This excerpt taken from the ALL DEF 14A filed Apr 2, 2007.
Annual Cash Incentive Awards for 2006
Adjusted operating income per diluted share: This measure is used to assess financial performance. The measure is equal to net income adjusted to exclude the after-tax effects of the items listed below, divided by the weighted average shares outstanding on a diluted basis:
Allstate Protection Segment Measures
Each of the Allstate Protection segment measures excludes the loan protection business, which was transferred from the Allstate Financial to the Allstate Protection segment effective January 1, 2006.
Growth and profit matrices: A combination of financial measures used by management to emphasize a balanced approach to premium growth, policy growth, and profit. The primary matrix matches the percent increase in Allstate Protection premiums written and the Allstate Protection combined ratio adjusted to exclude the effect of Restructuring and related charges. A second matrix matches the percent change in policies in force (PIF) over prior year and the same combined ratio. Results are summed for the two matrices to determine achievement relative to target. The percent increase in PIF excludes: Allstate Motor Club, Allstate Canada, personal property insurance in catastrophe prone markets, and commercial property insurance. For disclosure of Allstate Protection premiums written and combined ratio, see the discussion of the Allstate Protection segment in Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2006.
Financial product sales ("production credits"): This measure of sales and related profitability of proprietary and non-proprietary financial products is used by management to assess the execution of our strategy to become "broader" in financial services. This measure is calculated as the total amount of production credits for current year transactions. Production credits are an internal statistic calculated as a percent of premium or deposits to life insurance, annuities or mutual funds which vary based on the expected profitability of the specific financial product.
Adjusted expense ratio: This is a measure of profitability management uses to assess the efficiency of operations. This measure is computed using specific expenses as the numerator and Allstate Protection insurance premiums earned as the denominator. The specific expenses in the numerator are comprised of (a) Operating costs and expenses and Amortization of DAC, excluding (i) certain agent bonuses, (ii) effects of guaranty fund assessments, and (iii) interest expense and (b) Claims expenses reported in claims and claims expense incurred, including the planned level of catastrophe expense and excluding actual catastrophe related claims expense and the change in reserves for expenses to settle pending claims.
Customer loyalty index: This is an indicative measure used by management to assess the future retention of customers. This measure represents Allstate's position relative to its competitors. The index is
based on responses to a consumer survey developed by Allstate. The survey measures consumer satisfaction, likelihood to renew, and willingness to refer or recommend their insurance company. A vendor administers the survey and tabulates the index.
Allstate Financial Segment Measures
Adjusted operating income: This is a measure management uses to assess the profitability of the business. The Allstate Financial segment measure, operating income, is adjusted to exclude the actual results of the disposed variable annuity business and to include the planned results of the disposed variable annuity business. It also is adjusted to exclude the after tax effects of restructuring and related charges and accruals for specific litigation. For disclosure of the Allstate Financial segment measure see footnote 18 to our audited financial statements for 2006.
Expense management: This is a measure management uses to assess the cost efficiency of the business. It is a measure of the reduction of a specific group of expenses that management believes is important to control, determined on an incurred basis and excluding the impact of deferral for expenses that are deferrable as policy acquisition costs.
Sales and new business return measureexpected lifetime profits on new business: This is a measure used by management to emphasize a balanced approach to growth and profit. The measure is equal to the present value of expected future profits to be earned over the life of new business issued in 2006 excluding Allstate Workplace and Allstate Bank. For each product category, the measure is calculated as the product of three factors: (a) total product sales, (b) the actuarially determined expected return on required capital, and (c) the actuarially determined expected amount of required capital (expressed per dollar of sales) to support the product over its expected lifetime. Product sales include premiums (which are reported as life and annuity premiums and contract charges) and deposits (which are reported as increases in liabilities) plus internal product exchanges and exclude renewal premiums and deposits on life insurance products. In addition, the aggregate lifetime expected return on capital required across all new business issued in 2006 must exceed a specified minimum for any award with regard to this measure to be earned.
Allstate Investments Business Unit Measures
AIC portfolio excess total return: Management uses this measure to assess the value of active portfolio management relative to the benchmark. The measure is calculated as the excess, in basis points, of the AIC portfolio total return over the designated benchmark. Total return is principally determined using industry standards and the same sources used in preparing the financial statements to determine fair value. (See footnote 6 to our audited financial statements for 2006 for our methodologies for estimating the fair value of our investments.) In general, total return represents the increase or decrease, expressed as a percentage, in the value of the portfolio over one- and three-year periods. Time weighted returns are utilized, which removes the effects of cash flows. The portfolio includes Property-liability investments excluding investments held in certain subsidiaries, primarily New Jersey and Florida subsidiaries, and certain investments that do not have external benchmarks and for which fair value cannot readily be determined, such as investments in limited partnerships. The designated benchmark is a composite of pre-determined, customized indices which reflect the investment risk parameters established in the investment policies by the boards of the relevant subsidiaries, weighted in proportion to our investment plan, in accordance with our investment policy.
Allstate Financial excess spread: Management uses this measure to assess the value provided on each specific fixed income security and commercial mortgage purchase decision, up to specific purchase volumes, relative to the benchmark for securities of that purchase quality. Excess spread is calculated as the difference between Allstate's spread, calculated on a dollar weighted average basis for the majority of new purchases, and the customized Lehman US Corporate Fixed Income Index spread benchmark expressed in basis points. The benchmark is customized to reflect investment risk parameters established
in the investment policies by the boards of the relevant subsidiaries. Allstate's excess spread on a new purchase is determined as the difference between the purchase yield and the U. S. Treasury bond yield with a comparable duration at the time of purchase.
Allstate Financial high value add excess spread: Management uses this measure to assess the value provided by fixed income security and commercial mortgage purchase decisions on a predetermined volume of new investments targeted at a moderately higher risk and return. High value add excess spread is calculated as the difference between Allstate Financial's excess spread and the customized Lehman US Corporate Fixed Income Index spread benchmark calculated on a dollar weighted average basis expressed in basis points, as described and determined in the Allstate Financial excess spread measure.
Allstate Financial credit loss: Management uses this measure to assess the quality of credit decisions. Measure evaluates the realized capital losses attributed to credit incurred in the current year relative to a target, the determination of which is informed by a forecasting model and estimated investment positions. Credit losses include write downs and write offs, net of recoveries, and losses on sales of securities for credit concern reasons and other losses on dispositions where the price realized, as a percent of par value of fixed income securities or cost of equity securities, is below 85%. For purposes of this measure, lower losses are a better result.