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This excerpt taken from the ALL 8-K filed Feb 10, 2010. 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-months, after excluding the effect of unrealized net capital gains and
losses. Return on equity is the most
directly comparable GAAP measure. We use
operating income as the numerator for the same reasons we use operating income,
as discussed above. We use average
shareholders’ equity excluding the effect of unrealized net capital gains and
losses for the denominator as a representation of shareholders’ equity
primarily attributable to the Company’s earned and realized business operations
because it eliminates the effect of items that are unrealized and vary significantly
between periods due to external economic developments such as capital market conditions
like changes in equity prices and interest rates, the amount and timing of
which are unrelated to the insurance underwriting process. We use it to supplement our evaluation of net
income and return on equity because it excludes the effect of items that tend
to be highly variable from period to period.
We believe that this measure is useful to investors and that it provides
a valuable tool for investors when considered along with net income return on
equity because it eliminates the after-tax effects of realized and unrealized
net capital gains and losses that can fluctuate significantly from period to
period and that are driven by economic developments, the magnitude and timing
of which are generally not influenced by management. In addition, it eliminates non-recurring
items that are not indicative of our ongoing business or economic trends. A
byproduct of excluding the items noted above to determine operating income
return on equity from return on equity is the transparency and understanding of
their significance to return on equity variability and profitability while
recognizing these or similar items may recur in subsequent periods. Therefore, we believe it is useful for
investors to have operating income return on equity and return on equity when
evaluating our performance. We note that
investors, financial analysts, financial and business media organizations and
rating agencies utilize operating income return on equity results in their
evaluation of our and our industry’s financial performance and in their
investment decisions, recommendations and communications as it represents a
reliable, representative and consistent measurement of the industry and the
company and management’s utilization of capital. Operating income return on equity should not
be considered as a substitute for return on equity and does not reflect the
overall profitability of our business. A
reconciliation of return on equity and operating income return on equity can be
found in the schedule, “Return on Equity”.
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