-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IJ3ykQqJoBlwEiGGQ8L6oO6nJkILHZpBYYe6hQpIKh/77IHFQ81gfel2Na5NW7Gu zp1r3F6ch6vbi913y6u8UA== 0000950123-05-006310.txt : 20050513 0000950123-05-006310.hdr.sgml : 20050513 20050513161426 ACCESSION NUMBER: 0000950123-05-006310 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050513 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050513 DATE AS OF CHANGE: 20050513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METLIFE INC CENTRAL INDEX KEY: 0001099219 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 134075851 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15787 FILM NUMBER: 05829474 BUSINESS ADDRESS: STREET 1: 200 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10166 BUSINESS PHONE: 2125782211 MAIL ADDRESS: STREET 1: 200 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10166 8-K 1 y07921e8vk.txt FORM 8-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 13, 2005 METLIFE, INC. (Exact name of registrant as specified in charter) DELAWARE 1-15787 13-4075851 (State or other jurisdiction of (Commission file number) (IRS Employer incorporation) Identification No.)
--------------------- 200 PARK AVENUE NEW YORK, NEW YORK 10166-0188 (Address of principal executive offices) (Zip Code)
(212) 578-2211 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE N/A (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 8.01. OTHER EVENTS On January 31, 2005, MetLife, Inc. ("MetLife") announced that it plans to acquire Travelers Insurance Company, excluding certain assets, most significantly, Primerica, from Citigroup Inc., and substantially all Citigroup's international insurance businesses ("Citigroup Life Insurance and Annuities"). For additional information concerning the proposed acquisition transaction, see MetLife's Form 8-K filed on January 31, 2005 and its Form 8-K filed on February 4, 2005. The unaudited pro forma condensed consolidated financial information filed herewith as Exhibit 99.1, and incorporated herein by reference, gives effect to the proposed acquisition transaction as if it had occurred as of January 1, 2004 for purposes of the unaudited pro forma condensed consolidated statement of income and on December 31, 2004 for purposes of the unaudited pro forma condensed consolidated balance sheet. The combined balance sheet of Citigroup Life Insurance and Annuities Assets to be Acquired and Liabilities to be Assumed as of December 31, 2004, and the related combined statements of income, shareholder's equity and cash flows for the year then ended, included in Exhibit 99.2, and incorporated herein by reference, have been furnished to MetLife by Citigroup Inc. ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits 23.1 Consent of KPMG LLP. 99.1 MetLife, Inc.'s unaudited pro forma condensed consolidated balance sheet as of December 31, 2004 and unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2004. 99.2 Combined balance sheet of Citigroup Life Insurance and Annuities Assets to be Acquired and Liabilities to be Assumed as of December 31, 2004 and the related combined statements of income, shareholder's equity and cash flows for the year ended December 31, 2004. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. METLIFE, INC. By: /s/ Gwenn L. Carr ------------------------------------ Name: Gwenn L. Carr Title: Senior Vice-President and Secretary Date: May 13, 2005 2 EXHIBIT INDEX
23.1 Consent of KPMG LLP. 99.1 MetLife, Inc.'s unaudited pro forma condensed consolidated balance sheet as of December 31, 2004 and unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2004. 99.2 Combined balance sheet of Citigroup Life Insurance and Annuities Assets to be Acquired and Liabilities to be Assumed as of December 31, 2004 and the related combined statements of income, shareholder's equity and cash flows for the year ended December 31, 2004.
3 EX-23.1 2 y07921exv23w1.txt CONSENT OF KPMG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Citigroup Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-124358, 124358-01, 124358-02, 333-112073, 333-112073-01 and 333-112073-02) on Form S-3 and (Nos. 333-121342, 333-121343, 333-121344, 333-101291, 333-102306, 333-59134 and 333-37108) on Form S-8 of MetLife, Inc. of our report dated May 11, 2005, with respect to the combined balance sheet of Citigroup's Life Insurance and Annuities Assets to be Acquired and Liabilities to be Assumed as of December 31, 2004, and the related combined statements of income, changes in shareholder's equity and cash flows for the year then ended, which report appears in the Form 8-K of MetLife, Inc. dated May 13, 2005. Our report indicates that the combined financial statements represent a carve out of certain businesses from a consolidated group of companies rather than a complete legal entity. /s/ KPMG LLP Hartford, Connecticut May 13, 2005 EX-99.1 3 y07921exv99w1.txt UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION EXHIBIT 99.1 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION On January 31, 2005, MetLife, Inc. ("MetLife"), and Citigroup Inc. ("Citigroup"), entered into an Acquisition Agreement (the "Agreement"), pursuant to which MetLife agreed to acquire for $11.5 billion in consideration, subject to certain closing adjustments and financing arrangements, and receipt of regulatory approvals, all of the outstanding shares of capital stock of certain of the domestic and international insurance subsidiaries of Citigroup, referred to as the Citigroup Life Insurance and Annuities businesses ("Citigroup L&A"). The closing is expected to occur during the summer of 2005. The Agreement provides for Citigroup's execution of specific transactions to exclude certain assets and liabilities prior to the closing, and these transactions have been reflected in the Citigroup L&A historical combined financial statements as if completed as of December 31, 2004. The Citigroup L&A combined financial statements are included as an exhibit in the Form 8-K with which this financial information is filed. The following unaudited pro forma condensed consolidated financial information consolidates the historical consolidated statement of income and consolidated balance sheet of MetLife and the historical combined statement of income and combined balance sheet of Citigroup L&A. Those historical financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The unaudited pro forma condensed consolidated financial information has been prepared using the assumptions described in the notes thereto. The unaudited pro forma condensed consolidated financial information below should be read in conjunction with the notes thereto and the historical combined financial statements of Citigroup L&A, including the notes thereto, which are also included as an exhibit to the Form 8-K with which this financial information is filed, as well as in conjunction with the historical consolidated financial information of MetLife included in its Annual Report on Form 10-K for the year ended December 31, 2004. This unaudited pro forma condensed consolidated financial information is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations of the consolidated company that would have actually occurred had the acquisition been effective during the period presented or of the future financial position or future results of operations of the consolidated company. The consolidated financial information as of and for the period presented may have been different had the companies actually been consolidated as of or during that period due to, among other factors, possible revenue enhancements, expense efficiencies and integration costs. Additionally, as discussed in Note 1, the actual allocation of the purchase price to the acquired assets and liabilities may vary materially from the assumptions used in preparing the unaudited pro forma condensed consolidated financial information. METLIFE, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 2004
HISTORICAL PRO FORMA PRO FORMA ------------------------ PURCHASE FINANCING PRO FORMA METLIFE CITIGROUP L&A ADJUSTMENTS ADJUSTMENTS NOTES CONSOLIDATED -------- ------------- ----------- ----------- ---------- ------------ (IN MILLIONS, EXCEPT PER SHARE DATA) INCREASE/(DECREASE) ASSETS Investments: Fixed maturities available-for-sale, at fair value...................................... $176,763 $45,433 $ (160) $(1,404) 3(a), 3(b) $220,632 Equity securities, at fair value............. 2,188 346 -- -- 2,534 Mortgage and other loans..................... 32,406 2,246 73 -- 3(c) 34,725 Policy loans................................. 8,899 1,084 5 -- 3(d) 9,988 Real estate and real estate joint ventures held-for-investment........................ 3,981 258 145 (478) 3(e), 3(f) 3,906 Real estate held-for-sale.................... 252 37 14 -- 3(g) 303 Other limited partnership interests.......... 2,907 1,422 -- -- 4,329 Short-term investments....................... 2,663 3,301 -- -- 5,964 Trading securities........................... -- 1,504 -- -- 1,504 Other invested assets........................ 4,926 318 245 -- 3(h) 5,489 -------- ------- -------- ------- -------- TOTAL INVESTMENTS.......................... 234,985 55,949 322 (1,882) 289,374 Cash and cash equivalents...................... 4,051 501 (10,623) 10,623 3(i) 4,552 Common stock issuance and distribution......... -- -- (1,000) 1,000 3(i) -- Accrued investment income...................... 2,338 547 -- -- 2,885 Premiums and other receivables................. 6,696 4,183 1,064 -- 3(j) 11,943 Deferred policy acquisition costs.............. 12,752 2,926 (2,926) -- 3(l) 12,752 Value of business acquired..................... 1,584 91 2,852 -- 3(m), 3(n) 4,527 Goodwill....................................... 633 225 4,631 -- 3(o), 3(p) 5,489 Other intangible assets........................ -- -- 179 -- 3(q) 179 Assets of subsidiaries held-for-sale........... 379 -- -- -- 379 Other assets................................... 6,621 1,728 (11) 74 3(r), 8,412 3(ff), 3(s) Separate account assets........................ 86,769 31,183 -- -- 117,952 -------- ------- -------- ------- -------- TOTAL ASSETS............................... $356,808 $97,333 $ (5,512) $ 9,815 $458,444 ======== ======= ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Future policy benefits....................... $100,159 $12,756 $ 3,110 $ -- 3(j), 3(ff) $116,025 Policyholder account balances................ 83,570 36,061 2,634 -- 3(k) 122,265 Other policyholder funds..................... 6,984 1,471 -- -- 8,455 Policyholder dividends payable............... 1,071 -- -- -- 1,071 Policyholder dividend obligation............. 2,243 -- -- -- 2,243 Short-term debt.............................. 1,445 -- -- 1,000 3(t) 2,445 Long-term debt............................... 7,412 5 (154) 4,700 3(a), 3(t) 11,963 Shares subject to mandatory redemption....... 278 -- -- -- 278 Liabilities of subsidiaries held-for-sale.... 240 -- -- -- 240 Current income taxes payable................. 421 (15) 50 460 3(ff), 3(f) 916 Deferred income taxes payable................ 2,473 850 (1,976) (51) 3(u), 3(f) 1,296 Payables under securities loaned transactions............................... 28,678 2,040 -- -- 30,718 Trading securities sold not yet purchased.... -- 473 -- -- 473 Other liabilities............................ 12,241 3,562 (229) 111 3(v), 3(w) 15,685 Separate account liabilities................. 86,769 31,183 -- -- 117,952 -------- ------- -------- ------- -------- TOTAL LIABILITIES.......................... 333,984 88,386 3,435 6,220 432,025 -------- ------- -------- ------- -------- Stockholders' Equity: Common stock, par value $0.01 per share;..... 8 -- -- -- 8 Additional paid-in capital................... 15,037 -- 1,000 3(t) 16,037 Preferred stock, par value $0.01 per share;..................................... -- -- -- -- -- Additional paid-in capital................... -- -- 1,948 3(t) 1,948 Common stock of Citigroup L&A................ -- 131 (131) -- 3(x) -- Additional paid-in capital................... -- 3,141 (3,141) (111) 3(x), 3(w) (111) Retained earnings............................ 6,608 4,030 (4,030) 758 3(x), 3(f) 7,366 Treasury stock, at cost;..................... (1,785) -- -- -- (1,785) Accumulated other comprehensive income....... 2,956 1,645 (1,645) -- 3(x) 2,956 -------- ------- -------- ------- -------- TOTAL STOCKHOLDERS' EQUITY................. 22,824 8,947 (8,947) 3,595 26,419 -------- ------- -------- ------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $356,808 $97,333 $ (5,512) $ 9,815 $458,444 ======== ======= ======== ======= ========
See notes to unaudited pro forma condensed consolidated financial information. 2 METLIFE, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2004
HISTORICAL PRO FORMA PRO FORMA ----------------------- PURCHASE FINANCING PRO FORMA METLIFE CITIGROUP L&A ADJUSTMENTS ADJUSTMENTS NOTES CONSOLIDATED ------- ------------- ----------- ----------- ------------ ------------ (IN MILLIONS, EXCEPT PER SHARE DATA) INCREASE/(DECREASE) REVENUES Premiums........................... $22,316 $1,314 $ -- $ -- $23,630 Universal life and investment-type product policy fees.............. 2,900 711 34 -- 3(y) 3,645 Net investment income.............. 12,418 2,973 (311) (159) 3(z), 3(aa) 14,921 Other revenues..................... 1,198 161 (83) -- 3(bb) 1,276 Net investment gains............... 182 14 -- -- 196 ------- ------ ----- ----- ------- TOTAL REVENUES................... 39,014 5,173 (360) (159) 43,668 ------- ------ ----- ----- ------- EXPENSES Policyholder benefits and claims... 22,662 1,529 (36) -- 3(j) 24,155 Interest credited to policyholder account balances................. 2,998 1,386 (227) -- 3(k) 4,157 Policyholder dividends............. 1,814 -- -- -- 1,814 Other expenses..................... 7,761 1,014 (131) 279 3(cc), 3(dd) 8,923 ------- ------ ----- ----- ------- TOTAL EXPENSES................... 35,235 3,929 (394) 279 39,049 ------- ------ ----- ----- ------- Income from continuing operations before provision for income taxes............................ 3,779 1,244 34 (438) 4,619 Provision for income taxes......... 1,071 343 83 (153) 3(ee) 1,344 ------- ------ ----- ----- ------- INCOME FROM CONTINUING OPERATIONS....................... $ 2,708 $ 901 $ (49) $(285) $ 3,275 ======= ====== ===== ===== ======= EARNINGS PER SHARE Income from continuing operations available to common stockholders Basic............................ $ 3.61 $ 4.08 ======= ======= Diluted.......................... $ 3.59 $ 4.05 ======= ======= Weighted average number of common shares outstanding (in millions) Basic............................ 749.7 773.8 ======= ======= Diluted.......................... 754.8 778.9 ======= =======
See notes to unaudited pro forma condensed consolidated financial information. 3 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION 1. BASIS OF PRESENTATION The unaudited pro forma condensed consolidated financial information gives effect to the proposed acquisition as if it had occurred at December 31, 2004 for the purposes of the unaudited pro forma condensed consolidated balance sheet and at January 1, 2004 for the purposes of the unaudited pro forma condensed consolidated statement of income. The unaudited pro forma condensed consolidated financial information has been prepared by MetLife's management and is based on MetLife's historical consolidated financial statements and Citigroup L&A's historical combined financial statements, which have been prepared by Citigroup. Certain amounts from Citigroup L&A's historical combined financial statements have been reclassified to conform to the MetLife presentation. In accordance with Article 11 of Regulation S-X, discontinued operations and cumulative effects of changes in accounting and the related earnings per share data have been excluded from the presentation of the unaudited pro forma condensed consolidated statement of income. This unaudited pro forma condensed consolidated financial information is prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The unaudited pro forma condensed consolidated balance sheet at December 31, 2004 and the unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2004 have been prepared using the following information: (a) Audited historical consolidated financial statements of MetLife as of and for the year ended December 31, 2004; (b) Audited historical combined financial statements of Citigroup L&A as of and for the year ended December 31, 2004; and (c) Such other supplementary information as considered necessary to reflect the acquisition in the unaudited pro forma condensed consolidated financial information. The pro forma adjustments reflecting the acquisition of Citigroup L&A under the purchase method of accounting are based on certain estimates and assumptions. The unaudited pro forma condensed consolidated adjustments may be revised as additional information becomes available. The actual adjustments upon consummation of the acquisition and the allocation of the purchase price of Citigroup L&A will depend on a number of factors, including additional financial information available at such time, changes in values and changes in Citigroup L&A's operating results between the date of preparation of this unaudited pro forma condensed consolidated financial information and the effective date of the acquisition. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the differences may be material. MetLife's management believes that its assumptions provide a reasonable basis for presenting all of the significant effects of the transactions contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed consolidated financial information. The excess of the purchase price over the estimated fair value of the net assets acquired, including identifiable intangible assets, has been allocated to goodwill. The unaudited pro forma condensed consolidated financial information does not include the anticipated financial benefits or expenses from such items as expense efficiencies or revenue enhancements arising from the acquisition nor does the unaudited pro forma condensed consolidated financial information include the portion of restructuring and integration costs to be incurred by MetLife. The unaudited pro forma condensed consolidated financial information is not intended to reflect the results of operations or the financial position that would have resulted had the acquisition been affected on the dates indicated, or the results that may be obtained by the consolidated company in the future. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical 4 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) consolidated financial statements of MetLife included in MetLife's Annual Report on Form 10-K for the year ended December 31, 2004, the historical combined financial statements of Citigroup L&A included as an exhibit in the Form 8-K with which this financial information is filed, and the other information in the Form 8-K. 2. PURCHASE PRICE AND FINANCING CONSIDERATIONS Pursuant to the Agreement, MetLife will pay Citigroup $11.5 billion in consideration for all of the outstanding shares of capital stock of certain of the domestic and international insurance subsidiaries of Citigroup, constituting the Citigroup L&A businesses. The Agreement provides for Citigroup's execution of specific transactions to exclude certain assets and liabilities prior to the closing, and these transactions have been reflected in the Citigroup L&A historical combined financial statements as if completed as of December 31, 2004. The closing is expected to occur during the summer of 2005. This purchase price is subject to certain adjustments at closing, including adjustments based on differences between estimated and actual equity at closing and agreed-upon minimum risk based capital ("RBC") levels. The potential purchase price adjustments are more fully described in the Agreement. Under the terms of the Agreement, MetLife may, at its discretion, issue up to $3 billion of its common stock to Citigroup as part of the funding of the purchase price. The remainder of the purchase price must be paid in cash. The financing related to the cash portion of the purchase price will be finalized immediately prior to the closing of the transaction and may include the use of short-term bridge financing. The pro forma financial information included herein reflects management's best estimate of the forms and amounts of financing at the time this pro forma financial information was prepared. The actual form of financing of the acquisition may involve different forms of financing and/or different amounts of the same financing vehicles. These differences in form and amount of financing could result in materially different pro forma adjustments than those presented in this pro forma financial information. The actual financing forms and amounts of financing will not be determined until shortly before the closing date of the acquisition. The pro forma financial information presented herein assumes the following: (i) MetLife will issue $1 billion, 24.1 million shares, of common stock to Citigroup in the transaction. For purposes of computing the number of shares of common stock to be issued to Citigroup, the price of the MetLife common stock to be issued is assumed to be $41.44 per common share, which represents the average closing price of MetLife's common stock on the New York Stock Exchange for the ten-day period ending May 11, 2005. The impact on pro forma earnings per share of issuing the maximum amount, $3 billion, of consideration in common stock is described in Note 4. The number of shares to be issued for purposes of that calculation was computed using the same average closing price as described above. (ii) The remaining $10.5 billion of purchase price will be paid to Citigroup in cash and will be funded by MetLife in part through: a) The sale of a real estate property and available-for-sale fixed maturity securities. The unaudited pro forma condensed consolidated statement of income reflects the reduction in investment income from the sale of such real estate and fixed maturity securities. The unaudited pro forma condensed consolidated statement of income does not reflect the anticipated gain/(loss) on the sale of such investments as such gains/(losses) would be reported as discontinued operations or are sales that would not be part of the normal course of business. b) The issuance of commercial paper and various forms of securities including senior debt, mandatorily convertible equity units, and perpetual preferred stock. The unaudited pro forma condensed consolidated statement of income reflects the impact of these financing arrangements using MetLife's current anticipated borrowing and dividend rates for such types of securities. 5 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) These assumptions are made based on the best information available at the time the unaudited pro forma condensed consolidated financial information was prepared. Changes in risk-free interest rates and credit spreads could change the assumed borrowing and dividend rates for such types of securities. c) Bridge financing which would be a short-term substitution for some or all of the longer term financing alternatives may be considered. The amount and term of the bridge financing will depend upon the timing of the closing of the transaction in combination with market access and market conditions at such time. For purposes of presentation in the unaudited pro forma condensed consolidated financial information, the financing of the acquisition and allocation of purchase price is assumed to be as follows:
EXPECTED RANGE OF ANNUAL EXPECTED ANTICIPATED POTENTIAL INTEREST/ ANNUAL FINANCING FINANCING DIVIDEND INTEREST/ SOURCES: AMOUNT AMOUNTS RATE(4)(5) DIVIDEND(4)(5) - -------- ------------- -------------- ------------ -------------- (IN MILLIONS) (IN MILLIONS) (%) (IN MILLIONS) Cash............................. $ 3,049 $2,500 - 3,500 --(1)(2) -- (1)(2) Debt............................. 3,700 3,000 - 5,000 2.85 - 6.00% $175 Mandatorily convertible equity units.......................... 2,000 2,000 - 3,000 3.50 - 4.50% 80 Perpetual preferred stock........ 2,000 1,000 - 2,000 4.00 - 6.50% 120 MetLife, Inc. common stock....... 1,000 1,000 - 3,000 --(3) -- (3) ------- Total sources of funds......... $11,749 ======= USES: Debt and equity issuance costs -- See pro forma adjustments 3(s) and 3(t) in Note 3......................... $ 126 ------- Other transaction costs -- See pro forma adjustment 3(i) in Note (3)....................... 123 Purchase price paid to Citigroup...................... 11,500 ------- Total purchase price........... 11,623 ------- Total uses of funds......... $11,749 ======= PURCHASE PRICE ALLOCATION: Total purchase price............. $11,623 ------- Net balance sheet assets acquired: Carrying value of net balance sheet assets prior to the acquisition................. 8,947 Estimated fair value adjustments............... (2,180) ------- Estimated fair value of net balance sheet assets acquired.................. 6,767 ------- Goodwill.................... $ 4,856 =======
- --------------- (1) -- A real estate property with a carrying value of $478 million was sold on May 4, 2005 for $1,720 million, resulting in a gain of $758 million, net of current income taxes payable of $460 million, deferred income taxes of ($51) million and transaction costs of $75 million. The real estate is being 6 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) sold to facilitate the funding of the acquisition. Net investment income on such real estate property was $67 million during 2004. The sale of the real estate property and the elimination of the related net investment income are reflected as pro forma adjustments in the unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statement of income, respectively. The unaudited pro forma condensed consolidated statement of income does not reflect the anticipated gain on the sale of such investment as such gain would be reported as discontinued operations. See pro forma adjustment 3(f). (2) -- The sale of fixed maturities with a carrying value of $1,404 million have been assumed sold to fund the purchase price. The net investment income on such fixed maturities of $92 million was computed based upon the average yield of fixed maturities of 6.55% during 2004. The sale of the fixed maturities and the elimination of the related investment income are reflected as pro forma adjustments in the unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statement of income, respectively. Any gain/loss on the sale of such investments would not be part of the normal course of business and, as such, has not been reflected in the accompanying unaudited pro forma condensed consolidated statement of income. See pro forma adjustment 3(b). (3) -- Common stock dividend rates are set annually and are not reflected in the unaudited pro forma condensed consolidated financial information. (4) -- Debt and perpetual preferred stock may be issued in one or more series. Debt securities are expected to consist of a combination of instruments with varying maturities and interest rates, which may be fixed or floating. The perpetual preferred stock is also expected to consist of a mix of fixed and floating rate issuances. The ranges of interest and dividend rates noted above, which have been used to calculate the impact of the financing on the pro forma financial information, reflect the range associated with such potential issuances and are based on MetLife's borrowing rates to the date of this Form 8-K. The actual interest and dividend rates may differ from those estimated above. The range of interest rates presented above relative to the mandatorily convertible equity units (MCEUs) reflects only the interest rate on the debt portion of such securities. The rate on the MCEUs presented above does not reflect the contractual payment rate on the forward share purchase contract associated with such securities, which has been assumed to be 2%, and is reflected on a discounted basis as a $111 million reduction in additional paid-in capital. The discount of such contractual payments is amortized into income over the three year term of such contracts. MetLife's borrowing rates are sensitive to changes in risk-free rates and credit spreads. An increase in composite interest rates of one-quarter of a percent on debt issuances would result in an increase in annual interest expense of $13 million. Preferred dividends would increase by $5 million as a result of a one-quarter of a percent change in dividend rates and the related impact on earnings per share would be minor. (5) -- In addition to the financing alternatives shown above, MetLife has signed a commitment letter with term sheet for a facility to provide up to $7 billion in bridge financing for a period not to exceed 364 days from the earlier of the seventh day prior to closing or June 24, 2005. The net cash proceeds of certain of the financing alternatives shown above will be used to repay or reduce the amount available under the bridge facility. The bridge facility provides for an interest rate of either (i) a base rate equal to the higher of the Federal Funds Rate plus 1/2% or Bank of America's prime rate or (ii) LIBOR plus 25, 30 or 45 basis points, depending on MetLife's debt rating. As the bridge financing is expected to be temporary in nature, it would be a substitute for certain of the aforementioned financing alternatives, and would bear a short-term interest rate; therefore, no additional interest expense has been reflected in the accompanying unaudited pro forma condensed consolidated financial information. 7 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) The purchase price is allocated to balance sheet assets acquired (including identifiable intangible assets arising from the acquisition) and liabilities assumed based on their estimated fair value. The fair value adjustments to the Citigroup L&A historical combined balance sheet in connection with the acquisition are described below in Note 3. The excess of the total purchase consideration over the estimated fair value of the net assets acquired, together with capitalized costs, is allocated to goodwill. 3. PRO FORMA ADJUSTMENTS Adjustments As discussed above, these pro forma adjustments are based on certain estimates and assumptions made as of the date of the unaudited pro forma condensed consolidated financial information. The actual adjustments will depend on a number of factors, including changes in the estimated fair value of net balance sheet assets and operating results of Citigroup L&A between December 31, 2004 and the effective date of the acquisition. MetLife expects to make such adjustments at the effective date of the acquisition. These adjustments may be different from the adjustments made to prepare the unaudited pro forma condensed consolidated financial information and such differences may be material. (a) Elimination of the fair value of $160 million in available-for-sale fixed maturity securities held by Citigroup and issued by MetLife and the related historical cost of the debt securities issued by MetLife of $154 million. The related interest expense to MetLife and interest income to Citigroup L&A of $8 million has also been eliminated in the accompanying unaudited pro forma condensed consolidated statement of income. (b) Sale by MetLife of available-for-sale fixed maturity securities with a carrying value of $1,404 million to fund the acquisition of Citigroup L&A. The unaudited pro forma condensed consolidated statement of income reflects a reduction in net investment income as a result of the assumption that the sale of such fixed maturity securities would have occurred at the beginning of 2004. The net investment income foregone was computed based upon the average yield of fixed maturities of 6.55% in 2004 and was $92 million during 2004. Any gain/loss on the sale of such investments would not be part of the normal course of business and, as such, has not been reflected in the accompanying unaudited pro forma condensed consolidated statement of income. (c) Fair value adjustment of $73 million for the difference between the estimated fair value and carrying value of Citigroup L&A's investment in mortgage loans. Related amortization of the fair value adjustment during 2004 was estimated to be $15 million in the unaudited pro forma condensed consolidated statement of income. (d) Fair value adjustment of $5 million for the difference between the estimated fair value and carrying value of Citigroup L&A's investment in policy loans. Related amortization of the fair value adjustment during 2004 was estimated to be $1 million in the unaudited pro forma condensed consolidated statement of income. (e) Fair value adjustment of $145 million relates to Citigroup L&A's investment in real estate joint ventures held-for investment. Related amortization of the fair value adjustment during 2004 was estimated at $5 million and is reflected as a reduction in net investment income in the unaudited pro forma condensed consolidated statement of income. (f) A real estate property with a carrying value of $478 million was sold on May 4, 2005 for $1,720 million, resulting in an anticipated gain of $758 million, net of current income taxes payable of $460 million, deferred income taxes of ($51) million and transaction costs of $75 million. The real estate property was sold to facilitate the funding of the transaction. 8 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) Net investment income on the unaudited pro forma condensed consolidated statement of income has been reduced by $67 million to reflect the elimination of the investment income on such property as if it had then been sold as of the beginning of 2004. As the anticipated gain would be reported as discontinued operations, it has not been reflected in the accompanying unaudited pro forma condensed consolidated statement of income. The gain has been reflected as an increase in equity in the accompanying unaudited pro forma condensed consolidated balance sheet. (g) Fair value adjustment of $14 million relates to Citigroup L&A's investment in real estate held-for-sale. No related amortization of the fair value adjustment was estimated to have occurred during 2004. (h) Fair value adjustment of $245 million for the difference between the estimated fair value and carrying value of Citigroup L&A's investment in other invested assets -- principally the purchase accounting adjustment related to the elimination of the historical deferred policy acquisition costs and the establishment of value of business acquired ("VOBA") related to certain joint ventures acquired. Related amortization of the fair value adjustment during 2004 was estimated at $9 million and is reflected as a reduction in other revenues in the unaudited pro forma condensed consolidated statement of income. (i) The pro forma financing adjustment represents the cash position of $10,623 million resulting from the issuance of the commercial paper, senior debt, mandatorily convertible equity units, and perpetual preferred stock as well as the sale of real estate and fixed maturity securities. The common stock issuance of $1,000 million is reflected separately from the cash financing sources in the pro forma financing adjustments column. The remittance to Citigroup of $10,500 million of cash and $1,000 million in common stock to acquire Citigroup L&A, plus transaction costs to other parties, is reflected in the pro forma purchase adjustments column. The transaction costs of $123 million represent an estimate of the costs that the Company expects to incur over a two year period. These costs consist primarily of investment banker and legal fees, severance payments, relocation costs, lease terminations, and closing of facilities of Citigroup L&A and have been included in the purchase price. Actual costs may vary from such estimates. (j) Adjustment of $1,521 million to reinsurance recoverable represents an increase in reinsurance recoverable for benefits ceded to reinsurers and was computed using the same assumptions that were used to determine the purchase accounting adjustment to the liability for future policy benefits. Adjustments to the liability for future policy benefits of $3,567 million represents the difference between the Citigroup L&A carrying value of such liabilities and the purchase accounting basis of such liabilities using current assumptions. Included within such adjustment is $215 million related to Citigroup L&A's Argentinian operations as described in pro forma adjustments 3(ff)(i) and (ii). Elimination of reinsurance recoverable on the liability for future policy benefits and the liability for future policy benefits of $457 million between MetLife and Travelers Insurance Company, a subsidiary of Citigroup L&A, related to a reinsurance agreement between the two entities which will become an intercompany arrangement upon acquisition. Amortization of the adjustment to the liability for future policy benefits resulted in a decrease in policyholder benefits and claims of $36 million in 2004. 9 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) (k) The adjustment to policyholder account balances of $2,634 million represents the adjustment of the Citigroup L&A's carrying value to amounts based on expected liability cash flows discounted at current crediting rates. Interest credited to policyholder account balances in 2004 decreased by $227 million as a result of the revaluation of policyholder account balances. (l) Elimination of Citigroup L&A's historical deferred policy acquisition costs of $2,926 million, and related 2004 amortization of $394 million. (m) Elimination of Citigroup L&A's historical VOBA of $91 million and related 2004 amortization of $10 million. (n) The VOBA reflects the estimated fair value of in force contracts and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts in force at the acquisition date. VOBA was based on actuarially determined projections, by each block of business, of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. An 11.5% discount rate was used to value VOBA. VOBA is amortized in relation to estimated gross profits or premiums, depending on product type. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience. At December 31, 2004, the VOBA balance is estimated at $2,943 million. The estimated amortization for 2004 was $283 million. The following table provides an estimated amortization of the pro forma consolidated VOBA from 2005 to 2009:
(IN MILLIONS) 2005...................................................... $306 2006...................................................... $301 2007...................................................... $283 2008...................................................... $257 2009...................................................... $231
(o) Elimination of Citigroup L&A's historical goodwill of $225 million. (p) Represents the goodwill of $4,856 million arising from the transaction. See computation in Note 2. (q) Represents the recognition of identifiable intangible assets, comprised of the Citigroup L&A distribution agreement and customer relationships acquired as a part of the purchase. The estimated fair value of the distribution agreement and customer relationships are $166 million and $13 million, respectively, for a total of $179 million. The identifiable intangibles will be amortized in relation to the expected economic benefits of the agreement. Amortization for the first full year of the agreement is estimated to be $3 million. (r) Fair value adjustment of $11 million for the difference between the estimated fair value and carrying value of Citigroup L&A's other assets and a recoverable from Citigroup of $25 million as described in pro forma adjustment 3(ff)(iii). The estimated amortization in 2004 was not material. 10 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) (s) Adjustment representing the costs associated with the issuance of commercial paper, senior debt and mandatorily convertible equity units of $74 million. During 2004, $20 million of such costs were assumed to be amortized. (t) Adjustment to debt represents the issuance of $1,000 million of commercial paper, $2,700 million senior debt, and $2,000 million of mandatorily convertible equity units as described in Note 2. Related interest expense is also described in Note 2. Related debt issuance costs, and their amortization, are described in pro forma adjustment 3(s). Adjustment to equity represents the issuance of $1,000 million of common stock to Citigroup and $2,000 million of perpetual preferred shares as described in Note 2. Approximately $52 million in costs is associated with the issuance of the perpetual preferred stock and has been reflected as a reduction of their carrying value. (u) Deferred income taxes are adjusted to reflect the income tax effects of the pro forma purchase adjustments and the adjustment of the tax basis of the assets and liabilities acquired as a result of an election under Internal Revenue Code Section 338. The net effect of such adjustments is $1,976 million. The deferred tax asset is net of a valuation allowance of $123 million related to operations in Argentina. (v) The pro forma adjustment of $229 million consists of the fair value adjustment to decrease other liabilities for the difference between the estimated fair value and carrying value of Citigroup L&A's other liabilities. (w) The pro forma adjustment of $111 million records the estimated present value of the contractual payments to be made under the terms of the variable share forward contract component of the mandatorily convertible equity units. Also, a pro forma adjustment of $4 million has been made to record one year of accretion on that accrued balance. See Note 2 for further discussion of the terms of the mandatorily convertible equity units. (x) Elimination of Citigroup L&A's historical equity balances. (y) Represents a reclassification of $47 million in surrender fees from other revenues to universal life and investment-type policy fees offset by the elimination of $13 million in amortization of deferred policy fees resulting from the elimination of such deferred revenue, included within the other liabilities pro forma adjustment 3(v), in purchase accounting. (z) The pro forma purchase adjustments represent amortization of premiums and discounts of $282 million on fixed maturity securities of Citigroup L&A based upon the fair value of these assets as of December 31, 2004. Realized gains and losses have not been adjusted and, therefore, are based on their historical cost basis. Also included in such adjustment is $15 million in amortization of the increase in fair value of mortgage loans as described in pro forma adjustment 3(c), $1 million related to the amortization of the fair value adjustment on policy loans as described in pro forma adjustment 3(d), $5 million of amortization of the increase to real estate held-for-investment as described in pro forma adjustment 3(e), and the elimination of $8 million of investment income on the MetLife securities held by Citigroup L&A as described in pro forma adjustment 3(a). (aa) Represents the elimination of investment income on fixed maturity securities and real estate sold of $92 million and $67 million, respectively, as described in pro forma adjustments 3(b) and 3(f), respectively. 11 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) (bb) Represents a reclassification of $47 million in surrender fees from other revenues to universal life and investment-type policy fees, plus the elimination of $27 million in amortization of deferred ceding commission income resulting from the elimination of such deferred revenue, included within the other liabilities adjustment in pro forma adjustment 3(v), in purchase accounting, and the amortization of the fair value of other invested assets of $9 million as described in pro forma adjustment 3(h). (cc) Decrease in other expenses relates to purchase adjustments as follows:
(in millions) 1) Elimination of intercompany interest expense............. 3(a) $ (8) 2) Elimination of amortization on historical deferred policy acquisition costs......................................... 3(l) (394) 3) Elimination of historical amortization of VOBA........... 3(m) (10) 4) Amortization of VOBA..................................... 3(n) 283 5) Amortization of other intangible assets.................. 3(q) 3 6) Amortization of other asset adjustments.................. 3(r) (5) ----- $(131) =====
(dd) Interest expense on financing of transaction of $255 million is disclosed in Note 2, amortization of debt issuance costs of $20 million in pro forma adjustment 3(s) and $4 million in accretion on accrued contractual payments on mandatorily convertible equity units in pro forma adjustment 3(w) for total interest expense of $279 million. (ee) Represents the income tax effect of all pro forma consolidated statement of income adjustments using a tax rate of 35% adjusted to eliminate certain tax items which are not relevant to this current pro forma presentation. (ff) As a part of the acquisition, MetLife will acquire Citigroup L&A's insurance operations in Argentina. The Argentinian economic, regulatory and legal environment, including interpretation of laws and regulations by regulators and courts, is uncertain. Potential legal or governmental actions related to pension reform, fiduciary responsibilities, performance guarantees and tax rulings could adversely affect the results of the combined company as reflected in the accompanying unaudited pro forma condensed consolidated financial information. Upon acquisition there are certain liabilities which will be established in purchase accounting as follows (subject to any adjustments to reflect changes in Citigroup L&A's closing balance sheet): (i) In order to conform to MetLife's interpretation of applicable Argentine law, death and disability liabilities will increase by an estimated $110 million in Citigroup L&A's managed pension business in Argentina. This increase reflects additional death and disability claims that have occurred through December 31, 2004 but had not yet been approved by the Argentine regulator. MetLife's policy has been to accrue a liability for incurred claims in excess of the claims-made amounts, reflecting management's belief that applicable Argentine law does not relieve the managed pension business from providing for such additional claims. The accrued liability recorded by Citigroup L&A as of December 31, 2004 reflects Citigroup's belief that the managed pension business is only obligated under applicable Argentine law to provide group claims-made coverage to the managed pension business customers. 12 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) (ii) An additional liability of $105 million will be established related to litigation and an impending Supreme Court ruling in connection with the pesification of certain policyholder liabilities from U.S.-dollar-denominated insurance policies in January 2002 when the Argentina government converted all foreign currency denominated financial contracts to Argentinian pesos. The historical financial statements of Citigroup L&A reflect a liability for future policy benefits for the affected insurance policies based on a conversion ratio of one Argentine peso to one U.S. dollar adjusted by CER (inflation index), which is the conversion ratio specified by the conversion law and implementing regulations for these policies. However, throughout the country and affecting all insurance companies, policyholders have challenged the legality of the conversion of their policies to pesos in various court proceedings. When policyholders have brought similar actions against MetLife's Argentinian insurance companies, MetLife has accrued a liability, which it believes is both probable and reasonably estimable, for the difference between the value of the policy based on its original U.S. dollar terms and current open market currency exchange rates. In accordance with the requirements of Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141"), a pro forma adjustment of $35 million has been recorded to reflect MetLife's estimate of the present value of such policy liabilities at December 31, 2004. The Supreme Court of Justice of Argentina is also currently considering actions challenging the peso conversion as it was applied to insurance policies and annuity contracts. The outcome of the Supreme Court action is uncertain, but MetLife considers it probable that some modification to the original peso conversion will be required and that the most likely modification will be to require a conversion ratio of 1.4 Argentinian pesos to one U.S. dollar, which is the conversion ratio applied to bank deposits. MetLife has estimated the fair value of the additional policy liability required for Citigroup L&A's insurance companies would be approximately $70 million; accordingly, in accordance with SFAS 141, MetLife has recorded an adjustment to record the fair value of such liability. The maximum exposure for these companies if the Supreme Court were to overturn entirely the peso conversion is approximately $190 million. MetLife considers the possibility that the Supreme Court will entirely overturn the peso conversion as applied to insurance policies to be remote because the Supreme Court has previously upheld the peso conversion as applied to bank deposits at a conversion ratio of 1.4 Argentinian pesos to one U.S. dollar. (iii) A pro forma adjustment of $50 million at December 31, 2004 has been recorded related to tax contingencies generated upon pesification and the conversion of Argentinian national debt obligations from US dollars to pesos at a conversion rate of 1.4 Argentinian peso to one U.S. dollar adjusted by CER (inflation index). Based on statements from the Argentinian Undersecretary of Public Revenues Ministry of Economy MetLife believes a tax liability exists on the conversion premium and the CER; accordingly, a liability has been established for this potential tax contingency. A receivable of $25 million from Citigroup has also been established as Citigroup has indemnified MetLife for 50% of such tax contingencies. 13 METLIFE, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) Merger Related Costs MetLife's preliminary integration plan includes merger related costs of approximately $196 million, $127 million net of income taxes. Such costs are not included in the purchase price allocation but are period costs which will be charged to the statement of income as incurred over a two year period subsequent to the closing of the acquisition. As these costs are not a part of the normal operations of MetLife, they have not been reflected in the accompanying unaudited pro forma condensed consolidated statement of income. These costs include expenses related to the redeployment of MetLife staff, retention bonuses for Citigroup L&A employees, MetLife employee-related restructuring and integration expenses, system migration, product integration and other infrastructure costs. As integration plans are finalized and implemented, such costs will be more precisely quantified. Actual costs may vary materially from these preliminary estimates. 4. EARNINGS PER COMMON SHARE Pro forma earnings per common share for the year ended December 31, 2004 has been calculated based on the estimated weighted average number of common shares on a pro forma basis, as described below. (a) The historical weighted average number of common shares of MetLife was 749.7 million and 754.8 million, basic and diluted, respectively, for the year ended December 31, 2004. (b) The pro forma weighted average number of common shares, after giving effect to the acquisition, is 773.8 million and 778.9 million, basic and diluted, respectively, for the year ended December 31, 2004. The pro forma weighted average number of common shares reflects the issuance of 24.1 million MetLife common shares to Citigroup in the acquisition. For purposes of calculating the number of shares to be issued to Citigroup, the price of the MetLife common shares to be issued is assumed to be $41.44 per common share, which represents the weighted average closing price of MetLife's common shares on the New York Stock Exchange for the ten-day period ending May 11, 2005. (c) Estimated dividends of $120 million on the perpetual preferred stock to be issued in connection with the acquisition have been deducted from income available to common stockholders for purposes of the pro forma earnings per share calculation. See Note 2 for discussion of the dividend rate used in preparing the pro forma earnings per share. (d) As discussed in Note 2, the value of shares to be issued to Citigroup by MetLife under the Agreement may range up to $3 billion. This pro forma financial information assumes that $1 billion of common shares will be issued. The impact of issuing an additional $2 billion of common shares, for a total of $3 billion, to Citigroup would increase the basic and diluted weighted average common shares by 48.3 million shares and reduce both the basic and diluted pro forma earnings per share amounts by $0.16, to $3.92 and $3.89, respectively. The increase in the number of common shares issued by $2 billion reduces the amount of the mandatorily convertible equity units by $2 billion which results in a decrease in interest expense of $80 million, $52 million after income taxes. Debt issuance costs on the mandatorily convertible equity units would decline by $55 million, $36 million after income taxes. The amortization of debt issuance costs and amortization of the accretion on accrued contractual payments related to the forward share contract component of the mandatorily convertible equity units would also decline by $18 million, $12 million after income taxes, and $4 million, $3 million after income taxes, respectively. 14 EX-99.2 4 y07921exv99w2.txt ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED EXHIBIT 99.2 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED COMBINED FINANCIAL STATEMENTS DECEMBER 31, 2004 INDEPENDENT AUDITORS' REPORT The Board of Directors Citigroup Inc.: We have audited the accompanying combined balance sheet of Citigroup's Life Insurance and Annuities Assets to be Acquired and Liabilities to be Assumed (the "Company") as of December 31, 2004, and the related combined statements of income, shareholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying combined financial statements represent a carve out of certain businesses from a consolidated group of companies rather than a complete legal entity. See Note 1 to the financial statements for a description of the basis of presentation. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /S/ KPMG LLP Hartford, Connecticut May 11, 2005 2 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2004 ------------------ ($ IN MILLIONS) REVENUES Premiums.................................................... $1,314 Net investment income....................................... 2,973 Realized investment gains................................... 14 Fee income.................................................. 711 Other revenues.............................................. 161 ------ Total Revenues............................................ 5,173 ------ BENEFITS AND EXPENSES Current and future insurance benefits....................... 1,529 Interest credited to contractholders........................ 1,386 Amortization of deferred acquisition costs.................. 434 General and administrative expenses......................... 580 ------ Total Benefits and Expenses............................... 3,929 ------ INCOME FROM OPERATIONS BEFORE FEDERAL AND FOREIGN INCOME TAXES..................................................... 1,244 FEDERAL AND FOREIGN INCOME TAXES Current................................................... 60 Deferred.................................................. 283 ------ Total Federal and Foreign Income Taxes.................... 343 ------ NET INCOME.................................................. $ 901 ======
See Notes to Combined Financial Statements 3 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED COMBINED BALANCE SHEET
DECEMBER 31, 2004 --------------- ($ IN MILLIONS) ASSETS Fixed maturities, available for sale at fair value (including $2,303 subject to securities lending agreements) (cost $43,189)................................ $45,433 Equity securities, at fair value (cost $304)................ 346 Mortgage loans.............................................. 2,246 Policy loans................................................ 1,084 Short-term securities....................................... 3,301 Trading securities, at fair value........................... 1,504 Other invested assets....................................... 2,035 ------- Total Investments......................................... 55,949 ------- Cash........................................................ 501 Investments income accrued.................................. 547 Premium balances receivable................................. 171 Reinsurance recoverable..................................... 4,012 Deferred acquisition costs.................................. 2,926 Separate and variable accounts.............................. 31,183 Other assets................................................ 2,044 ------- Total Assets.............................................. 97,333 ------- LIABILITIES Contractholder funds........................................ 36,076 Future policy benefits and claims........................... 14,211 Separate and variable accounts.............................. 31,183 Deferred Federal and foreign income taxes................... 850 Trading securities sold not yet purchased, at fair value.... 473 Other liabilities........................................... 5,593 ------- Total Liabilities......................................... 88,386 ------- Shareholder's Equity Common stock (see Note 7)................................... 131 Additional paid-in capital.................................. 3,141 Retained earnings........................................... 4,030 Accumulated other changes in equity from nonowner sources... 1,645 ------- Total Shareholder's Equity................................ 8,947 ------- Total Liabilities and Shareholder's Equity................ $97,333 =======
See Notes to Combined Financial Statements 4 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED COMBINED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2004 ------------------ ($ IN MILLIONS) COMMON STOCK Balance, January 1,......................................... $ 131 Changes in common stock..................................... -- ------ Balance, December 31,....................................... 131 ====== ADDITIONAL PAID IN CAPITAL Balance, January 1,......................................... 2,959 Stock options tax expense................................... (2) Capital contributed by parent............................... 184 ------ Balance, December 31,....................................... 3,141 ====== RETAINED EARNINGS Balance, January 1,......................................... 3,848 Net income.................................................. 901 Citigroup MIS (see Note 11)................................. (46) Dividends................................................... (673) ------ Balance, December 31,....................................... 4,030 ====== ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES Balance, January 1,......................................... 1,357 Unrealized gains, net of tax................................ 145 Foreign currency translation, net of tax.................... 45 Derivative instrument hedging activity gains, net of tax.... 98 ------ Balance, December 31,....................................... 1,645 ====== SUMMARY OF CHANGES IN EQUITY FROM NONOWNER SOURCES Net income.................................................. 901 Citigroup MIS (see Note 11)................................. (46) Other changes in equity from nonowner sources............... 288 ------ Total changes in equity from nonowner sources............... 1,143 ====== TOTAL SHAREHOLDER'S EQUITY Changes in total shareholder's equity....................... 652 Balance, January 1,......................................... 8,295 ------ Balance, December 31,....................................... $8,947 ======
See Notes to Combined Financial Statements 5 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED COMBINED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH
FOR YEAR ENDED DECEMBER 31, 2004 --------------- ($ IN MILLIONS) CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 901 Adjustment to reconciled net income to net cash provided by operating activities Net realized (gains)...................................... (14) Deferred Federal and foreign income taxes................. 283 Amortization of deferred acquisition costs................ 457 Additions to deferred acquisition costs................... (889) Investment income accrued................................. (175) Premium balances receivable............................... (28) Insurance reserves........................................ 500 Change in trading account assets.......................... 279 Change in trading account liabilities..................... (164) Non-cash Citigroup tax top-off (see Note 6)............... (55) Other..................................................... 43 -------- Net cash provided by operating activities............ 1,138 -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investments Fixed maturities....................................... 6,430 Mortgage loans......................................... 700 Proceeds from sales of investments Fixed maturities....................................... 8,342 Equity securities...................................... 112 Mortgage loans......................................... 52 Real estate held for sale.............................. 55 Purchases of investments Fixed maturities....................................... (19,933) Equity securities...................................... (146) Mortgage loans......................................... (944) Policy loans, net......................................... 10 Short-term securities purchases, net...................... (465) Other investments sales, net.............................. 381 Securities transactions in course of settlement, net...... 711 -------- Net cash used in investing activities................ (4,695) -------- CASH FLOWS FROM FINANCING ACTIVITIES Contractholder fund deposits.............................. 10,565 Contractholder fund maturities and withdrawals............ (6,598) Paid in capital from parent company....................... 184 Dividends to parent company............................... (674) Other..................................................... (22) -------- Net cash provided by financing activities............ 3,455 -------- Net (decrease) in cash...................................... (102) Cash at December 31, previous year.......................... 603 -------- Cash at December 31, current year........................... $ 501 ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income taxes paid......................................... $ 102 ========
See Notes to Combined Financial Statements 6 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION -- COMBINED FINANCIAL STATEMENTS The accompanying combined financial statements of Citigroup Life Insurance and Annuities Assets to be Acquired and Liabilities to be Assumed (the Transferred Businesses, or TB) represent the Citigroup operations to be sold pursuant to an Acquisition Agreement (the Agreement) entered into on January 31, 2005 between Citigroup Inc. (Citigroup) and MetLife, Inc. (MetLife). Under the terms of the Agreement, Citigroup agreed to sell certain of its domestic and international insurance operations to MetLife for $11.5 billion in consideration, subject to certain closing adjustments and financing arrangements. The transaction is subject to Citigroup's execution of specific transactions to exclude certain assets and liabilities prior to the close. The following summarizes the domestic and international businesses included in the sale. The combined financial statements have been prepared as if the TB had been standalone operations, though they are not necessarily representative of results had the TB operated as standalone operations. The financial results reflect allocations of corporate expenses from Citigroup, which may be different from comparable expenses that would have been incurred had the TB operated as a standalone company. DOMESTIC In accordance with the Agreement, Citigroup will sell the Hartford, Connecticut based Travelers Life & Annuity insurance operations (the Domestic Transferred Businesses or DTB). These operations include retail annuities, individual life insurance, corporate owned life insurance (COLI) and institutional annuity products. In addition, the sale also includes certain individual life and retail annuity business in runoff status since 2003. DTB total assets are $93.5 billion, which is approximately 96% of total TB assets and DTB net income is $819 million, which is approximately 91% of total TB net income. The following table summarizes the legal entities where the DTB reside, and the associated states of domicile for the insurance entities. These DTB legal entities, excluding certain assets and liabilities in accordance with the Agreement, will be transferred to MetLife.
STATE OF DOMICILE LEGAL ENTITY NAME ----------------- ----------------- Connecticut The Travelers Insurance Company (TIC) Connecticut The Travelers Life and Annuity Company (TLAC) Arizona Citicorp Life Insurance Company (CLIC) New York First Citicorp Life Insurance Company (FCLIC) Bermuda Citicorp International Life Insurance Company, Ltd. of Hamilton Bermuda Florida Citicorp International Life Insurance Company, Ltd. (U.S. Branch) of Hamilton Bermuda (CILIC) South Carolina The Travelers Life and Annuity Reinsurance Company (TLARC) N/A Trumbull Street Investments LLC (TSI)
Among the range of retail annuity products offered are fixed and variable deferred annuities and payout annuities. Individual life insurance products offered include term, universal and variable life insurance. The COLI product is a variable universal life product distributed to corporations through independent specialty brokers. The institutional annuity products include institutional pensions, including guaranteed investment contracts (GICs), payout annuities, group annuities sold to employer-sponsored retirement and savings plans, structured settlements and funding agreements. Individual fixed and variable deferred annuities are primarily used for retirement funding purposes. Variable annuities permit policyholders to direct retirement funds into a number of separate accounts, which 7 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) offer differing investment options. Individual payout annuities offer a guaranteed payment stream over a specified or life-contingent period. Retail annuity products are distributed through Citigroup affiliated channels and non-affiliated channels. The Citigroup affiliated channels include CitiStreet Retirement Services, a division of CitiStreet LLC, (CitiStreet), a joint venture between Citigroup and State Street Bank; Smith Barney (SB), a division of Citigroup Global Markets Inc.; Primerica Financial Services (PFS); and Citibank. The non-affiliated channels primarily include a nationwide network of independent financial professionals and independent broker-dealers. Total annuity premiums and deposits were $5.7 billion in 2004. The primary Citigroup affiliated channels were: CitiStreet -- $1.5 billion, PFS -- $983 million, SB -- $877 million and Citibank -- $529 million. The non-affiliated channels accounted for $1.8 billion of individual annuity premiums and deposits. Individual life insurance is used to meet estate, business planning and retirement needs and also to provide protection against financial loss due to death. Individual life products are primarily marketed by independent financial professionals who account for $745 million of the $964 million total life sales for 2004. SB and Citibank accounted for $81 million and $43 million, respectively, of total individual life sales for 2004. Institutional annuity products include fixed and variable rate GICs, which provide a guaranteed return on investments. Annuities are purchased by employer-sponsored plans to fulfill retirement obligations to individual employees. Payout annuities are used primarily as a pension close-out investment for companies. Structured settlements are purchased as a means of settling certain indemnity claims and making other payments to policyholders over a period of time. Funding agreement transactions offer fixed term and fixed or variable rate investment options with policyholder status to domestic and foreign institutional investors. These group annuity products are sold through direct sales and various intermediaries. Also included in the sale are two active broker-dealers, Tower Square Securities, Inc. (Tower Square) and Travelers Distribution LLC (TDLLC), wholly owned subsidiaries of TIC. Tower Square is an introducing broker-dealer registered under the Securities Exchange Act of 1934 and a member of the National Associate of Securities Dealers (NASD). Tower Square's principal activity is to facilitate the sale of variable annuity, variable universal life and other investment products and advisory services through independent registered representatives. TDLLC, a Delaware limited liability company, is a registered limited business broker-dealer under the Securities Exchange Act of 1934 and a member of NASD. TDLLC operates as the principal underwriter and distributor of the DTB' variable annuities and variable life insurance contracts. TIC's ownership of Tribeca Citigroup Investments Ltd. (Tribeca) is included in the sale. For further details regarding Tribeca, see Note 9. The DTB are licensed to sell and market their individual products in all 50 states, the District of Columbia, Canada, Puerto Rico, Guam, the Bahamas and the U.S. and British Virgin Islands. INTERNATIONAL In accordance with the Agreement, Citigroup will also sell certain portions of the International Insurance Manufacturing (IIM) operations (the International Transferred Businesses, or ITB). The ITB manufacture insurance products in eight countries with six wholly owned subsidiaries in Australia, Brazil, Argentina, the UK, Belgium and Poland and two joint ventures in Japan and Hong Kong. ITB total assets are $3.8 billion, which is approximately 4% of total TB assets and ITB net income is $82 million, which is approximately 9% of total TB net income. 8 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) From the manufacturing perspective, it offers a range of products including credit insurance, basic indemnity policies (such as accident and health products), traditional term life, group life, whole life, endowment, fixed and variable annuities, pension annuity and unit-linked policies. These products are distributed through Citigroup's consumer businesses, including its retail banking, credit cards and consumer finance franchises, as well as non-proprietary channels. Sales are also conducted through direct mail/telemarketing, branch sales, wholesaling networks, agencies and direct sales agents. The following table summarizes the legal entities and associated countries of operation. These ITB legal entities, excluding certain assets and liabilities in accordance with the Agreement, will be transferred to MetLife.
COUNTRY OF OPERATION MANUFACTURING OPERATION LEGAL NAME - -------------------- ---------------------------------- Australia...................... Citicorp General Insurance Limited & Citicorp Life Insurance Limited Argentina...................... Compania Previsional Citi S.A., Siembra Administradora de Fondos de Jubilaciones y Pensiones S.A. (the Siembra Group or AFJP), Siembra Seguros de Retiro S.A., Siembra Seguros de Vida S.A., Best Market S.A. Brazil......................... CitiInsurance do Brasil Vida e Previdencia S.A. Poland......................... CitiInsurance Polska Towarzystwo Ubezpieczen na Zycie S.A. U.K............................ CitiInsurance General Insurance Company Limited, CitiInsurance Life Assurance Company Limited & CitiInsurance Administration Services Limited Belgium........................ CitiLife S.A./N.V. Japan.......................... Mitsui Sumitomo CitiInsurance Life Insurance Co., Ltd. (joint venture) Citigroup Direct Marketing Japan Co., Ltd. Hong Kong...................... Citi Fubon Life Insurance Company Hong Kong Limited (joint venture) China.......................... CitiInsurance Life Insurance Company, Ltd. (in formation) Bermuda........................ CitiInsurance Reinsurance (Bermuda) Ltd. South Korea.................... CDMK, Inc. USA............................ CitiInsurance International Holdings Inc.
The Agreement effectively carves out Citigroup's Life Insurance and Annuity Business included in its Global Investment Management segment. As noted in the Agreement, the sale contemplates specific restructuring transactions that will occur to the legal entities where the TB are contained. The following is a summary of those assets, liabilities and related earnings which are not considered part of the TB, and accordingly have been excluded from the accompanying combined financial statements: (1) All TIC's membership in Keeper Holdings LLC, which holds an interest in CitiStreet; (2) All TIC's shares of Citigroup Series YYY and YY preferred stock, and all dividends with respect thereto; (3) All TIC's shares of American Financial Life Insurance Company stock, and all earnings with respect thereto; (4) All TIC's shares of Primerica Life Insurance Company stock, and all earnings with respect thereto; 9 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (5) All CLIC's shares of Citicorp Assurance Company stock, and all earnings with respect thereto; (6) Citilife S.A./N.V.'s .16% equity interest in Europa Financia Limited; (7) All TIC's obligations in the amount of $74 million and the related assets (including deferred tax assets) in the amount of $74 million associated with the Connecticut River Plaza lease; (8) CLIC's $542 million dividend of fixed maturities, and the earnings with respect thereto; (9) Citilife S.A./N.V. (or from one or more subsidiaries of Associates Financial Corporation Limited, and one or more subsidiaries of Citicorp Limited) $200 million dividend of short term investments in aggregate and the earnings with respect thereto; (10) All owned intellectual property and all trademarks used in connection with products offered only by or through the TB, its parent or affiliates. This includes, but is not limited to, the "umbrella" trademark and umbrella design trademark, and all trademarks which include the terms "citi," "Citi," the arc design and the blue wave design; (11) All TIC's net obligations in the amount of $452 million related to non-qualified employee benefit plans (including retiree welfare, pension, long-term disability, workers compensation and deferred compensation obligations) and associated assets consisting of $294 million in invested assets and other assets and a deferred tax asset of $158 million, and; (12) TIC's rights in respect to the future earnings or adverse development related to long-term care (LTC) accounts. The Agreement also provides for an indemnification from Citigroup to MetLife for specified tax liabilities incurred by a TB legal entity prior to the closing date. As referenced in the Agreement, the TB legal entities maintain tax reserves for potential audit liabilities for Federal and state income taxes and other taxes of approximately $80 million with respect to pre-closing date tax periods. These liabilities remain the obligation of the TB parent under either the indemnification agreement or under the Federal consolidated income tax return rules rather than of the TB legal entities. Accordingly, these liabilities are transferred to the TB parent and are not included in the accompanying combined financial statements. In accordance with the Agreement, the assets related to the $152.5 million dividend TIC paid to its parent on January 3, 2005 have been excluded from the accompanying combined financial statements. The ITB intercompany debt with Citigroup in the amount of $213 million, and the related assets associated with this liability, also have been excluded from the accompanying combined financial statements in accordance with the Agreement. The TB consolidate entities deemed to be variable interest entities when the TB are determined to be the primary beneficiary under Financial Accounting Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). The ITB' operations utilize the Citigroup Management Information Systems (MIS) process to report their management financial statements. Within Citigroup, MIS transactions are used to allocate revenue and expense adjustments between Citigroup legal entities to create management based income statements by region and product type. The ITB receive allocations for their manufacturing of insurance products distributed through Citigroup channels not being sold. MIS transactions are generally recorded on a fair market value basis between Citigroup entities for various services rendered without transfer of cash. See Note 11 for further details. Significant intercompany transactions between TB have been eliminated. 10 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The combined financial statements and accompanying footnotes are prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and benefits and expenses during the reporting period. Actual results could differ from those estimates. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies discussed in this section are those that are considered to be significant to the portrayal of the TB' financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. In addition to the policies described below, there are certain accounting policies specific to the ITB' Argentina business, the Siembra Group, see section detailed below. INVESTMENTS Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed maturities, including instruments subject to securities lending agreements (see Note 3), are classified as "available for sale" and are reported at fair value, with unrealized investment gains and losses, net of income taxes, credited or charged directly to shareholder's equity. Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes. If quoted market prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment are used to determine fair value. Impairments are realized when investment losses in value are deemed other-than-temporary. The TB conduct a rigorous review each quarter to identify and evaluate investments that have possible indications of impairment. An investment in a debt or equity security is impaired if its fair value falls below its cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and the TB's ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. Changing economic conditions -- global, regional, or related to specific issuers or industries -- could result in other-than-temporary losses. Also included in fixed maturities are loan-backed and structured securities (including beneficial interests in securitized financial assets). Beneficial interests in securitized financial assets that are rated "A" and below are accounted for under the prospective method in accordance with EITF 99-20. Under the prospective method of accounting, the investment's effective yield is based upon projected future cash flows. All other loan-backed and structured securities are amortized using the retrospective method. The effective yield used to determine amortization is calculated based upon actual and projected future cash flows. Equity securities, which include common and non-redeemable preferred stocks, are classified as "available for sale" and carried at fair value based primarily on quoted market prices. Changes in fair values of equity securities are charged or credited directly to shareholder's equity, net of income taxes. Mortgage loans are carried at amortized cost. A mortgage loan is considered impaired when it is probable that the TB will be unable to collect principal and interest amounts due. For mortgage loans that are determined to be impaired, a reserve is established for the difference between the amortized cost and the fair market value of the underlying collateral. Cash received on impaired loans is reported as income. In estimating fair value, the TB use interest rates reflecting the higher returns required in the current real estate financing market. 11 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Policy loans are carried at the amount of the unpaid balances that are not in excess of the net cash surrender values of the related insurance policies. The carrying value of policy loans, which have no defined maturities, is considered to be fair value. Short-term securities, consisting primarily of money market instruments and other debt issues purchased with a maturity of less than one year, are carried at amortized cost, which approximates fair value. Cash includes certificates of deposits and other time deposits with original maturities of less than 90 days. Trading securities and related liabilities, which are designated as such at time of purchase, are normally held for periods less than six months. These investments are marked to market with the change recognized in net investment income during the current period. Other invested assets include limited partnership and limited liability company interests in investment funds and real estate joint ventures accounted for on the equity method of accounting. Undistributed income is reported in net investment income. Also included in other invested assets is real estate held for sale, which is carried at the lower of cost or fair value less estimated cost to sell. Fair value of foreclosed properties is established at the time of foreclosure by internal analysis or external appraisers, using discounted cash flow analyses and other accepted techniques. Thereafter, an impairment for losses on real estate held for sale is established if the carrying value of the property exceeds its current fair value less estimated costs to sell. Also included in other invested assets are investments in partially-owned companies within the ITB. The equity method of accounting is used for the ITB' investment in companies in which ownership interest approximates 20 percent but is not greater than 50 percent (minority-owned companies). At December 31, 2004, the ITB' investments in partially-owned companies included their 50 percent (49 percent voting) interest in Mitsui Sumitomo CitiInsurance Life Insurance Company, Ltd. and their 50 percent interest in Citi Fubon Life Insurance Company Hong Kong Limited. Accrual of investment income is suspended on fixed maturities or mortgage loans that are in default, or on which it is likely that future payments will not be made as scheduled. Interest income on investments in default is recognized only as payment is received. DERIVATIVE FINANCIAL INSTRUMENTS The TB use derivative financial instruments, including financial futures contracts, swaps, interest rate caps, options and forward contracts, as a means of hedging exposure to interest rate changes, equity price changes, credit and foreign currency risk. The TB also use derivative financial instruments to enhance portfolio income and replicate cash market investments. The TB, through Tribeca Citigroup Investments Ltd., hold and issue derivative instruments in conjunction with investment strategies designed to enhance portfolio returns. (See Note 9 for a more detailed description of the TB' derivative use.) Derivative financial instruments in a gain position are reported in the combined balance sheet in other invested assets and other assets derivative financial instruments in a loss position are reported in the combined balance sheet in other liabilities and derivatives purchased to offset embedded derivatives related to variable annuity contracts, including equity annuity index and guaranteed minimum withdrawal benefits (GMWB) features, are reported in other invested assets. To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception detailing the particular risk management objective and strategy for the hedge. This documentation includes the item and risk that is being hedged, the derivative that is being used, as well as how effectiveness is being assessed. A derivative must be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. 12 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) For fair value hedges, in which derivatives hedge the fair value of assets and liabilities, changes in the fair value of derivatives are reflected in realized investment gains and losses, together with changes in the fair value of the related hedged item. The TB primarily hedge available-for-sale securities. For cash flow hedges, the accounting treatment depends on the effectiveness of the hedge. To the extent that derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value will be reported in accumulated other changes in equity from nonowner sources in shareholder's equity. For certain strategies in which foreign currency risk is being hedged, changes in fair value related to changes in foreign exchange rates are immediately reclassified to earnings. These changes in fair value will be included in earnings of future periods when earnings are also affected by the variability of the hedged cash flows. To the extent these derivatives are not effective, the ineffective portion of the change in fair value is immediately included in realized investment gains and losses. For net investment hedges, in which derivatives hedge the foreign currency exposure of a net investment in a foreign operation, the accounting treatment will similarly depend on the effectiveness of the hedge. The effective portion of the change in fair value of the derivative, including any premium or discount, is reflected in the accumulated other changes in equity from nonowner sources as part of the foreign currency translation adjustment in shareholder's equity. The ineffective portion is reflected in realized investment gains and losses. The effectiveness of these hedging relationships is evaluated on a retrospective and prospective basis using qualitative or quantitative measures of effectiveness. If a hedge relationship is found to be ineffective, it no longer qualifies for hedge accounting and any gains or losses attributable to such ineffectiveness as well as subsequent changes in fair value are recognized in realized investment gains and losses. For those fair value and cash flow hedge relationships that are terminated, hedge designations removed, or forecasted transactions that are no longer expected to occur, the hedge accounting treatment described in the paragraphs above will no longer apply. For fair value hedges, any changes to the hedged item remain as part of the basis of the asset or liability and are ultimately reflected as an element of the yield. For cash flow hedges, any changes in fair value of the derivative remain in the accumulated other changes in equity from nonowner sources in shareholder's equity and are included in earnings of future periods when earnings are also affected by the variability of the hedged cash flow. If the hedged relationship is discontinued because a forecasted transaction will not occur when scheduled, the accumulated changes in fair value of the derivative recorded in shareholder's equity are immediately reflected in realized investment gains and losses. The TB enter into derivative contracts that are economic hedges but do not qualify or are not designated as hedges for accounting purposes. These derivative contracts are carried at fair value with changes in value and settlement amounts reflected in realized investment gains and losses. Derivatives in a gain position are reported in other assets, and derivatives in a loss position are reported in other liabilities. Financial instruments with embedded derivatives The TB bifurcate an embedded derivative from the host contract where the economic characteristics and risks of the embedded instrument are not clearly and closely related to the economic characteristics and risks of the host contract, the entire instrument would not otherwise be remeasured at fair value and a separate instrument with the same terms of the embedded instrument would meet the definition of a derivative under FASB Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative and Hedging Instruments" (SFAS 133). The TB purchase investments that have embedded derivatives, primarily convertible debt securities. These embedded derivatives are carried at fair value with changes in value reflected in realized investment gains and losses. Derivatives embedded in convertible debt securities are classified in the combined balance sheet as fixed maturity securities, consistent with the host instruments. 13 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The TB market certain investment contracts that have embedded derivatives, primarily variable annuity contracts. These embedded derivatives are carried at fair value, with changes in value reflected in realized investment gains and losses. Derivatives embedded in variable annuity contracts, including equity annuity index and GMWB features, are classified in the combined balance sheet as future policy benefits and claims. The TB may enter into derivative contracts to hedge the exposures represented by these embedded derivatives. These are economic hedges; however they do not qualify for hedge accounting. These derivatives are carried at fair value with contract changes in value and settlement amounts reflected in realized investment gains and losses. Derivatives in a gain position are reported in other assets, and derivatives in a loss position are reported in other liabilities. INVESTMENT GAINS AND LOSSES Realized investment gains and losses are included as a component of pre-tax revenues based upon specific identification of the investments sold on the trade date. Realized gains and losses also result from fair value changes in derivative contracts that do not qualify, or are not designated, as hedging instruments, and the application of fair value hedges under SFAS 133. Impairments are recognized as realized losses when investment losses in value are deemed other-than-temporary. The TB conduct regular reviews to assess whether other-than-temporary losses exist. Also included in pre-tax revenues are gains and losses arising from the remeasurement of the local currency value of foreign investments to U.S. dollars, the functional currency of the TB. TRANSLATION OF FOREIGN CURRENCIES Financial statement accounts expressed in foreign currencies are translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation" (SFAS 52). Under SFAS 52, functional currency assets and liabilities are translated into U.S. dollars using current rates of exchange prevailing at the balance sheet date of each respective subsidiary and the related translation adjustments are recorded as a separate component of comprehensive income, net of any related taxes in shareholder's equity. Functional currencies are generally the currencies of the local operating environment. Income statement accounts expressed in functional currencies are translated using average exchange rates. Exchange gains and losses resulting from foreign currency transactions are recorded in income. DEFERRED ACQUISITION COSTS Deferred acquisition costs (DAC) represent costs that are deferred and amortized over the estimated life of the related insurance policies. DAC principally includes commissions and certain expenses related to policy issuance, underwriting and marketing, all of which vary with and are primarily related to the production of new business. The method for determining amortization of deferred acquisition costs varies by product type based upon three different accounting pronouncements: SFAS No. 60, "Accounting and Reporting by Insurance Enterprises" (SFAS 60), SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and for Realized Gains and Losses from the Sale of Investments" (SFAS 97). DAC for deferred annuities, both fixed and variable, and payout annuities is amortized employing a level effective yield methodology per SFAS 91 as indicated by AICPA Practice Bulletin 8, generally over 10-15 years. An amortization rate is developed using the outstanding DAC balance and projected account balances and is applied to actual account balances to determine the amount of DAC amortization. The projected account balances are derived using a model that contains assumptions related to investment returns and persistency. The model rate is evaluated at least annually, and changes in underlying lapse and interest 14 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) rate assumptions are treated retrospectively. Variances in expected equity market returns versus actual returns are treated prospectively and a new amortization pattern is developed so that the DAC balances will be amortized over the remaining estimated life of the business. DAC for universal life and COLI are amortized in relation to estimated gross profits from surrender charges, investment, mortality, and expense margins per SFAS 97, generally over 16-25 years. Actual profits can vary from management's estimates, resulting in increases or decreases in the rate of amortization. Re-estimates of gross profits, performed at least annually, result in retrospective adjustments to earnings by a cumulative charge or credit to income. DAC relating to traditional life, including term insurance, credit insurance, group life insurance and health insurance is amortized in relation to anticipated premiums per SFAS 60, generally over 3-20 years. Assumptions as to the anticipated premiums are made at the date of policy issuance or acquisition and are consistently applied over the life of the policy. All DAC is reviewed at least annually to determine if it is recoverable from future income, including investment income, and if not recoverable, is charged to expenses. All other acquisition expenses are charged to operations as incurred. Sales Inducements to Contract Holders. Accounting Standards Executive Committee of the American Institute of Certified Public Accountants' Statement of Position (SOP) No. 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP 03-1) provides, prospectively, that sales inducements provided to contract holders meeting certain criteria are capitalized and amortized over the expected lives of the contracts as a component of benefit expenses. During 2004, the TB capitalized sales inducements of approximately $50.6 million in accordance with SOP 03-1. These inducements relate to bonuses on certain products offered by the TB. For 2004, amortization of these capitalized amounts was insignificant. VALUE OF INSURANCE IN FORCE The value of insurance in force related to prior acquisitions is an asset that represents the actuarially determined present value of anticipated profits to be realized from life insurance and annuities contracts at the date of acquisition using the same assumptions that were used for computing related liabilities where appropriate. The value of insurance in force for the DTB was the actuarially determined present value of the projected future profits discounted at interest rates ranging from 14% to 18%. Traditional life insurance is amortized in relation to anticipated premiums; universal life is amortized in relation to estimated gross profits; and annuity contracts are amortized employing a level yield method. The value of insurance in force, which is included in other assets, is reviewed periodically for recoverability to determine if any adjustment is required. Adjustments, if any, are charged to income. SEPARATE AND VARIABLE ACCOUNTS Separate and variable accounts primarily represent funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholders. Each account has specific investment objectives. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the TB. The assets of these accounts are carried at fair value. Amounts assessed to the separate account contractholders for management services are included in revenues. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues, and related liability increases are excluded from benefits and expenses. 15 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Variable Annuity Contracts with Guaranteed Minimum Death Benefit Features. For variable annuity contracts with guaranteed minimum death benefit features (GMDB), SOP 03-1 requires the reporting entity to categorize the contract as either an insurance or investment contract based on the significance of mortality or morbidity risk. SOP 03-1 provides explicit guidance for calculating a reserve for insurance contracts, and provides that the reporting entity does not hold reserves for investment contracts (i.e., there is no significant mortality risk). Management determined that the mortality risk on its GMDB features was not a significant component of the overall variable annuity product, and accordingly continued to classify these products as investment contracts. Prior to the adoption of SOP 03-1, the DTB held a reserve of approximately $8 million to cover potential GMDB exposure. This reserve was released during the first quarter of 2004 as part of the implementation of SOP 03-1. The TB evaluate new issues of variable products to determine that mortality risk on GMDB features is insignificant. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets are included in other assets. The carrying amount of goodwill and other intangible assets is reviewed at least annually for indication of impairment in value. If it is determined that goodwill and other intangible assets are unlikely to be recovered, impairment is recognized on a discounted cash flow basis. In accordance with SFAS No. 141, "Business Combinations" (SFAS 141) and SFAS No. 142, "Goodwill and Other Intangibles" (SFAS 142), the TB do not amortize goodwill and intangible assets deemed to have an infinite useful life. Instead, these assets are subject to an annual review for impairment. Other intangible assets that are not deemed to have an indefinite useful life will continue to be amortized over their useful lives. See Note 5. CONTRACTHOLDER FUNDS Contractholder funds represent receipts from the issuance of universal life, COLI, pension investment, GICs, and certain deferred annuity contracts. For universal life and COLI contracts, contractholder fund balances are increased by receipts for mortality coverage, contract administration, surrender charges and interest accrued, where one or more of these elements are not fixed or guaranteed. These balances are decreased by withdrawals, mortality charges and administrative expenses charged to the contractholder. Interest rates credited to contractholder funds related to universal life and COLI range from 3.5% to 5.4%, with a weighted average interest rate of 4.7%. Pension investment, GICs and certain annuity contracts do not contain significant insurance risks and are considered investment-type contracts. Contractholder fund balances are increased by receipts and credited interest, and reduced by withdrawals and administrative expenses charged to the contractholder. Interest rates credited to those investment-type contracts range from 1.0% to 8.0% with a weighted average interest rate of 4.2%. The voluntary pension products in Argentina, while insignificant in total to these financial statements, offer crediting rates that are linked to an inflation index. These crediting rates may fall outside the stated ranges. Reserving for Universal Life and Variable Universal Life Contracts. SOP 03-1 requires that a reserve, in addition to the account balance, be established for certain insurance benefit features provided under universal life (UL) and variable universal life (VUL) products if the amounts assessed against the contract holder each period for the insurance benefit feature are assessed in a manner that is expected to result in profits in earlier years and losses in subsequent years from the insurance benefit function. 16 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The TB' UL and VUL products were reviewed to determine if an additional reserve is required under SOP 03-1. It was determined that SOP 03-1 applied to some of its UL and VUL contracts with these features and established an additional reserve of approximately $1 million. The TB evaluate new issues of UL and VUL products to determine that mortality risk on GMDB features is insignificant. FUTURE POLICY BENEFITS Future policy benefits represent liabilities for future insurance policy benefits for payout annuities and traditional life products and are prepared in accordance with industry standards and U.S. GAAP. The annuity payout reserves are calculated using the mortality and interest assumptions used in the actual pricing of the benefit. Mortality assumptions are based on TB experience and are adjusted to reflect deviations such as substandard mortality in structured settlement benefits. The DTB interest rates range from 1.7% to 8.7% with a weighted average of 6.5% for these products. Traditional life products include whole life and term insurance. Some of the pension payout products offered in Argentina, while insignificant in total to these financial statements, offer crediting rates that are linked to an inflation index. The interest rate assumptions may fall outside the stated ranges. Future policy benefits for traditional life products are estimated on the basis of actuarial assumptions as to mortality, persistency and interest, established at policy issue. Interest assumptions applicable to traditional life products range from 2.5% to 7.0%, with a weighted average of 3.9%. Assumptions established at policy issue as to mortality and persistency are based on TB experience, which, together with interest assumptions, include a margin for adverse deviation. Appropriate recognition has been given to experience rating and reinsurance. GUARANTY FUND AND OTHER INSURANCE RELATED ASSESSMENTS Included in other liabilities is the DTB' estimate of its liability for guaranty fund and other insurance-related assessments. State guaranty fund assessments are based upon the DTB' share of premium written or received in one or more years prior to an insolvency occurring in the industry. Once an insolvency has occurred, the DTB recognize a liability for such assessments if it is probable that an assessment will be imposed and the amount of the assessment can be reasonably estimated. At December 31, 2004, the DTB had a liability of $22.6 million for guaranty fund assessments and a related premium tax offset recoverable of $4.8 million. The assessments are expected to be paid over a period of three to five years and the premium tax offsets are expected to be realized over a period of 3 to 15 years. PERMITTED STATUTORY ACCOUNTING PRACTICES The DTB' insurance operations, domiciled in Arizona, Connecticut, Florida, New York, and South Carolina, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of the states of domicile. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the domiciliary state, but allowed by the domiciliary state regulatory authority. The DTB do not have any permitted statutory accounting practices. PREMIUMS Premium income is reported for individual payout annuities, group close-out annuities, whole life and term insurance. The annuities premiums are recognized as revenue when collected. The life premiums are recognized as revenue when due. Premiums for contracts with a limited number of premium payments, due over a significantly shorter period than the period over which benefits are provided, are considered revenue 17 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) when due. The portion of premium which is not required to provide for benefits and expenses is deferred and recognized in revenues in a constant relationship to insurance benefits in force. FEE INCOME Fee income is recognized on deferred annuity and universal life contracts for mortality, administrative and equity protection charges according to contract due dates. Fee income is recognized on variable annuity and universal life separate accounts either daily, monthly, quarterly or annually as per contract terms. OTHER REVENUES Other revenues include surrender penalties collected at the time of a contract surrender, and other miscellaneous charges related to annuity and universal life contracts recognized when received. Also included are revenues from unconsolidated non-insurance subsidiaries. Amortization of deferred income related to reinsured blocks of ceded business is recognized in relation to the expected remaining life of the underlying policies and is reported in other revenues. CURRENT AND FUTURE INSURANCE BENEFITS Current and future insurance benefits represent charges for mortality and morbidity related to fixed annuities, universal life, term life and health insurance benefits. INTEREST CREDITED TO CONTRACTHOLDERS Interest credited to contractholders represents amounts earned by universal life, COLI, pension investment, GICs and certain deferred annuity contracts in accordance with contract provisions. FEDERAL AND FOREIGN INCOME TAXES The provision for Federal and foreign income taxes is comprised of two components, current income taxes and deferred income taxes. Deferred Federal and foreign income taxes arise from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. SIGNIFICANT ACCOUNTING POLICIES SPECIFIC TO THE ARGENTINA BUSINESSES Death and Disability Coverage Reserves The Siembra Group provides group death and disability coverage for customers of its pension business. Argentine regulators have mandated that this coverage be provided on a claims-made basis, rather than on an occurrence basis. A portion of customer commissions charged by the Siembra Group, also mandated by the Argentine regulators, effectively represents an insurance premium for providing this coverage. Under this claims-made coverage, losses are recognized on the date that the loss is reported as approved by the Argentine regulator. As part of its annual issuance of the group death and disability coverage, Siembra Group reviews expected commissions, claims and expenses for the upcoming coverage year. If a deficiency is projected for the upcoming coverage year, a premium deficiency reserve is recorded. This reserve is re-evaluated periodically and updated to reflect current experience. At December 31, 2004, the premium deficiency and related reserves were $28 million. Given the current uncertain economic, regulatory and legal environment in Argentina, including the potential for legal or governmental actions related to pension reform, it is possible that changes may occur which may impact the obligations of the Siembra Group to its customers. Such developments, if any, could result in future losses for Siembra Group. 18 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Trading Securities In Argentina, many of the insurance assets are classified as trading. Annuity contracts sold in the past were backed by shares in specific assets. Although the characteristics of these contracts are similar to separate accounts, they do not meet the definition of separate accounts under SOP 03-1 due to the fact that they are not legally insulated. In order to match the valuation of assets with liabilities, the majority of these assets are classified by the TB as trading. Assets backing the Argentina life company's group death and disability contracts are also classified as trading in order to match the valuation of the liability; net amount at risk varies with the net asset values of Pension funds managed by the TB' Argentina pension business. As of December 31, 2004, assets classified as trading securities in Argentina totaled $190 million. 3. INVESTMENTS FIXED MATURITIES The amortized cost and fair value of investments in fixed maturities were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 2004 COST GAINS LOSSES VALUE - ----------------- --------- ---------- ---------- ------- ($ IN MILLIONS) Available For Sale: Mortgage-backed securities -- CMOs and pass- through securities........................ $ 7,623 $ 246 $ 9 $ 7,860 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities........................... 2,027 103 -- 2,130 Obligations of states, municipalities and political subdivisions.................... 364 41 1 404 Debt securities issued by foreign governments............................... 916 87 -- 1,003 All other corporate bonds................... 25,135 1,404 41 26,498 Other debt securities....................... 6,967 388 12 7,343 Redeemable preferred stock.................. 157 39 1 195 ------- ------ --- ------- Total Available For Sale.................... $43,189 $2,308 $64 $45,433 ======= ====== === =======
Proceeds from sales of fixed maturities classified as available for sale were $8.3 billion in 2004. Gross gains of $236 million and gross losses of $252 million in 2004 were realized on those sales. Additional losses of $38 million in 2004 were realized due to other-than-temporary losses in value. 19 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and fair value of fixed maturities at December 31, 2004, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED FAIR COST VALUE --------- ------- ($ IN MILLIONS) Maturity: Argentina government bonds in default....................... $ 10 $ 12 Due in one year or less..................................... 2,196 2,247 Due after 1 year through 5 years............................ 13,295 13,773 Due after 5 years through 10 years.......................... 12,260 12,984 Due after 10 years.......................................... 7,805 8,557 ------- ------- 35,566 37,573 ======= ======= Mortgage-backed securities.................................. 7,623 7,860 ------- ------- Total Maturity.............................................. $43,189 $45,433 ======= =======
The TB make investments in collateralized mortgage obligations (CMOs). CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to U.S. Treasury securities. The TB' investment strategy is to purchase CMO tranches which are protected against prepayment risk, including planned amortization class and last cash flow tranches. Prepayment protected tranches are preferred because they provide stable cash flows in a variety of interest rate scenarios. The TB invest in other types of CMO tranches if a careful assessment indicates a favorable risk/return tradeoff. The TB do not purchase residual interests in CMOs. At December 31, 2004 the TB held CMOs classified as available for sale with a fair value of $5.0 billion. Approximately 27% of the TB' CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2004. In addition, the TB held $2.5 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31, 2004. All of these securities are rated AAA. The TB engage in securities lending transactions whereby certain securities from its portfolio are loaned to other institutions for short periods of time. The TB generally receive cash collateral from the borrower, equal to at least the market value of the loaned securities plus accrued interest, and invests it in the TIC short-term money market pool. The loaned securities remain a recorded asset of the TB, however, the TB record a liability for the amount of the cash collateral held, representing its obligation to return the cash collateral related to these loaned securities, and reports that liability as part of other liabilities in the combined balance sheet. At December 31, 2004 the TB held cash collateral of $2.0 billion. The TB also had $332.9 million of investments held as collateral with a third party at December 31, 2004. 20 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) EQUITY SECURITIES The cost and fair values of investments in equity securities were as follows:
GROSS GROSS UNREALIZED UNREALIZED FAIR EQUITY SECURITIES: COST GAINS LOSSES VALUE - ------------------ ---- ---------- ---------- ----- ($ IN MILLIONS) December 31, 2004 Common stocks................... $180 $41 $1 $220 Non-redeemable preferred stocks................... 124 3 1 126 ---- --- -- ---- Total Equity Securities........................... $304 $44 $2 $346 ==== === == ====
Proceeds from sales of equity securities were $112 million in 2004. Gross gains of $27 million and gross losses of $10 million in 2004 were realized on those sales. Additional losses of $5 million in 2004 were realized due to other-than-temporary losses in value. OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS At December 31, 2004, the cost of approximately 963 investments in fixed maturity and equity securities exceeded their fair value by $66 million. Of the $66 million, $46 million represents fixed maturity investments that have been in a gross unrealized loss position for less than a year and of these 93% are rated investment grade. Fixed maturity investments that have been in a gross unrealized loss position for a year or more total $18 million and 87% of these are rated investment grade. The gross unrealized loss on equity securities was $2 million at December 31, 2004. Management has determined that the unrealized losses on the TB' investments in fixed maturity and equity securities at December 31, 2004 are temporary in nature. The TB conduct a periodic review to identify and evaluate investments that have indications of possible impairment. An investment in a debt or equity security is impaired if its fair value falls below its cost and the decline is considered other-than-temporary. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been below cost; the financial condition and near-term prospects of the issuer; and the TB' ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. The TB' review for impairment generally entails: - Identification and evaluation of investments that have possible indications of impairment; - Analysis of individual investments that have fair values less than 80% of amortized cost, including consideration of the length of time the investment has been in an unrealized loss position; - Discussion of evidential matter, including an evaluation of factors or triggers that would or could cause individual investments to qualify as having other-than-temporary impairments and those that would not support other-than-temporary impairment; - Documentation of the results of these analyses, as required under business policies. 21 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The table below shows the fair value of investments in fixed maturities and equity securities that are available for sale and have been in an unrealized loss position at December 31, 2004:
GROSS UNREALIZED LOSSES ---------------------------------------- LESS THAN ONE YEAR ONE YEAR OR LONGER TOTAL ------------------- ------------------ ------------------- GROSS GROSS GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------ ---------- ----- ---------- ------ ---------- ($ IN MILLIONS) Fixed maturity securities available-for-sale: Mortgage-backed securities-CMOs and pass-through securities............ $ 856 $ 6 $162 $ 3 $1,018 $ 9 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities........................ 153 -- -- -- 153 -- Obligations of states, municipalities and political subdivisions......... 7 -- 11 -- 18 -- Debt securities issued by foreign governments........................ 40 1 5 -- 45 1 All other corporate bonds............ 3,427 30 384 11 3,811 41 Other debt securities................ 966 9 178 3 1,144 12 Redeemable preferred stock........... 13 -- 7 1 20 1 ------ --- ---- --- ------ --- Total fixed maturities............... $5,462 $46 $747 $18 $6,209 $64 Equity securities.................... $ 31 $ 1 $ 29 $ 1 $ 60 $ 2 ====== === ==== === ====== ===
Fair values of investments in fixed maturities, equity and short term securities, and fixed for zero swaps, which are recorded as other invested assets, are based on quoted market prices or dealer quotes or, if these are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. The fair value of investments for which quoted market prices, third-party broker quotations or validated model prices are not available amounted to $331.3 million at December 31, 2004. MORTGAGE LOANS At December 31, 2004 the TB' mortgage loan portfolios consisted of the following:
2004 --------- ($ IN MILLIONS) Current Mortgage Loans...................................... $2,192 Underperforming Mortgage Loans.............................. 54 ------ Total Mortgage Loans........................................ $2,246 ======
Underperforming mortgage loans include delinquent mortgage loans over 90 days past due, loans in the process of foreclosure and loans modified at interest rates below market. 22 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Aggregate annual maturities on mortgage loans at December 31, 2004 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
($ IN YEAR ENDING DECEMBER 31, MILLIONS) 2005........................................................ $ 122 2006........................................................ 308 2007........................................................ 249 2008........................................................ 93 2009........................................................ 252 Thereafter.................................................. 1,222 ------ Total....................................................... $2,246 ======
CONCENTRATIONS The TB had concentrations of investments, excluding those in Federal and government agencies, primarily fixed maturities at fair value, in the following industries:
2004 --------- ($ IN MILLIONS) Finance..................................................... $7,947 Banking..................................................... 3,408 Electric Utilities.......................................... 3,093
The TB held investments in foreign banks in the amount of $1,304 million at December 31, 2004, which are included in the table above. The TB define its below investment grade assets as those securities rated Ba1 by Moody's Investor Services (or its equivalent) or below by external rating agencies, or the equivalent by internal analysts when a public rating does not exist. Such assets include publicly traded below investment grade bonds and certain other privately issued bonds and notes that are classified as below investment grade. Below investment grade assets included in the categories of the preceding table include $842 million in Electric Utilities at December 31, 2004. Below investment grade assets in Finance and Banking were $144 million at December 31, 2004. Total below investment grade assets were $5.2 billion at December 31, 2004. Included in mortgage loans were the following group concentrations:
2004 --------- ($ IN MILLIONS) STATE California.................................................. $ 788 PROPERTY TYPE Agricultural................................................ $1,177
The TB monitor creditworthiness of counterparties to all financial instruments by using controls that include credit approvals, credit limits and other monitoring procedures. Collateral for fixed maturities often includes pledges of assets, including stock and other assets, guarantees and letters of credit. The TB' 23 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) underwriting standards with respect to new mortgage loans generally require loan to value ratios of 75% or less at the time of mortgage origination. NON-INCOME PRODUCING INVESTMENTS Investments included in the combined balance sheets that were non-income producing amounted to $106 million at December 31, 2004. RESTRUCTURED INVESTMENTS The TB had mortgage loans and debt securities that were restructured at below market terms at December 31, 2004. The balances of the restructured investments were insignificant. The new terms typically defer a portion of contract interest payments to varying future periods. Gross interest income on restructured assets that would have been recorded in accordance with the original terms of such loans was insignificant in 2004. Interest on these assets, included in net investment income, was also insignificant in 2004. NET INVESTMENT INCOME
FOR THE YEAR ENDED DECEMBER 31, 2004 - ------------------------------- --------- ($ IN MILLIONS) GROSS INVESTMENT INCOME Fixed maturities............................................ $2,468 Mortgage loans.............................................. 209 Trading..................................................... 44 Other invested assets....................................... 286 Other, including policy loans............................... 69 ------ Total gross investment income............................... 3,076 ------ Investment expenses......................................... (103) ------ Net Investment Income....................................... $2,973 ======
24 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) Net realized investment gains (losses) for the period was as follows:
FOR THE YEAR ENDED DECEMBER 31, 2004 - ------------------------------- --------- ($ IN MILLIONS) REALIZED INVESTMENT GAINS (LOSSES) Fixed maturities............................................ $(17) Equity securities........................................... 17 Mortgage loans.............................................. 1 Real estate held for sale................................... (4) Other invested assets....................................... 5 Derivatives: Guaranteed minimum withdrawal benefit derivatives, net.... 30 Other derivatives......................................... (16) Other....................................................... (2) ---- Total realized investment gains (losses)............... $ 14 ====
Changes in net unrealized investment gains (losses) that are reported in accumulated other changes in equity from nonowner sources were as follows:
FOR THE YEAR ENDED DECEMBER 31, 2004 - ------------------------------- --------- ($ IN MILLIONS) UNREALIZED INVESTMENT GAINS (LOSSES) Fixed maturities............................................ $ 218 Equity securities........................................... 8 Other....................................................... -- ------ Total unrealized investment gains........................... 226 ------ Related taxes............................................... (81) ------ Change in unrealized investment gains....................... 145 Balance beginning of year................................... 1,345 ------ Balance end of year......................................... $1,490 ======
25 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) VARIABLE INTEREST ENTITIES The following table represents the carrying amounts and classification of combined assets that are collateral for VIE obligations. These two VIEs are a collateralized debt obligation and a real estate joint venture:
DECEMBER 31, 2004 ----------------- ($ IN MILLIONS) Investments................................................. $386 Cash........................................................ 9 Other....................................................... 2 ---- Total assets of consolidated VIEs........................... $397 ====
The debt holders of these VIEs have no recourse to the TB. The TB' maximum exposure to loss is limited to its investment of approximately $8 million. The TB regularly become involved with VIEs through its investment activities. This involvement is generally restricted to small passive debt and equity investments. 4. REINSURANCE Reinsurance is used in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and to effect business-sharing arrangements. Reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term (YRT), coinsurance and modified coinsurance. Reinsurance involves credit risk and the TB monitor the financial condition of these reinsurers on an ongoing basis. The TB remain primarily liable as the direct insurer on all risks reinsured. Since 1997 the majority of universal life business has been reinsured under an 80% ceded/20% assumed YRT quota share reinsurance program and term life business has been reinsured under a 90%/10% YRT quota share reinsurance program. Beginning June 1, 2002, COLI business has been reinsured under a 90%/10% quota share reinsurance program. Beginning in September 2002, newly issued term life business has been reinsured under a 90%/10% coinsurance quota share reinsurance program. Subsequently, portions of this term coinsurance has reverted to YRT for new business. Generally, the maximum retention on an ordinary life risk is $2.5 million. Maximum retention of $2.5 million is generally reached on policies in excess of $12.5 million for universal life and $25.0 million for term insurance. For other plans of insurance, it is the policy of the TB to obtain reinsurance for amounts above certain retention limits on individual life policies, which limits vary with age and underwriting classification. Total in-force business ceded under reinsurance contracts is $397.4 billion at December 31, 2004. Effective July 1, 2000 the DTB sold 90% of its individual long-term care insurance business to General Electric Capital Assurance Company and its subsidiary in the form of indemnity reinsurance arrangements. Written premiums ceded per these arrangements were $224.2 million in 2004, and earned premiums ceded were $224.3 million in 2004. Reinsurance recoverables for the life and accident and health business include $1,876 million at December 31, 2004 from General Electric Capital Assurance Company. Assets collateralizing these receivables in the amount of $1,894 million at December 31, 2004 were held in trust for the purpose of paying DTB claims. On January 3, 1995, the DTB sold its group life business to MetLife under the form of an indemnity insurance arrangement. Premiums written and earned in 2004 were insignificant. Reinsurance recoverables also include $409 million at December 31, 2004 from MetLife. Prior to April 1, 2001, the DTB also reinsured substantially all of the GMDB on its variable annuity product. Total variable annuity account balances with GMDB were $26.7 billion, of which $12.0 billion, or 26 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 45%, was reinsured, at December 31, 2004. GMDB is payable upon the death of a contractholder. When the benefit payable is greater than the account value of the variable annuity, the difference is called the net amount at risk (NAR). NAR totals $1.1 billion, of which $.9 billion, or 84%, is reinsured at December 31, 2004. Prior to 2004, TIC wrote workers' compensation business. This business is reinsured through a 100% quota-share agreement with The Travelers Indemnity Company, an insurance subsidiary of St. Paul Travelers. A summary of reinsurance financial data reflected within the combined statements of income and balance sheets is presented below ($ in millions):
FOR THE YEAR ENDED DECEMBER 31, 2004 - ------------------------------- ------ WRITTEN PREMIUMS Direct...................................................... $1,593 Assumed..................................................... 64 Ceded....................................................... (336) ------ Total Net Written Premiums.................................. $1,321 ======
2004 ------ EARNED PREMIUMS Direct...................................................... $1,584 Assumed..................................................... 64 Ceded....................................................... (334) ------ Total Net Earned Premiums................................... $1,314 ======
Reinsurance recoverables at December 31, 2004 include amounts recoverable on unpaid and paid losses and were as follows ($ in millions):
2004 ------ REINSURANCE RECOVERABLES Life and accident and health business....................... $2,522 Workers' compensation business.............................. 1,490 ------ Total Reinsurance Recoverables.............................. $4,012 ======
5. INTANGIBLE ASSETS The TB' intangible assets include DAC, goodwill and the value of insurance in force. DAC and the value of insurance in force are amortizable. VALUE OF INSURANCE IN FORCE The value of insurance in force totaled $91 million at December 31, 2004 and is included in other assets. Amortization expense on the value of insurance in force was $11 million for the year ended December 31, 2004. Amortization expense related to the value of insurance in force is estimated to be $13 million in 2005, $14 million in 2006, $11 million in 2007, $8 million in 2008 and $8 million in 2009. 27 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) GOODWILL At December 31, 2004, goodwill totaled $224 million and is included in other assets. 6. INCOME TAXES DOMESTIC The tax provision for the transferred subsidiaries is reflected in accordance with the actual tax return liabilities (or benefits) incurred by each subsidiary. For the taxable year ending December 31, 2004, TIC, TLAC, and TLARC will file Federal tax returns as part of the Citigroup consolidated Federal income tax return. Neither TIC nor TLAC received any material tax benefit or additional tax cost from being part of the Citigroup consolidated return. TLARC had a net operating loss in 2004 for which it will be paid under the terms of the Citigroup tax sharing agreement. In the event that TLARC did not file its Federal income tax return as part of the Citigroup consolidated tax return, these losses would have not have been used to reduce current taxable income of the Citigroup consolidated group. There is no material Federal income tax difference for any subsidiaries of TIC that results from TIC and TLAC not being part of the Citigroup consolidated Federal tax return. CLIC and FCLIC file a separate consolidated Federal tax return and do not file as part of the Citigroup consolidated tax return. INTERNATIONAL No foreign subsidiary files as part of any U.S. consolidated Federal income tax return. U.S. Federal income taxes on foreign operations consist of current U.S. tax paid on subpart F income plus deferred taxes on non-subpart F income, net of any Accounting Practices Board Opinion No. 23, "Accounting for Income Taxes -- Special Areas" (APB 23) benefit, for earnings that will not be distributed to the U.S. Both current and deferred Federal income taxes are net of any U.S. foreign tax credits. In 2004, the APB 23 benefit was $2 million based on undistributed earnings of $36 million. The entire APB 23 benefit relates to Australian operations. Citigroup adjusts, through a "tax top off" process, local taxes booked in local legal vehicles to reflect U.S. tax rates. The appropriate U.S. tax rates are determined by the Citigroup corporate tax division and consider such factors as availability and utilization of foreign tax credits. The combined financial statements as they have been presented include the tax top offs in the income statement, but do not impact the balance sheet. See Note 11 for details on the Citigroup MIS process. All ITB entities are included in the Citigroup "tax top off" process. In 2004, ITB' tax top off was $55.4 million, due in large part to the pre-filing agreement (PFA) in Argentina. A $47 million tax U.S. income tax benefit was recognized in 2004 with respect to a prior period write-down of Argentina operations due to a ruling from the IRS confirming the deductibility of those losses. 28 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) EFFECTIVE TAX RATE
FOR THE YEAR ENDED DECEMBER 31, 2004 - ------------------------------- --------- ($ IN MILLIONS) Income before Federal and foreign income taxes.............. $1,244 Statutory tax rate.......................................... 35% ------ Expected Federal and foreign income taxes................... 435 Tax effect of: Non-taxable investment income............................... (22) Tax reserve release......................................... (23) Utilized foreign losses and other........................... (47) ------ Federal and foreign income taxes............................ $ 343 ====== Effective tax rate.......................................... 28% ------ COMPOSITION OF FEDERAL AND FOREIGN INCOME TAXES Current: United States............................................... $ 58 Foreign..................................................... 2 ------ Total....................................................... 60 ------ Deferred: United States............................................... 261 Foreign..................................................... 22 ------ Total....................................................... 283 ------ Federal and foreign income taxes............................ $ 343 ======
Additional tax benefits (expense) attributable to employee stock plans allocated directly to shareholder's equity for the year ended December 31, 2004, was $(2) million. 29 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The net deferred tax liability at December 31, 2004 was comprised of the tax effects of temporary differences related to the following assets and liabilities:
2004 --------- ($ IN MILLIONS) Deferred Tax Assets: Benefit, reinsurance and other reserves..................... $ 489 Operating lease reserves.................................... 7 Employee benefits........................................... 11 Other....................................................... 136 ------- Total....................................................... 643 ------- Deferred Tax Liabilities: Deferred acquisition costs and value of insurance in force..................................................... (792) Investments, net............................................ (627) Other....................................................... (74) ------- Total....................................................... (1,493) ------- Net Deferred Tax Liability.................................. $ (850) =======
The TB, collectively, had a $15 million receivable from Citigroup at December 31, 2004 related to the Tax Sharing Agreement. At December 31, 2004 FCLIC had a capital loss carryforward of $2 million. No other TB had any ordinary or capital loss carryforwards. Under the 1984 Tax Act, life insurance companies were subject to tax on any subtractions made from the Policyholders' Surplus Account (PSA). The PSA arose under pre-1984 law, and consists generally of that portion of the gain from operations that had not been subject to tax, plus certain special deductions. Under the 2004 Act, distributions may be made from the PSA without triggering any tax. The balance in the PSA as of December 31, 2004, taking into account the restructuring transactions reflected in the balance sheet, is zero. As the result of the changes made by the 2004 Tax Act, no tax is imposed on any of these distributions. 7. SHAREHOLDER'S EQUITY SHAREHOLDER'S EQUITY The DTB' statutory net income and statutory capital and surplus reflect the excluded restructuring transactions as described in Note 1. The DTB' combined statutory net income was $474.7 million for the year ended December 31, 2004. The DTB' combined capital and surplus was $3.293 billion at December 31, 2004. DIVIDEND AVAILABILITY Domestic The DTB are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of insurance regulatory authorities. The DTB are domiciled in the following states: Arizona, Connecticut, Florida, New York, and South Carolina. Depending upon both the timing and the amounts of proposed dividends, procedures for their payment vary from state to state. The State of Connecticut Insurance Department requires prior approval for any dividends for a period of 30 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) two years following a change in control. Accordingly, any dividends from TIC or TLAC, during that period, would require prior approval from the State of Connecticut Insurance Department. The States of Arizona, New York, and South Carolina do not have specific statutes addressing dividend capability following a change in control. The amount of dividends which may be paid without prior approval during 2005 for CLIC, FCLIC and TLARC are $26.7 million, $5.4 million and $70.0 million, respectively. In determining whether a dividend is extraordinary, the dividend limitation threshold is applied to the cumulative dividends paid during the preceding twelve months. Accordingly, any dividends paid during 2005 related to Citigroup's execution of specific transactions as discussed in Note 1, will be included in determining whether a dividend is considered extraordinary. CILIC maintains trusteed surplus in accordance with Florida statutes. Any dividend requires prior approval from the State of Florida Insurance Department. International Each ITB is subject to the respective local-country restrictions that limit the amount of dividends available to be paid to their parent company. Such limitations include regulatory restrictions on minimum required capital, local solvency margin calculations as well as local market practices. Restrictions are primarily formula driven in certain countries and negotiated with regulators in others. Procedures for remitting dividends also vary by country, ranging from the requirement to obtain formal regulatory approval to informal notification to regulators. 31 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) COMMON STOCK The details of the common stock for the entities included in the TB, as defined in the Agreement, are as follows:
SHARES SHARES SHARES COUNTRY COMPANY PAR VALUE AUTHORIZED ISSUED OUTSTANDING - ------- --------------------------------- --------- ---------- ---------- ----------- Argentina Compania Previsional Citi S.A. 1 AR N/A 11,300,000 11,300,000 AFJP 1 AR N/A 10,340,000 10,340,000 Siembra Seguros de Retiro S.A. 1 AR N/A 10,000,000 10,000,000 Siembra Seguros de Vida S.A. 1 AR N/A 500,000 500,000 Best Market S.A. 1 AR N/A 12,000 12,000 Australia Citicorp General Insurance N/A N/A 4,400,000 4,400,000 Limited Citicorp Life Insurance Limited N/A N/A 650,000 650,000 Belgium CitiLife S.A./N.V. N/A 10,000,000 10,000,000 10,000,000 Bermuda CitiInsurance Reinsurance $ 1.00 250,000 250,000 250,000 (Bermuda) Ltd. Brazil CitiInsurance do Brasil Vida e N/A N/A 23,500,000 23,500,000 Previdencia S.A. Japan Citigroup Direct Marketing Japan N/A 800 200 200 Co., Ltd. Poland CitiInsurance Polska Towarzystwo 100 PN N/A 500,000 500,000 Ubezpieczen na Zycie S.A. South Korea CDMK, Inc. 1 KRW 50,000,000 50,000,000 50,000,000 U.K. CitiInsurance General Insurance 1 Pound 10,000,000 2,000,000 2,000,000 Company Limited CitiInsurance Life Assurance 1 Pound 10,000,000 2,000,000 2,000,000 Company Limited CitiInsurance Administration 1 Pound 100 2 2 Services Limited United States TIC $ 2.50 40,000,000 40,000,000 40,000,000 TLAC $100.00 100,000 30,000 30,000 CLIC $ 1.00 10,000,000 3,200,000 3,200,000 FCLIC $ 5.00 400,000 400,000 400,000 CILIC $ 1.00 250,000 250,000 250,000 TLARC N/A 1,000 1,000 1,000 CitiInsurance International $ 0.01 1,000 1,000 1,000 Holdings Inc.
32 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX Changes in each component of Accumulated Other Changes in Equity from Nonowner Sources were as follows:
ACCUMULATED NET OTHER UNREALIZED FOREIGN DERIVATIVE CHANGES IN GAIN/LOSS ON CURRENCY INSTRUMENTS EQUITY FROM INVESTMENT TRANSLATION AND HEDGING NONOWNER SECURITIES ADJUSTMENTS ACTIVITIES SOURCES ------------- ----------- ----------- ----------- ($ IN MILLIONS) BALANCE, DECEMBER 31, 2003........... $1,345 $114 $(102) $1,357 ------ ---- ----- ------ Unrealized gains on investment securities, net of tax of $81...... 145 -- -- 145 Foreign currency translation adjustment, net of tax of $24...... -- 45 -- 45 Add: Derivative instrument hedging activity gains, net of tax of $53................................ -- -- 98 98 ------ ---- ----- ------ Period change........................ 145 45 98 288 ------ ---- ----- ------ BALANCE, DECEMBER 31, 2004........... $1,490 $159 $ (4) $1,645 ====== ==== ===== ======
8. LEASES Most leasing functions for the TB are administered by a Citigroup subsidiary. Net rent expense for the TB was $11 million in 2004.
MINIMUM OPERATING MINIMUM CAPITAL YEAR ENDING DECEMBER 31, RENTAL PAYMENTS RENTAL PAYMENTS - ------------------------ ----------------- --------------- ($ IN MILLIONS) 2005................................................ $ 9 $ 5 2006................................................ 8 5 2007................................................ 8 6 2008................................................ 6 6 2009................................................ 1 6 Thereafter.......................................... -- 12 --- --- Total rental payments............................... $32 $40 === ===
9. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS The TB use derivative financial instruments, including financial futures contracts, swaps, interest rate caps, options and forward contracts, as a means of hedging exposure to interest rate changes, equity price changes, credit and foreign currency risk. The TB also use derivative financial instruments to enhance portfolio income and replicate cash market investments. The TB, through Tribeca, hold and issue derivative instruments in conjunction with these investment strategies designed to enhance portfolio returns. The TB use exchange traded financial futures contracts to manage their exposure to changes in interest rates or equity market prices that arise from the sale of certain insurance and investment products, or the need to reinvest proceeds from the sale or maturity of investments. In addition, the TB enter into interest rate 33 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) futures contracts in connection with macro hedges intended to reduce interest rate risk by adjusting portfolio duration. To hedge against adverse changes in interest rates or equity market prices, the TB enter long or short positions in financial futures contracts, which offset asset price changes resulting from changes in market interest rates or equity market prices until an investment is purchased, or a product is sold. Futures contracts are commitments to buy or sell at a future date a financial instrument, at a contracted price, and may be settled in cash or through delivery. The TB use equity option contracts to manage their exposure to changes in equity market prices that arise from the sale of certain insurance products. To hedge against adverse changes in the equity market prices, the TB enter long positions in equity option contracts with major financial institutions. These contracts allow the TB, for a fee, the right to receive a payment if the referenced index, such as the Standard and Poor's 500 Index, falls below agreed upon strike prices. Currency option contracts are used on an ongoing basis to hedge the TB' exposure to foreign currency exchange rates that result from the TB' direct foreign currency investments. To hedge against adverse changes in exchange rates, the TB enter into contracts that give them the right, but not the obligation, to sell the foreign currency within a limited time at a contracted price that may also be settled in cash, based on differentials in the foreign exchange rate. These contracts cannot be settled prior to maturity. The TB enter into interest rate swaps in connection with other financial instruments to provide greater risk diversification and better match the cash flows from assets and related liabilities. In addition, the TB enter into interest rate swaps in connection with macro hedges intended to reduce interest rate risk by adjusting portfolio duration. Under interest rate swaps, the TB agree with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed upon notional principal amount. The TB also enter into basis swaps in which both legs of the swap are floating with each based on a different index. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. A single net payment is usually made by one counterparty at each due date. The TB enter into currency swaps in connection with other financial instruments to provide greater risk diversification and better match assets purchased in one currency, such as U.S. dollars, with a corresponding liability originated in a different currency. Under currency swaps, the TB agree with other parties to exchange, at specified intervals, one currency for a different currency. Generally, there is an exchange of currency at the outset of the contract based upon prevailing foreign exchange rates. Swap agreements are not exchange traded so they are subject to the risk of default by the counterparty. The TB enter into interest rate caps in connection with other financial instruments to provide greater risk diversification and better match assets and liabilities. In addition, the TB enter into interest rate caps in connection with macro hedges intended to reduce interest rate risk by adjusting portfolio duration. Under interest rate caps, the TB pay a premium and is entitled to receive cash payments equal to the excess of the market interest rates over the strike prices multiplied by the notional principal amount. Interest rate cap agreements are not exchange traded so they are subject to the risk of default by the counterparty. Forward contracts are used on an ongoing basis to hedge the TB' exposure to foreign currency exchange rates that result from direct foreign currency investments. To hedge against adverse changes in exchange rates, the TB enter into contracts to exchange foreign currency for U.S. dollars with major financial institutions. These contracts cannot be settled prior to maturity. At the maturity date the TB must purchase the foreign currency necessary to settle the contracts. The TB enter into credit default swaps in conjunction with a fixed income investment to reproduce the investment characteristics of a different investment. The TB will also enter credit default swaps to reduce exposure to certain corporate debt security investment exposures that it holds. Under credit default swaps, the 34 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) TB agree with other parties to receive or pay, at specified intervals, fixed or floating rate interest amounts calculated by reference to an agreed notional principal amount in exchange for the credit default risk of a specified bond. Swap agreements are not exchange traded so they are subject to the risk of default by the counterparty. Several of the TB' hedging strategies do not qualify or are not designated as hedges for accounting purposes. This can occur when the hedged item is carried at fair value with changes in fair value recorded in earnings, the derivative contracts are used in a macro hedging strategy, the hedge is not expected to be highly effective, or structuring the hedge to qualify for hedge accounting is too costly or time consuming. The TB monitor the creditworthiness of counterparties to these financial instruments by using criteria of acceptable risk that are consistent with on-balance sheet financial instruments. The controls include credit approvals, credit limits and other monitoring procedures. Additionally, the TB enter into collateral agreements with its derivative counterparties. As of December 31, 2004, the TB held collateral under these contracts amounting to approximately $813.0 million. The table below provides a summary of the notional and fair value of derivatives by type:
DECEMBER 31, 2004 FAIR VALUE ---------------------------------- NOTIONAL DERIVATIVE TYPE AMOUNT ASSETS LIABILITIES - --------------- --------- -------- ----------- ($ IN MILLIONS) Interest rate, equity and currency swaps.............. $ 9,335.8 $ 949.6 $156.2 Financial futures..................................... 1,775.9 -- -- Interest rate and equity options...................... 1,361.9 201.8 -- Currency forwards..................................... 713.3 8.8 8.5 Credit derivatives.................................... 414.1 3.8 3.4 Interest rate caps.................................... 117.5 3.1 -- Embedded derivatives included in liabilities.......... -- -- 181.3 --------- -------- ------ TOTAL............................................... $13,718.5 $1,167.1 $349.4 ========= ======== ======
The following table summarizes certain information related to the TB' hedging activities for the year ended December 31, 2004:
YEAR ENDED IN MILLIONS OF DOLLARS DECEMBER 31, 2004 - ---------------------- ----------------- Hedge ineffectiveness recognized related to fair value hedges.................................................... $(33.2) Hedge ineffectiveness recognized related to cash flow hedges.................................................... 6.1 Net loss recorded in accumulated other changes in equity from nonowner sources related to net investment hedges.... (0.6) Net loss from economic hedges recognized in earnings........ (29.5)
During the year ended December 31, 2004 there were no discontinued forecasted transactions. The amount expected to be reclassified from accumulated other changes in equity from nonowner sources into pre-tax earnings for cash flow hedges within twelve months from December 31, 2004 is $(68.9) million. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the TB issue fixed and variable rate loan commitments and have unfunded commitments to partnerships and joint ventures. All of these commitments are to unaffiliated 35 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) entities. The off-balance sheet risk of fixed and variable rate loan commitments was $374.3 million at December 31, 2004. The TB had unfunded commitments of $1,040.9 million to these partnerships at December 31, 2004. FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS The TB use various financial instruments in the normal course of its business. Certain insurance contracts are excluded by SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," and therefore are not included in the amounts discussed. At December 31, investments in fixed maturities had a carrying value and a fair value of $45.4 billion. See Note 3. At December 31, 2004, mortgage loans had a carrying value of $2.2 billion and a fair value of $2.3 billion. In estimating fair value, the TB used interest rates reflecting the current real estate financing market. At December 31, 2004, contractholder funds with defined maturities had a carrying value of $17.4 billion and a fair value of $17.8 billion. The fair value of these contracts is determined by discounting expected cash flows at an interest rate commensurate with the TB' credit risk and the expected timing of cash flows. Contractholder funds without defined maturities had a carrying value of $14.4 billion and a fair value of $14.1 billion at December 31, 2004. The contracts without defined maturities are fair valued using surrender values. The carrying values of $569 million of financial instruments classified as other assets approximated their fair values at December 31, 2004. The carrying value of $2.8 billion of financial instruments classified as other liabilities at December 31, 2004 also approximated their fair values at both December 31, 2004. Fair value is determined using various methods, including discounted cash flows, as appropriate for the various financial instruments. The carrying values of cash, trading securities and trading securities sold not yet purchased are carried at fair value. The carrying values of short-term securities and investment income accrued approximated their fair values. The carrying value of policy loans, which have no defined maturities, is considered to be fair value. 10. COMMITMENTS AND CONTINGENCIES DOMESTIC Litigation In August 1999, an amended putative class action complaint captioned Lisa Macomber, et al. vs. Travelers Property Casualty Corporation, et al. was filed in New Britain, Connecticut Superior Court against TIC, its parent corporation, certain of TIC's affiliates (collectively TLA), and TIC's former affiliate, Travelers Property Casualty Corporation. The amended complaint alleges Travelers Property Casualty Corporation purchased structured settlement annuities from TIC and spent less on the purchase of those structured settlement annuities than agreed with claimants; and that commissions paid to brokers of structured settlement annuities, including a TIC affiliate, were paid, in part, to Travelers Property Casualty Corporation. The amended complaint was dismissed and following an appeal by plaintiff in September 2002 the Connecticut Supreme Court reversed the dismissal of several of the plaintiff's claims. On May 26, 2004, the Connecticut Superior Court certified a nation wide class action. The class action claims against TLA are violation of the Connecticut Unfair Trade Practice Statute, unjust enrichment and civil conspiracy. On June 15, 2004, the Defendants, including TLA, appealed the Connecticut Superior Court's May 26, 2004 class certification order. 36 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In 2003 and 2004, several issues in the mutual fund and variable insurance product industries have come under the scrutiny of Federal and state regulators. Like many other companies in our industry, TIC and certain of the DTB legal entities have received a request for information from the Securities and Exchange Commission (SEC) and a subpoena from the New York Attorney General regarding market timing and late trading. During 2004 the SEC requested additional information about variable product operations on market timing, late trading and revenue sharing, and the SEC, the NASD and the New York Insurance Department have made inquiries into these issues and other matters associated with the sale and distribution of insurance products. In addition, like many insurance companies and agencies, in 2004 and 2005 TIC and certain of the DTB legal entities received inquiries from certain state Departments of Insurance regarding producer compensation and bidding practices. TIC and certain of the DTB legal entities are cooperating fully with all of these requests and are not able to predict their outcomes. In addition, TIC and certain of the DTB legal entities are defendants or co-defendants in various other litigation matters in the normal course of business. These include civil actions, arbitration proceedings and other matters arising in the normal course of business out of activities as an insurance company, a broker and dealer in securities or otherwise. In the opinion of DTB' management, the ultimate resolution of these legal and regulatory proceedings would not be likely to have a material adverse effect on the combined financial condition or liquidity, but, if involving monetary liability, may be material to the TB' operating results for any particular period. Other DTB are members of the Life & Health Insurance Guarantee Association in each of the states they are licensed to conduct business, which have the authority to assess DTB for the purpose of raising funds in order to pay claims and expenses of insurance companies that have been declared insolvent and are unable to meet their legal obligations. At this time, DTB cannot make an estimate of what assessment from the Association would amount to. TIC is a member of the Federal Home Loan Bank of Boston (the Bank), and in this capacity has entered into a funding agreement (the funding agreement) with the Bank where a blanket lien has been granted to collateralize the Bank's deposits. TIC maintains control of these assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding agreement further states that upon any event of default, the Bank's recovery is limited to the amount of the member's outstanding funding agreement. The amount of TIC's liability for funding agreements with the Bank as of December 31, 2004 is $1.1 billion, included in contractholder funds. The TB holds $60.3 million of common stock of the Bank, included in equity securities. INTERNATIONAL Japan Joint Venture Pursuant to the joint venture agreement governing the ITB' Japan joint venture interest, upon a change of control of CitiInsurance International Holdings Inc. (CIHI), Mitsui Sumitomo Insurance Co., Ltd. (MSI), the ITB' partner in the Japan joint venture, has the right to purchase all of the joint venture shares owned by CIHI at a price per share equal to the fair market value thereof as determined by an independent financial advisor. Such right may be exercised not later than 30 days after notice of the change of control is received by MSI. 37 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Siembra Group As the economic situation, as well as legal and regulatory issues, in Argentina remain fluid, the Siembra Group is watching the potential impact that government actions may have on our pension and insurance businesses, including the potential for pension reform, re-dollarization of pension annuities, impact of debt restructurings, and the liquidity and capital needs of the pension and insurance subsidiaries. Additional costs to the Siembra Group will depend on future actions by the Argentine government and the Siembra Group. Additional losses may be incurred. Injunctions (Amparos) The Argentina businesses have received court injunctions relating to customers' claims that they are owed U.S. dollars despite the government mandated conversion into pesos of all U.S. dollar denominated contracts at specified rates. If a customer is successful, an Argentine judge may issue an order of Amparos allowing the customer to withdrawal the original U.S. dollar denominated balance at the current free-floating exchange rate, resulting in a loss to the Siembra Group. The Siembra Group accounts for Amparos as litigation costs. Because the Siembra Group cannot monitor the number or related amounts of Amparos in the court system, combined with the uncertainty related to the legal issues surrounding their enforcement, the total exposure is not reasonably estimable. Therefore, the Siembra Group accounts for Amparos losses as specific court orders to pay are received. In the opinion of ITB' management, the ultimate resolution of these legal and regulatory proceedings would not be likely to have a material adverse effect on the combined financial condition or liquidity, but, if involving monetary liability, may be material to the TB' operating results for any particular period. 11. RELATED PARTY TRANSACTIONS DOMESTIC The DTB conduct business under various company names, including TIC, TLAC, CLIC, FCLIC, CILIC and TLARC. Prior to the Agreement, all of DTB was consolidated under Citigroup, their ultimate parent. The following discussions are categorized between the domestic and international operations and provide a summary of significant intercompany transactions. Citigroup and certain of its subsidiaries provide investment management and accounting services, payroll, internal auditing, benefit management and administration, property management and information technology services to the DTB as of December 31, 2004. DTB paid Citigroup and its subsidiaries $102.7 million in 2004 for these services, including $61.7 from TIC to TSI for investment services. The financial results reflect allocations of corporate expenses from Citigroup, which may be different from comparable expenses that would have been incurred, had the DTB operated as a standalone company. The amounts due to affiliates related to these services, included in other liabilities at December 31, 2004 was insignificant. At December 31, 2004 DTB had outstanding loaned securities to its affiliate Smith Barney (SB), a division of Citigroup Global Markets, Inc., of $348 million. DTB had investments in an affiliated joint venture, Tishman Speyer, in the amount of $92.9 million at December 31, 2004. Income of $54.2 million was earned on these investments in 2004. DTB also had an investment in Greenwich Street Capital Partners I, an affiliated private equity investment, in the amount of $42.2 million December 31, 2004. Income of $4.3 million was earned on this investment in 2004. 38 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In the ordinary course of business, DTB purchases and sells securities through affiliated broker-dealers. These transactions are conducted on an arm's-length basis. Amounts due to SB were $363.7 million at December 31, 2004 DTB markets deferred annuity products and life insurance through SB. Annuity deposits related to these products were $877 million in 2004. Life premiums were $137.5 million in 2004. Commissions and fees paid to SB were $71.9 million in 2004. DTB also markets individual annuity and life insurance through CitiStreet Retirement Services, a division of CitiStreet LLC, (CitiStreet), a joint venture between Citigroup and State Street Bank. Deposits received from CitiStreet were $1.5 billion in 2004. Commissions and fees paid to CitiStreet were $45.9 million in 2004. DTB markets individual life and annuity products through an affiliate Citibank, N.A. (together with its subsidiaries, Citibank). Life premiums were $43 million, and annuity deposits received from Citibank were $529 million in 2004. Commissions and fees paid to Citibank were $44.3 million in 2004. Primerica Financial Services (PFS), an affiliate, is a distributor of products for DTB. PFS sold $983 million of individual annuities in 2004. Commissions and fees paid to PFS were $75.4 million in 2004. INTERNATIONAL ITB conducts business through various legal entities (see Note 1). Prior to the Agreement, all of the ITB entities were consolidated under Citigroup, their ultimate parent. The following discussions provide a summary of significant intercompany transactions for the international operations. As of December 31, 2004 ITB has approximately $125.4 million of cash and short-term securities with Citigroup banking operations around the world. The ITB are heavily integrated with the Citigroup banking and finance operations around the world. Wherever possible, the ITB utilize Citigroup's international infrastructure to support the insurance operations. In general, services rendered between Citigroup entities and the ITB, which include real estate services, information technology, treasury services, human resources services and accounting support, are at fair market value and are settled either in cash through the Citigroup MIS, as described below. CITIGROUP MIS PROCESS ITB operations utilize the Citigroup MIS process to report its management financial statements. Within Citigroup, MIS transactions are used to allocate revenue and expense adjustments between Citigroup legal entities to create management based income statements by region and product type. The ITB receive allocations for their manufacturing of insurance products distributed through Citigroup distribution channels not being sold. MIS transactions are generally at fair market value between Citigroup entities for various services rendered without transfer of cash. Within Citigroup, all MIS transactions eliminate in consolidation and have no impact on the consolidation of Citigroup. The combined financial statements as they have been presented here do include a number of MIS transactions between ITB legal entities and Citigroup legal entities that do not impact the balance sheet, but do impact the income statement. Going forward, ITB entities will no longer be able to utilize MIS transactions. All services rendered between Citigroup and ITB must be settled in cash. As a result of moving from an MIS to a cash basis settlement of transactions, there may be certain sales tax implications for both parties. However, the nature and amounts of these taxes are not known at this time, but are not expected to be material to the business as a whole. 39 CITIGROUP LIFE INSURANCE AND ANNUITIES ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 12. SUBSEQUENT EVENT INTERNATIONAL On January 14, 2005, AFJP tendered defaulted government debt as part of a general Argentine debt restructuring in expectation of receiving new securities. As of December 31, 2004, securities tendered had a fair value of 33 million Argentine pesos (approximately $11 million). These securities are expected to have a mandatory trading restriction of one year after receipt and are, therefore, not expected to have a publicly quoted fair market value until such time that they can be traded. 40 -----END PRIVACY-ENHANCED MESSAGE-----