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| Definitions of Non-GAAP and Operating
Measures |
We believe that investors’
understanding of Allstate’s performance is enhanced by
our disclosure of the following non-GAAP and operating financial
measures. Our methods of calculating these measures may differ
from those used by other companies and therefore comparability
may be limited.
Operating income is income
before dividends on preferred securities and cumulative
effect of change in accounting principle, after-tax, excluding:
- realized capital gains and losses, after-tax, except for
periodic settlements and accruals on non-hedge derivative
instruments, which are reported with realized capital gains
and losses but included in operating income,
- amortization of deferred policy acquisition costs (“DAC”)
and deferred sales inducements (“DSI”), to the
extent they resulted from the recognition of realized capital
gains and losses, and
- (loss) gain on disposition of operations, after-tax.
Net income is the GAAP measure that is most directly comparable
to operating income.
We use operating income to evaluate our results of operations.
It reveals trends in our insurance and financial services
business that may be obscured by the net effect of realized
capital gains and losses and (loss) gain on disposition
of operations. These items may vary significantly between
periods and are generally driven by business decisions and
economic developments such as market conditions, the timing
of which is unrelated to the insurance underwriting process.
Moreover, we reclassify periodic settlements on non-hedge
derivative instruments into operating income to report them
in a manner consistent with the economically hedged investments,
replicated assets or product attributes (e.g. net investment
income and interest credited to contractholder funds) and
by doing so, appropriately reflect trends in product performance.
Therefore, we believe it is useful for investors to evaluate
these components separately and in the aggregate when reviewing
our performance. We note that the price to earnings multiple
commonly used by insurance investors as a forward-looking
valuation technique uses operating income as the denominator.
We use adjusted measures of operating income and operating
income per diluted share in incentive compensation. Operating
income should not be considered as a substitute for net
income and does not reflect the overall profitability of
our business.
The following table reconciles operating income and operating
income per diluted share to net income and net income per diluted
share for the years ended December 31.
Operating income
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($ in millions) |
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2004 |
2003 |
2002 |
2001 |
2000 |
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| Operating income |
|
$3,091 |
$2,662 |
$2,075 |
$1,492 |
$2,004 |
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| Realized capital gains and losses |
|
591 |
196 |
(924) |
(352) |
425 |
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| Income tax (expense) benefit |
|
(199) |
(62) |
326 |
127 |
(177) |
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| Realized capital gains and losses, after-tax |
|
392 |
134 |
(598) |
(225) |
248 |
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| DAC and DSI amortization related to realized
capital gains and losses, after-tax |
|
(89) |
(30) |
(1) |
(11) |
— |
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| Reclassification of periodic settlements
and accruals on non-hedge derivative instruments, after-tax |
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(32) |
(15) |
(3) |
(4) |
— |
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| (Loss) gain on disposition of operations,
after-tax |
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(6) |
(26) |
2 |
(40) |
— |
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Income before dividends on preferred securities
and cumulative effect of change in accounting
principle, after-tax |
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3,356 |
2,725 |
1,475 |
1,212 |
2,252 |
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Dividends on preferred securities of subsidiary
trust, after-tax |
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— |
(5) |
(10) |
(45) |
(41) |
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Cumulative effect of change in accounting
principle, after-tax |
|
(175) |
(15) |
(331) |
(9) |
— |
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| Net income |
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$3,181 |
$2,705 |
$1,134 |
$1,158 |
$2,211 |
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Operating income (continued)
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Per diluted share (In dollars) |
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2004 |
2003 |
2002 |
2001 |
2000 |
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| Operating income |
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$ 4.41 |
$ 3.77 |
$ 2.92 |
$ 2.06 |
$ 2.68 |
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| Realized capital gains and losses |
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| Income tax (expense) benefit |
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| Realized capital gains and losses, after-tax |
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0.56 |
0.19 |
(0.84) |
(0.31) |
0.33 |
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| DAC and DSI amortization related to realized
capital gains and losses, after-tax |
|
(0.13) |
(0.05) |
— |
(0.01) |
— |
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| Reclassification of periodic settlements
and accruals on non-hedge derivative instruments, after-tax |
|
(0.04) |
(0.02) |
(0.01) |
(0.01) |
— |
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| (Loss) gain on disposition of operations,
after-tax |
|
(0.01) |
(0.04) |
— |
(0.06) |
— |
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Income before dividends on preferred securities
and cumulative effect of change in accounting
principle, after-tax |
|
4.79 |
3.85 |
2.07 |
1.67 |
3.01 |
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Dividends on preferred securities of subsidiary
trust, after-tax |
|
— |
— |
(0.01) |
(0.06) |
(0.06) |
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Cumulative effect of change in accounting
principle, after-tax |
|
(0.25) |
(0.02) |
(0.46) |
(0.01) |
— |
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| Net income |
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$ 4.54 |
$ 3.83 |
$ 1.60 |
$ 1.60 |
$ 2.95 |
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Operating income
return on equity is a ratio that uses a non-GAAP measure.
It is calculated by dividing the rolling 12-month operating
income by the average of shareholders’ equity at the beginning
and at the end of the 12-month period, after excluding the after-tax
effect of unrealized net capital gains. We use it to supplement
our evaluation of net income and return on equity. We believe
that this measure is useful to investors because it eliminates
the effect of items that can fluctuate significantly from period
to period and that are driven by developments, the magnitude
and timing of which are generally not influenced by management:
the after-tax effects of realized and unrealized capital gains
and losses and the cumulative effect of change in accounting
principle. Return on equity is the most directly comparable
GAAP measure. The following tables show the reconciliations
for the years ended December 31.
Return on equity |
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| ($ in millions) |
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2004 |
2003 |
2002 |
2001 |
2000 |
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| Numerator: |
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| Net income |
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$ 3,181 |
$ 2,705 |
$ 1,134 |
$ 1,158 |
$ 2,211 |
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| Denominator: |
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| Beginning shareholders’ equity |
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20,565 |
17,438 |
17,196 |
17,451 |
16,601 |
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| Ending shareholders’ equity |
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21,823 |
20,565 |
17,438 |
17,196 |
17,451 |
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| Average shareholders’ equity |
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$21,194 |
$19,002 |
$17,317 |
$17,324 |
$17,026 |
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| ROE (%) |
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15.0 |
14.2 |
6.5 |
6.7 |
13.0 |
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Operating income return on equity
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| ($ in millions) |
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2004 |
2003 |
2002 |
2001 |
2000 |
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| Numerator: |
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| Operating income |
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$ 3,091 |
$ 2,662 |
$ 2,075 |
$ 1,492 |
$ 2,004 |
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| Denominator: |
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| Beginning shareholders’ equity |
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20,565 |
17,438 |
17,196 |
17,451 |
16,601 |
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| Unrealized net capital gains |
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3,125 |
2,602 |
1,789 |
1,980 |
1,369 |
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| Adjusted beginning shareholders’ equity |
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17,440 |
14,836 |
15,407 |
15,471 |
15,232 |
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| Ending shareholders’ equity |
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21,823 |
20,565 |
17,438 |
17,196 |
17,451 |
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| Unrealized net capital gains |
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2,988 |
3,125 |
2,602 |
1,789 |
1,980 |
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| Adjusted ending shareholders’ equity |
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18,835 |
17,440 |
14,836 |
15,407 |
15,471 |
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| Average shareholders’ equity |
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$18,138 |
$16,138 |
$15,122 |
$15,439 |
$15,352 |
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| Operating income ROE (%) |
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17.0 |
16.5 |
13.7 |
9.7 |
13.1 |
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Premiums and deposits
is an operating measure that we use to analyze production trends
for Allstate Financial sales. It includes premiums on insurance
policies and annuities and all deposits and other funds received
from customers on deposit-type products including the net new
deposits of Allstate Bank, which we account for under GAAP as
increases to liabilities rather than as revenue.
The following table illustrates where premiums and deposits
are reflected in the consolidated financial statements for the
years ended December 31.
Premiums and deposits
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| ($ in millions) |
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2004 |
2003 |
2002 |
2001 |
2000 |
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| Life and annuity premiums |
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$ 1,045 |
$ 1,365 |
$ 1,371 |
$ 1,345 |
$ 1,344 |
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| Deposits to contractholder
funds |
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13,616 |
10,373 |
9,484 |
7,970 |
8,393 |
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| Deposits to separate accounts and other |
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1,258 |
1,357 |
979 |
1,290 |
2,508 |
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| Total premiums and deposits |
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$15,919 |
$13,095 |
$11,834 |
$10,605 |
$12,245 |
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New sales of financial products by
Allstate exclusive agencies is an operating measure that
we use to quantify the current year sales of financial products
by the Allstate Agency proprietary distribution channel. New
sales of financial products by Allstate exclusive agencies includes
annual premiums on new insurance policies, initial premiums
and deposits on annuities, net new deposits in the Allstate
Bank and sales of other companies’ mutual funds, and excludes
renewal
premiums. New sales of financial products by Allstate exclusive
agencies for the twelve months ended December 31, 2004, 2003,
2002, 2001 and 2000 totaled $2.27 billion, $1.83 billion, $1.61
billion, $702 million and $414 million, respectively.
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