Citibank 2012 Annual Report Download - page 299

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Custody indemnifications
Custody indemnifications are issued to guarantee that custody clients will
be made whole in the event that a third-party subcustodian or depository
institution fails to safeguard clients’ assets.
Other guarantees and indemnifications
Credit Card Protection Programs
The Company, through its credit card business, provides various cardholder
protection programs on several of its card products, including programs
that provide insurance coverage for rental cars, coverage for certain losses
associated with purchased products, price protection for certain purchases
and protection for lost luggage. These guarantees are not included in
the table, since the total outstanding amount of the guarantees and the
Company’s maximum exposure to loss cannot be quantified. The protection
is limited to certain types of purchases and certain types of losses, and it is
not possible to quantify the purchases that would qualify for these benefits
at any given time. The Company assesses the probability and amount of its
potential liability related to these programs based on the extent and nature of
its historical loss experience. At December 31, 2012 and December 31, 2011,
the actual and estimated losses incurred and the carrying value of the
Company’s obligations related to these programs were immaterial.
Other Representation and Warranty Indemnifications
In the normal course of business, the Company provides standard
representations and warranties to counterparties in contracts in connection
with numerous transactions and also provides indemnifications, including
indemnifications that protect the counterparties to the contracts in the event
that additional taxes are owed due either to a change in the tax law or an
adverse interpretation of the tax law. Counterparties to these transactions
provide the Company with comparable indemnifications. While such
representations, warranties and indemnifications are essential components
of many contractual relationships, they do not represent the underlying
business purpose for the transactions. The indemnification clauses are often
standard contractual terms related to the Company’s own performance under
the terms of a contract and are entered into in the normal course of business
based on an assessment that the risk of loss is remote. Often these clauses
are intended to ensure that terms of a contract are met at inception. No
compensation is received for these standard representations and warranties,
and it is not possible to determine their fair value because they rarely, if
ever, result in a payment. In many cases, there are no stated or notional
amounts included in the indemnification clauses, and the contingencies
potentially triggering the obligation to indemnify have not occurred and
are not expected to occur. These indemnifications are not included in the
tables above.
Value-Transfer Networks
The Company is a member of, or shareholder in, hundreds of value-transfer
networks (VTNs) (payment, clearing and settlement systems as well as
exchanges) around the world. As a condition of membership, many of
these VTNs require that members stand ready to pay a pro rata share of the
losses incurred by the organization due to another member’s default on
its obligations. The Company’s potential obligations may be limited to its
membership interests in the VTNs, contributions to the VTN’s funds, or, in
limited cases, the obligation may be unlimited. The maximum exposure
cannot be estimated as this would require an assessment of future claims that
have not yet occurred. We believe the risk of loss is remote given historical
experience with the VTNs. Accordingly, the Company’s participation in VTNs
is not reported in the Company’s guarantees tables above, and there are no
amounts reflected on the Consolidated Balance Sheet as of December 31,
2012 or December 31, 2011 for potential obligations that could arise from the
Company’s involvement with VTN associations.
Long-Term Care Insurance Indemnification
In the sale of an insurance subsidiary, the Company provided an
indemnification to an insurance company for policyholder claims and
other liabilities relating to a book of long-term care (LTC) business (for the
entire term of the LTC policies) that is fully reinsured by another insurance
company. The reinsurer has funded two trusts with securities whose fair
value (approximately $4.9 billion at December 31, 2012 and $4.4 billion at
December 31, 2011) is designed to cover the insurance company’s statutory
liabilities for the LTC policies. The assets in these trusts are evaluated and
adjusted periodically to ensure that the fair value of the assets continues to
cover the estimated statutory liabilities related to the LTC policies, as those
statutory liabilities change over time. If the reinsurer fails to perform under
the reinsurance agreement for any reason, including insolvency, and the
assets in the two trusts are insufficient or unavailable to the ceding insurance
company, then Citigroup must indemnify the ceding insurance company for
any losses actually incurred in connection with the LTC policies. Since both
events would have to occur before Citi would become responsible for any
payment to the ceding insurance company pursuant to its indemnification
obligation, and the likelihood of such events occurring is currently not
probable, there is no liability reflected in the Consolidated Balance Sheet
as of December 31, 2012 related to this indemnification. Citi continues to
closely monitor its potential exposure under this indemnification obligation.
Carrying Value—Guarantees and Indemnifications
At December 31, 2012 and December 31, 2011, the total carrying amounts
of the liabilities related to the guarantees and indemnifications included in
the tables above amounted to approximately $3.2 billion and $3.3 billion,
respectively. The carrying value of derivative instruments is included in
either Trading account liabilities or Other liabilities, depending upon
whether the derivative was entered into for trading or non-trading purposes.
The carrying value of financial and performance guarantees is included
in Other liabilities. For loans sold with recourse, the carrying value of the
liability is included in Other liabilities. In addition, at December 31, 2012
and December 31, 2011, Other liabilities on the Consolidated Balance Sheet
included an allowance for credit losses of $1,119 million and $1,136 million,
respectively, relating to letters of credit and unfunded lending commitments.