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Samuel H. Pilch |
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Group Vice President and |
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Controller |
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Allstate Life Insurance Company |
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August 1, 2007
Mr. James B. Rosenberg
Senior Assistant Chief Accountant
U.S. Securities and Exchange Commission
100 F Street N.E.
Washington, DC 20549
Mail Stop 6010
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Re: |
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Allstate Life Insurance Company |
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Form 10-K for the Fiscal Year Ended December 31, 2006 |
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Filed on March 13, 2007 |
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Form 8-K dated April 23, 2007 |
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Filed on April 23, 2007 |
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File No. 000-31248 |
Dear Mr. Rosenberg:
This letter is being submitted in response to the comments set forth in your letter dated June 29, 2007, to Mr. John C. Pintozzi, Vice President and Chief Financial Officer of Allstate Life Insurance Company with respect to the above-referenced filing.
For your convenience, we have set forth the comment from your letter in bold typeface and appearing below it is the disclosure information requested.
General
1. Please explain why excluding the information required by Item 302 of Regulation S-K was considered appropriate. Provide to us this information in disclosure-type format if you conclude that this disclosure is required.
Thank you for bringing this disclosure to our attention. The Company will provide the disclosure information below in our second quarter 10-Q. Item 8 of Form 10-K requires that registrants with securities registered pursuant to section 12(b) or 12 (g) of the Exchange Act provide the selected quarterly financial data specified in Item 302 of Regulation S-K.
The Company has securities registered under section 12(g) of the Exchange Act which are its $227 par value common stock. All of the outstanding shares are privately owned by Allstate Insurance Company. This disclosure information is intended for the benefit of the investors in the applicable equity securities. The securities are wholly owned by the parent company which has full access to the information.
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First Quarter |
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Second Quarter |
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Third Quarter |
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Fourth Quarter |
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(in millions) |
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2006 |
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2005 |
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2006 |
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2005 |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues |
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$ |
1,349 |
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$ |
1,290 |
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$ |
1,360 |
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$ |
1,315 |
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$ |
1,352 |
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$ |
1,347 |
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$ |
1,502 |
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$ |
1,327 |
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Income before cumulative effect of change in accounting principle, after-tax |
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96 |
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68 |
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56 |
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87 |
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122 |
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159 |
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154 |
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103 |
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Net income |
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96 |
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68 |
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56 |
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87 |
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122 |
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159 |
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154 |
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103 |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 12
2. Please tell us why your use of “Investment margin,” “Benefit margin,” and “Gross margin” as performance measures in your annual report are not prohibited by Item 10(e)(1)(ii)(B) of Regulation S-K. Include a discussion that demonstrates the substantive reasons why management believes that these measures provide useful information to investors. The fact that these measures are used by the company as an indicator of business performance should not be the sole support for presenting these non-GAAP financial measures. Rather, the justification for the use of these measures must be substantive. Please refer to SAB 107 and to the “Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures” on our website at www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm issued on June 13, 2003. Provide to us revisions to your disclosures in disclosure-type format.
Provide to us revisions to your disclosures in disclosure-type format.
The Company will include the following expanded disclosure in its second quarter 2007 Form 10-Q. Changes are marked from the first quarter disclosure.
Gross
margin, a non-GAAP measure, is comprised of premiums and
contract charges, and net investment income, less contract benefits and
interest credited to contractholder funds excluding amortization of DSI. Gross
margin also includes periodic settlements and accruals on certain non-hedge
derivative instruments (see additional discussion under “investment margin”). We use g Gross margin ais
a component of our evaluation of the profitability of our life insurance and
financial product portfolio. Additionally, for many of our products,
including fixed annuities, variable life and annuities, and interest sensitive
life insurance, the amortization of DAC and DSI is determined based on actual
and expected gross margin. Gross margin is comprised of three components
that are utilized to further analyze the business: investment margin, benefit
margin, and contract charges and fees.
We use gross margin to evaluate the performance of the business. We believe gross margin and its
components are also useful to investors because they allow for the
evaluation of income components separately and in the aggregate when reviewing
performance. This actuarial analysis,
which is commonly employed throughout the life insurance industry, measures the
difference between product premiums and accrued policy benefits and between net
investment income and interest credited to both contractholder funds and
insurance reserves. It reveals the
integrity and propriety of the pricing assumptions and financial performance. Additionally, for many of our products,
including fixed annuities, variable life, and interest-sensitive life
insurance, the amortization of DAC and DSI is determined based on actual and
expected gross margin. Variability of our results may be caused by this
amortization which may be the result of gross margin variability. The analysis of gross margin and its
components separately and in the aggregate provide transparency to our results
of operations. We also employ gross profit analysis to evaluate our major
products’ financial performance. For a
single segment entity, this combined presentation facilitates a better
understanding of our financial performance.
Gross margin, investment margin and benefit margin 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 is best
considered in its context as a component of net income and is presented as such
and is reconciled to GAAP net income in the table above.
Form 8-K dated April 23, 2007
3. The financial measures “Operating Income” and “Operating income return on equity” exclude certain recurring items and their exclusion appears to smooth earnings. While the acceptability of a non-GAAP financial measure that eliminates recurring items from the most comparable GAAP measure depends on all facts and circumstances, we do not believe that non-GAAP measures that have the effect of smoothing earnings are appropriate. Your disclosure regarding these measures does not appear to meet the requirements of Item 10(e)(1)(i) of Regulation S-K. Please refer to Instruction 2 to Item 2.02 of Form 8-K. The disclosure could be improved by including statements disclosing the reasons why management believes that the presentation of these measures provides useful information to investors regarding your
financial condition and results of operations. The justification for the use of these measures must be substantive. Please tell us the following in disclosure-type format:
· the economic substance behind management’s decision to use these measures;
· the material limitations associated with use of the non-GAAP financial measures as compared to the use of the most directly comparable GAAP financial measures;
· the manner in which management compensates for these limitations when using the non-GAAP financial measures; and,
· the substantive reasons why management believes the non-GAAP financial measures provide useful information to investors.
The Company included the following expanded disclosure in its Form 8-K dated July 24, 2007. Changes are marked from the April 23, 2007 8-K disclosure.
Operating income is net income, 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 DAC and deferred sales inducements (“DSI”), to the extent they resulted from the recognition of certain realized capital gains and losses,
· (loss) gain on disposition of operations, after-tax, and
· adjustments for other significant non-recurring, infrequent or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, or (b) there has been no similar charge or gain within the prior two years.
Net income is the GAAP measure that is most directly comparable to operating income.
We use operating income as an important measure to evaluate our
results of operations. We believe
that the measure provides investors with a valuable measure of the company’s
ongoing performance because it reveals trends in our insurance and
financial services business that may be obscured by the net effect of realized
capital gains and losses, (loss) gain on disposition of operations and
adjustments for other significant non-recurring, infrequent or unusual
items. Realized capital gains and losses
and (loss) gain on disposition of operations may vary significantly between
periods and are generally driven by business decisions and external economic
developments such as capital market conditions, the timing of which is
unrelated to the insurance underwriting process. Consistent with our intent to protect results
or earn additional income, including to enhance or maintain investment
margin, operating income includes periodic settlements and accruals on
certain derivative instruments that are reported in realized capital gains and
losses because they do not qualify for hedge accounting or are not designated
as hedges for accounting purposes. These
instruments are used for economic hedges and to replicate fixed income
securities, and by including them in operating income, we are appropriately
reflecting their trends in our performance and in a manner consistent with the
economically hedged investments, product attributes (e.g. net investment income
and interest credited to contractholder funds) or replicated investments. Non-recurring items are excluded because, by
their nature, they are not indicative of our business or economic trends. Accordingly operating income excludes the
effect of items that tend to be highly variable from period to period and
highlights the results from ongoing operations and the underlying profitability
of our business. A byproduct of
excluding these items to determine operating income is the transparency and
understanding of their significance to net income variability and profitability
while recognizing these or similar items may recur in subsequent periods. Operating income is used by management along
with the other components of net income to assess our performance. We use
adjusted measures of operating income in incentive compensation. Therefore, we believe it is useful for
investors to evaluate net income, operating income and theirse
components separately and in the aggregate when reviewing and evaluating
our performance. We use adjusted measures of operating income in incentive
compensation. We note that investors, financial analysts, financial and
business media organizations and rating agencies utilize operating income
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 performance. Operating income should not be considered as a
substitute for net income and does not reflect the overall profitability of our
business.
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 shareholder’s equity at the
beginning and at the end of the 12-month period, after excluding the effect of
unrealized net capital gains. 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
shareholder’s equity excluding the effect of unrealized net capital gains for
the denominator as a representation of shareholder’s 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 is 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 effect of items 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: the after-tax
effects of realized and unrealized capital gains and losses, and the cumulative
effect of change in accounting principleand. 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 net income and
does not reflect the overall profitability of our business. Return
on equity is the most directly comparable GAAP measure.
The company acknowledges that:
· the company is responsible for the adequacy and accuracy of the disclosures in the filings;
· staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
· the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
If you have any questions
regarding this response letter, please contact me at
(847) 402-2213.
Very truly yours,
/s/ Samuel H. Pilch
Samuel H. Pilch
Group Vice President and Controller
Allstate Life Insurance Company