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This excerpt taken from the ALL 10-Q filed Oct 31, 2007. Gross margin
increased 6.5% in the third quarter of 2007 and declined 5.4% in the first nine
months of 2007, compared to the same periods of 2006. The increase in the third
quarter of 2007 was the result of increased investment, benefit, and contract
charges and fees margin. The decline in the first nine months of 2007 was due
to the absence in 2007 of gross margin on variable annuities that were
reinsured effective June 1, 2006. Excluding the impact of the reinsured
variable annuity business, gross margin increased 2.4% in the first nine months
of 2007. This increase was attributable to higher investment and contract charges
and fees margin, partially offset by lower benefit margin.
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This excerpt taken from the ALL 8-K filed Oct 17, 2007. Gross
margin*, a non-GAAP
measure that is a component of our net income analysis for Allstate Financial,
includes:
• Life and annuity premiums, • Contract charges, • Net investment income, • Contract benefits, • Interest credited to contractholder funds, excluding amortization of DSI reported in interest credited to contractholder funds. DSI is aggregated with DAC amortization expense in the analysis since it impacts net income in a consistent manner, and • Periodic settlements and accruals on certain non-hedge derivative instruments (see additional discussion under “investment margin”) reported as realized capital gains and losses.
Gross margin is further divided into three components, investment margin*, benefit margin*, and contract charges and fees margin*, in order to reveal trends that are otherwise difficult to observe in the consolidated statement of operations. Each is a non-GAAP measure.
We use gross margin, its components, and other analysis presented below, to more effectively analyze changes in net income and to reveal more of the underlying financial performance of our business, including each of our major product groups. This analysis enables investors to also observe trends and variability in net investment results, underwriting results, and contract charges which would not otherwise be determinable. This analysis:
• Assists investors in understanding the sources of earnings and causes of periodic variability between periods; • Provides insights into changes in profitability due to changes in revenues and related incurred benefits; • Highlights operating trends that might otherwise not be transparent; • Helps reveal the reasonableness of our pricing assumptions; and • Facilitates a better understanding of our financial performance.
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Gross margin measures the excess of life and annuity premiums, contract charges and net investment income over the cost of contract benefits and interest credited to reserves and contractholder funds. This excess amount is available to cover our expenses (including the amortization of deferred policy acquisition costs) and income taxes. We believe it is important for investors and other users of our financial statements to effectively analyze and determine if our revenues are sufficient to cover expenses. Gross margin, investment margin, benefit margin and contract charges and fees margin are supplemental analyses presented to enable more effective review of changes in net income and should not be considered as a substitute for net income and do not reflect the overall profitability of the business. Net income is the GAAP measure that is most directly comparable to these margins. Gross margin, investment margin, benefit margin and contract charges and fees margin are only components of net income and exclude other important components of net income. These other items are also presented in the analysis and discussion below in a manner designed to supplement and explain the consolidated statement of operations and variability in net income.
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