Provision for credit losses 23 24 12
- ----------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES 589 511 430
Income taxes 211 188 161
- ----------------------------------------------------------------------------------------
CORE INCOME 378 323 269
Restructuring-related items, after-tax (4) (5) 1
- ----------------------------------------------------------------------------------------
INCOME $ 374 $ 318 $ 270
========================================================================================
Average assets (IN BILLIONS OF DOLLARS) $ 26 $ 25 $ 20
Return on assets 1.44% 1.27% 1.35%
========================================================================================
EXCLUDING RESTRUCTURING-RELATED ITEMS
Return on assets 1.45% 1.29% 1.35%
========================================================================================
Client business volumes under
management (IN BILLIONS OF DOLLARS) $ 158 $ 153 $ 140
========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
The Citigroup Private Bank provides personalized wealth management services
for high net worth clients around the world. The Citigroup Private Bank core
income was $378 million in 2001, up $55 million or 17% from 2000 primarily
reflecting increased customer activity across most products, partially offset by
increased investment spending in technology and front-end sales and servicing
capabilities. Core income of $323 million in 2000 was up $54 million or 20% from
1999 primarily reflecting continued customer revenue momentum, partially offset
by increased front-end expenses and a moderate increase in the provision for
credit losses.
Client business volumes under management which include custody accounts,
client assets under fee-based management and deposits and loans, were $158
billion at the end of the year, up 3% from $153 billion in 2000 reflecting
strong growth in Asia and continued growth in the U.S., despite challenging
market conditions.
Revenue, net of interest expense, were $1.536 billion in 2001, up $127
million or 9% from 2000, primarily driven by the impact of lower interest
rates and higher investment product (fees and trading) revenues. The 2001
increase also reflects strong international growth in Japan and Asia, up 22%
and 19%, respectively, from the prior-year period and continued growth in the
North American region, up 12% from the prior-year period. Revenues in 2000
were $1.409 billion, up $197 million or 16% from 1999 reflecting increases in
fee and interest-related products. The 2000 increase also reflects strong
international growth in Japan, Asia and CEEMEA, up 40%, 23% and 19%,
respectively, from the prior-year period and growth in the North American
region, up 16% from the prior-year period.
Adjusted operating expenses of $924 million in 2001 were up $50 million or
6% from 2000 primarily reflecting continued investment spending in technology
and front-end sales and servicing capabilities. Expenses were $874 million in
2000, up $104 million or 14% from 1999 primarily reflecting higher levels of
bankers and product specialists hired to improve front-end sales and service
capabilities.
30
<Page>
The provision for credit losses was $23 million in 2001, compared to $24
million in 2000 and $12 million in 1999. The increase in the provision for
credit losses in 2000 of $12 million primarily related to a loan in Europe. Net
credit losses in 2001 remained at a nominal level of 0.06% of average loans
outstanding, compared with 0.09% in 2000. Loans 90 days or more past due at
year-end 2001 were $135 million or 0.53% of total loans outstanding, compared
with 0.23% at the end of 2000 and 0.54% at the end of 1999.
Average assets of $26 billion in 2001 increased $1 billion or 4% from $25
billion in 2000, which, in turn, increased $5 billion or 25% from 1999. The
increase in 2000 was primarily related to incremental margin lending and
mortgage financing.
CITIGROUP ASSET MANAGEMENT
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 1,929 $ 1,845 $ 1,493
Adjusted operating expenses(2) 1,309 1,246 950
Provision for benefits, claims and credit losses 57 26 --
- ------------------------------------------------------------------------------------------
CORE INCOME BEFORE TAXES
AND MINORITY INTEREST 563 573 543
Income taxes 226 225 216
Minority interest, after-tax 1 3 --
- ------------------------------------------------------------------------------------------
CORE INCOME 336 345 327
Restructuring, related items, after-tax (3) (6) 1
- ------------------------------------------------------------------------------------------
INCOME $ 333 $ 339 $ 328
==========================================================================================
Assets under management (IN BILLIONS OF DOLLARS)(3)(4) $ 417 $ 400 $ 377
==========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes restructuring-related items.
(3) Includes $31 billion, $30 billion, and $31 billion in 2001, 2000 and 1999,
respectively, for Citigroup Private Bank clients.
(4) Includes Unit Investment Trusts held in client accounts of $7 billion, $9
billion and $13 billion in 2001, 2000 and 1999, respectively, and $5 billion
in Emerging Markets Pension Administration assets under management in 2001.
Citigroup Asset Management is comprised of the substantial resources
that are available through its three primary asset management business
platforms--Smith Barney Asset Management, Salomon Brothers Asset Management
and Citibank Asset Management--along with the pension administration business
of Global Retirement Services. These businesses offer institutional, high net
worth and retail clients a broad range of investment alternatives from
investment centers located around the world. Products and services offered
include mutual funds, closed-end funds, separately managed accounts, unit
investment trusts, alternative investments, variable annuities (through
affiliated and third party insurance companies), pension administration and
insurance.
Core income of $336 million in 2001 was down $9 million or 3% compared
to 2000 primarily reflecting a charge for Argentine debt securities exchanged
for loans held in the Siembra insurance companies of Global Retirement
Services, partially offset by growth in Citigroup Asset Management earnings.
The Argentine debt securities were held in support of existing
contractholders' liabilities. The Global Retirement Services business in
Argentina, Siembra, includes pension administration and insurance companies.
Core income of $345 million in 2000 was up $18 million or 6% compared to 1999
reflecting the impact of Latin American acquisitions in the Global Retirement
Services business and growth in asset-based fee revenues, partially offset by
increased expenses.
Assets under management rose to $417 billion as of December 31, 2001, up 4%
from $400 billion in 2000 reflecting strong net flows that were partially offset
by negative market activity and the transfer of $26 billion in retail Money
Market assets to the SSB Bank Deposit Program. Institutional client assets of
$185 billion as of December 31, 2001 were up 20% compared to a year ago
reflecting an increase in institutional money market fund and long-term product
flows, offset by negative market action and alternative investment volume
growth. Retail client assets were $227 billion, down 6% from $242 billion in
2000. Retail client assets, excluding money markets and unit investment trusts,
grew 9%, driven by strong net flows, partially offset by negative market action.
Sales of proprietary mutual funds and managed account products at SSB rose
33% to $28 billion in 2001 from the prior year primarily driven by growth in
managed account products, and represented 59% of SSB's retail channel sales for
the year. Sales of mutual and money funds through Global Consumer's banking
network were $11 billion for the year, representing 53% of total sales,
including $8 billion in International and $3 billion in the U.S., of which
Primerica sold $2.0 billion of proprietary U.S. mutual and money funds in 2001,
a 9% increase compared to 2000, representing 67% of Primerica's total sales.
Institutional long-term product sales of $28 billion increased 40% over the
prior year and include $14 billion of sales to Global Corporate clients.
Revenues, net of interest expense, increased $84 million or 5% to $1.929
billion in 2001. This was compared to $1.845 billion in 2000, which was up $352
million or 24% from 1999. The increase in 2001 was primarily due to the effects
of positive net flows, the impact of acquisitions and a reduction in death and
disability reinsurance premiums in the Global Retirement Services business,
partially offset by the impact of lower market values of assets under
management, the transfer of assets to the SSB Bank Deposit Program and the
impact of the Siembra Argentina debt securities exchange. The increase in 2000
was primarily due to the impact of the acquisition of Siembra, Colfondos and
Confia in the Global Retirement Services business, along with continued growth
in asset-based fee revenues.
Adjusted operating expenses of $1.309 billion in 2001 increased $63 million
or 5% from 2000. The increase in 2001 primarily represents the impact of Global
Retirement Services acquisitions and other variable expenses related to revenue
growth. Adjusted operating expenses of $1.246 billion in 2000 increased $296
million or 31% from 1999. The increase in 2000 was primarily due to the impact
of acquisitions in the Global Retirement Services business, as well as continued
investment in sales and marketing activities, technology and product
development.
Provision for benefits, claims and credit losses of $57 million in 2001
increased $31 million from 2000, driven by reduced reinsurance levels on
death and disability business and the Generar acquisition.
31
<Page>
GLOBAL INVESTMENT MANAGEMENT AND PRIVATE BANKING OUTLOOK
The statements below are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 33.
TRAVELERS LIFE AND ANNUITY should benefit from growth in the aging population
which is 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. TLA 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
retirement and estate planning 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. Financial services reform is likely to have
many effects on the life insurance industry and the results will take time to
assess, however, heightened competition is expected. Also, the annuities
business is interest rate and market sensitive, and swings in interest rates and
equity markets could influence sales and retention of in-force policies. In
order to strengthen its competitive position, TLA expects to maintain a current
product portfolio, further diversify its distribution channels, and retain its
financial position through strong sales growth and maintenance of an efficient
cost structure.
PRIVATE BANKING AND ASSET MANAGEMENT. The businesses of Private Banking and
Asset Management are affected by the economic outlook and market levels. The
market for private banking and asset management services continues to be
extremely attractive because the "wealth" segment has been growing faster
than the overall market. While competition for this attractive and dynamic
market segment is increasing, the global market is highly fragmented. This
presents Private Banking and Asset Management with an extremely attractive
business opportunity because it is one of the few providers that can claim to
offer a full range of services on a global basis.
The Argentina economic and political crisis that occurred towards the end
of 2001 impacted the Global Retirement Services business, which operates a
portion of its business in Argentina. In 2002, the business will focus on
containing the negative fallout from Argentina's economic crisis.
INVESTMENT ACTIVITIES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL REVENUES, NET OF INTEREST EXPENSE $ 907 $ 2,309 $1,089
Total operating expenses 118 124 72
Provisions for credit losses -- 7 --
- ------------------------------------------------------------------------------
INCOME BEFORE TAXES AND MINORITY INTEREST 789 2,178 1,017
Income taxes 264 805 356
Minority interest, after-tax (5) (10) 11
- ------------------------------------------------------------------------------
INCOME $ 530 $ 1,383 $ 650
==============================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
Investment Activities comprises Citigroup's venture capital activities,
realized investment gains (losses) from certain insurance-related
investments, results from certain proprietary investments, the results of
certain investments in countries that refinanced debt under the 1989 Brady
Plan or plans of a similar nature, and since August 2001, the investment
portfolio related to Banamex.
Revenues, net of interest expense, include $380 million, $2.042 billion
and $809 million from proprietary investments, $59 million, $331 million and $78
million from LDC Debt Sales/Refinancing portfolios and $468 million, ($64)
million and $202 million from net realized gains from insurance-related
investments for the years ended 2001, 2000 and 1999, respectively.
Revenues, net of interest expense, in 2001 of $907 million decreased
$1.402 billion from 2000 primarily reflecting lower venture capital results
and current year impairment write-downs in insurance-related and other
proprietary investments, partially offset by increased gains in
insurance-related and other proprietary investments. Revenues, net of
interest expense, in 2000 of $2.309 billion increased $1.220 billion from
1999 primarily reflecting increases in venture capital results and gains on
the exchange of certain Latin American bonds. The 2000 first quarter included
losses in insurance-related investments from repositioning activities
designed to improve yields and maturity profiles, and write-downs in the
refinancing portfolio.
Investments Activities results may fluctuate in the future as a result of
market and asset-specific factors. This statement is a forward-looking statement
within the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" on page 33.
32
<Page>
CORPORATE/OTHER
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000(1) 1999(1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADJUSTED REVENUES, NET OF
INTEREST EXPENSE(2) $ (397) $ (697) $ 30
Adjusted operating expenses(2) 801 642 797
Adjusted provision (credit) for benefits
claims and credit losses(2) 1 (4) 208
- -------------------------------------------------------------------------------------------
CORE LOSS BEFORE TAX BENEFITS
AND MINORITY INTEREST (1,199) (1,335) (975)
Income tax benefits (504) (477) (338)
Minority interest, after-tax 11 -- -
- -------------------------------------------------------------------------------------------
CORE LOSS (706) (858) (637)
Restructuring-related items and
merger-related costs, after-tax 3 (249) (20)
Housing Finance unit charge, after-tax -- (71) --
- -------------------------------------------------------------------------------------------
LOSS $ (703) $(1,178) $ (657)
===========================================================================================
</Table>
(1) Reclassified to conform to the 2001 presentation.
(2) Excludes Housing Finance unit charge and restructuring-related items and
merger-related costs.
Corporate/Other includes net corporate treasury results, corporate staff
and other corporate expenses, certain intersegment eliminations, the
remainder of Internet-related development activities not allocated to the
individual businesses and in 1999 and 2000, activities related to the
Associates Housing Finance (AHF) unit. In January 2000, Associates announced
its intention to discontinue the loan origination operations of its AHF unit.
Prior to the announcement, AHF originated and serviced loans for manufactured
homes.
Adjusted revenues in 2001 of ($397) million increased $300 million from
2000 due to lower net treasury costs primarily related to reduced rates and the
impact of higher intersegment eliminations, partially offset by increased
funding costs related to the Associates and Banamex acquisitions. Adjusted
revenues in 2000 of ($697) million decreased $727 million from 1999 primarily
reflecting the discontinuation of AHF activity, higher net treasury costs and
the impact of lower intersegment eliminations. Adjusted operating expenses in
2001 of $801 million increased $159 million from 2000 primarily due to the
impact of higher intersegment eliminations, as well as a $57 million fourth
quarter pretax expense for the contribution of appreciated venture capital
securities to Citigroup's Foundation, which had minimal impact on Citigroup's
earnings after related tax benefits and investment gains, partially offset by a
2000 $108 million pretax expense for the contribution of appreciated venture
capital securities to Citigroup's Foundation. Adjusted operating expenses in
2000 of $642 million decreased $155 million from 1999 primarily reflecting the
discontinuation of AHF activity and decreases in certain unallocated corporate
costs, intersegment eliminations, performance-based option expense and
technology costs. The adjusted provision for benefits, claims and credit losses
in 1999 primarily related to AHF.
The 2000 after-tax restructuring-related items and merger-related charges
of $249 million ($346 million pretax) included exit costs incurred as a result
of Citigroup's acquisition of Associates. See Note 15 to the Consolidated
Financial Statements for a discussion of restructuring-related items. The 2000
after-tax Housing Finance unit charge of $71 million ($112 million pretax)
included costs related to the discontinuation of AHF loan origination
operations. The 1999 after-tax restructuring-related charge of $20 million
related primarily to accelerated depreciation.
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," "Global Corporate Outlook," and "Global Investment
Management and Private Banking 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," "intent," "estimate," "may increase,"
"may fluctuate," 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, weakening
global economic conditions, the economic crisis in Argentina, higher
unemployment rates and the continued increase in bankruptcy filings in Japan,
sovereign or regulatory actions, and political conditions and developments;
possible changes in estimated reserves for property and casualty insurance
losses, an increase in the number of entities seeking bankruptcy protection
as a result of asbestos-related liabilities, the changing trend in
policyholders' claims with respect to aggregation limits and separate
occurrence treatment, and environmental and asbestos claims and related
litigation; the highly competitive nature of the personal-lines marketplace;
inflationary pressures in medical costs and auto and home repair costs;
asbestos-related developments including more intensive advertising by lawyer
seeking asbestos claimants and the increasing focus by plaintiffs on new and
previously peripheral defendants; rising reinsurance and litigation costs in
the property and casualty insurance marketplace; proposed changes in laws and
regulations on the cost and availability of certain types of insurance, as
well as the claim and coverage obligations of insurers; assessments on
insurance subsidiaries from state-administered guaranty associations,
second-injury funds and similar associations; the amount of refinancing
activity in mortgage banking; the effect of banking and financial services
reforms, of rules governing the regulatory treatment of merchant banking
investments, and of rules regarding the regulatory capital treatment of
recourse, direct credit substitutes and residual interest in asset
securitizations; possible amendments to, and interpretations of, risk-based
capital guidelines and reporting instructions; the ability of states to adopt
more extensive consumer privacy protections through legislation or
regulation; the resolution of legal proceedings and related matters; and the
Company's success in managing the costs associated with the expansion of
existing distribution channels and developing new ones, and in realizing
increased revenues from such distribution channels, including cross-selling
initiatives and electronic commerce based efforts.
33
<Page>
MANAGING GLOBAL RISK
The Citigroup Risk Management framework recognizes the wide range and diversity
of global business activities by balancing strong corporate oversight with
defined independent risk management functions at the business level. Included in
this oversight is an assessment of the accounting and financial reporting risks
across all businesses.
The risk management framework is grounded on the following seven
principles, which apply universally across all businesses and all risk types:
- - INTEGRATION OF BUSINESS AND RISK MANAGEMENT--Risk management is integrated
within the business plan and strategy.
- - RISK OWNERSHIP--All risks and resulting returns are owned and managed by an
accountable business unit.
- - INDEPENDENT OVERSIGHT--Risk limits are approved by both business management
and independent risk management.
- - POLICIES--All risk management policies are clearly and formally documented.
- - RISK IDENTIFICATION AND MEASUREMENT--All risks are measured using defined
methodologies, including stress testing.
- - LIMITS AND METRICS--All risks are managed within a limit framework.
- - RISK REPORTING--All risks are comprehensively reported across the
organization.
The risk management functions at the corporate-level are responsible for
establishing Citigroup risk management standards for the measurement, approval,
reporting and limiting of risk, appointing independent risk managers at the
business-level, approving business unit risk management policies, approving
business risk-taking authority through the allocation of limits and capital, and
reviewing, on an ongoing basis, major risk exposures and concentrations across
the organization.
The independent risk managers at the business-level are responsible for
establishing and implementing risk management policies and practices within
their business, while ensuring ongoing consistency with Citigroup standards. The
business risk managers have dual accountability--to the Citigroup Senior Risk
Officer and to the head of their business unit.
The Citigroup Senior Risk Officer is responsible for reviewing material
corporate-wide risks, and determining appropriate exposure levels and limits.
Risks are regularly reviewed with the independent business risk managers, the
Citigroup Management Committee, and as necessary, with committees of the Board
of Directors. Reviews may include analysis of current exposure levels, trends in
exposure levels, as well as assessments of the impact of "normal" market moves
and sudden, severe market events. The scope of risks covered includes, but is
not limited to:
- - Corporate Credit Risk, including obligor exposures vis-a-vis
limits, risk ratings, industry concentrations, and country cross-border risks;
- - Consumer Credit Risk, including product concentrations, regional
concentrations, and trends in portfolio performance;
- - Counterparty pre-settlement risk in trading activities;
- - Distribution and underwriting risks;
- - Price Risk, including the earnings or economic impact of changes in the level
and volatilities of interest rates, foreign exchange rates and commodity, debt
and equity prices on trading portfolios and on investment portfolios;
- - Liquidity Risk, including funding concentrations and diversification strategy;
- - Risks resulting from the underwriting, sale and reinsurance of life insurance
policies and property and casualty policies (commercial, personal and
performance bonds); and
- - Other risks, including legal, technology, operational and franchise, as well
as specific matters identified and reviewed in the Audit and Risk Review.
The following sections summarize the process for managing credit and market
risks within Citigroup's major businesses, and reflect the ongoing integration
of businesses and risk management practices.
THE CREDIT RISK MANAGEMENT PROCESS
Credit risk is the potential for financial loss resulting from the failure of a
borrower or counterparty to honor its financial or contractual obligation.
Credit risk arises in many of the Company's business activities including
lending activities, sales and trading activities, derivatives activities,
securities transactions settlement activities, and when the Company acts as an
intermediary on behalf of its clients and other third parties. The credit risk
management process at Citigroup relies on corporate-wide standards to ensure
consistency and integrity, with business-specific policies and practices to
ensure applicability and ownership.
CONSUMER CREDIT RISK
Within the Global Consumer Group (GCG), business-specific credit risk policies
and procedures are derived from the following risk management framework:
- - Each business must develop a plan, including risk/return tradeoffs, as well as
risk acceptance criteria and policies appropriate to their activities;
- - Senior Business Managers are responsible for managing risk/return tradeoffs in
their business;
- - Senior Business Managers, in conjunction with Senior Credit Officers,
implement business-specific risk management policies and practices;
- - Approval policies for a product or business are tailored to internal audit
ratings, profitability and credit risk management performance;
- - Independent credit risk management is responsible for establishing the GCG
Policy, approving business-specific policies and procedures, monitoring
business risk management performance, providing ongoing assessment of
portfolio credit risks, and approving new products and new risks.
Citigroup's consumer loan portfolio is well diversified by both customer
and product. Consumer loans comprise 62% of the total loan portfolio. These
loans represent thousands of borrowers with relatively small individual
balances. The loans are diversified with respect to the location of the
borrower, with 67% originated in the United States and 33% originated from
offices outside the United States. Mortgage and real estate loans constitute 44%
of the total consumer loan portfolio and installment, revolving credit and other
consumer loans constitute 56% of the portfolio.
34
<Page>
CONSUMER PORTFOLIO REVIEW
In the consumer portfolio, credit loss experience is expressed in terms of
annualized net credit losses as a percentage of average loans. Pricing and
credit policies reflect the 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 following table summarizes delinquency and net credit loss
experience in both the managed and on-balance sheet loan portfolios in terms of
loans 90 days or more past due, net credit losses, and as a percentage of
related loans.
CONSUMER LOAN DELINQUENCY AMOUNTS, NET CREDIT LOSSES, AND RATIOS
<Table>
<Caption>
TOTAL AVERAGE
IN MILLIONS OF DOLLARS, EXCEPT LOANS 90 DAYS OR MORE PAST DUE(1) LOANS NET CREDIT LOSSES(1)
TOTAL AND AVERAGE LOAN AMOUNTS --------- ------------------------------- --------- ----------------------------------
IN BILLIONS 2001 2001 2000(2) 1999(2) 2001 2001 2000(2) 1999(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Citibanking North America $ 11.7 $ 96 $ 35 $ 55 $ 9.3 $ 96 $ 64 $ 90
RATIO 0.82% 0.48% 0.78% 1.03% 0.91% 1.22%
Mortgage Banking 45.7 1,157 846 707 45.1 40 59 52
RATIO 2.53% 2.01% 2.26% 0.09% 0.16% 0.18%
Citi Cards 107.7 2,135 1,497 1,285 102.1 5,556 3,921 3,903
RATIO 1.98% 1.46% 1.51% 5.44% 4.28% 4.91%
Other Cards 1.0 6 6 21 1.5 47 65 49
RATIO 0.61% 0.35% 1.31% 3.13% 3.76% 3.00%
CitiFinancial 60.2 2,002 1,272 943 58.7 1,583 1,338 1,189
RATIO 3.32% 2.23% 1.96% 2.70% 2.57% 2.66%
Western Europe 19.0 800 835 928 18.0 338 342 345
RATIO 4.21% 4.78% 5.39% 1.88% 2.05% 2.00%
Japan 14.4 178 101 112 14.4 589 406 270
RATIO 1.24% 0.73% 1.19% 4.10% 3.50% 3.49%
Asia (excluding Japan) 21.2 367 335 442 21.3 259 257 286
RATIO 1.73% 1.51% 1.93% 1.21% 1.16% 1.32%
Latin America 5.3 248 235 303 6.0 279 321 408
RATIO 4.71% 3.59% 3.99% 4.63% 4.67% 5.32%
Mexico 6.0 523 15 17 2.6 96 11 11
RATIO 8.75% 5.17% 6.78% 3.72% 3.67% 4.89%
CEEMEA 2.5 36 32 46 2.3 39 38 32
RATIO 1.41% 1.37% 2.25% 1.70% 1.95% 1.96%
The Citigroup Private Bank(3) 25.7 135 61 120 24.9 14 23 19
RATIO 0.53% 0.23% 0.54% 0.06% 0.09% 0.10%
Other 4.0 18 30 33 3.4 13 (12) 39
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL MANAGED $ 324.4 $ 7,701 $ 5,300 $ 5,012 $ 309.6 $ 8,948 $ 6,833 $ 6,693
RATIO 2.37% 1.75% 1.95% 2.89% 2.48% 2.80%
- ------------------------------------------------------------------------------------------------------------------------------
Securitized receivables (68.4) (1,282) (1,012) (916) (63.8) (3,251) (2,228) (2,479)
Loans held for sale (11.9) (110) (110) (32) (14.2) (317) (182) (121)
- ------------------------------------------------------------------------------------------------------------------------------
CONSUMER LOANS $ 244.1 $ 6,309 $ 4,178 $ 4,064 $ 231.6 $ 5,380 $ 4,423 $ 4,093
RATIO 2.58% 1.83% 2.09% 2.32% 2.11% 2.24%
==============================================================================================================================
</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) Reclassified to conform to the 2001 presentation.
(3) The Citigroup Private Bank results are reported as part of the Global
Investment Management and Private Banking segment.
CONSUMER LOAN BALANCES, NET OF UNEARNED INCOME
<Table>
<Caption>
END OF PERIOD AVERAGE
----------------------------- ----------------------------
IN BILLIONS OF DOLLARS 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL MANAGED $ 324.4 $ 302.8 $ 257.2 $ 309.6 $ 275.5 $ 239.3
Securitized receivables (68.4) (60.6) (58.0) (63.8) (57.0) (51.0)
Loans held for sale (11.9) (13.3) (4.6) (14.2) (8.7) (5.5)
- --------------------------------------------------------------------------------------------------
ON-BALANCE SHEET $ 244.1 $ 228.9 $ 194.6 $ 231.6 $ 209.8 $ 182.8
==================================================================================================
</Table>
Citigroup's allowance for credit losses of $10.088 billion is available to
absorb probable credit losses inherent in the entire portfolio. For analytical
purposes only, the portion of Citigroup's allowance for credit losses attributed
to the consumer portfolio was $5.169 billion at December 31, 2001, $4.946
billion at December 31, 2000 and $5.220 billion at December 31, 1999. The
increase in the allowance for credit losses from 2000 was primarily due to the
acquisitions of Banamex and EAB. The allowance as a percentage of loans on the
balance sheet was 2.13% at December 31, 2001, down from 2.16% at
35
<Page>
December 31, 2000 and 2.68% at December 31, 1999. The decline in the allowance
as a percentage of loans primarily reflects the growth in consumer loans.
On-balance sheet consumer loans of $244.1 billion grew $15 billion or 7% from
December 31, 2000 primarily driven by the impact of the acquisitions of
Banamex and EAB and growth in CitiFinancial, mostly real estate secured
loans. On-balance sheet loans in Citi Cards declined in 2001 as growth in
managed receivables was more than offset by increased securitization
activity. In addition, loans in 2001 increased in Japan and Western Europe,
mainly in consumer finance, and decreased in Asia and Latin America. The
decline in Latin America loans primarily reflects reductions associated with
the re-denomination of certain consumer loans in Argentina. The attribution
of the allowance is made for analytical purposes only and may change from
time to time. Consumer net credit losses and loans 90 days or more past due
are expected to increase from 2001 levels as a result of portfolio growth and
seasonal factors and as uncertain global economic conditions persist. This
statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 33.
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for credit losses $ 5,169 $ 4,946 $ 5,220
As a percentage of total consumer loans 2.13% 2.16% 2.68%
============================================================================
</Table>
CORPORATE CREDIT RISK
For corporate clients and investment banking activities across the organization,
the credit process is grounded in a series of fundamental policies, including:
- - Ultimate business accountability for managing credit risks;
- - Joint business and independent risk management responsibility for establishing
limits and risk management practices;
- - Single center of control for each credit relationship that coordinates credit
activities with that client, directly approves or consents to all extensions
of credit to that client, reviews aggregate exposures, and ensures compliance
with exposure limits;
- - Portfolio limits, including obligor limits by risk rating and by maturity, to
ensure diversification and maintain risk/capital alignment;
- - A minimum two-authorized credit officer-signature requirement on extensions of
credit-one from a sponsoring credit officer in the business and one from a
credit officer in independent credit risk management;
- - Uniform risk measurement standards, including risk ratings, which must be
assigned to every obligor and facility in accordance with Citigroup standards;
and
- - Consistent standards for credit origination, measurement and documentation, as
well as problem recognition, classification and remedial action.
These policies apply universally across corporate clients and investment
banking activities in the Corporate and Investment Bank and Emerging Markets.
Businesses that require tailored credit processes, due to unique or unusual risk
characteristics in their activities, may only do so under a Credit Program that
has been approved by independent credit risk management. In all cases, the above
policies must be adhered to, or specific exceptions must be granted by
independent credit risk management.
The Global Corporate credit portfolio is diversified by obligor, industry
and geographic location.
The following table presents the Global Corporate credit portfolio before
consideration of collateral by maturity at December 31, 2001 broken out by
direct outstandings which include drawn loans, overdrafts, interbank placements,
banker's acceptances and leases; unfunded commitments which include unused
commitments to lend, letters of credit and financial guarantees:
<Table>
<Caption>
GREATER
WITHIN THAN 1 YEAR GREATER TOTAL
IN BILLIONS 1 YEAR BUT WITHIN 5 THAN 5 YEARS EXPOSURE
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct outstandings $ 133 $ 54 $ 28 $ 215
Unfunded commitments 132 52 10 194
- --------------------------------------------------------------------
Total $ 265 $ 106 $ 38 $ 409
====================================================================
</Table>
CREDIT EXPOSURE ARISING FROM DERIVATIVES AND FOREIGN EXCHANGE
The Company measures and manages the credit exposure on its derivative and
foreign exchange contracts taking into account both the current
mark-to-market value of each contract plus a prudent estimate of its
potential change in value over its life. The measurement of the potential
future exposure for each credit facility is based on simulation of market
rates and generally takes into account legally enforceable risk-mitigating
agreements for each obligor such as netting and margining.
Under a margin agreement the Company obtains collateral from its
counterparties, consisting primarily of cash or marketable securities which
are revalued on a regular basis. The collateral reduces the measured exposure.
The current mark-to-market which is reported within the balance sheet
credit exposure of $29.8 billion represents the current cost of replacing
all contracts and is reported as a component of Trading Account Assets. The
total exposure, which is used to manage counterparty risk, also includes a
prudent estimate of the potential increase in the replacement cost of each
credit facility. The simple sum of the maximum potential lifetime increase in
replacement cost of all facilities is $101 billion. While the current
mark-to-market and the maximum potential increase in replacement cost per
credit facility for a single counterparty is a prudent number used to manage
exposure, when summed across all facilities it materially overstates the
potential loss that could occur at any one time.
PORTFOLIO MIX
The Global Corporate credit portfolio is geographically diverse by region.
The following table shows direct outstandings, unfunded commitments,
derivatives, and foreign exchange, measured as discussed above, by region:
<Table>
<Caption>
DEC 31, 2001 DEC 31, 2000
- -----------------------------------------------------------------
<S> <C> <C>
North America 46% 48%
Europe 22% 22%
Japan 3% 3%
Asia 9% 11%
Latin America 6% 7%
Mexico(1) 7% 2%
CEEMEA 6% 5%
Other 1% 2%
- -----------------------------------------------------------------
TOTAL 100% 100%
=================================================================
</Table>
(1) December 31, 2001 includes Banamex outstandings and unfunded commitments.
36
<Page>
The Company attempts to maintain accurate and consistent risk ratings
across the Global Corporate credit portfolio. This facilitates the comparison of
credit exposures across all lines of business, geographic region and product.
All internal risk ratings must be derived in accordance with the Corporate Risk
Rating Policy. Any exception to the Policy must be approved by the Citigroup
Senior Risk Officer. The Corporate Risk Rating Policy establishes standards for
the derivation of obligor and facility risk ratings that are generally
consistent with the approaches used by the major rating agencies.
Obligor risk ratings reflect an estimated probability of default for an
obligor, and are derived through the use of validated statistical models,
external rating agencies (under defined circumstances), or approved scoring or
judgmental methodologies. Facility risk ratings are assigned, using the obligor
risk rating, and then taken into consideration are factors that affect the
loss-given default of the facility such as parent support, collateral or
structure.
Internal obligor ratings equivalent to BBB- and above are considered
investment grade. Ratings below the equivalent of BBB- are considered
non-investment grade.
The following table presents the Global Corporate credit portfolio by
internal obligor credit rating at December 31, 2001 and December 31, 2000, as a
percentage of the total portfolio:
<Table>
<Caption>
DIRECT OUTSTANDINGS AND
DERIVATIVES UNFUNDED COMMITMENTS
- -------------------------------- -----------------------
2001 2000 2001 2000
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/AA/A 75% 79% 42% 47%
BBB 15% 14% 29% 23%
BB/B 8% 6% 19% 18%
CCC or below - - 3% 2%
Unrated(1) 2% 1% 7% 10%
- ------------------------------------------------------------
100% 100% 100% 100%
============================================================
</Table>
(1) Includes retail margin loans, as well as portfolios of recent acquisitions,
which are in the process of conforming to Citigroup's risk rating
methodology.
The Global Corporate credit portfolio is diversified by industry with a
concentration only to the financial sector which includes banks, other
financial institutions, investment banks and governments and central banks.
The following table shows direct outstandings, unfunded commitments,
derivatives and foreign exchange to the top thirteen industries as a percentage
of the total commercial portfolio:
<Table>
<Caption>
DEC. 31, DEC. 31,
2001 2000
- --------------------------------------------------------------------------
<S> <C> <C>
Banks 14% 14%
Other financial institutions and investment banks 14% 11%
Governments and central banks 11% 7%
Telephone and cable 4% 5%
Insurance 4% 4%
Industrial machinery and equipment 4% 4%
Agricultural and food prep 4% 4%
Utilities 4% 4%
Freight transportation 3% 4%
Global information technology 3% 4%
Petroleum 3% 3%
Chemicals 2% 3%
Autos 2% 2%
Other industries(1) 28% 31%
- --------------------------------------------------------------------------
TOTAL 100% 100%
==========================================================================
</Table>
(1) Includes all other industries, none of which exceed 2% of total
outstandings.
GLOBAL CORPORATE PORTFOLIO REVIEW
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. Impaired collateral-dependent loans are written down to the lower
of cost or collateral value. The following table summarizes commercial
cash-basis loans and net credit losses:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- ----------------------------------------------------------------------
<S> <C> <C> <C>
CASH-BASIS LOANS AT YEAR-END
Corporate and Investment Bank(1)(4) $ 1,525 $ 776 $ 481
EM Corporate & GTS 1,465 1,069 989
Mexico (2) 1,030 79 55
Insurance and Investment Activities (3) 21 46 55
- ----------------------------------------------------------------------
TOTAL COMMERCIAL CASH-BASIS LOANS $ 4,041 $ 1,970 $ 1,580
======================================================================
NET CREDIT LOSSES
Corporate and Investment Bank (4) $ 1,261 $ 536 $ 145
EM Corporate & GTS 321 199 388
Mexico (2) 66 29 21
Insurance and Investment Activities (3) -- 7 --
- ----------------------------------------------------------------------
TOTAL COMMERCIAL NET CREDIT LOSSES $ 1,648 $ 771 $ 554
======================================================================
</Table>
(1) Prior period cash-basis loans were restated to change the policy of the
Associates Commercial Leasing business for suspending accrual of interest on
past due loans to conform with other leasing businesses in the Corporate and
Investment Bank. The prior policy of placing loans that are 60 days or more
past due into cash-basis, was changed to 90 days or more past due.
(2) 2001 includes Banamex cash-basis loans and net-credit losses.
(3) Investment Activities results are reported in the Investment Activities
segment.
(4) In 1999, excludes amounts related to manufactured housing, as such loan
origination operations were discontinued in early 2000. Excluded cash-basis
loans and net-credit losses relating to manufactured housing were $55
million and $36 million, respectively.
Total commercial cash-basis loans were $4.041 billion, $1.970 billion and
$1.580 billion at December 31, 2001, 2000 and 1999, respectively. Cash-basis
loans in CIB were $1.525 billion, $776 million and $481 million at December 31,
2001, 2000 and 1999, respectively, reflecting increases in the transportation
leasing portfolio and borrowers in the telecommunication, energy, utility,
and retail industries. EM Corporate & GTS cash-basis loans were $1.465
billion, $1.069 billion and $989 million at December 31, 2001, 2000 and 1999,
respectively. The increase in 2001 primarily reflects increases in Latin
America, mainly Argentina, and increases in Asia, mainly Australia and New
Zealand. The increase in 2000 was primarily due to the acquisition of Bank
Handlowy along with increases in Latin America, partially offset by
improvements in Asia. Mexico cash-basis loans were $1.030 billion, $79
million and $55 million at December 31, 2001, 2000 and 1999, respectively.
The increase in 2001 reflects the acquisition of Banamex whose cash-basis
loans include exposures in steel, textile, food products and other industries.
Total Other Repossessed Assets were $439 million, $292 million and $256
million at December 31, 2001, 2000 and 1999, respectively, primarily reflecting
increases in repossessed transportation equipment and the acquisition of
Banamex.
Total commercial loans outstanding at December 31, 2001 were $148 billion
compared to $138 billion and $120 billion at December 31, 2000 and 1999,
respectively.
37
<Page>
Total commercial net credit losses of $1.648 billion in 2001 increased $877
million compared to 2000 primarily reflecting increases in CIB and EM Corporate
& GTS. CIB net credit losses of $1.261 billion in 2001 were up $725 million
compared to 2000 primarily reflecting higher net credit losses in the
transportation portfolio combined with higher net credit losses in the
telecommunication, energy, retail and airline industries. EM Corporate & GTS net
credit losses of $321 million in 2001 increased $122 million from 2000 primarily
due to write-downs in Argentina, partially offset by improvements in CEEMEA.
Total commercial net credit losses increased $217 million in 2000 compared to
1999 primarily due to increases in CIB, partially offset by decreases in EM
Corporate & GTS. The CIB increase in 2000 was due to write-offs on the
transportation portfolio and North American health care borrowers, 1999
recoveries on real estate loans and the inclusion of losses for Copelco, which
was acquired in the second quarter of 2000. The EM Corporate & GTS decrease in
2000 primarily reflects improvements in Asia, mainly China, Indonesia, Australia
and Thailand, and in CEEMEA. For a further discussion of trends by business, see
the business discussions on pages 21 to 23.
Citigroup's allowance for credit losses of $10.088 billion is available
to absorb probable credit losses inherent in the entire portfolio. For
analytical purposes only, the portion of Citigroup's allowance for credit
losses attributed to the commercial portfolio was $4.919 billion at December
31, 2001 compared to $4.015 billion and $3.633 billion at December 31, 2000
and 1999, respectively. The increase in the allowance at December 31, 2001
primarily reflects the acquisition of Banamex. The increase in the allowance
at December 31, 2000 primarily reflects additional provisions related to the
transportation portfolio. Losses on commercial lending activities and the
level of cash-basis loans can vary widely with respect to timing and amount,
particularly within any narrowly-defined business or loan type. Commercial
net credit losses and cash-basis loans may increase from the 2001 levels due
to weakening global economic conditions, the economic crisis in Argentina,
sovereign or regulatory actions and other factors. This statement is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act. See "Forward-Looking Statements" on page 33.
<Table>
<Caption>
IN BILLIONS OF DOLLARS AT YEAR-END 2001 2000 1999
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial allowance for credit losses $ 4.919 $ 4.015 $ 3.633
As a percentage of total commercial loans 3.31% 2.90% 3.02%
==========================================================================
</Table>
REINSURANCE RISK
In the course of its insurance activities, TPC reinsures a portion of the risks
it underwrites in an effort to control its exposure to losses, stabilize
earnings and protect capital resources. TPC 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 TPC generally to the
extent of the reinsurance ceded, TPC remains primarily liable as the direct
insurer on all risks reinsured. TPC also holds collateral, including escrow
funds and letters of credit, under certain reinsurance agreements. TPC monitors
the financial condition of reinsurers on an ongoing basis, and reviews its
reinsurance arrangements periodically. Reinsurers are selected based on their
financial condition and business practices and the price of their product
offerings. For additional information concerning reinsurance, see Note 14 to the
Consolidated Financial Statements.
THE MARKET RISK MANAGEMENT PROCESS
Market risk at Citigroup--like credit risk--is managed through corporate-wide
standards and business policies and procedures.
- - Market risks are measured in accordance with established standards to ensure
consistency across businesses and the ability to aggregate like risks at the
Citigroup-level.
- - Each business is required to establish, and have approved by independent
Market Risk Management, a market risk limit framework, including risk
measures, limits and controls, that clearly defines approved risk profiles and
is within the parameters of Citigroup's overall risk appetite.
- - Businesses, working in conjunction with independent Market Risk Management,
must ensure that market risks are independently measured, monitored and
reported, to ensure transparency in risk-taking activities and integrity in
risk reports.
In all cases, the businesses are ultimately responsible for the market
risks that they take, and for remaining within their defined limits.
Market risk encompasses liquidity risk and price risk, both of which arise
in the normal course of business of a global financial intermediary. Liquidity
risk 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. Liquidity Risk is discussed in the Liquidity and Capital Resources section.
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. Price risk arises in Non-Trading Portfolios, as well as in Trading
Portfolios.
NON-TRADING PORTFOLIOS
Price risk in non-trading portfolios is measured predominantly through
Earnings-at-Risk and Factor Sensitivity techniques. These measurement techniques
are supplemented with additional tools, including stress testing and
cost-to-close analysis.
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 that are designated and effective as hedges. 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.
Earnings-at-Risk is the primary method for measuring price risk in
Citigroup's non-trading portfolios (excluding the Insurance companies).
Earnings-at-Risk measures the pretax earnings impact of a specified upward and
downward parallel shift in the yield curve for the appropriate currency. The
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. U.S. dollar exposures are calculated by multiplying the gap between
interest sensitive items, including assets, liabilities, derivative instruments
and other off-balance sheet instruments, by 100 basis points. Non-U.S. dollar
exposures are calculated utilizing the statistical equivalent of a 100 basis
point change in interest rates and assuming no correlation between exposures in
different currencies.
Citigroup's primary non-trading price risk exposure is to movements in the
U.S. dollar and Mexican peso interest rates. Citigroup also has
38
<Page>
Earnings-at-Risk in various other currencies; however, there are no significant
risk concentrations in any other individual non-U.S. dollar currency.
The following table illustrates the impact to Citigroup's pretax earnings
from a 100 basis point increase or decrease in the U.S. dollar yield curve. As
of December 31, 2001, the potential impact on pretax earnings over the next 12
months is a decrease of $241 million from an interest rate increase and an
increase of $244 million from an interest rate decrease. This level of 12 month
Earnings-at-Risk equates to less than 1.5% of Citigroup pretax earnings in 2001.
The potential impact on pretax earnings for periods beyond the first 12 months
is an increase of $898 million from an increase in interest rates and a decrease
of $1,082 million from an interest rate decrease. The change in Earnings-at-Risk
from the prior year reflects the growth in Citigroup's fixed funding, the change
in mortgage prepayment characteristics in our portfolio, offset by the change in
the asset/liability mix to reflect Citigroup's view of interest rates.
The statistical equivalent of a 100 basis point increase in Mexican peso
interest rates would have a potential positive impact on Citigroup's pretax
earnings of approximately $208 million for 2002 and a potential positive impact
of $207 million for the years thereafter. The statistical equivalent of a 100
basis points decrease in Mexican peso interest rates would have a potential
negative impact on Citigroup's pretax earnings of approximately $208 million for
2002 and potential negative impact of $207 million for the years thereafter. The
change in Earnings-at-Risk from December 31, 2000 primarily represents the
inclusion of Banamex's Mexican peso exposure.
Excluding the impact of changes in Mexican peso interest rates the
statistical equivalent of a 100 basis point increase in other non-U.S. dollar
interest rates would have a potential negative impact on Citigroup's pretax
earnings of $275 million for 2002 and potential negative impact $236 million for
the years thereafter. The statistical equivalent of a 100 basis point decrease
in other non-U.S. dollar interest rates would have potential positive impact on
Citigroup's pretax earnings of $278 million for 2002 and a potential positive
impact of $250 million for the years thereafter. The sensitivity to rising rates
in the other non-U.S. dollar Earnings-at-Risk from prior year reflects the
change in the use of derivatives in managing the risk portfolio and the change
in the asset/liability mix to reflect Citigroup's view of interest rates.
CITIGROUP EARNINGS-AT-RISK (IMPACT ON PRETAX EARNINGS)(1)
<Table>
<Caption>
DECEMBER 31, 2001
------------------------------------------------------------------
U.S. DOLLAR MEXICAN PESO OTHER NON-U.S. DOLLAR
------------------------------------------------------------------
IN MILLIONS OF DOLLARS INCREASE DECREASE INCREASE DECREASE INCREASE DECREASE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve months and less $ (241) $ 244 $ 208 $ (208) $ (275) $ 278
Thereafter 898 (1,082) 207 (207) (238) 250
- ------------------------------------------------------------------------------------------
Total $ 657 $ (838) $ 415 $ (415) $ (511) $ 528
==========================================================================================
<Caption>
December 31, 2001(2)
------------------------------------------------------------------
U.S. dollar Mexican peso Other non-U.S. dollar
------------------------------------------------------------------
IN MILLIONS OF DOLLARS Increase Decrease Increase Decrease Increase Decrease
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Twelve months and less $ (243) $ 270 $ (9) $ 9 $ (178) $ 180
Thereafter 778 (883) (9) 9 (89) 106
- ------------------------------------------------------------------------------------------
Total $ 535 $ (613) $ (18) $ 18 $ (267) $ 286
==========================================================================================
</Table>
(1) Excludes the Insurance Companies (see below).
(2) Prior year amounts have been restated to conform with the current period's
presentation.
INSURANCE COMPANIES
The table below reflects the estimated decrease in the fair value of financial
instruments held in the Insurance companies, as a result of a 100 basis point
increase in interest rates.
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT DECEMBER 31, 2001 2000
- -----------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments $ 3,404 $ 2,715
- -----------------------------------------------------------------
LIABILITIES
Long-term debt $ 18 $ 28
Contractholder funds 775 542
Redeemable securities of subsidiary trusts 1 44
=================================================================
</Table>
A significant portion of the Insurance companies' 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 Citigroup non-trading portfolios
or the Value-at-Risk for the trading portfolios.
TRADING PORTFOLIOS
Price risk in trading portfolios is measured through a complementary set of
tools, including Factor Sensitivities, Value-at-Risk, and Stress Testing. Each
trading portfolio has its own market risk limit framework, encompassing these
measures and other controls, including permitted product lists and a new product
approval process for complete products, established by the business and approved
by independent market risk management.
Factor Sensitivities are defined as the change in the value of a position
for a defined change in a market risk factor (e.g., the change in the value of a
Treasury bill for a 1 basis point change in interest rates). It is the
responsibility of independent market risk management to ensure that factor
sensitivities are calculated, monitored and, in some cases, limited, for all
relevant risks taken in a trading portfolio. Value-at-Risk estimates the
potential decline in the value of a position or a portfolio, under normal market
conditions, over a one-day holding period, at a 99% confidence level. The
Value-at-Risk method incorporates the Factor Sensitivities of the trading
portfolio with the volatilities and correlations of those factors.
Stress Testing is performed on trading portfolios on a regular basis, to
estimate the impact of extreme market movements. Stress Testing is performed on
individual trading portfolios, as well as on aggregations of portfolios and
businesses, as appropriate. It is the responsibility of independent market risk
management, in conjunction with the businesses, to develop stress scenarios,
review the output of periodic stress testing exercises, and utilize the
information to make judgments as to the ongoing appropriateness of exposure
levels and limits.
39
<Page>
New and/or complex products in trading portfolios are required to be
reviewed and approved by the Capital Markets Approval Committee (CMAC). The CMAC
is responsible for ensuring that all relevant risks are identified and
understood, and can be measured, managed and reported in accordance with
applicable business policies and practices. The CMAC is made up of senior
representatives from market and credit risk management, legal, accounting,
operations and other support areas, as required.
The level of price risk exposure at any given point in time depends on the
market environment and expectations of future price and market movements, and
will vary from period to period.
For Citigroup's major trading centers, the aggregate pretax Value-at-Risk
in the trading portfolios was $54 million at December 31, 2001. Daily exposures
averaged $63 million in 2001 and ranged from $39 million to $96 million.
The following table summarizes Value-at-Risk in the trading portfolios as
of December 31 2001 and 2000, along with the averages.
<Table>
<Caption>
DEC. 31, 2001 Dec. 31, 2000(1)
IN MILLIONS OF DOLLARS 2001 AVERAGE 2000(1) Average
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate $ 44 $ 55 $ 53 $ 43
Foreign Exchange 9 12 11 10
Equity 10 15 24 20
All other (primarily commodity) 21 18 15 14
Covariance adjustment (30) (37) (39) (35)
- ----------------------------------------------------------------------------
$ 54 $ 63 $ 64 $ 52
============================================================================
</Table>
(1) Prior-year information has been restated from that previously presented to
reflect reorganizations and a change in assumptions made to reflect a more
consistent view for managing price risk throughout the organization.
The table below provides the range of Value-at-Risk in the trading
portfolios that was experienced during 2001 and 2000.
<Table>
<Caption>
2001 2000(1)
-------------------------------
IN MILLIONS OF DOLLARS LOW HIGH LOW HIGH
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate $ 33 $ 90 $ 32 $ 65
Foreign Exchange 6 22 5 26
Equity 9 53 10 51
All other (primarily commodity) 8 52 6 32
================================================================
</Table>
(1) Prior-year information has been restated from that previously presented to
reflect reorganizations and a change in assumptions made to reflect a more
consistent view for managing price risk throughout the organization.
MANAGEMENT OF CROSS-BORDER RISK
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
risk management framework described on page 34.
Except as described below for cross-border resale agreements and the
netting of certain long and short securities positions, the following table
presents total cross-border outstandings and commitments on a regulatory basis
in accordance with FFIEC guidelines. In regulatory reports under FFIEC
guidelines, cross-border resale agreements are presented based on the domicile
of the issuer of the securities that are held as collateral. However, for
purposes of the following table, cross-border resale agreements are presented
based on the domicile of the counterparty because the counterparty has the legal
obligation for repayment. Similarly, under FFIEC guidelines, long securities
positions are required to be reported on a gross basis. However, for purposes of
the following table, certain long and short securities positions are presented
on a net basis consistent with internal cross-border risk management policies,
reflecting a reduction of risk from offsetting positions.
CROSS-BORDER OUTSTANDINGS AND COMMITMENTS
Total cross-border outstandings include cross-border claims on third parties as
well as investments in and funding of local franchises. Countries with FFIEC
outstandings greater than 0.75% of Citigroup assets for the respective periods
include:
<Table>
<Caption>
DECEMBER 31, 2001
---------------------------------------------------------------------------------------------------
CROSS-BORDER CLAIMS ON THIRD PARTIES
-------------------------------------------------- NET INVESTMENTS
TRADING AND CROSS-BORDER IN AND FUNDING TOTAL CROSS-
SHORT-TERM RESALE OF LOCAL BORDER
IN BILLIONS OF DOLLARS CLAIMS(1) AGREEMENTS ALL OTHER TOTAL FRANCHISES OUTSTANDINGS COMMITMENTS(2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Germany $ 6.0 $ 5.8 $ 1.5 $ 13.3 $ 0.2 $ 13.5 $ 7.3
Mexico(3) 3.3 -- 5.6 8.9 3.4 12.3 0.6
United Kingdom 3.9 3.6 3.7 11.2 -- 11.2 16.8
France 5.1 3.8 1.5 10.4 0.5 10.9 8.7
Brazil 3.2 -- 2.8 6.0 4.7 10.7 0.3
Italy 5.3 1.4 1.2 7.9 1.8 9.7 2.4
Japan 2.9 3.5 1.5 7.9 -- 7.9 3.3
Canada 2.7 0.1 3.0 5.8 2.1 7.9 3.4
Netherlands 4.1 1.8 1.3 7.2 -- 7.2 3.0
=============================================================================================================================
<Caption>
December 31, 2001
---------------------------
Total cross
border
IN BILLIONS OF DOLLARS outstandings Commitments(2)
- -------------------------------------------------------
<S> <C> <C>
Germany $ 12.4 $ 7.1
Mexico(3) 3.9 1.7
United Kingdom 10.9 15.4
France 13.4 8.4
Brazil 8.1 0.2
Italy 9.9 5.7
Japan 7.4 0.8
Canada 8.9 5.0
Netherlands 10.6 1.9
=======================================================
</Table>
(1) Trading and short-term claims include cross-border debt and equity
securities held in the trading account, trade finance receivables, net
revaluation gains on foreign exchange and derivative contracts, and other
claims with a maturity of less than one year.
(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) Increase from December 31, 2000 primarily represents inclusion of Banamex's
Mexican exposure.
40
<Page>
Total cross-border outstandings under FFIEC guidelines, including
cross-border resale agreements based on the domicile of the issuer of the
securities that are held as collateral, and long securities positions
reported on a gross basis, at December 31, 2001, 2000, and 1999 were (in
billions): Germany ($19.5, $16.8, and $14.9), Mexico ($13.2, $4.7, and $5.2),
the United Kingdom ($9.3, $9.6, and $8.8), France ($13.5, $13.5, and $7.9),
Brazil ($11.9, $9.8, and $4.9), Italy ($12.8, $13.9, and $10.2), Japan ($6.5,
$9.1, and $10.5), Canada ($8.9, $9.0, and $7.1), and the Netherlands ($6.9,
$7.7, and $5.0), respectively.
Cross-border commitments (in billions) at December 31, 1999 were $3.7 for
Germany, $0.1 for Mexico, $15.5 for the United Kingdom, $2.2 for France, $0.1
for Brazil, $0.4 for Italy, $0.1 for Japan, $2.1 for Canada, and $2.9 for the
Netherlands.
The sector percentage allocation for bank, public, and private cross-border
claims on third parties under FFIEC guidelines at December 31, 2001 was: Germany
(17%, 59%, and 24%) Mexico (1%, 28%, and 71%), the United Kingdom (24%, 18%,and
58%), France (26%, 47%, and 27%), Brazil (14%, 25%, and 61%), Italy(13%, 72%,
15%), Japan (21%, 22%, and 57%), Canada (30%, 9%, and 61%), and the Netherlands
(16%, 13%, and 71%), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Citigroup's primary source of capital resources is its net earnings. Other
sources include proceeds from the issuance of trust preferred securities, senior
debt, subordinated debt and commercial paper. Citigroup can also generate funds
by securitizing various financial assets including credit card receivables and
other receivables generally secured by collateral such as automobiles and
single-family residences.
Citigroup uses these capital resources to pay dividends to its
stockholders, to repurchase its shares in the market pursuant to
Board-of-Directors approved plans, to support organic growth, to make
acquisitions and to service its debt obligations.
As a financial holding company, substantially all of Citigroup's net
earnings are generated within its operating subsidiaries including Citibank,
SSB, TIC and TPC. Each of these subsidiaries makes these funds available to
Citigroup in the form of dividends. The subsidiaries' dividend paying abilities
are limited by certain covenant restrictions in credit agreements and/or by
regulatory requirements. Certain of these subsidiaries are also subject to
rating agency requirements that also impact their capitalization levels.
During 2002, it is not anticipated that any restrictions on the
subsidiaries' dividending capability will restrict Citigroup's ability to meet
its obligations as and when they become due. It is also anticipated that during
2002 Citigroup will maintain its share repurchase program.
Citigroup announced that its wholly-owned subsidiary, Travelers Property
Casualty Corp. (TPC), intends to sell a minority interest in TPC in an
initial public offering and Citigroup intends to make a tax free distribution
to its stockholders of such amount of the remainder of its interest in TPC so
that it will hold approximately 9.9% of the outstanding voting securities of
TPC following the initial public offering and tax-free distribution. The
distribution is expected to be concluded by the year-end 2002. Citigroup is
not obligated to conclude the distribution at that time or at all. The
distribution of TPC, if it occurs, will be treated as a dividend to
stockholders for accounting purposes that will reduce stockholders' equity by
an amount in excess of $7 billion. This paragraph and the preceding paragraph
contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 33.
Citigroup, Citicorp and certain other subsidiaries issue commercial
paper directly to investors. Citigroup and Citicorp, both of which are bank
holding companies, maintain combined liquidity reserves of cash, securities
and unused bank lines of credit to support their combined outstanding
commercial paper.
Citigroup, has unutilized bilateral committed revolving credit facilities
in the amount of $950 million that expire in 2002. Under these facilities,
Citigroup is required to maintain a certain level of consolidated stockholders'
equity (as defined in the agreements). Citigroup exceeded this requirement by
approximately $56 billion at December 31, 2001.
Associates, a subsidiary of Citicorp has a combination of unutilized credit
facilities of $6.8 billion as of December 31, 2001 which have maturities ranging
from 2002 to 2005. All of these facilities are guaranteed by Citicorp. In
connection with the facilities, Citicorp is required to maintain a certain level
of consolidated stockholder's equity (as defined in the agreements). At December
31, 2001, this requirement was exceeded by approximately $49 billion. Citicorp
has also guaranteed various debt obligations of Associates and CitiFinancial
Credit Company (CCC), an indirect subsidiary of Citicorp.
41
<Page>
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 facility fees for its lines of credit.
Citicorp, Salomon Smith Barney, and some of their nonbank subsidiaries
have credit facilities with Citicorp's subsidiary banks, including
Citibank, N.A. Borrowings under these facilities must be secured in accordance
with Section 23A of the Federal Reserve Act.
The following table summarizes the maturity profile of the Company's
consolidated contractual long-term debt payments and operating leases at
December 31, 2001:
<Table>
<Caption>
IN MILLIONS OF DOLLARS LONG-TERM DEBT OPERATING LEASES
- -----------------------------------------------------------------
<S> <C> <C>
2002 $ 31,202 $1,079
2003 24,636 927
2004 16,305 761
2005 13,175 759
2006 10,045 488
Thereafter 26,268 2,654
- -----------------------------------------------------------------
TOTAL $121,631 $6,668
=================================================================
</Table>
MANAGEMENT OF LIQUIDITY
Management of liquidity at Citigroup is the responsibility of the Corporate
Treasurer. A uniform liquidity risk management policy exists for Citigroup and
its major operating subsidiaries. Under this policy, there is a single set of
standards for the measurement of liquidity risk in order to ensure consistency
across businesses, stability in methodologies and transparency of risk.
Management of liquidity at each operating subsidiary and/or country is performed
on a daily basis and is monitored by Corporate Treasury. Each major operating
subsidiary and/or country must prepare an annual liquidity and funding plan for
the approval by the Corporate Treasurer. Under the annual liquidity and funding
plan, liquidity limits, targets and ratios are established. Contingency Funding
Plans are prepared on a periodic basis for Citigroup and each major operating
subsidiary and country. These plans include stress testing of assumptions about
significant changes in key funding sources, credit ratings, contingent uses of
funding, and political and economic conditions in Emerging Markets countries.
Citigroup's funding sources are well-diversified across funding types and
geography, a benefit of the strength of the global franchise. Funding for the
Parent and its major operating subsidiaries includes a large geographically
diverse retail and corporate deposit base, a significant portion of which is
considered core. Other sources of funding include collateralized borrowings,
securitizations (primarily credit card and mortgages), long-term debt, and
purchased/wholesale funds. This funding is significantly enhanced by Citigroup's
strong capital position. Each of Citigroup's major operating subsidiaries
finances its operations on a basis consistent with its capitalization,
regulatory structure and the operating environment in which its operates.
Other liquidity and capital resource considerations for Citigroup and its
major operating facilities follow.
OFF-BALANCE SHEET ARRANGEMENTS
Citigroup and its subsidiaries are involved with several types of off-balance
sheet arrangements, including special purpose entities (SPEs), lines and letters
of credit, and loan commitments.
The principal uses of SPEs are to obtain sources of liquidity by
securitizing certain of Citigroup's financial assets, to assist our clients in
securitizing their financial assets, and to create other investment products for
our clients.
SPEs may be organized as trusts, partnerships, or corporations. In a
securitization, the company transferring assets to an SPE, converts those assets
into cash before they would have been realized in the normal course of business.
The SPE obtains the cash needed to pay the transferor for the assets received by
issuing securities to investors in the form of debt instruments, certificates,
commercial paper, and other notes of indebtedness. Investors usually have
recourse to the assets in the SPE and often benefit from other credit
enhancements, such as a cash collateral account, overcollateralization in the
form of excess assets in the SPE, or a liquidity facility, such as a line of
credit or asset purchase agreement. Accordingly, the SPE can typically obtain a
more favorable credit rating from rating agencies, such as Standard and Poor's
and Moody's Investors Service, than the transferor could obtain for its own debt
issuances, resulting in less expensive financing costs. The transferor can use
the cash proceeds from the sale to extend credit to additional customers or for
other business purposes. The SPE may also enter into a derivative contract in
order to convert the yield or currency of the underlying assets to match the
needs of the SPE's investors or to limit the credit risk of the SPE. The Company
may be the counterparty to any such derivative. The securitization process
enhances the liquidity of the financial markets, may spread credit risk among
several market participants, and makes new funds available to extend credit to
consumers and commercial entities.
SECURITIZATION OF CITIGROUP'S ASSETS
Citigroup securitizes credit card receivable, mortgage, home equity and auto
loans, and certain other financial assets that it originates or purchases.
CREDIT CARD RECEIVABLES
Credit card receivables are securitized through a trust, which is established to
purchase the receivables. Citigroup sells receivables into the trust on a non-
recourse basis.
After securitization of credit card receivables, the Company continues to
maintain credit card customer account relationships and provides servicing for
receivables transferred to the SPE trusts. As a result, the Company considers
both the securitized and unsecuritized credit card receivables to be part of the
business it manages. The documents establishing the trusts generally require the
Company to maintain an ownership interest in the trust. The Company also
arranges for third parties to provide credit enhancement to the trusts,
including cash collateral accounts, subordinated securities, and letters of
credit. As specified in certain of the sale agreements, the net revenue with
respect to the investors' interest collected by the trusts each month is
accumulated up to a predetermined maximum amount, and is available over the
remaining term of that transaction to make payments of interest to trust
investors, fees, and transaction costs in the event that net cash flows from the
receivables are not sufficient. If the net cash flows are insufficient,
Citigroup's loss is limited to its retained interest. When the predetermined
amount is reached, net revenue with respect to the investors' interest is passed
directly to the Citigroup subsidiary that sold the receivables. Credit card
securitizations are revolving securitizations; that is, as customers pay their
credit card balances, the cash proceeds are used to replenish the receivables in
the trust. Salomon Smith Barney is one of several underwriters that distribute
securities issued by the trusts to investors. The Company relies on
securitizations to fund about 60% of its Card business.
42
<Page>
At December 31, 2001, total assets in the credit card trusts were $87
billion. Of that amount, $67 billion has been sold to investors via trust-issued
securities, and the remaining seller's interest of $20 billion is recorded in
Citigroup's Consolidated Statement of Financial Position as Consumer Loans.
Citigroup retains credit risk on its seller's interests. Amounts receivable from
the trusts were $1,098 million and amounts due to the trusts were $701 million
at December 31, 2001. During the year-ended December 31, 2001, finance charges
and interchange fees of $10.1 billion were collected by the trusts. Also for the
year-ended December 31, 2001, the trusts recorded $6.5 billion in coupon
interest paid to third-party investors, servicing fees, and other costs.
Servicing fees of $1.2 billion were earned and an additional $3.6 billion of net
cash flows were received by the Company in 2001.
MORTGAGES, HOME EQUITY AND AUTO LOANS
The Company provides a wide range of mortgage, home equity and auto loan
products to a diverse customer base. In addition to providing a source of
liquidity and less expensive funding, securitizing these assets also reduces
the Company's credit exposure to the borrowers. In connection with the
securitization of these loans, servicing rights entitle the Company to a
future stream of cash flows based on the outstanding principal balances of
the loans and the contractual servicing fee. Failure to service the loans in
accordance with contractual servicing obligations may lead to a termination
of the servicing rights and the loss of future servicing fees. In
non-recourse servicing, the principal credit risk to the servicer arises from
temporary advances of funds. In recourse servicing, the servicer agrees to
share credit risk with owner of the mortgage loans, such as FNMA, FHLMC,
GNMA, or with a private investor, insurer or guarantor. Our mortgage loan
securitizations are primarily non-recourse, thereby effectively transferring
the risk of future credit losses to the purchasers of the securities issued
by the trust. Home equity loans may be revolving lines of credit under which
borrowers have the right to draw on the line of credit up to their maximum
amount for a specified number of years. In addition to servicing rights, the
Company also retains a residual interest in its home equity, manufactures
housing and auto loan securitizations, consisting of seller's interest and
interest-only strips that arise from the calculation of gain or loss at the
time assets are sold to the SPE.
At December 31, 2001, total loans securitized and outstanding were $85
billion. Servicing rights and other retained interests amounted to $3.2 billion
at December 31, 2001. During the year ended December 31, 2001, the Company
recognized $271 million of gains on securitizations of mortgage loans.
The following table summarizes certain cash flows received from and paid to
securitization trusts during the year ended December 31, 2001:
<Table>
<Caption>
2001
- ---------------------------------------------------------------------------------
IN BILLIONS OF DOLLARS CREDIT CARDS MORTGAGES(1) AND AUTO
- ---------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from new securitizations $ 22.7 $34.8
Proceeds from collections reinvested
in new receivables 131.4 0.4
Servicing fees received 1.2 0.3
Cash flows received on retained
interests and other net cash flows 3.6 0.4
=================================================================================
</Table>
(1) Includes mortgages and home equity loans.
SECURITIZATIONS OF CLIENT ASSETS
The Company acts as intermediary or agent for its corporate clients, assisting
them in obtaining sources of liquidity, by selling the clients' trade
receivables or other financial assets to an SPE.
The Company administers several third-party owned, special purpose,
multi-seller finance companies that purchase pools of trade receivables, credit
cards, and other financial assets from third-party clients of the Company. As
administrator, the Company provides accounting, funding, and operations services
to these conduits. The Company has no ownership interest in the conduits. The
clients continue to service the transferred assets. The conduits' asset
purchases are funded by issuing commercial paper and medium-term notes. Clients
absorb the first losses of the conduit by providing collateral in the form of
excess assets. The Company along with other financial institutions provides
liquidity facilities, such as commercial paper back-stop lines of credit to the
conduits. The Company also provides second loss enhancement in the form of
letters of credit and other guarantees. All fees are charged on a market basis.
At December 31, 2001, total assets in the conduits were $52 billion.
The Company also securitizes clients' debt obligations in transactions
involving SPEs that issue collateralized debt obligations (CDOs). A majority of
the transactions are on behalf of clients where the Company first purchases the
assets at the request of the clients and warehouses them until the
securitization transaction is executed. Other CDOs are structured where the
underlying debt obligations are purchased directly in the open market or from
issuers. Some CDOs have static unmanaged portfolios of assets, while other have
a more actively managed portfolio of financial assets. The Company receives fees
for structuring and distributing the CDO securities to investors.
CREATION OF OTHER INVESTMENT PRODUCTS
The Company packages and securitizes assets purchased in the financial
markets in order to create new security offerings, including hedge funds,
mutual funds, and other investment funds, for institutional and private bank
clients as well as retail customers, that match the clients' investment needs
and preferences. The SPEs may be credit-enhanced by excess assets in the
investment pool or by third party insurers assuming the risks of the
underlying assets, thus reducing the credit risk assumed by the investors and
diversifying investors' risk to a pool of assets as compared with investments
in individual assets. The Company typically manages the SPE for market-rate
fees. In addition, the Company may be one of several liquidity providers to
the SPE and may place the securities with investors. The Company has no
ownership interest in these entities.
43
<Page>
CREDIT COMMITMENTS AND LINES OF CREDIT
The table below summarizes Citigroup's credit commitments. Further details are
included in the footnotes.
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT YEAR-END 2001
- -------------------------------------------------------------------------------------
<S> <C>
Financial standby letters of credit and foreign office guarantees $ 29,541
Performance standby letters of credit and foreign office guarantees 7,749
Commercial and similar letters of credit 5,681
One-to-four family residential mortgages 5,470
Revolving open-end loans secured by 1-4 family residential properties 7,107
Commercial real estate, construction and land development 1,882
Credit card lines(1) 387,396
Commercial and other consumer loan commitments(2) 210,909
- -------------------------------------------------------------------------------------
Total $655,735
=====================================================================================
</Table>
(1) Credit card lines are unconditionally cancelable by the issuer.
(2) Includes $138 billion with original maturity less than one year and
approximately $50 billion with original maturity of one-to-five years.
CAPITAL
CITIGROUP INC. (CITIGROUP)
Citigroup is subject to risk-based capital guidelines issued by the Board of
Governors of the Federal Reserve System (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 leverage ratio requirement.
CITIGROUP RATIOS
<Table>
<Caption>
AT YEAR END 2001 2000
- -------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital 8.42% 8.38%
Total capital (Tier 1 and Tier 2) 10.92 11.23
Leverage(1) 5.64 5.97
Common stockholders' equity 7.58 7.14
=========================================================================
</Table>
(1) Tier 1 capital divided by adjusted average assets.
Citigroup maintained a strong capital position during 2001. Total
capital (Tier 1 and Tier 2) amounted to $75.8 billion at December 31, 2001,
representing 10.92% of risk-adjusted assets. This compares to $73.0 billion
and 11.23% at December 31,2000. Tier 1 capital of $58.4 billion at December
31,2001 represented 8.42% of risk-adjusted assets, compared to $54.5 billion
and 8.38% at December 31, 2000. Citigroup's leverage ratio was 5.64% at
December 31,2001 compared to 5.97% at December 31, 2000. See Note 18 to the
Consolidated Financial Statements.
COMPONENTS OF CAPITAL UNDER REGULATORY GUIDELINES
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT YEAR-END 2001 2000
- -------------------------------------------------------------------------------------
<S> <C> <C>
TIER 1 CAPITAL
Common stockholders' equity $ 79,722 $ 64,461
Qualifying perpetual preferred stock 1,400 1,745
Qualifying mandatorily redeemable securities
of subsidiary trusts 6,725 4,920
Minority interest 803 334
Less: Net unrealized gains on securities
available-for-sale(1) (852) (973)
Accumulated net gains on cash flow hedges, net of tax (168) -
Intangible assets:
Goodwill (23,861) (11,972)
Other intangible assets (4,944) (3,572)
Net unrealized losses on available-for-sale
equity securities, net of tax(1) - (68)
50% investment in certain subsidiaries(2) (72) (82)
Other (305) (295)
- -------------------------------------------------------------------------------------
TOTAL TIER 1 CAPITAL 58,448 54,498
- -------------------------------------------------------------------------------------
TIER 2 CAPITAL
Allowance for credit losses(3) 8,694 8,140
Qualifying debt(4) 8,648 10,492
Unrealized marketable equity securities gain(1) 79 -
Less: 50% investment in certain subsidiaries(2) (72) (82)
- -------------------------------------------------------------------------------------
TOTAL TIER 2 CAPITAL 17,349 18,550
- -------------------------------------------------------------------------------------
TOTAL CAPITAL (TIER 1 AND TIER 2) $ 75,797 $ 73,048
=====================================================================================
RISK-ADJUSTED ASSETS(5) $694,035 $650,351
=====================================================================================
</Table>
(1) Tier 1 capital excludes unrealized gains and losses on debt securities
available-for-sale in accordance with regulatory risk-based capital
guidelines. The Federal bank regulatory agencies 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. Institutions are required to deduct from Tier 1 capital net
unrealized holding losses on available-for-sale equity securities with
readily determinable fair values, net of tax.
(2) Represents investment in certain overseas insurance activities and
unconsolidated banking and finance subsidiaries.
(3) Includable up to 1.25% of risk-adjusted assets. Any excess allowance is
deducted from risk-adjusted assets.
(4) Includes qualifying senior and subordinated debt in an amount not exceeding
50% of Tier 1 capital, and subordinated capital notes subject to certain
limitations. The net decrease in qualifying debt during 2001 was due to
redemptions of subsidiary-obligated debt.
(5) Includes risk-weighted credit equivalent amounts, net of applicable
bilateral netting agreements, of $26.2 billion for interest rate, commodity
and equity derivative contracts and foreign exchange contracts, as of
December 31, 2001 compared to $27.7 billion as of December 31, 2000. Market
risk equivalent assets included in risk-adjusted asses amounted to $31.4
billion and $39.6 billion at December 31, 2001 and 2000, respectively.
Risk-adjusted assets also includes the effect of other off-balance sheet
exposures such as unused as unused loan commitments and letters of credit
and reflects deductions for intangible assets and any excess allowance for
credit losses.
44
<Page>
Common stockholders' equity increased a net $15.3 billion during the year
to $79.7 billion at December 31, 2001, representing 7.58% of assets, compared to
$64.5 billion and 7.14% at year-end 2000. The increase in common stockholders'
equity during the year principally reflected net income of $14.1 billion, $6.5
billion related to the issuance of shares to effect the Banamex acquisition,
and $2.2 billion related to the issuance of shares pursuant to employee benefit
plans and other activity, offset by dividends declared on common and preferred
stock of $3.2 billion, treasury stock acquired of $3.0 billion, and $1.3 billion
related to foreign currency translation adjustment and change in unrealized
gains and losses on investment securities. The increase in the common
stockholders' equity ration during the year reflected the above items, and was
partially offset by the increase in total assets.
During the 2001 fourth quarter, the Board of Directors granted approval for
the repurchase of an additional $5 billion of Citigroup common stock, continuing
the Company's program of buying back its shares. Under its long-standing
repurchase program, the Company buys back shares in the market from time to
time.
During the 2001 fourth quarter, Citigroup redeemed its Series K cumulative
preferred stock for $250 million.
On January 7, 2002, Citigroup redeemed for cash all outstanding shares of
its Series U cumulative preferred stock. Because notice for redemption of these
shares occurred prior to year-end, they did not qualify as Tier 1 Capital at
December 31, 2001.
The total mandatorily redeemable securities of subsidiary trusts (trust
securities) which qualify as Tier 1 capital at December 31, 2001 and 2000
were $6.725 billion and $4.92 billion, respectively. The amount outstanding
at December 31,2001 includes $4.85 billion of parent-obligated securities and
$2.275 billion of subsidiary-obligated securities, and at December 31, 2000
includes $2.30 billion of parent-obligated securities and $2.62 billion of
subsidiary-obligated securities. On January 7, 2002, Citigroup redeemed for
cash the $400 million Citigroup Capital 1 Trust Preferred Securities (16
million 8% Trust Preferred Securities at the redemption price of $25 per
Preferred Security plus any accrued and unpaid distribution thereon). Because
notice for redemption of these securities occurred prior to year end, they
did not qualify as Tier 1 Capital at December 31, 2001.
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, 2001, all of Citigroup's subsidiary depository institutions were
"well capitalized" under the Federal bank regulatory agencies' definitions.
On January 8, 2002, the FRB issued final rules that govern the regulatory
treatment of merchant banking investments and certain similar equity
investments, including investments made by venture capital subsidiaries, in
nonfinancial companies held by bank holding companies with certain exclusions.
The new rules impose a capital charge that would increase in steps as the
banking organization's level of concentration in equity investments increases.
An 8% Tier 1 capital deduction applies on covered investments that in the
aggregate represent up to 15% of an organization's Tier 1 capital. For covered
investments that aggregate more than 25% of the organization's Tier 1 capital, a
top marginal charge of 25% applies. The rules are not expected to have
significant impact on Citigroup.
In December 2001, the Basel Committee on Banking Supervision (Committee)
announced that a new consultative package on the new Basel Capital Accord (new
Accord) would not be issued in early 2002, as previously indicated. Instead, the
Committee will first seek to complete a comprehensive impact assessment of the
draft proposal, after which a new consultative package will be issued. The new
Accord, which will apply to all "significant" banks, as well as to holding
companies that are parents of banking groups, is still intended to be finalized
by year-end 2002, with implementation of the new framework beginning in 2005.
The Company is monitoring the status and progress of the proposed rule.
On November 29, 2001 the FRB issued final rules regarding the regulatory
capital treatment of recourse, direct credit substitutes and residual interest
in asset securitizations. The rules require a deduction from Tier 1 capital for
the amount of credit-enhancing interest-only strips (a type of residual
interest) that exceeds 25% of Tier 1 capital, as well as requiring dollar-for
- -dollar capital for residual interest not deducted for Tier 1 capital. These
rules, which require adoption in the fourth quarter of 2002, are not expected to
have a significant impact on Citigroup.
Additionally, 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. This
paragraph and the preceding three paragraphs contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act. See
"Forward Looking Statements" on page 33.
CITICORP
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. The Country Corporate Officer and
the Country Treasurer ensure that all funding obligations in each country are
met when due. The Citigroup Corporate Treasurer, in concert with the Country
Corporate Officer and the Regional Market Risk Manager, appoints 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
Citigroup Corporate Treasurer. 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. Finally, the limits are subject
to the evaluation of the entities' stress test results. Generally, limits are
established such that in stress scenarios, entities need to be self-funded or
providers of liquidity to Citicorp.
45
<Page>
Regional Treasurers generally have responsibility for monitoring liquidity
risk across a number of countries within a defined geography. They are also
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 business. 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 59% of
total funding at December 31, 2001 and 55% at December 31, 2000, are broadly
diversified by both geography and customer segments.
Stockholders's equity, which grew $15.6 billion during the year to $63.5
billion at year-end 2001, 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 2001 was
$81.1 billion, compared with $80.3 billion at year-end 2000.
Asset securitization programs remain an important source of liquidity.
Loans securitized during 2001 included $23.3 billion of U.S. credit cards and
$24.3 billion of U.S. consumer mortgages. As credit card securitization
transactions amortize, newly originated receivables are recorded on Citicorp's
balance sheet and become available for asset securitization. In 2001, the
scheduled amortization of certain credit card securitization transactions made
available $11.6 billion of new receivables. In addition, at least $9.4 billion
of credit card securitization transactions are scheduled to amortize during
2002.
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 2002, without regulatory
approval, of approximately $9.1 billion, adjusted by the effect of their net
income (loss) for 2002 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, directly or through their parent holding company, of
approximately $8.9 billion of the available $9.1 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 FRB.
CITICORP RATIOS
<Table>
<Caption>
AT YEAR-END 2001 2000
- -----------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital 8.33% 8.41%
Total capital (Tier 1 and Tier 2) 12.41 12.29
Leverage(1) 6.85 7.54
Common stockholder's equity 9.81 8.68
=======================================================================
</Table>
(1) Tier 1 capital divided by adjusted average assets.
Citicorp maintained a strong capital position during 2001. Total capital
(Tier 1 and Tier 2) amounted to $62.9 billion at December 31,2001, representing
12.41% of risk-adjusted assets. This compares with $58.0 billion and 12.29% at
December 31,2000. Tier 1 capital of $42.2 billion at year-end 2001 represented
8.33% of risk-adjusted assets, compared with $39.7 billion and 8.41% at year-end
2000. The Tier 1 capital ratio at year-end 2001 was above Citicorp's target
range of 8.00% to 8.30%. See Note 18 to the Consolidated Financial Statements.
SALOMON SMITH BARNEY HOLDINGS INC.
(SALOMON SMITH BARNEY)
Salomon Smith Barney's total assets were $301 billion at December 31, 2001,
compared to $238 billion at year-end 2000. Due to the nature of Salomon Smith
Barney's trading activities, it is not uncommon for asset levels to fluctuate
from period to period. At December 31, 2001, approximately 35% of these assets
represent trading securities, commodities, and derivatives used for proprietary
trading and to facilitate customer transactions. Approximately 46% of these
assets were 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. The carrying values of
the majority of Salomon Smith Barney's securities inventories are adjusted daily
to reflect current prices. See Notes 1,5,6,7,8, and 23 to the Consolidated
Financial Statements for a further description of these assets.
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. 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.
46
<Page>
Salomon Smith Barney funds its operations through the use of secured and
unsecured short-term borrowings, long-term borrowing and TruPS(R). 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.
Salomon Smith Barney has a $5.0 billion 364-day committed uncollateralized
revolving line of credit with unaffiliated banks that extends through May 21,
2002, with repayment on any borrowings due by May 21, 2004. Salomon Smith Barney
may borrow under this revolving credit facility at various interest rate options
(LIBOR or base rate) and compensates the banks for this facility through
facility fees. Under this facility, Salomon Smith Barney is required to
maintain a certain level of consolidated adjusted net worth (as defined in
the agreement). At December 31, 2001, this requirement was exceeded by
approximately $4.3 billion. At December 31, 2001, there were no borrowings
outstanding under this 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 $26.8 billion at December 31, 2001
and $19.7 billion at December 31, 2000. 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.
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.
TRAVELERS PROPERTY CASUALTY CORP. (TPC)
TPC'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. A maximum of $1.0
billion is available by the end of 2002 for such dividends without prior
approval of the Connecticut Insurance Department. However, the payment of a
significant portion of this amount is likely to be subject to such approval
depending upon the amount and timing of the payments.
THE TRAVELERS INSURANCE COMPANY (TIC)
At December 31, 2001, TIC had $34.1 billion of life and annuity product deposit
funds and reserves. Of that total, $19.1 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $15.0 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 is $4.2 billion of liabilities that is surrenderable with market
value adjustments. Also included is an additional $5.0 billion of the life
insurance and individual annuity liabilities which is subject to discretionary
withdrawals and an average surrender charge of 4.7%. In the payout phase, these
funds are credited at significantly reduced interest rates. The remaining $5.8
billion of liabilities is surrenderable without charge. More than 10.2% of this
relates 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 2002,
2003, 2004, 2005 and thereafter are $3.972 billion,$1.441 billion, $1.141
billion, $965 million, and $3.832 billion, respectively. At December 31, 2001,
the interest rates credited on GICs had a weighted average rate of 5.10%.
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 $586 million of statutory surplus
is available by the end of the year 2002 for such dividends without the prior
approval of the Connecticut Insurance Department.
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, 2001 and
2000, all of the Company's life and property and casualty companies had adjusted
capital in excess of amounts requiring Company or any regulatory action.
47
<Page>
GLOSSARY OF TERMS
ADJUSTED OPERATING EXPENSES--GAAP operating expenses excluding restructuring-
and merger-related items.
ADJUSTED PROVISIONS FOR BENEFITS, CLAIMS AND CREDIT LOSSES--Provisions for
benefits, claims and credit losses adjusted for the effect of securitization
activities. See Adjusted Revenues.
ADJUSTED REVENUES--Reflects the reclassification of net credit losses on
securitized receivables, where the Company continues to manage the receivables
after they have been securitized, from other income to the adjusted provisions
for benefits, claims and credit losses.
ANNUITY--A contract that pays a periodic benefit for the life of a person (the
annuitant), the lives of two or more persons or for a specified period of time.
ASSETS UNDER MANAGEMENT--Assets held by Citigroup in a fiduciary capacity for
clients. These assets are not included on Citigroup's balance sheet.
CASH BASIS LOANS--Loans on which interest payments are recorded when collected
from the borrower. These are loans in which the borrower has fallen behind in
interest payments, and are considered as nonaccrual assets. In situations where
the lender reasonably expects that only a portion of the principal and interest
owed ultimately will be collected, payments are credited directly to the
outstanding principal.
CATASTROPHE--A severe loss, usually involving risks such as fire, earthquake,
windstorm, explosion and other similar events.
CATASTROPHE LOSS--Loss and directly identified loss adjustment expenses from
catastrophes.
CATASTROPHE REINSURANCE--A form of excess of loss property reinsurance which,
subject to a specified limit, indemnifies the ceding company for the amount of
loss in excess of a specified limit or indemnifies the coding company for the
amount of loss in excess of a specified retention with respect to an
accumulation of losses resulting from a catastrophic event.
CLAIM--Request by an insured for indemnification by an insurance company for
loss incurred from an insured peril.
CLEAN LETTER OF CREDIT--An instrument issued by a bank on behalf of its customer
which gives the beneficiary the right to draw funds upon the presentation of the
letter of credit in accordance with its terms and conditions. Generally, they
are issued to guarantee the performance of the customer or to act as a payment
mechanism. Clean letters of credit, unlike commercial letters of credit, are not
related to the shipment of goods and do not require the beneficiary to present
shipping documents in order to receive payment from the bank.
COMBINED RATIO--The sum of the loss and LAE ratio, the underwriting expense
ratio and, where applicable, the ratio of dividends to policyholders to net
premiums earned. A combined ratio under 100% generally indicates an
underwriting profit. A combined ratio over 100% generally indicates an
underwriting loss.
COMMERCIAL LINES--The various kinds of property and casualty insurance that are
written for businesses.
CORE INCOME--Net income excluding restructuring-related items and merger-related
costs and cumulative effect of accounting changes or other non-recurring items,
as specified.
CREDIT DEFAULT SWAP--An agreement between two parties whereby one party pays the
other a fixed coupon over a specified term. The other party makes no payment
unless a specified credit event such as a default occurs, at which time a
payment is made and the swap terminates.
DEFERRED ACQUISITION COSTS--Primarily commissions and premium taxes, which vary
with and are primarily related to the production of new insurance business that
are deferred and amortized to achieve a matching of revenues and expenses when
reported in financial statements prepared in accordance with GAAP.
DEFERRED TAX ASSET--An asset attributable to deductible temporary
differences and carryforwards. A deferred tax asset is measured using the
applicable enacted tax rate and provisions of the enacted tax law.
DEFERRED TAX LIABILITY--A liability attributable to taxable temporary
differences. A deferred tax liability is measured using the applicable enacted
tax rate and provisions of the enacted tax law.
DERIVATIVE--A contract or agreement whose value is derived from changes in
interest rates, foreign exchange rates, prices of securities or commodities or
financial or commodity indices.
DIRECT WRITTEN PREMIUMS--The amounts charged by a primary insurer to insureds in
exchange for coverages provided in accordance with the terms of an insurance
contract.
EARNED PREMIUMS OR PREMIUMS EARNED--That portion of property-casualty premiums
written that applies to the expired portion of the policy term.
FEDERAL FUNDS--Non-interest bearing deposits held by member banks at the Federal
Reserve Bank.
FOREGONE INTEREST--Interest on cash-basis loans that would have been earned at
the original contractual rate if the loans were on accrual status.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)--Accounting rules and
conventions defining acceptable practices in preparing financial statements
in the United States of America. The Financial Accounting Standards Board
(FASB), an independent self-regulatory organization, is the primary source of
accounting rules.
LOSS ADJUSTMENT EXPENSES (LAE)--The expenses of settling claims, including legal
and other fees and the portion of general expenses allocated to claim settlement
costs.
LOSS AND LAE RATIO--For insurance company statutory accounting, it is the ratio
of incurred losses and loss adjustment expenses to net earned premiums. For
GAAP, it is the ratio of incurred losses and loss adjustment expenses reduced by
an allocation of fee income to net earned premiums.
48
<Page>
LOSSES AND LOSS ADJUSTMENT EXPENSES--The sum of losses incurred and loss
adjustment expenses.
MANAGED BASIS REPORTING--Reporting, adjusted to reflect certain effects of
securitization activities, receivables held for securitization, and receivables
sold with servicing retained. On a managed basis, these earnings are
reclassified and presented as if the receivables had neither been held for
securitization nor sold.
MANAGED LOANS--Includes loans classified as Loans on the balance sheet plus
loans held for sale which are included in other assets and securitized
receivables, primarily credit card receivables.
MANAGED NET CREDIT LOSSES--Net credit losses adjusted for the effect of credit
card securitizations. See Adjusted Revenues.
MINORITY INTEREST--When a parent owns a majority (but less than 100%) of a
subsidiary's stock, the Consolidated Financial Statements must reflect the
minority's interest in the subsidiary. The minority interest as shown in the
Statement of Income is equal to the minority's proportionate share of the
subsidiary's net income and, as included within other liabilities in the
Statement of Financial Position, is equal to the minority's proportionate share
of the subsidiary's net assets.
NET CREDIT LOSSES--Gross credit losses (write-offs) less gross credit
recoveries.
NET CREDIT LOSS RATIO--Annualized net credit losses divided by average loans
outstanding.
NET WRITTEN PREMIUMS--Direct written premiums plus assumed reinsurance premiums,
less premiums ceded to reinsurers.
PERSONAL LINES--Types of property and casualty insurance written for individuals
or families, rather than for businesses.
POOL--An organization of insurers or reinsurers through which particular types
of risks are underwritten with premiums, losses and expenses being shared in
agreed-upon percentages.
PREMIUMS--The amount charged during the year on policies and contracts issued,
renewed or reinsured by an insurance company.
PROPERTY INSURANCE--Insurance that provides coverage to a person with an
insurable interest in tangible property for that person's property loss, damage
or loss of use.
REINSURANCE--A transaction in which a reinsurer (ASSUMING ENTERPRISE), for a
consideration (PREMIUM), assumes all or part of a risk undertaken originally by
another insurer (CEDING ENTERPRISE).
RETENTION--The amount of exposure an insurance company retains on any one risk
or group of risks.
RETURN ON ASSETS--Annualized income (core or net) divided by average assets.
RETURN ON COMMON EQUITY--Annualized income (core or net) less preferred stock
dividends, divided by average common equity.
RISK ADJUSTED REVENUE--Adjusted revenues less managed net credit losses.
RISK ADJUSTED MARGIN--Risk adjusted revenue as a percent of average managed
loans.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (REVERSE REPO AGREEMENTS)--An
agreement between a seller and a buyer, generally of government or agency
securities, whereby the buyer agrees to purchase the securities, and the seller
agrees to repurchase them at an agreed upon price at a future date.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (REPURCHASE AGREEMENTS)--An
agreement between a seller and a buyer, generally of government or agency
securities, whereby the seller agrees to repurchase the securities at an agreed
upon price at a future date.
STANDBY LETTER OF CREDIT--An obligation issued by a bank on behalf of a bank
customer to a third party where the bank promises to pay the third party in the
event of some defined failure by the bank's customer, usually, but not always, a
failure to pay.
STATUTORY SURPLUS--As determined under Statutory Accounting Practices, the
amount remaining after all liabilities, including loss reserves, are subtracted
from all admitted assets. Admitted assets are assets of an insurer prescribed or
permitted by a state to be recognized on the statutory balance sheet. Statutory
surplus is also referred to as "surplus" or "surplus as regards policyholders"
for statutory accounting purposes.
TIER 1 AND TIER 2 CAPITAL--Tier 1 capital includes common stockholders' equity
(excluding certain components of other comprehensive income), qualifying
perpetual preferred stock, mandatorily redeemable securities of subsidiary
trusts, and minority interests that are held by others, less certain intangible
assets. Tier 2 capital includes, among other items, perpetual preferred stock to
the extent it does not qualify for Tier 1, qualifying senior and subordinated
debt and subordinated capital notes, limited life preferred stock and the
allowance for credit losses, subject to certain limitations.
UNEARNED COMPENSATION--The unamortized portion of a grant to employees of
restricted stock measured at the market value on the date of grant. Unearned
compensation is displayed as a reduction of stockholders' equity on the
Consolidated Statement of Financial Position.
UNFUNDED COMMITMENTS--Legally binding agreements to provide financing at a
future date.
49
<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 judgements,
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
management's authorization, assets are safeguarded, and financial records are
reliable. Management also takes steps to see that information and communication
flows are effective and to monitor performance, including performance of
internal control procedures.
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 audit and 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 full 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, 2001.
/s/ Sanford I. Weill /s/ Todd S. Thomson
Sanford I. Weill Todd S. Thomson
Chairman and Chief Financial Officer
Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
[KPMG LOGO]
The Board of Directors and Stockholders
Citigroup Inc.:
We have audited the accompanying consolidated statement of financial position of
Citigroup Inc. and subsidiaries as of December 31, 2001 and 2000, 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,
2001. 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 conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes 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 provide a
reasonable basis for our opinion.
In our opinion, 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 2001
the Company changed its methods of accounting for derivative instruments and
hedging activities, accounting for interest income and impairment on purchased
and retained beneficial interests in securitized financial assets, and
accounting for goodwill and intangible assets resulting from business
combinations consummated after June 30, 2001. Also, as discussed in Note 1 to
the consolidated financial statements, in 1999 the Company changed its methods
of accounting for insurance-related assessments, accounting for insurance and
reinsurance contracts that do not transfer insurance risk, and accounting for
the costs of start-up activities.
/s/ KPMG LLP
New York, New York
January 17, 2002
50
<Page>
CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
CONSOLIDATED STATEMENT OF INCOME CITIGROUP INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
---------------------------------
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Loan interest including fees $ 39,616 $ 37,377 $ 33,018
Other Interest and dividends 26,949 27,562 21,971
Insurance premiums 13,460 12,429 11,504
Commissions and fees 15,944 16,363 13,229
Principal transactions 5,544 5,981 5,160
Asset management and administration fees 5,389 5,338 4,164
Realized gains from sales of investments 578 806 541
Other income 4,542 5,970 4,809
- --------------------------------------------------------------------------------------------------------------
Total revenues 112,022 111,826 94,396
Interest expense 31,965 36,638 28,674
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES, NET OF INTEREST EXPENSE 80,057 75,188 65,722
- --------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND CREDIT LOSSES
Policyholder benefits and claims 11,759 10,147 9,120
Provision for credit losses 6,800 5,339 4,760
- --------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND CREDIT LOSSES 18,559 15,486 13,880
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Non-insurance compensation and benefits 19,449 18,633 16,169
Insurance underwriting, acquisition, and operating 3,921 3,643 3,765
Restructuring- and merger related items 458 759 (53)
Other operating expenses 15,773 15,524 13,810
- --------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 39,601 38,559 33,691
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES 21,897 21,143 18,151
Provision for income taxes 7,526 7,525 6,530
Minority interest, net of income taxes 87 99 251
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 14,284 13,519 11,370
- --------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting changes (158) -- (127)
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 14,126 $ 13,519 $ 11,243
==============================================================================================================
BASIC EARNINGS PER SHARE
Income before cumulative effect of accounting changes $ 2.82 $ 2.69 $ 2.26
Cumulative effect of accounting changes (0.03) -- (0.03)
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.79 $ 2.69 $ 2.23
==============================================================================================================
Weighted average common shares outstanding 5,031.7 4,977.0 4,979.2
- --------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of accounting changes $ 2.75 $ 2.62 $ 2.19
Cumulative effect of accounting changes (0.03) -- (0.02)
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 2.72 $ 2.62 $ 2.17
==============================================================================================================
Adjusted weighted average common shares outstanding 5,147.0 5,122.2 5,127.8
==============================================================================================================
</Table>
See Notes to the Consolidated Financial Statements.
51
<Page>
<Table>
<Caption>
CONSOLIDATED STATEMENT OF FINANCIAL POSITION CITIGROUP INC. AND SUBSIDIARIES
DECEMBER 31,
-----------------------
IN MILLIONS OF DOLLARS 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (including segregated cash and other deposits) $ 18,515 $ 14,621
Deposits at interest with banks 19,216 16,164
Federal funds sold and securities borrowed or purchased under agreements to resell 134,809 105,877
Brokerage receivables 35,155 25,696
Trading account assets (including $36,351 and $30,502 pledged to creditors at
December 31, 2001 and December 31, 2000, respectively) 144,904 132,513
Investments (including $15,475 and $3,354 pledged to creditors at
December 31, 2001 and December 31, 2000, respectively) 160,837 120,122
Loans, net of unearned income
Consumer 244,159 228,879
Commercial 147,774 138,143
- -----------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 391,933 367,022
Allowance for credit losses (10,088) (8,961)
- -----------------------------------------------------------------------------------------------------------------------
Total loans, net 381,845 358,061
Reinsurance recoverables 12,373 10,716
Separate and variable accounts 25,569 24,947
Other assets 118,227 93,493
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,051,450 $ 902,210
=======================================================================================================================
LIABILITIES
Non-interest-bearing deposits in U.S. offices $ 23,054 $ 21,694
Interest-bearing deposits in U.S. offices 110,388 58,913
Non-interest-bearing deposits in offices outside the U.S. 18,779 13,811
Interest-bearing deposits in offices outside the U.S. 222,304 206,168
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 374,525 300,586
Federal funds purchased and securities loaned or sold under agreements to repurchase 153,511 110,625
Brokerage payables 32,891 15,882
Trading account liabilities 80,543 85,107
Contractholder funds and separate and variable accounts 48,932 44,884
Insurance policy and claims reserves 49,294 44,666
Investment banking and brokerage borrowings 14,804 18,227
Short-term borrowings 24,461 51,675
Long-term debt 121,631 111,778
Other liabilities 62,486 47,654
- -----------------------------------------------------------------------------------------------------------------------
Citigroup or subsidiary obligated mandatorily redeemable securities of
subsidiary trusts holding solely junior subordinated debt securities of -Parent 4,850 2,300
-Subsidiary 2,275 2,620
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 970,203 836,004
- -----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value 1,525 1,745
Common stock ($.01 par value; authorized shares: 15 billion),
issued shares: 2001--5,477,416,254 SHARES and 2000--5,351,143,583 shares 55 54
Additional paid-in capital 23,196 16,504
Retained earnings 69,803 58,862
Treasury stock, at cost: 2001--328,727,790 SHARES and 2000--328,921,189 shares (11,099) (10,213)
Accumulated other changes in equity from nonowner sources (844) 123
Unearned compensation (1,389) (869)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 81,247 66,206
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,051,450 $ 902,210
=======================================================================================================================
</Table>
See Notes to the Consolidated Financial Statements.
52
<Page>
<Table>
<Caption>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY CITIGROUP INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
AMOUNTS SHARES
---------------------------------- ---------------------------------------
IN MILLIONS OF DOLLARS, EXCEPT SHARES IN THOUSANDS 2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK AT AGGREGATE LIQUIDATION VALUE
Balance, beginning of year $ 1,745 $ 1,895 $ 2,274 6,233 6,831 8,327
Redemption or retirement of preferred stock (250) (150) (379) (500) (598) (1,496)
Other(1) 30 -- -- 117 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,525 1,745 1,895 5,850 6,233 6,831
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 16,558 15,361 14,210 5,351,144 5,350,977 5,338,223
Employee benefit plans 228 1,119 1,036 -- -- 381
Conversion of redeemable preferred stock to
common stock -- -- 140 -- -- 12,489
Other(2) 6,465 78 (25) 126,272 167 (116)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 23,251 16,558 15,361 5,477,416 5,351,144 5,350,977
- ----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 58,862 47,997 38,893
Net income 14,126 13,519 11,243
Common dividends (3,075) (2,535) (1,990)
Preferred dividends (110) (119) (149)
- ----------------------------------------------------------------------------------------
Balance, end of year 69,803 58,862 47,997
- ----------------------------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance, beginning of year (10,213) (7,662) (4,829) (328,922) (326,918) (288,935)
Issuance of shares pursuant to employee
benefit plans 1,980 1,465 1,116 59,681 83,601 78,469
Treasury stock acquired (3,045) (4,066) (3,954) (64,184) (87,149) (116,697)
Other 179 50 5 4,697 1,544 245
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (11,099) (10,213) (7,662) (328,728) (328,922) (326,918)
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES IN EQUITY FROM
NONOWNER SOURCES
Balance, beginning of year 123 1,155 984
Cumulative effect of accounting changes, net of tax(3) 118 -- --
Net change in unrealized gains and losses on investment
securities, net of tax (222) (674) 214
Net change for cash flows hedges, net of tax 171 -- --
Net change in foreign currency translation adjustment,
net of tax (1,034) (358) (43)
- ----------------------------------------------------------------------------------------
Balance, end of year (844) 123 1,155
- ----------------------------------------------------------------------------------------
UNEARNED COMPENSATION
Balance, beginning of year (869) (456) (497)
Net issuance of restricted stock (1,133) (1,055) (380)
Restricted stock amortization 613 642 421
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (1,389) (869) (456)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY AND
COMMON SHARES OUTSTANDING 79,722 64,461 56,395 5,148,688 5,022,222 5,024,059
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 81,247 $ 66,206 $ 58,290
==================================================================================================================================
SUMMARY OF CHANGES IN EQUITY FROM
NONOWNER SOURCES
Net income $ 14,126 $ 13,519 $ 11,243
Other changes in equity from nonowner
sources, net of tax (967) (1,032) 171
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CHANGES IN EQUITY FROM NONOWNER SOURCES $ 13,159 $ 12,487 $ 11,414
==================================================================================================================================
</Table>
(1) Represents shares previously held by affiliates that have subsequently been
traded on the open market to third parties.
(2) In 2001, primarily includes $6.5 billion for the issuance of shares to
effect the Banamex acquisition.
(3) Refers to the adoption of SFAS 133 and the adoption of EITF 99-20 in 2001,
resulting in increases to equity from nonowner sources of $25 million and
$93 million, respectively.
See Notes to the Consolidated Financial Statements.
53
<Page>
<Table>
<Caption>
CONSOLIDATED STATEMENT OF CASH FLOWS CITIGROUP INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
-----------------------------------
IN MILLIONS OF DOLLARS 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,126 $ 13,519 $ 11,243
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs and value of
insurance in force 2,062 1,676 1,613
Additions to deferred policy acquisition costs (2,592) (2,154) (1,961)
Depreciation and amortization 2,417 2,648 2,226
Deferred tax provision 1,014 1,537 598
Provision for credit losses 6,800 5,339 4,760
Change in trading account assets (12,391) (25,452) 9,928
Change in trading account liabilities (4,564) (5,393) (3,848)
Change in Federal funds sold and securities borrowed or purchased
under agreements to resell (28,932) 6,778 (17,824)
Change in Federal funds purchased and securities loaned or sold
under agreements to repurchase 39,834 18,034 11,566
Change in brokerage receivables net of brokerage payables 7,550 (1,033) (4,926)
Change in insurance policy and claims reserves 4,628 824 405
Net gains on sales of investments (578) (806) (541)
Venture capital activity 888 (1,044) (863)
Restructuring-related items and merger related costs 458 759 (53)
Cumulative effect of accounting changes, net of tax 158 -- 127
Other, net (4,300) (12,559) (1,227)
- ----------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 12,452 (10,846) (20)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,578 2,673 11,223
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in deposits at interest with banks (3,052) (3,898) (573)
Change in loans (34,787) (82,985) (120,970)
Proceeds from sales of loans 26,470 32,580 94,677
Purchases of investments (453,504) (103,461) (92,495)
Proceeds from sales of investments 403,078 67,561 49,678
Proceeds from maturities of investments 31,867 34,774 35,525
Other investments, primarily short-term, net (642) (3,086) 2,677
Capital expenditures on premises and equipment (1,774) (2,249) (1,750)
Proceeds from sales of premises and equipment, subsidiaries and
affiliates, and repossessed assets 1,802 1,232 3,437
Business acquisitions (7,067) (8,843) (6,321)
- ----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (37,609) (68,375) (36,115)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (3,185) (2,654) (2,139)
Issuance of common stock 875 958 758
Issuance of mandatorily redeemable securities of subsidiary trusts -- -- 600
Issuance of mandatorily redeemable securities of parent trusts 2,550 -- --
Redemption of mandatorily redeemable securities of subsidiary trusts (345) -- --
Redemption of preferred stock, net (220) (150) (388)
Treasury stock acquired (3,045) (4,066) (3,954)
Stock tendered for payment of withholding taxes (506) (593) (496)
Issuance of long-term debt 43,735 43,527 18,537
Payments and redemptions of long-term debt (34,795) (22,330) (18,835)
Change in deposits 39,398 39,013 32,160
Change in short-term borrowings including investment banking and
brokerage borrowings (32,091) 9,851 (580)
Contractholder fund deposits 8,363 6,077 5,933
Contractholder fund withdrawals (5,486) (4,758) (5,028)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,248 64,875 26,568
- ----------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND DUE FROM BANKS (323) (530) (98)
- ----------------------------------------------------------------------------------------------------------
Change in cash and due from banks 3,894 (1,357) 1,578
Cash and due from banks at beginning of period 14,621 15,978 14,400
- ----------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 18,515 $ 14,621 $ 15,978
==========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for income taxes $ 2,411 $ 5,357 $ 4,314
Cash paid during the period for interest 32,831 34,924 27,502
Non-cash investing activities--transfers to repossessed assets 445 820 862
Non-cash effects of accounting for the conversion of investments in
Nikko Securities Co., Ltd. -- 702 --
==========================================================================================================
</Table>
See Notes to the Consolidated Financial Statements.
54
<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 and its subsidiaries (the Company). Twenty-to-fifty
percent-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 twenty percent-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 their value that is other than temporary, such that recovery of
the carrying amount is deemed unlikely, are included in other income. On July 1,
2001 the Company adopted the provisions of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," (SFAS 141) and certain provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets (SFAS 142), as required for goodwill and intangible
assets resulting from business combinations consummated after June 30, 2001.
Goodwill related to purchase acquisitions completed prior to June 30, 2001 is
amortized on a straight-line basis over its estimated useful life through the
end of the year, while goodwill related to purchase acquisitions completed after
June 30, 2001, principally Banamex and EAB (as described in Note 2 to the
Consolidated Financial Statements), is not amortized. On, January 1, 2002,
Citigroup adopted the remaining provisions of SFAS 142 under which goodwill and
intangible assets deemed to have indefinite useful lives will no longer be
amortized, but will be subject to annual impairment tests. See Future
Application of Accounting Standards in Note 1 to the Consolidated Financial
Statements. Other intangible assets are amortized over their estimated useful
lives, subject to periodic review for impairment that is other than temporary.
Prior to the adoption of SFAS 141 and SFAS 142, if it was determined that
enterprise level goodwill was unlikely to be recovered, impairment was measured
on a discounted cash-flow basis. The Company recognizes a gain or loss in the
Consolidated Statement of Income when a subsidiary issues its own stock to a
third party at a price higher or lower than the Company's proportionate carrying
amount.
Certain amounts in prior years have been reclassified to conform to the
current year's presentation.
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.
USE OF ESTIMATES. 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 FLOWS. Cash equivalents are defined as those amounts included in cash and
due from banks. Cash flows from risk management activities are classified in the
same category as the related assets and liabilities.
INVESTMENTS. Investments include fixed maturity and equity securities. Fixed
maturities include 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. Declines in fair value that are determined to be other
than temporary are charged to earnings. 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 held by these
subsidiaries that are not publicly traded, estimates of fair value are made
based upon review of the investee's financial results, condition, and prospects,
together with comparisons to similar companies for which quoted market prices
are available.
55
<Page>
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. Interest received
or paid is recorded in interest income or interest expense.
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;
counterparty credit quality; 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; and derivatives transaction
maintenance costs during that period. 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, credit, and commodity swap agreements, options, caps and floors,
warrants, and financial and commodity futures and forward contracts. The fair
value of derivatives is determined based upon liquid market prices evidenced by
exchange traded prices, broker-dealer quotations or prices of other transactions
with similarly rated counterparties. The fair value includes an adjustment for
individual counterparty credit risk and other adjustments, as appropriate, to
reflect liquidity and ongoing servicing costs. The fair values (unrealized gains
and losses) associated with derivatives are reported net by counterparty,
provided a legally enforceable master netting 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. 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 TRANSACTIONS revenues and related
expenses are recognized in income on a trade date basis.
CONSUMER LOANS includes loans managed by the Global Consumer business, The
Citigroup Private Bank and consumer loans issued by Banamex in Mexico. Consumer
loans are generally written off not later than a predetermined number of days
past due primarily 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 Global Corporate and commercial
loans issued by Banamex in Mexico. 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 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.
56
<Page>
SECURITIZATIONS primarily include sales of credit card receivables, mortgages
and home equity loans.
Revenue on securitized credit card receivables is recorded monthly as
earned over the term of each securitization transaction, which may range up to
12 years. The revolving nature of the receivables sold and the monthly
recognition of revenue result in a pattern of recognition that is similar to the
pattern that would be experienced if the receivables had not been sold.
Net revenue on securitized credit card receivables is collected over the
life of each sale transaction. The net revenue is based upon the sum of finance
charges and fees received from cardholders and interchange revenue earned on
cardholder transactions, less the sum of the yield paid to investors, credit
losses, transaction costs, and a contractual servicing fee, which is also
retained by certain Citigroup subsidiaries as servicers.
The Company retains a seller's interest in the credit card receivables
transferred to the trust, which is not in securitized form. Accordingly, the
seller's interest is carried on a historical cost basis and classified as
consumer loans. Retained interests in securitized mortgage loans are classified
as investments.
Servicing rights retained in the securitization of mortgage and home equity
loans are measured by allocating the carrying value of the loans between the
assets sold and the interest retained, based on the relative fair value at the
date of the securitization. The fair market values are determined using either
financial models, quoted market prices or sales of similar assets. Gain or loss
on the sale of mortgage loans is recognized at the time of the securitizations.
Mortgage servicing assets are amortized over the expected life of the loan and
are evaluated periodically for impairment.
LOANS HELD FOR SALE. Credit card and other receivables and mortgage loans
originated for sale are classified as loans held for sale, which are accounted
for at the lower of cost or market value in other assets with net credit losses
charged to other income.
ALLOWANCE FOR CREDIT LOSSES represents management's estimate of probable losses
inherent in the portfolio. 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 including unfunded commitments. 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.
Larger-balance, non-homogenous exposures representing significant
individual credit exposures are evaluated based upon the borrower's 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. The allowance for credit losses attributed to these
loans is established via a process which begins with estimates of probable loss
inherent in the portfolio based upon various statistical analyses. These
analyses consider historical and projected default rates and loss severities;
internal risk ratings; geographic, industry, and other environmental factors;
and model imprecision. Management also considers overall portfolio indicators
including trends in internally risk-rated exposures, classified exposures,
cash-basis loans, and historical and forecasted write-offs; and a review of
industry, geographic, and portfolio concentrations, including current
developments within those segments. In addition, management considers the
current business strategy and credit process, including credit limit setting and
compliance, credit approvals, loan underwriting criteria, and loan workout
procedures. Within the allowance for credit losses, a valuation allowance is
maintained for larger-balance, non-homogenous loans that have been individually
determined to be impaired. This estimate considers all available evidence
including, as appropriate, the present value of the expected future cash flows
discounted at the loan's contractual effective rate, the secondary market value
of the loan and the fair value of collateral.
Each portfolio of smaller balance, homogenous loans, including consumer
mortgage, installment, revolving credit and most other consumer loans, is
collectively evaluated for impairment. The allowance for credit losses
attributed to these loans is established via a process that begins with
estimates of probable losses inherent in the portfolio, based upon various
statistical analyses. These include migration analysis, in which historical
delinquency and credit loss experience is applied to the current aging of the
portfolio, together with analyses that reflect current trends and conditions.
Management also considers overall portfolio indicators including historical
credit losses, delinquent, non-performing and classified loans, and trends in
volumes and terms of loans; an evaluation of overall credit quality and the
credit process, including lending policies and procedures; consideration of
economic, geographical, product, and other environmental factors; and model
imprecision.
This evaluation includes an assessment of the ability of borrowers with
foreign currency obligations to obtain the foreign currency necessary for
orderly debt servicing.
REPOSSESSED ASSETS. Upon repossession, loans are adjusted, if necessary, to the
estimated fair value of the underlying collateral and transferred to Repossessed
Assets, which is reported in other assets net of a valuation allowance for
selling costs and net declines in value as appropriate.
57
<Page>
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 as well as foreign exchange contracts. These end-user derivatives are
carried at fair value in other assets or other liabilities.
To qualify as a hedge, the hedge relationship is designated and formally
documented at inception detailing the particular risk management objective and
strategy for the hedge which includes the item and risk that is being hedged,
the derivative that is being used, as well as how effectiveness is being
assessed. A derivative must be highly effective in accomplishing the objective
of offsetting either changes in fair value or cash flows for the risk being
hedged. The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using quantitative measures of correlation.
If a hedge relationship is found to be ineffective, it no longer qualifies as a
hedge and any excess gains or losses attributable to such ineffectiveness, as
well as subsequent changes in fair value, are recognized in other income.
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
forecasted transaction may be an individual item or a portfolio of similar
items.
For fair value hedges, in which derivatives hedge the fair value of assets,
liabilities or firm commitments, changes in the fair value of derivatives are
reflected in other income, together with changes in the fair value of the
related hedged item. The net amount, representing hedge ineffectiveness, is
reflected in current earnings. Citigroup's fair value hedges are primarily the
hedges of fixed-rate long-term debt, loans and available for sale securities.
For cash flow hedges, in which derivatives hedge the variability of cash
flows related to floating rate assets, liabilities or forecasted transactions,
the accounting treatment depends on the effectiveness of the hedge. To the
extent these derivatives are effective in offsetting the variability of the
hedged cash flows, changes in the derivatives' fair value will not be included
in current earnings but are reported as other changes in stockholders' equity
from nonowner sources. These changes in fair value will be included in earnings
of future periods when earnings are also affected by the variability of the
hedged cash flows. To the extent these derivatives are not effective, changes in
their fair values are immediately included in other income. Citigroup's cash
flow hedges primarily include hedges of floating rate credit card receivables
and loans, rollovers of commercial paper and foreign currency denominated
funding. Cash flow hedges also include hedges of certain forecasted transactions
up to a maximum tenor of 30 years, although a substantial majority of the
maturities is under five years.
For net investment hedges, in which derivatives hedge the foreign currency
exposure of a net investment in a foreign operation, the accounting treatment
will similarly depend on the effectiveness of the hedge. The effective portion
of the change in fair value of the derivative, including any forward premium or
discount, is reflected in other changes in stockholders' equity from nonowner
sources as part of the foreign currency translation adjustment.
Non-trading derivatives that are either hedging instruments that are
carried at fair value or do not qualify as hedges are also carried at fair value
with changes in value included either as an element of the yield or return on
the hedged item or in other income.
For those hedge relationships that are terminated, hedge designations that
are removed, or forecasted transactions that are no longer expected to occur,
the hedge accounting treatment described in the paragraphs above is no longer
applied. The end-user derivative is terminated or transferred to the trading
account. For fair value hedges, any changes to the hedged item remain as part of
the basis of the asset or liability and are ultimately reflected as an element
of the yield. For cash flow hedges, any changes in fair value of the end-user
derivative remain in other changes in stockholders' equity from nonowner sources
and are included in earnings of future periods when earnings are also affected
by the variability of the hedged cash flow. If the hedged relationship was
discontinued or a forecasted transaction is not expected to occur when
scheduled, any changes in fair value of the end-user derivative are immediately
reflected in other income.
Prior to the adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), on January 1, 2001 (see
Accounting Changes below), end-user derivatives designated in qualifying hedges
were accounted for consistent with the risk management strategy as follows.
Amounts payable and receivable on interest rate swaps and options were accrued
according to the contractual terms and included 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 were deferred until the contract is closed;
accumulated deferred amounts on futures contracts and amounts paid or received
at settlement of forward contracts were accounted for as elements of the
carrying value of the associated instrument, affecting the resulting yield.
End-user contracts related to instruments carried at fair value were 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 were reported in stockholders'
equity, net of tax.
If an end-user derivative contract was terminated, any resulting gain or
loss was deferred and amortized over the original term of the agreement provided
that the effectiveness criteria had been met. If the underlying designated items
were no longer held, or if an anticipated transaction was no longer likely to
occur, any previously unrecognized gain or loss on the derivative contract was
recognized in earnings and the contract was accounted for at fair value with
subsequent changes recognized in earnings.
58
<Page>
Foreign exchange contracts which qualified as hedges of foreign currency
exposures, including net capital investments outside the U.S., were revalued at
the spot rate with any forward premium or discount recognized over the life of
the contract in interest revenue or interest expense. Gains and losses on
foreign exchange contracts which qualified as a hedge of a firm commitment were
deferred and recognized as part of the measurement of the related transaction,
unless deferral of a loss would have led 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, including estimated ultimate premiums on retrospectively
rated policies, and credit life and accident and health policies.
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
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
insurance 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 the 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 rate assumptions (ranging from 2.5% to 8.1%)
applicable to these coverages, including 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 performs a
continuing review of its overall position, its reserving techniques and its
reinsurance. The reserves are also reviewed periodically by a qualified actuary
employed by the Company. 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 1.9% to 14.0%) 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.
59
<Page>
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
granted in prior periods was recorded over the periods to the 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 wholly owned 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. Associates
filed separate consolidated Federal income tax returns prior to the merger.
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, excluding restricted stock. 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 weighted average dilutive effect of the Company's
convertible securities, common stock warrants, stock options and the shares
issued under the Company's Capital Accumulation Plan and other restricted stock
plans.
ACCOUNTING CHANGES
ADOPTION OF EITF 99-20. During the second quarter of 2001, the Company adopted
Emerging Issues Task Force (EITF) Issue No. 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets" (EITF 99-20). EITF 99-20 provides new guidance
regarding income recognition and identification and determination of impairment
on certain asset-backed securities. The initial adoption resulted in a
cumulative adjustment of $116 million after-tax, recorded as a charge to
earnings, and an increase of $93 million included in other changes in
stockholders' equity from nonowner sources.
DERIVATIVES AND HEDGE ACCOUNTING. On January 1, 2001, Citigroup adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." These new
rules changed the accounting treatment of derivative contracts (including
foreign exchange contracts) that are employed to manage risk outside of
Citigroup's trading activities, as well as certain derivative instruments
embedded in other contracts. SFAS 133 requires that all derivatives be recorded
on the balance sheet at their fair value. The treatment of changes in the fair
value of derivatives depends on the character of the transaction, including
whether it has been designated and qualifies as part of a hedging relationship.
The majority of Citigroup's derivatives are entered into for trading purposes
and were not impacted by the adoption of SFAS 133. The cumulative effect of
adopting SFAS 133 at January 1, 2001 was an after-tax charge of $42 million
included in net income and an increase of $25 million included in other changes
in stockholders' equity from nonowner sources.
BUSINESS COMBINATIONS. Effective July 1, 2001, the Company adopted the
provisions of SFAS No. 141, "Business Combinations," and certain provisions of
SFAS No. 142, "Goodwill and Other Intangible Assets" as required for goodwill
and intangible assets resulting from business combinations consummated after
June 30, 2001. The new rules require that all business combinations initiated
after June 30, 2001 be accounted for under the purchase method. The
nonamortization provisions of the new rules affecting goodwill and intangible
assets deemed to have indefinite lives are effective for all purchase business
combinations completed after June 30, 2001.
INSURANCE-RELATED ASSESSMENTS. During the first quarter of 1999, the Company
adopted Statement of Position ("SOP") 97.3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." 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. The initial adoption resulted in a cumulative
adjustment recorded as a charge to earnings of $135 million after-tax and
minority interest.
DEPOSIT ACCOUNTING. During the first quarter of 1999, the Company adopted SOP
98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk." 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. The initial adoption
resulted in a cumulative adjustment recorded as a credit to earnings of $23
million after-tax and minority interest.
START-UP COSTS. During the first quarter of 1999, the Company adopted SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of
start up activities and organization costs to be expensed as incurred. The
initial adoption resulted in a cumulative adjustment recorded as a charge to
earnings of $15 million after-tax.
60
<Page>
FUTURE APPLICATION OF ACCOUNTING STANDARDS
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, Citigroup adopted the remaining provisions of SFAS 142, when
the rules became effective for calendar year companies. Under the new rules,
effective January 1, 2002, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives.
Based on current levels of goodwill and an evaluation of the Company's
intangible assets, which determined that certain intangible assets should be
reclassified as goodwill and identified as other intangible assets that have
indefinite lives, the nonamortization provisions of the new standards will
reduce other expense by approximately $570 million and increase net income by
approximately $450 million in 2002.
During 2002, the Company will perform the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002. It is not
expected that the adoption of the remaining provisions of SFAS 142 will have a
material effect on the financial statements as a result of these impairment
tests.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125" (SFAS 140). In July 2001, FASB issued Technical
Bulletin No. 01-1, "Effective Date for Certain Financial Institutions of Certain
Provisions of Statement 140 Related to the Isolation of Transferred Assets."
Certain provisions of SFAS 140 require that the structure for transfers of
financial assets to certain securitization vehicles be modified to comply with
revised isolation guidance for institutions subject to receivership by the
Federal Deposit Insurance Corporation. These provisions are effective for
transfers taking place after December 31, 2001, with an additional transition
period ending no later than September 30, 2006 for transfers to certain master
trusts. It is not expected that these provisions will materially affect the
financial statements. SAFS 140 also provides revised guidance for an entity to
be considered a qualifying special purpose entity.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
On January 1, 2002, Citigroup adopted No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144), when the rule became effective for
calendar year companies. SFAS 144 establishes additional criteria as compared
to existing generally accepted accounting principles to determine when a
long-lived asset is held for sale. It also broadens the definition of
"discontinued operations," but does not allow for the accrual of future
operating losses, as was previously permitted.
The provisions of the new standard are generally to be applied
prospectively. The provisions of SFAS 144 will affect the timing of discontinued
operations treatment for the planned initial public offering and tax-free
distribution of Travelers Property Casualty Corp.
2. BUSINESS DEVELOPMENTS
PLANNED INITIAL PUBLIC OFFERING AND TAX-FREE DISTRIBUTION OF TRAVELERS
PROPERTY CASUALTY CORP.
Citigroup announced that its wholly-owned subsidiary, Travelers Property
Casualty Corp. (TPC), intends to sell a minority interest in TPC in an
initial public offering and Citigroup intends to make a tax-free distribution
to its stockholders of such amount of the remainder of its interest in TPC so
that it will hold approximately 9.9% of the outstanding voting securities of
TPC following the initial public offering and tax-free distribution.
The distribution is subject to various regulatory approvals as well as a
private letter ruling from the Internal Revenue Service that the distribution
will be tax-free to Citigroup and its stockholders. Citigroup has no obligation
to consummate the distribution, whether or not these conditions are satisfied.
ACQUISITION OF BANAMEX
On August 6, 2001, Citicorp completed its acquisition of 99.86% of the issued
and outstanding ordinary shares of Grupo Financiero Banamex-Accival (Banamex), a
leading Mexican financial institution, for approximately $12.5 billion in cash
and Citigroup stock. Citicorp completed the acquisition by settling transactions
that were conducted on the Mexican Stock Exchange. On September 24, 2001,
Citicorp became the holder of 100% of the issued and outstanding ordinary shares
of Banamex following a share redemption by Banamex. Banamex's and Citicorp's
banking operations in Mexico have been integrated and conduct business under the
"Banamex" brand name.
ACQUISITION OF EAB
On July 17, 2001, Citibank completed its acquisition of European American Bank
(EAB), a New York state-chartered bank, for $1.6 billion plus the assumption of
$350 million in EAB preferred stock.
ACQUISITION OF ASSOCIATES
On November 30, 2000, Citigroup Inc., completed its acquisition of Associates
First Capital Corporation (Associates). The acquisition was consummated
through a merger of a subsidiary of Citigroup with and into Associates (with
Associates as the surviving corporation) pursuant to which each share of
Associates common stock became a right to receive .7334 of a share of
Citigroup Inc. common stock (534.5 million shares). Subsequent to the
acquisition, Associates was contributed to and became a wholly-owned
subsidiary of Citicorp and Citicorp issued a full and unconditional guarantee
of the outstanding long-term debt securities and commercial paper of
Associates. Associates' debt securities and commercial paper will no longer
be separately rated. The acquisition was accounted for as a pooling of
interests.
ACQUISITION OF TRAVELERS PROPERTY CASUALTY CORP.
MINORITY INTEREST
During April 2000, a subsidiary of the Company completed a cash tender offer to
purchase all of the outstanding shares of Travelers Property Casualty Corp. not
previously owned.
61
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3. BUSINESS SEGMENT INFORMATION
Citigroup is a diversified bank-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, Global Investment Management and Private Banking, and Investment
Activities. These segments reflect the characteristics of its products and
services and the clients to which those products or services are delivered.
The Global Consumer segment includes a global, full-service consumer
franchise encompassing, among other things, branch and electronic banking,
consumer lending services, investment services, credit and charge card
services, and auto and homeowners insurance. The businesses included in the
Company's Global Corporate segment provide corporations, governments,
institutions, and investors in over 100 countries and territories with a
broad range of financial products and services, including investment advice,
financial planning and retail brokerage services, banking and financial
services, and commercial insurance products. The Global Investment Management
and Private Banking segment offers a broad range of life insurance, annuity
and asset management products and services from global investment centers
around the world, including individual annuity, group annuity, individual
life insurance products, COLI products, mutual funds, closed-end funds,
managed accounts, unit investment trusts, variable annuities, pension
administration, and personalized wealth management services distributed to
institutional, high net worth, and retail clients. The Investment Activities
segment includes the Company's venture capital activities, realized
investment gains and losses from certain insurance-related investments,
results from certain proprietary 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, corporate staff and other corporate expenses, certain intersegment
eliminations, and the remainder of Internet-related development activities
not allocated to the individual businesses. The accounting policies of these
reportable segments are the same as those disclosed in Note 1 to the
Consolidated Financial Statements.
The following table presents certain information regarding these segments:
<Table>
<Caption>
TOTAL REVENUES, NET PROVISION FOR
OF INTEREST EXPENSE(1) INCOME TAXES
IN MILLIONS OF DOLLARS, EXCEPT --------------------------------- ---------------------------------
IDENTIFIABLE ASSETS IN BILLIONS 2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Consumer $ 37,697 $ 32,999 $ 29,816 $ 4,023 $ 3,315 $ 2,911
Global Corporate 34,297 33,479 28,688 2,929 3,234 2,902
Global Investment Management
and Private Banking 7,553 7,145 6,099 817 786 702
Investment Activities 907 2,309 1,089 264 805 356
Corporate/Other (397) (744) 30 (507) (615) (341)
- ---------------------------------------------------------------------------------------------------------------
Total $ 80,057 $ 75,188 $ 65,722 $ 7,526 $ 7,525 $ 6,530
===============================================================================================================
<Caption>
IDENTIFIABLE
NET INCOME (LOSS)(2)(3)(4) ASSETS AT YEAR-END
IN MILLIONS OF DOLLARS, EXCEPT --------------------------------- ---------------------------------
IDENTIFIABLE ASSETS IN BILLIONS 2001 2000 1999 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Consumer $ 7,222 $ 5,860 $ 4,897 $ 357 $ 275 $ 235
Global Corporate 5,707 6,020 5,259 572 506 449
Global Investment Management
and Private Banking 1,528 1,434 1,221 99 93 83
Investment Activities 530 1,383 650 9 11 11
Corporate/Other (861) (1,178) (784) 14 17 18
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 14,126 $ 13,519 $ 11,243 $ 1,051 $ 902 $ 796
===============================================================================================================
</Table>
(1) Includes total revenues, net of interest expense in the United States of
$55.4 billion, $53.3 billion, and $47.5 billion in 2001, 2000, and 1999,
respectively. Includes total revenues, net of interest expense in Mexico of
$2.1 billion, $603 million, and $531 million in 2001, 2000, and 1999,
respectively. There were no other individual foreign countries that were
material to total revenues, net of interest expense.
(2) For 2001, Global Consumer, Global Corporate, Global Investment Management
and Private Banking, and Corporate/Other results reflect after-tax
restructuring-related charges (credits) of $144 million, $137 million, $7
million, and ($3) million, respectively. For 2000, Global Consumer, Global
Corporate, Global Investment Management and Private Banking, and
Corporate/Other results reflect after-tax restructuring-related charges and
merger-related costs of $144 million, $146 million, $11 million, and $320
million, respectively. The 2000 results also reflect after-tax Housing
Finance unit charges in Corporate/Other. For 1999, Global Consumer, Global
Corporate, Global Investment Management and Private Banking, and
Corporate/Other results reflect after-tax restructuring-related charges
(credits) of $78 million, ($121) million, ($2) million, and $20 million,
respectively.
(3) Includes provision for benefits, claims and credit losses in the Global
Consumer results of $9.4 billion, $7.9 billion, and $7.3 billion, in the
Global Corporate results of $6.5 billion, $5.2 billion, and $4.3 billion, in
the Global Investment Management and Private Banking results of $2.6
billion, $2.4 billion, and $2.0 billion, and in the Corporate/Other results
of $1 million, $36 million, and $208 million for 2001, 2000, and 1999,
respectively. Includes provision for credit losses in the Investment
Activities results of $7 million in 2000.
(4) For 2001, Corporate/Other includes after-tax charges of $42 million and
$116 million for the cumulative effect of accounting changes related to the
implementation of SFAS 133 and EITF 99 20, respectively. For 1999,
Corporate/Other includes after-tax charges (credits) of $135 million, ($23)
million, and $15 million for the cumulative effect of accounting changes
related to the implementation of SOP 97-3, SOP 98-7, and SOP 98-5,
respectively. See Note 1 to the Consolidated Financial Statements.
62
<Page>
4. INVESTMENTS
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT YEAR-END 2001 2000
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities, primarily available for sale at fair value $ 139,344 $ 99,484
Equity securities, primarily at fair value 7,577 6,652
Venture capital, at fair value 4,316 5,204
Short-term and other 9,600 8,782
- -------------------------------------------------------------------------------------------
$ 160,837 $ 120,122
===========================================================================================
</Table>
The amortized cost and fair value of investments in fixed maturities and equity
securities at December 31, were as follows:
<Table>
<Caption>
2001
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
IN MILLIONS OF DOLLARS AT YEAR-END COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIXED MATURITY SECURITIES HELD TO MATURITY,
PRINCIPALLY MORTGAGE-BACKED
SECURITIES(1) $ 26 $ -- $ -- $ 26
- ------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES AVAILABLE FOR
SALE
Mortgage-backed securities, principally
obligations of U.S. Federal agencies $ 28,614 $ 438 $ 250 $ 28,802
U.S. Treasury and Federal agencies 6,136 62 85 6,113
State and municipal 16,712 441 152 17,001
Foreign government(2) 44,942 266 79 45,129
U.S. corporate 30,097 843 591 30,349
Other debt securities 11,516 554 146 11,924
- ------------------------------------------------------------------------------------------
138,017 2,604 1,303 139,318
- ------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 138,043 $ 2,604 $ 1,303 $ 139,344
==========================================================================================
EQUITY SECURITIES(3) $ 7,401 $ 400 $ 224 $ 7,577
==========================================================================================
<Caption>
2000
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
IN MILLIONS OF DOLLARS AT YEAR-END cost gains losses value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIXED MATURITY SECURITIES HELD TO MATURITY,
PRINCIPALLY MORTGAGE-BACKED
SECURITIES(1) $ 28 $ -- $ -- $ 28
- ------------------------------------------------------------------------------------------
FIXED MATURITY SECURITIES AVAILABLE FOR
SALE
Mortgage-backed securities, principally
obligations of U.S. Federal agencies $ 16,196 $ 329 $ 211 $ 16,314
U.S. Treasury and Federal agencies 5,680 171 15 5,836
State and municipal 15,314 730 141 15,903
Foreign government(2) 25,934 148 154 25,928
U.S. corporate 25,143 589 547 25,185
Other debt securities 9,633 763 106 10,290
- ------------------------------------------------------------------------------------------
97,900 2,730 1,174 99,456
- ------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 97,928 $ 2,730 $ 1,174 $ 99,484
==========================================================================================
EQUITY SECURITIES(3) $ 6,757 $ 340 $ 445 $ 6,652
==========================================================================================
</Table>
(1) Recorded or amortized cost.
(2) Increase primarily relates to inclusion of Banamex portfolio of Mexican
government securities.
(3) Includes non-marketable equity securities carried at cost, which are
reported in both the amortized cost and fair value columns.
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:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Taxable interest $ 5,687 $ 6,743 $ 6,916
Interest exempt from U.S. Federal
income tax 827 762 688
Dividends 263 393 306
- ---------------------------------------------------------------------
Gross realized investment gains(1) $ 2,070 $ 2,008 $ 1,273
Gross realized investment losses(1) 1,492 1,202 732
- ---------------------------------------------------------------------
Net realized and unrealized
ventures capital gains which $ 393 $ 1,850 $ 816
included:
Gross unrealized gains 782 1,752 999
Gross unrealized losses 613 618 587
- ---------------------------------------------------------------------
</Table>
(1) Includes net realized gains related to insurance subsidiaries' sale of OREO
and mortgage loans of $8 million, $74 million, and $215 million in 2001,
2000, and 1999, respectively.
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, 2001:
<Table>
<Caption>
AMORTIZED FAIR
IN MILLIONS OF DOLLARS COST VALUE YIELD
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY AND FEDERAL AGENCIES(1)
Due within 1 year $ 1,422 $ 1,426 2.81%
After 1 but within 5 years 2,038 2,086 4.42
After 5 but within 10 years 1,651 1,679 5.69
After 10 years(2) 24,255 24,266 6.36
- --------------------------------------------------------------------------------
TOTAL $ 29,366 $ 29,457 6.02%
================================================================================
STATE AND MUNICIPAL
Due within 1 year $ 128 $ 130 5.47%
After 1 but within 5 years 995 1,035 5.43
After 5 but within 10 years 3,431 3,519 5.07
After 10 years(2) 12,158 12,317 5.44
- --------------------------------------------------------------------------------
TOTAL $ 16,712 $ 17,001 5.36%
================================================================================
ALL OTHER(3)
Due within 1 year $ 18,628 $ 18,775 5.78%
After 1 but within 5 years 36,529 37,118 7.17
After 5 but within 10 years 17,669 17,847 7.33
After 10 years(2) 19,139 19,146 8.27
- --------------------------------------------------------------------------------
TOTAL $ 91,965 $ 92,886 7.15%
================================================================================
</Table>
(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.
63
<Page>
5. 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:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Federal funds sold and resale agreements $ 89,472 $ 69,087
Deposits paid for securities borrowed 45,337 36,790
- --------------------------------------------------------------------------------
$ 134,809 $ 105,877
================================================================================
</Table>
Federal funds purchased and securities loaned or sold under agreements to
repurchase, at their respective carrying values, consisted of the following at
December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and repurchase agreements $ 137,649 $ 94,397
Deposits received for securities loaned 15,862 16,228
- --------------------------------------------------------------------------------
$ 153,511 $ 110,625
================================================================================
</Table>
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 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 $141.2 billion and $118.9 billion at
December 31, 2001 and 2000, 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
FAS Interpretation 39, "Offsetting of Amounts Related to Certain Contracts" (FIN
39).
6. 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.
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:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Receivables from customers $ 19,660 $ 23,142
Receivables from brokers, dealers, and clearing
organizations 15,495 2,554
- --------------------------------------------------------------------------------
TOTAL BROKERAGE RECEIVABLES $ 35,155 $ 25,696
================================================================================
Payables to customers $ 16,876 $ 13,564
Payables to brokers, dealers, and clearing
organizations 16,015 2,318
- --------------------------------------------------------------------------------
TOTAL BROKERAGE PAYABLES $ 32,891 $ 15,882
================================================================================
</Table>
7. TRADING ACCOUNT ASSETS AND LIABILITIES
Trading account assets and liabilities, at market value, consisted of the
following at December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
TRADING ACCOUNT ASSETS
U.S. Treasury and Federal agency securities $ 46,218 $ 30,939
State and municipal securities 4,517 2,439
Foreign government securities 12,450 13,308
Corporate and other debt securities 21,318 17,046
Derivatives(1) 29,762 35,177
Equity securities 15,619 17,174
Mortgage loans and collateralized mortgage securities 6,869 6,024
Other 8,151 10,406
- --------------------------------------------------------------------------------
$ 144,904 $ 132,513
================================================================================
TRADING ACCOUNT LIABILITIES
Securities sold, not yet purchased $ 51,815 $ 48,489
Derivatives(1) 28,728 36,618
- --------------------------------------------------------------------------------
$ 80,543 $ 85,107
================================================================================
</Table>
(1) Net of master netting agreements.
64
<Page>
8. TRADING RELATED REVENUE
Trading related revenue consists of principal transactions revenues and net
interest revenue associated with trading activities. Principal transactions
revenues consist of realized and unrealized gains and losses from trading
activities. The following table presents trading related revenue for the years
ended December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL CORPORATE
Fixed income(1) $ 4,007 $ 2,531 $ 2,306
Equities(2) 882 1,720 1,273
Foreign exchange(3) 1,464 1,103 1,115
All other(4) 197 308 499
- ----------------------------------------------------------------------------
Total Global Corporate 6,550 5,662 5,193
GLOBAL CONSUMER AND OTHER 826 782 584
- ----------------------------------------------------------------------------
TOTAL TRADING RELATED REVENUE $ 7,376 $ 6,444 $ 5,777
============================================================================
</Table>
(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, 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 foreign exchange spot, forward, option and swap
contracts.
(4) Primarily includes revenues from the results of Phibro Inc. (Phibro), which
trades crude oil, refined oil products, natural gas, electricity, metals,
and other commodities. Also includes revenues related to arbitrage
strategies.
The following table reconciles principal transactions revenues on the
Consolidated Statement of Income to trading related revenue for the years ended
December 31:
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Principal transactions $ 5,544 $ 5,981 $ 5,160
Net interest revenue 1,832 463 617
- -----------------------------------------------------------------------------
TOTAL TRADING RELATED REVENUE $ 7,376 $ 6,444 $ 5,777
=============================================================================
</Table>
9. LOANS
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT YEAR-END 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER
In U.S. offices
Mortgage and real estate(1)(2) $ 80,099 $ 73,166
Installment, revolving credit, and other 84,367 78,017
- --------------------------------------------------------------------------------
164,466 151,183
- --------------------------------------------------------------------------------
In offices outside the U.S.
Mortgage and real estate(1)(3) 27,703 24,988
Installment, revolving credit, and other 54,276 55,515
Lease financing 391 427
- --------------------------------------------------------------------------------
82,370 80,930
- --------------------------------------------------------------------------------
246,836 232,113
Unearned income (2,677) (3,234)
- --------------------------------------------------------------------------------
CONSUMER LOANS, NET OF UNEARNED INCOME $ 244,159 $ 228,879
================================================================================
COMMERCIAL
In U.S. offices
Commercial and industrial(4) $ 32,431 $ 37,220
Lease financing 18,518 14,864
Mortgage and real estate(1) 2,784 3,490
- --------------------------------------------------------------------------------
53,733 55,574
- --------------------------------------------------------------------------------
In offices outside the U.S.
Commercial and industrial(4) 76,459 69,111
Mortgage and real estate(1) 2,859 1,720
Loans to financial institutions 10,163 9,559
Lease financing 3,788 3,689
Governments and official institutions 4,033 1,952
- --------------------------------------------------------------------------------
97,302 86,031
- --------------------------------------------------------------------------------
151,035 141,605
Unearned income (3,261) (3,462)
- --------------------------------------------------------------------------------
COMMERCIAL LOANS, NET OF UNEARNED INCOME $ 147,774 $ 138,143
================================================================================
</Table>
(1) Loans secured primarily by real estate.
(2) Includes $4.9 billion in 2001 and $3.7 billion in 2000 of commercial real
estate loans related to community banking and private banking activities.
(3) Includes $2.5 billion in 2001 and $2.7 billion in 2000 of loans secured by
commercial real estate.
(4) Includes loans not otherwise separately categorized.
65
<Page>
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.
Valuation allowances for these loans are estimated considering all available
evidence including, as appropriate, the present value of the expected future
cash flows discounted at the loan's contractual effective rate, the secondary
market value of the loan and fair value of collateral. The following table
presents information about impaired loans.
<Table>
<Caption>
IN MILLIONS OF DOLLARS AT YEAR-END 2001 2000 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired commercial loans $ 3,572 $ 1,847 $ 1,551
Other impaired loans(1) 339 100 185
- ----------------------------------------------------------------------------------------------
Total impaired loans(2) $ 3,911 $ 1,947 $ 1,736
==============================================================================================
Impaired loans with valuation allowances $ 3,500 $ 1,583 $ 1,381
Total valuation allowances(3) 915 480 411
==============================================================================================
During the year:
Average balance of impaired loans $ 3,098 $ 1,858 $ 1,898
Interest income recognized on impaired loans 98 97 85
==============================================================================================
</Table>
(1) Primarily commercial real estate loans related to community and private
banking activities.
(2) At year-end 2001, approximately 17% of these loans were measured for
impairment using the fair value of the collateral, compared with
approximately 25% at year-end 2000.
(3) Included in the allowance for credit losses.
For the loan portfolios where the Company continues to manage loans
after they have been securitized, the following table presents the total loan
amounts managed, the portion of those portfolios securitized, and
delinquencies (loans which are 90 days or more past due) at December 31, 2001
and 2000, and credit losses, net of recoveries, for the years ended December
31, 2001 and 2000:
<Table>
<Caption>
2001 2000
- ----------------------------------------------------------------------------------------------
HOME EQUITY Home equity
CREDIT CARD AND AUTO Credit card and auto
MANAGED LOANS RECEIVABLES LOANS receivables loans
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IN BILLIONS OF DOLLARS
Principal amounts, at year-end:
Total managed $ 108.7 $ 27.4 $ 104.0 $ 33.0
Securitized amounts (67.1) (1.3) (57.0) (3.6)
- -----------------------------------------------------------------------------------------------
ON-BALANCE SHEET(1) $ 41.6 $ 26.1 $ 47.0 $ 29.4
- -----------------------------------------------------------------------------------------------
IN MILLIONS OF DOLLARS
Delinquencies, at year-end:
Total managed $ 2,141 $ 1,174 $ 1,503 $ 794
Securitized amounts (1,268) (14) (925) (87)
- -----------------------------------------------------------------------------------------------
ON-BALANCE SHEET(1) $ 873 $ 1,160 $ 578 $ 707
- -----------------------------------------------------------------------------------------------
IN MILLIONS OF DOLLARS
Credit losses, net of recoveries,
for the year ended December 31:
Total managed $ 5,603 $ 720 $ 3,986 $ 619
Securitized amounts (3,140) (111) (2,216) (12)
- -----------------------------------------------------------------------------------------------
ON-BALANCE SHEET(1) $ 2,463 $ 609 $ 1,770 $ 607
===============================================================================================
</Table>
(1) Includes loans held for sale.
10. ALLOWANCE FOR CREDIT LOSSES
<Table>
<Caption>
IN MILLIONS OF DOLLARS 2001 2000 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
AT BEGINNING OF YEAR $ 8,961 $ 8,853 $ 8,596
Additions
Consumer provision for credit losses 5,316 4,345 4,169
Commercial provision for credit losses 1,484 994 591
- ----------------------------------------------------------------------------------------------
TOTAL PROVISION FOR CREDIT LOSSES 6,800 5,339 4,760
- ----------------------------------------------------------------------------------------------
Deductions
Consumer credit losses 6,233 5,352 4,862
Consumer credit recoveries (853) (929) (769)
- ----------------------------------------------------------------------------------------------
NET CONSUMER CREDIT LOSSES 5,380 4,423 4,093
- ----------------------------------------------------------------------------------------------
Commercial credit losses 2,055 906 746
Commercial credit recoveries(1) (407) (135) (156)
- ----------------------------------------------------------------------------------------------
NET COMMERCIAL CREDIT LOSSES 1,648 771 590
- ----------------------------------------------------------------------------------------------
Other net(2) 1,355 (37) 180
- ----------------------------------------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES AT END OF YEAR $ 10,088 $ 8,961 $ 8,853
==============================================================================================
</Table>
(1) Includes amounts received under credit default swaps purchased from third
parties.
(2) Includes the addition of credit loss reserves related to the acquisitions of
Banamex and EAB in 2001. Also includes the addition of allowance for credit
losses related to other acquisitions and the impact of foreign currency
translation effects.
11. SECURITIZATION ACTIVITY
Citigroup and its subsidiaries securitize primarily credit card receivables,
mortgages, home equity loans and auto loans.
After securitizations of credit card receivables, the Company continues to
maintain credit card customer account relationships and provides servicing for
receivables transferred to the trust. The Company also provides credit
enhancement to the trust using cash collateral accounts. As specified in certain
of the sale agreements, the net revenue collected each month is accumulated up
to a predetermined maximum amount, and is available over the remaining term of
that transaction to make payments of yield, fees, and transaction costs in the
event that net cash flows from the receivables are not sufficient. When the
predetermined amount is reached net revenue is passed directly to the Citigroup
subsidiary that sold the receivables.
The Company provides a wide range of mortgage and home equity products to a
diverse customer base. In connection with these loans, the servicing rights
entitle the Company to a future stream of cash flows based on the outstanding
principal balances of the loans and the contractual servicing fee. Failure to
service the loans in accordance with contractual requirements may lead to a
termination of the servicing rights and the loss of future servicing fees. In
non-recourse servicing, the principal credit risk to the servicer is the cost
of temporary advances of funds. In recourse servicing, the servicer agrees to
share credit risk with the owner of the mortgage loans such as FNMA or FHLMC
or with a private investor, insurer or guarantor. Losses on recourse servicing
occur primarily when foreclosure sale proceeds of the property underlying a
defaulted mortgage or home equity loan are less than the outstanding principal
balance and accrued interest of such mortgage loan and the cost of holding and
disposing of the underlying property.
66
<Page>
The following table summarizes certain cash flows received from and paid to
securitization trusts during the year-ended December 31:
<Table>
<Caption>
2001 2000
- -----------------------------------------------------------------------------------------
MORTGAGES(1) Mortgages(1)
AND AUTO and auto
IN MILLIONS OF DOLLARS CREDIT CARDS LOANS Credit cards