** **

** **

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-Q**

 

**TheRegistrant meets the conditions set forth in General Instruction H (1)(a) and(b) of Form 10-Q and is therefore filing this Form with the reduced disclosureformat.**

 

** **

**x****           QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2007**

 

**OR**

 

**o****            TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)**

**OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

 

**Commission file number: 000-31248**

 

**ALLSTATELIFE INSURANCE COMPANY**

(Exact name of registrant as specified in itscharter)

 

 
| **Illinois**                             | ** ** | **36-2554642**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **3100  Sanders Road**                   | ** ** | **60062**                            |
| **Northbrook,  Illinois**                | ** ** | (Zip code)                           |
| (Address of principal executive offices) |       |                                 |

 

**Registrant’s telephone number, including area code:  (847) 402-5000**

 

**Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.**

**                                                                                                Yes****x****  No****o**

 

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.**

| **Large accelerated filer** | ** ** | **Accelerated filer** | ** ** | **Non-accelerated filer** |
|-----------------------------|------------|-----------------------|------------|---------------------------|
| **o**                       | ** ** | **o**                 | ** ** | **x**                     |

 

**Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).**

**Yes****o    No****x**

** **

**As ofNovember 5, 2007, the registrant had 23,800 common shares, $227 par value,outstanding, all of which are held by Allstate Insurance Company.**

 

 

 

 

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**ALLSTATE LIFE INSURANCE COMPANY**

**INDEX TO QUARTERLY REPORT ON FORM 10-Q**

##### **September 30,2007**

 
| **PART I**  | **FINANCIAL  INFORMATION**                                                                                                                 | **PAGE**   |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
|        |                                                                                                                                       |       |
| Item 1.     | Financial  Statements                                                                                                                      |       |
|        |                                                                                                                                       |       |
|        | Condensed  Consolidated Statements of Operations for the Three-Month and Nine-Month  Periods Ended September 30, 2007 and 2006 (unaudited) |  

1  |
|        |                                                                                                                                       |       |
|        | Condensed  Consolidated Statements of Financial Position as of September 30, 2007  (unaudited) and December 31, 2006                       |  

2  |
|        |                                                                                                                                       |       |
|        | Condensed  Consolidated Statements of Cash Flows for the Nine-Month  Periods Ended September 30, 2007 and 2006  (unaudited)           |  

3  |
|        |                                                                                                                                       |       |
|        | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                          | 4          |
|        |                                                                                                                                       |       |
|        | Report  of Independent Registered Public Accounting Firm                                                                                   | 14         |
|        |                                                                                                                                       |       |
| Item 2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                |  

15 |
|        |                                                                                                                                       |       |
| Item 4.     | Controls  and Procedures                                                                                                                   | 29         |
|        |                                                                                                                                       |       |
| **PART II** | **OTHER  INFORMATION**                                                                                                                     | ** ** |
|        |                                                                                                                                       |       |
| Item 1.     | Legal  Proceedings                                                                                                                         | 30         |
|        |                                                                                                                                       |       |
| Item 1A.    | Risk  Factors                                                                                                                              | 30         |
|        |                                                                                                                                       |       |
| Item 5.     | Other  Information                                                                                                                         | 30         |
|        |                                                                                                                                       |       |
| Item 6.     | Exhibits                                                                                                                                   | 31         |
|        |                                                                                                                                       |       |

 

 

 

----

 

 

##### **PART I.FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

** **
| ** **                                           | ** ** | **Three  Months Ended**   | ** ** | **Nine  Months Ended**    | ** ** |
|------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                           | ** ** | **September  30,**        | ** ** | **September  30,**        | ** ** |
| **($ in  millions)**                            | ** ** | **2007**                  | ** ** | **2006**                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**** ** | ** ** | **(Unaudited)**** ** | ** ** |
| **Revenues**                                         | ** ** | ** **                | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Premiums                                             |       | $                         | 104        |                      | $          | 129 |   | $ | 381 |   | $ | 392 |   |
| Contract charges                                     |       | 236                       |       | 218                       |       | 694 |   | 780 |   |
| Net investment income                                |       | 1,062                     |       | 1,035                     |       | 3,145 |   | 3,026 |   |
| Realized capital gains and losses                    |       | (128                      | )          | (30                       | )          | (2 | ) | (137 | ) |
|                                                 |       | 1,274                     |       | 1,352                     |       | 4,218 |   | 4,061 |   |
|                                                 |       |                      |       |                      |       |   |   |   |   |
| **Costs and expenses**                               | ** ** | ** **                | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contract benefits                                    |       | 315                       |       | 336                       |       | 1,020 |   | 989 |   |
| Interest credited to contractholder funds            |       | 672                       |       | 651                       |       | 1,967 |   | 1,889 |   |
| Amortization of deferred policy acquisition costs    |       | 129                       |       | 106                       |       | 410 |   | 387 |   |
| Operating costs and expenses                         |       | 84                        |       | 82                        |       | 244 |   | 283 |   |
| Restructuring and related charges                    |       | —                    |       | 5                         |       | (1 | ) | 23 |   |
|                                                 |       | 1,200                     |       | 1,180                     |       | 3,640 |   | 3,571 |   |
|                                                 |       |                      |       |                      |       |   |   |   |   |
| Gain (loss) on disposition of operations             |       | 6                         |       | 3                         |       | 9 |   | (85 | ) |
|                                                 |       |                      |       |                      |       |   |   |   |   |
| **Income from operations before income tax expense** |       | 80                        |       | 175                       |       | 587 |   | 405 |   |
|                                                 |       |                      |       |                      |       |   |   |   |   |
| Income tax expense                                   |       | 24                        |       | 53                        |       | 195 |   | 131 |   |
|                                                 |       |                      |       |                      |       |   |   |   |   |
| **Net income**                                       |       | $                         | 56         |                      | $          | 122 |   | $ | 392 |   | $ | 274 |   |

 

 

Seenotes to condensed consolidated financial statements.

 

1

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**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION**

** **
| **($ in  millions, except par value data)**                                                                                         | ** ** | **September   30,  2007** | ** ** | **December   31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
|                                                                                                                                     |       | **(Unaudited)**                |       |                          |       |
| **Assets**                                                                                                                               | ** ** | ** **                     | ** ** | ** **                    | ** ** |
| Investments                                                                                                                              |       |                           |       |                          |       |
| Fixed income  securities, at fair value (amortized cost $61,099 and $60,851)                                                             |       | $                              | 61,658     |                          | $          | 62,439 |   |
| Mortgage loans                                                                                                                           |       | 9,543                          |       | 8,690                         |       |
| Equity  securities                                                                                                                       |       | 967                            |       | 533                           |       |
| Short-term                                                                                                                               |       | 748                            |       | 805                           |       |
| Policy loans                                                                                                                             |       | 765                            |       | 752                           |       |
| Other                                                                                                                                    |       | 890                            |       | 941                           |       |
|                                                                                                                                     |       |                           |       |                          |       |
| Total  investments                                                                                                                       |       | 74,571                         |       | 74,160                        |       |
|                                                                                                                                     |       |                           |       |                          |       |
| Cash                                                                                                                                     |       | 132                            |       | 273                           |       |
| Deferred policy  acquisition costs                                                                                                       |       | 3,793                          |       | 3,485                         |       |
| Reinsurance  recoverables, net                                                                                                           |       | 3,399                          |       | 3,392                         |       |
| Accrued  investment income                                                                                                               |       | 720                            |       | 689                           |       |
| Other assets                                                                                                                             |       | 671                            |       | 585                           |       |
| Separate  Accounts                                                                                                                       |       | 15,863                         |       | 16,174                        |       |
|                                                                                                                                     |       |                           |       |                          |       |
| **Total  assets**                                                                                                                        |       | $                              | 99,149     |                          | $          | 98,758 |   |
|                                                                                                                                     |       |                           |       |                          |       |
| **Liabilities**                                                                                                                          | ** ** | ** **                     | ** ** | ** **                    | ** ** |
| Contractholder  funds                                                                                                                    |       | $                              | 61,317     |                          | $          | 60,565 |   |
| Reserve for  life-contingent contract benefits                                                                                           |       | 12,296                         |       | 12,204                        |       |
| Unearned  premiums                                                                                                                       |       | 32                             |       | 34                            |       |
| Payable to  affiliates, net                                                                                                              |       | 115                            |       | 84                            |       |
| Other  liabilities and accrued expenses                                                                                                  |       | 3,664                          |       | 3,235                         |       |
| Deferred income  taxes                                                                                                                   |       | 154                            |       | 258                           |       |
| Note payable to parent                                                                                                                   |       | —                         |       | 500                           |       |
| Long-term debt                                                                                                                           |       | 200                            |       | 206                           |       |
| Separate  Accounts                                                                                                                       |       | 15,863                         |       | 16,174                        |       |
|                                                                                                                                     |       |                           |       |                          |       |
| **Total  liabilities**                                                                                                                   |       | 93,641                         |       | 93,260                        |       |
|                                                                                                                                     |       |                           |       |                          |       |
| **Commitments  and Contingent Liabilities (Note 5)**                                                                                     | ** ** | ** **                     | ** ** | ** **                    | ** ** |
|                                                                                                                                     |       |                           |       |                          |       |
| **Shareholder’s  Equity**                                                                                                           | ** ** | ** **                     | ** ** | ** **                    | ** ** |
| Redeemable  preferred stock — series A, $100 par value, 1,500,000 shares authorized, none  and 49,230 shares issued and outstanding |       | —                         |       | 5                             |       |
| Redeemable  preferred stock — series B, $100 par value, 1,500,000 shares authorized, none  issued                                   |       | —                         |       | —                        |       |
| Common stock,  $227 par value, 23,800 shares authorized and outstanding                                                                  |       | 5                              |       | 5                             |       |
| Additional  capital paid-in                                                                                                              |       | 1,108                          |       | 1,108                         |       |
| Retained income                                                                                                                          |       | 4,354                          |       | 4,055                         |       |
| Accumulated  other comprehensive income:                                                                                                 |       |                           |       |                          |       |
| Unrealized net  capital gains and losses                                                                                                 |       | 41                             |       | 325                           |       |
|                                                                                                                                     |       |                           |       |                          |       |
| **Total  accumulated other comprehensive income**                                                                                        |       | 41                             |       | 325                           |       |
|                                                                                                                                     |       |                           |       |                          |       |
| **Total  shareholder’s equity**                                                                                                     |       | 5,508                          |       | 5,498                         |       |
|                                                                                                                                     |       |                           |       |                          |       |
| **Total  liabilities and shareholder’s equity**                                                                                     |       | $                              | 99,149     |                          | $          | 98,758 |   |

 

 

Seenotes to condensed consolidated financial statements.****

** **

 

2

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** **

**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **September 30,**     | ** ** |
| **($ in  millions)**                                                          | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**       | ** ** |
| **Cash flows from operating activities**                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                     | 392        |   | $ | 274 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                  |       |   |   |
| Amortization and other non-cash items                                              |       | (218                  | )          | (212 | ) |
| Realized capital gains and losses                                                  |       | 2                     |       | 137 |   |
| (Gain) loss on disposition of operations                                           |       | (9                    | )          | 85 |   |
| Interest credited to contractholder funds                                          |       | 1,967                 |       | 1,889 |   |
| Changes in:                                                                        |       |                  |       |   |   |
| Contract benefit and other insurance reserves                                      |       | (190                  | )          | (180 | ) |
| Unearned premiums                                                                  |       | (2                    | )          | (1 | ) |
| Deferred policy acquisition costs                                                  |       | 11                    |       | (204 | ) |
| Reinsurance recoverables, net                                                      |       | (212                  | )          | (159 | ) |
| Income taxes payable                                                               |       | 68                    |       | (115 | ) |
| Other operating assets and liabilities                                             |       | (5                    | )          | 7 |   |
|                                                                               |       |                  |       |   |   |
| Net cash provided by operating activities                                          |       | 1,804                 |       | 1,521 |   |
|                                                                               |       |                  |       |   |   |
| **Cash flows from investing activities**                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Proceeds from sales:                                                               |       |                  |       |   |   |
| Fixed income securities                                                            |       | 8,886                 |       | 10,096 |   |
| Equity securities                                                                  |       | 203                   |       | 99 |   |
| Investment collections:                                                            |       |                  |       |   |   |
| Fixed income securities                                                            |       | 2,618                 |       | 2,433 |   |
| Mortgage loans                                                                     |       | 1,234                 |       | 1,367 |   |
| Investment purchases:                                                              |       |                  |       |   |   |
| Fixed income securities                                                            |       | (11,262               | )          | (13,744 | ) |
| Equity securities                                                                  |       | (591                  | )          | (202 | ) |
| Mortgage loans                                                                     |       | (2,064                | )          | (1,620 | ) |
|                                                                               |       |                  |       |   |   |
| Change in short-term investments, net                                              |       | 138                   |       | 238 |   |
| Disposition of operations                                                          |       | (2                    | )          | (812 | ) |
| Change in other investments, net                                                   |       | 54                    |       | (7 | ) |
|                                                                               |       |                  |       |   |   |
| Net cash used in investing activities                                              |       | (786                  | )          | (2,152 | ) |
|                                                                               |       |                  |       |   |   |
| **Cash flows from financing activities**                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Note payable to parent                                                             |       | (500                  | )          | — |   |
| Redemption of redeemable preferred stock                                           |       | (11                   | )          | (19 | ) |
| Contractholder fund deposits                                                       |       | 6,630                 |       | 7,772 |   |
| Contractholder fund withdrawals                                                    |       | (7,193                | )          | (6,702 | ) |
| Dividends paid                                                                     |       | (85                   | )          | (425 | ) |
|                                                                               |       |                  |       |   |   |
| Net cash (used in) provided by financing activities                                |       | (1,159                | )          | 626 |   |
|                                                                               |       |                  |       |   |   |
| **Net decrease in cash**                                                           |       | (141                  | )          | (5 | ) |
| **Cash at beginning of the period**                                                |       | 273                   |       | 154 |   |
| ** **                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Cash at end of period**                                                          |       | $                     | 132        |   | $ | 149 |   |

 

 

Seenotes to condensed consolidated financial statements.

 

 

 

3

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**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

** **

**1.****             ****General**

**Basis of Presentation**

Theaccompanying condensed consolidated financial statements include the accountsof Allstate Life Insurance Company (“ALIC”) and its wholly ownedsubsidiaries (collectively referred to as the “Company”). ALIC is wholly ownedby Allstate Insurance Company (“AIC”), a wholly owned subsidiary of TheAllstate Corporation (the “Corporation”).

The condensedconsolidated financial statements and notes as of September 30, 2007, and forthe three-month and nine-month periods ended September 30, 2007 and 2006 areunaudited.  The condensed consolidatedfinancial statements reflect all adjustments (consisting only of normalrecurring accruals), which are, in the opinion of management, necessary for thefair presentation of the financial position, results of operations and cashflows for the interim periods.  Thesecondensed consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006.  The results ofoperations for the interim periods should not be considered indicative ofresults to be expected for the full year.

**Investments**

Equitysecurities include limited partnership interests and non-redeemable preferredand common stocks.  Common stocks andnon-redeemable preferred stocks had a carrying value of $107 million and $72million, and cost of $104 million and $61 million at September 30, 2007 andDecember 31, 2006, respectively. Investments in limited partnership interests had a carrying value of$860 million and $461 million at September 30, 2007 and December 31, 2006,respectively.

**Adoptedaccounting standards**

*Statement of Position 05-1, Accounting byInsurance Enterprises for Deferred Acquisition Costs in Connection withModifications or Exchanges of Insurance Contracts (“SOP 05-1”)*

 In October 2005, the American Institute ofCertified Public Accountants (“AICPA”) issued SOP 05-1.  SOP 05-1 provides accounting guidance fordeferred policy acquisition costs associated with internal replacements ofinsurance and investment contracts other than those set forth in Statement ofFinancial Accounting Standards (“SFAS”) No. 97, “Accounting and Reporting byInsurance Enterprises for Certain Long-Duration Contracts and for RealizedGains and Losses from the Sale of Investments”. SOP 05-1 defines an internal replacement as a modification in productbenefits, features, rights or coverages that occurs by the exchange of anexisting contract for a new contract, or by amendment, endorsement or rider toan existing contract, or by the election of a feature or coverage within an existingcontract.  In February 2007, the AICPAissued Technical Practice Aids (“TPAs”) that provide interpretive guidance tobe used in applying SOP 05-1.  TheCompany adopted the provisions of SOP 05-1 on January 1, 2007 for internalreplacements occurring in fiscal years beginning after December 15, 2006.  The adoption resulted in a $9 millionafter-tax reduction to retained income to reflect the impact on estimatedfuture gross profits from the changes in accounting for certain costsassociated with contract continuations that no longer qualify for deferralunder SOP 05-1 and a reduction of deferred acquisition costs (“DAC”) anddeferred sales inducements (“DSI”) balances of $13 million pre-tax as ofJanuary 1, 2007.  The ongoing effects ofSOP 05-1 are not expected to have a material impact on the Company’s results ofoperations or financial position.

*SFAS No. 155, Accounting for CertainHybrid Financial Instruments — an amendment**of FASBStatements No. 133 and 140 (“SFAS No. 155”)*

In February 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 155, which permits the fair valueremeasurement at the date of adoption of any hybrid financial instrumentcontaining an embedded derivative that otherwise would require bifurcationunder paragraph 12 or 13 of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities*”*(“SFAS No. 133”); clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS No. 133; establishes a requirement to evaluate interestsin securitized financial assets to identify interests that are freestandingderivatives or hybrid financial instruments that contain embeddedderivatives requiring bifurcation; and clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives. The Company adopted theprovisions of SFAS No. 155 on January 1, 2007, which were effective for allfinancial instruments acquired, issued or subject to a remeasurement eventoccurring after the beginning of the first fiscal year beginning afterSeptember 15, 2006.  The Company electednot to remeasure existing hybrid financial instruments that contained embeddedderivatives requiring 

 

4

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bifurcation at the date of adoption pursuant to paragraph 12 or 13 ofSFAS No. 133.  The adoption of SFAS No.155 did not have a material effect on the results of operations or financialposition of the Company.

*FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”)*

InJuly 2006, the FASB issued FIN 48, which clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with SFAS No. 109, “Accounting for Income Taxes”.  FIN 48 requires an entity to recognize thetax benefit of uncertain tax positions only when it is more likely than not,based on the position’s technical merits, that the position would be sustainedupon examination by the respective taxing authorities.  The tax benefit is measured as the largestbenefit that is more than fifty-percent likely of being realized upon finalsettlement with the respective taxing authorities.  On January 1, 2007, the Company adopted theprovisions of FIN 48, which were effective for fiscal years beginning afterDecember 15, 2006.  No cumulative effectof a change in accounting principle or adjustment to the liability forunrecognized tax benefits was recognized as a result of the adoption of FIN 48.  Accordingly, the adoption of FIN 48 did nothave an effect on the results of operations or financial position of theCompany.

The Company had noliability for unrecognized tax benefits at January 1, 2007 or September 30,2007, and believes it is reasonably possible that the liability balance willnot significantly increase or decrease within the next 12 months.

The Internal Revenue Service (“IRS”) has completed itsexamination of the Company’s federal income tax returns for 2003-2004.  The Company’s tax years prior to 2003 havebeen examined by the IRS and the statute of limitations has expired on thoseyears.

*Securities and Exchange Commission (“SEC”) StaffAccounting Bulletin No. 108, Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements (“SAB 108”)*

In September 2006, the SEC issued SAB 108 to eliminatethe diversity of practice in the process by which misstatements are quantifiedfor purposes of assessing their materiality in the financial statements.  SAB 108 is intended to eliminate thepotential for the build up of improper amounts on the balance sheet due tolimitations of certain methods of materiality assessment utilized in currentpractice.  SAB 108 establishes a singlequantification framework wherein the significance determination is based on theeffects of the misstatements on each of the financial statements as well as therelated financial statement disclosures. On December 31, 2006, the Company adopted the provisions of SAB 108which were effective for the first fiscal year ending after November 15,2006.  The adoption of SAB 108 did nothave any effect on the results of operations or financial position of theCompany.

*FASB Staff Position No. FAS 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments (“FSP FAS 115-1”)*

FSP FAS 115-1 nullifies the guidance inparagraphs 10-18 of Emerging Issues Task Force Issue 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” andreferences existing other-than-temporary impairment guidance.  FSP FAS 115-1 clarifies that an investorshould recognize an impairment loss no later than when the impairment is deemedother-than-temporary, even if a decision to sell the security has not beenmade, and also provides guidance on the subsequent income recognition forimpaired debt securities.  The Companyadopted FSP FAS 115-1 as of January 1, 2006 on a prospective basis.  The effect of adoption did not have amaterial effect on the results of operations or financial position of theCompany.

*SFAS No. 154, AccountingChanges and Error Corrections (“SFAS No. 154”)*

SFAS No. 154 replaces Accounting Principles Board (“APB”)Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting AccountingChanges in Interim Financial Statements”. SFAS No. 154 requires retrospective application to prior periods’financial statements for changes in accounting principle, unless determinationof either the period specific effects or the cumulative effect of the change isimpracticable or otherwise not required. The Company adopted SFAS No. 154 on January 1, 2006.  The adoption of SFAS No. 154 did not have anyeffect on the results of operations or financial position of the Company.

## ** **

 

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## **Pending accounting standards**

*SFAS No.157, Fair Value Measurements (“SFAS No. 157”)*

In September 2006, the FASB issued SFAS No. 157 whichredefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (“GAAP”), and expands disclosuresabout fair value measurements.  SFAS No.157 applies where other accounting pronouncements require or permit fair valuemeasurements.  Additional disclosures andmodifications to current fair value disclosures will be required upon adoptionof SFAS No. 157.  SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007.  The Company is currently evaluating theeffects of adoption of SFAS No. 157 on its results of operations andfinancial position.

*SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFASNo. 159”)*

InFebruary 2007, the FASB issued SFAS No. 159 which provides reporting entitiesan option to report selected financial assets, including investment securitiesdesignated as available for sale, and financial liabilities, including mostinsurance contracts, at fair value.  SFASNo. 159 establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementalternatives for similar types of financial assets and liabilities.  The standard also requires additionalinformation to aid financial statement users’ understanding of the impacts of areporting entity’s decision to use fair value on its earnings and also requiresentities to display, on the face of the statement of financial position, thefair value of those assets and liabilities for which the reporting entity haschosen to measure at fair value.  SFASNo. 159 is effective as of the beginning of a reporting entity’s first fiscalyear beginning after November 15, 2007.  Because application of thestandard is optional, any impacts are limited to those financial assets andliabilities to which SFAS No. 159 would be applied, which have yet to bedetermined by the Company.

*SOP 07-1,Clarification of the Scope of the Audit and Accounting Guide, InvestmentCompanies (“the Guide”) and Accounting by Parent Companies and Equity MethodInvestors for Investments in Investment Companies (“SOP 07- 1”)*

InJune 2007, the AICPA issued SOP 07-1. Upon adoption of the SOP, the Company must also adopt the provisions ofFASB Staff Position No. FIN 46(R)-7, “Application of FASB Interpretation No.46(R) to Investment Companies”, which permanently exempts investment companiesfrom applying the provisions of Interpretation 46(R) to investments carried atfair value.  SOP 07-1 provides guidancefor determining whether an entity falls within the scope of the Guide andwhether investment company accounting should be retained by a parent companyupon consolidation of an investment company subsidiary or by an equity methodinvestor in an investment company.  Incertain circumstances SOP 07-1 precludes retention of specialized accountingfor investment companies (i.e. fair value accounting) when similar directinvestments exist in the consolidated group and are measured on a basisinconsistent with that applied to investment companies.  Additionally SOP 07-1 precludes retention ofspecialized accounting for investment companies if the reporting entity doesnot distinguish through documented policies the nature and type of investmentsto be held in the investment companies from those made in the consolidatedgroup where other accounting guidance is being applied.  SOP 07-1 was to be effective for fiscal yearsbeginning on or after December 15, 2007, however the FASB voted in October 2007to delay the effective date.  A revisedeffective date for SOP 07-1 is not yet available.  The Company is assessing the current andfuture implications of this standard on its results of operations and financialposition.

*FASB StaffPosition No. FIN 39-1**Amendment ofFASB Interpretation No. 39* (“FSP FIN 39-1”)

In April 2007, the FASBissued FSP FIN 39-1, which amends FASB Interpretation No. 39, “Offsetting ofAmounts Related to Certain Contracts”. FSP FIN 39-1 replaces the terms “conditional contracts” and “exchangecontracts” with the term “derivative instruments” and requires a reportingentity to offset fair value amounts recognized for the right to reclaim cashcollateral or the obligation to return cash collateral against fair valueamounts recognized for derivative instruments executed with the samecounterparty under the same master netting arrangement that have been offset inthe statement of financial position. FSP FIN 39-1 is effective for fiscal yearsbeginning after November 15, 2007, with early adoption permitted.  The effects of applying FSP FIN 39-1 will berecorded as a change in accounting principle through retrospectiveapplication.  The adoption of FSP FIN 39-1is not expected to have a material impact on the Company’s results ofoperations or financial position based on the current level of derivativeactivity.

 

6

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**2.****              Related PartyTransactions**

On September 24, 2007, the Company paid a dividend in the amount of $85million to its parent, AIC.

On December27, 2006, the Company issued an intercompany note in the amount of $500 millionpayable to its parent, AIC, on demand and, in any event, by March 30,2007.  This note was fully repaid in thefirst quarter of 2007.  This note had aninterest rate of 5.25% and was reflected as note payable to parent on theCompany’s Consolidated Statements of Financial Position at December 31,2006.  Interest expense on this note, whichtotaled $5 million in the first nine months of 2007, is included as a componentof operating costs and expenses in the Condensed Consolidated Statements ofOperations.

**3.****             ****SupplementalCash Flow Information**

Non-cashinvestment exchanges and modifications, which primarily reflect refinancing offixed income securities, totaled $72 million and $26 million for the nine-monthperiods ended September 30, 2007 and 2006, respectively.

Liabilities for collateral received in conjunction with securitieslending and other activities and for funds received from security repurchaseactivities are reported in other liabilities and accrued expenses in theCondensed Consolidated Statements of Financial Position. The associated cashflows are included in cash flows from operating activities in the CondensedConsolidated Statements of Cash Flows along with the related changes ininvestments, which are as follows:

 
| ** **                                                            | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in  millions)**                                                    | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                            | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net change in fixed income securities                                 |       | $                                    | (400       | ) | $ | (531 | ) |
| Net change in short-term investments                                  |       | (34                                  | )          | (760 | ) |
| Net change in proceeds managed                                        |       | (434                                 | )          | (1,291 | ) |
|                                                                  |       |                                 |       |   |   |
| Liabilities for collateral and security repurchase, beginning of year |       | $                                    | (2,294     | ) | $ | (2,231 | ) |
| Liabilities for collateral and security repurchase, end of period     |       | (2,728                               | )          | (3,522 | ) |
| Operating cash flow provided                                          |       | $                                    | 434        |   | $ | 1,291 |   |

 

**4.****             ****Reinsurance**

Theeffects of reinsurance on premiums and contract charges are as follows:
| ** **                                        | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                                 | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums and contract charges**                 | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                            |       | $                                     | 564        |                                 | $          | 562 |   | $ | 1,742 |   | $ | 1,690 |   |
| Assumed                                           |       |                                  |       |                                 |       |   |   |   |   |
| Affiliate                                         |       | 4                                     |       | 4                                    |       | 12 |   | 12 |   |
| Non-affiliate                                     |       | 7                                     |       | 6                                    |       | 20 |   | 21 |   |
| Ceded—non-affiliate                          |       | (235                                  | )          | (225                                 | )          | (699 | ) | (551 | ) |
|                                              |       |                                  |       |                                 |       |   |   |   |   |
| Premiums and contract charges, net of reinsurance |       | $                                     | 340        |                                 | $          | 347 |   | $ | 1,075 |   | $ | 1,172 |   |

 

7

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        The effects of reinsurance on contractbenefits are as follows:
| ** **                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                     | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                            | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract benefits**                 | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                |       | $                                     | 478        |                                 | $          | 483 |   | $ | 1,471 |   | $ | 1,369 |   |
| Assumed                               |       |                                  |       |                                 |       |   |   |   |   |
| Affiliate                             |       | 3                                     |       | 2                                    |       | 8 |   | 8 |   |
| Non-affiliate                         |       | 6                                     |       | 6                                    |       | 20 |   | 17 |   |
| Ceded—non-affiliate              |       | (172                                  | )          | (155                                 | )          | (479 | ) | (405 | ) |
|                                  |       |                                  |       |                                 |       |   |   |   |   |
| Contract benefits, net of reinsurance |       | $                                     | 315        |                                 | $          | 336 |   | $ | 1,020 |   | $ | 989 |   |

 

The effects of reinsurance on interest credited to contractholder fundsare as follows:
| ** **                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                                             | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest credited to contractholder funds**                 | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                                        |       | $                                     | 676        |                                 | $          | 657 |   | $ | 1,979 |   | $ | 1,875 |   |
| Assumed                                                       |       |                                  |       |                                 |       |   |   |   |   |
| Affiliate                                                     |       | 3                                     |       | 5                                    |       | 10 |   | 20 |   |
| Non-affiliate                                                 |       | 5                                     |       | 7                                    |       | 14 |   | 20 |   |
| Ceded—non-affiliate                                      |       | (12                                   | )          | (18                                  | )          | (36 | ) | (26 | ) |
|                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Interest credited to contractholder funds, net of reinsurance |       | $                                     | 672        |                                 | $          | 651 |   | $ | 1,967 |   | $ | 1,889 |   |

 

**Variable Annuity Business**

On June 1, 2006, in accordance with the terms of the definitive MasterTransaction Agreement and related agreements (collectively the “Agreement”)ALIC, its subsidiary, Allstate Life Insurance Company of New York (“ALNY”), andthe Corporation completed the disposal through reinsurance of substantially allof our variable annuity business to Prudential Financial, Inc. and itssubsidiary, The Prudential Insurance Company of America (collectively “Prudential”).  For Allstate, this disposal achieved theeconomic benefit of transferring to Prudential the future rights andobligations associated with this business.

The disposal was effected through reinsurance agreements (the “ReinsuranceAgreements”) which include both coinsurance and modified coinsuranceprovisions.  Coinsurance and modifiedcoinsurance provisions are commonly used in the reinsurance of variableannuities because variable annuities generally include both separate accountand general account liabilities.  Whencontractholders make a variable annuity deposit, they must choose how toallocate their account balances between a selection of variable-return mutualfunds that must be held in a separate account and fixed-return funds held inthe Company’s general account.  Inaddition, variable annuity contracts include various benefit guarantees thatare general account obligations of the Company. The Reinsurance Agreements do not extinguish the Company’s primaryliability under the variable annuity contracts.

Variable annuity balances invested in variable-return mutual funds areheld in separate accounts, which are legally segregated assets and availableonly to settle separate account contract obligations.  Because the separate account assets mustremain with the Company under insurance regulations, modified coinsurance istypically used when parties wish to transfer future economic benefits of suchbusiness.  Under the modified coinsuranceprovisions, the separate account assets remain on the Company’s CondensedConsolidated Statements of Financial Position, but the related results ofoperations are fully reinsured and presented net of reinsurance on theCondensed Consolidated Statements of Operations.

 

8

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The coinsurance provisions of the ReinsuranceAgreements were used to transfer the future rights and obligations related tofixed-return fund options and benefitguarantees.  $1.37 billion of assetssupporting general account liabilities were transferred to Prudential, net ofconsideration, under the coinsurance provisions as of the transaction closingdate.  General account liabilities of $1.31 billion at September 30, 2007and $1.49 billion as of December 31, 2006, however, remain on the CondensedConsolidated Statements of Financial Position with a corresponding reinsurancerecoverable.

For purposes of presentation in the CondensedConsolidated Statements of Cash Flows, the Company treated the reinsurance ofsubstantially all our variable annuity business to Prudential as a dispositionof operations, consistent with the substance of the transaction which was thedisposition of a block of business accomplished through reinsurance.Accordingly, the net consideration transferred to Prudential of $744 million(computed as $1.37 billion of general account liabilities transferred toPrudential on the closing date less consideration of $628 million), the cost ofhedging the ceding commission received from Prudential of $69 million, pretax,and the costs of executing the transaction of $13 million, pretax, wereclassified as a disposition of operations in the cash flows from investingactivities section of the Condensed Consolidated Statements of Cash Flows.

Under the Agreement, the Company has indemnified Prudential for certainpre-closing contingent liabilities (including extra-contractual liabilities ofthe Company and liabilities specifically excluded from the transaction) thatthe Company has agreed to retain.  Inaddition, the Company will indemnify Prudential for certain post-closing liabilitiesthat may arise from the acts of the Company and its agents, including inconnection with the Company’s provision of transition services.  The Reinsurance Agreements contain no limitsor indemnifications with regard to insurance risk transfer, and transferred allof the future risks and responsibilities for performance on the underlyingvariable annuity contracts to Prudential, including those related to benefitguarantees, in accordance with the provisions of SFAS No. 113, “Accounting andReporting for Reinsurance of Short-Duration and Long-Duration Contracts”.

The terms of the Agreement give Prudential the right to be theexclusive provider of its variable annuity products through the Allstateproprietary agency force for three years and a non-exclusive preferred providerfor the following two years.  During a transition period, the Company willcontinue to issue new variable annuity contracts, accept additional deposits onexisting business from existing contractholders on behalf of Prudential and,for a period of twenty-four months or less from the effective date of thetransaction, service the reinsured business while Prudential prepares for themigration of the business onto its servicing platform.

Pursuant to the Agreement,the final market-adjusted consideration was $628 million.  The disposal resulted in a gain of $77million pretax for ALIC, which was deferred as a result of the dispositionbeing executed through reinsurance.  Thedeferred gain is included as a component of other liabilities and accruedexpenses on the Consolidated Statements of Financial Position, and is amortizedto gain (loss) on dispositions of operations on the Consolidated Statements ofOperations over the life of the reinsured business which is estimated to beapproximately 18 years.  For ALNY, thetransaction resulted in a loss of $9 million pretax.  ALNY’s reinsurance loss and other amountsrelated to the disposal of the business, including the initial costs and finalmarket value settlements of the derivatives acquired by ALIC to economicallyhedge substantially all of the exposure related to market adjustments betweenthe effective date of the Agreement and the closing of the transaction,transactional expenses incurred and amortization of ALIC’s deferred reinsurancegain, were included as a component of loss on disposition of operations on theCompany’s Consolidated Statements of Operations and amounted to $61 million,after-tax, during 2006.  Gain (loss) ondisposition of operations on the Consolidated Statements of Operations includedamortization of ALIC’s deferred gain, after tax, of $3 million and $1 millionfor the nine-month periods ended September 30, 2007 and 2006,respectively.  DAC and DSI were reducedby $726 million and $70 million, respectively, as of the effective date of thetransaction for balances related to the variable annuity business subject tothe Reinsurance Agreements.

The separate account balances related to themodified coinsurance were $14.67 billion as of September 30, 2007 and $15.07billion as of December 31, 2006.  Separate account balances totalingapproximately $1.19 billion as of September 30, 2007 and $1.10 billion atDecember 31, 2006 related primarily to the variable life business that is beingretained by the Company, and the variable annuity business in three affiliated companiesthat were not included in the Agreement. In the first five-months of 2006, prior to this disposition, the Company’svariable annuity business generated approximately $127 million in contractcharges.

 

9

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**5.****             ****Guarantees and Contingent Liabilities**

**Guaranty Funds**

Under state insurance guaranty fund laws,insurers doing business in a state can be assessed, up to prescribed limits,for certain obligations of insolvent insurance companies owed to policyholdersand claimants.  Amounts assessed to eachcompany are typically related to its proportion of business written in aparticular state.

The New York Liquidation Bureau (the “Bureau”)has publicly reported that Executive Life Insurance Company of New York (“ExecutiveLife”), currently under its jurisdiction as part of a 1992 court-orderedrehabilitation plan, may only be able to meet future obligations of its annuitycontracts for the next fifteen years due to an estimated $600 million shortfallin assets to fund those obligations.  IfExecutive Life were to be declared insolvent in the future, the Company wouldlikely have exposure to guaranty fund assessments or other costs.

Based on the currently available information, theoutcome of this situation is uncertain at this time.  The Bureau may eventually take actions toaddress this situation that may lead to guaranty fund assessments or othercosts in other states beyond New York. Under current law, the Company may be allowed in some states to recoup aportion of the amount of any additional guaranty fund assessments in periodssubsequent to the recognition of such states’ guaranty fund assessments byoffsetting future taxes due in such states. The market share of the Company'sNew York based subsidiary, ALNY, was approximately 5.5% in 2005 based onindustry annuity premium in the State of New York.

**Guarantees**

The Company owns certain fixed incomesecurities that obligate the Company to exchange credit risk or to forfeitprincipal due, depending on the nature or occurrence of specified credit eventsfor the referenced entities.  In theevent all such specified credit events were to occur, the Company’s maximumamount at risk on these fixed income securities, as measured by the amount ofthe aggregate initial investment was $244 million at September 30, 2007.  The obligations associated with these fixedincome securities expire at various times during the next seven years.

In thenormal course of business, the Company provides standard indemnifications tocounterparties in contracts in connection with numerous transactions, includingacquisitions and divestitures.  The typesof indemnifications typically provided include indemnifications for breaches ofrepresentations and warranties, taxes and certain other liabilities, such asthird party lawsuits.  Theindemnification clauses are often standard contractual terms and were enteredinto in the normal course of business based on an assessment that the risk ofloss would be remote.  The terms of theindemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and thecontingencies triggering the obligation to indemnify have not occurred and arenot expected to occur.  Consequently, themaximum amount of the obligation under such indemnifications is notdeterminable.  Historically, the Companyhas not made any material payments pursuant to these obligations.

Theaggregate liability balance related to all guarantees was not material as ofSeptember 30, 2007.

**Regulation**

The Company is subject to changing social, economic and regulatoryconditions.  From time to time regulatoryauthorities or legislative bodies seek to impose additional regulationsregarding agent and broker compensation and otherwise expand overall regulationof insurance products and the insurance industry.  The ultimate changes and eventual effects ofthese initiatives on the Company’s business, if any, are uncertain.

**Legaland regulatory proceedings and inquiries**

**Background**

The Company and certainaffiliates are involved in a number of lawsuits, regulatory inquiries, andother legal proceedings arising out of various aspects of its business.  As background to the “Proceedings” subsectionbelow, please note the following:

 

10

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•             These mattersraise difficult and complicated factual and legal issues and are subject tomany uncertainties and complexities, including the underlying facts of eachmatter; novel legal issues; variations between jurisdictions in which mattersare being litigated, heard or investigated; differences in applicable laws andjudicial interpretations; the length of time before many of these matters mightbe resolved by settlement, through litigation or otherwise and, in some cases,the timing of their resolutions relative to other similar matters involvingother companies; the fact that some of the lawsuits are putative class actionsin which a class has not been certified and in which the purported class maynot be clearly defined; the fact that some of the lawsuits involve multi-stateclass actions in which the applicable law(s) for the claims at issue is indispute and therefore unclear; and the current challenging legal environmentfaced by large corporations and insurance companies.

 

•             The outcome on these matters may also beaffected by decisions, verdicts, and settlements, and the timing of suchdecisions, verdicts, and settlements, in other individual and class actionlawsuits that involve the Company, other insurers, or other entities and byother legal, governmental, and regulatory actions that involve the Company,other insurers, or other entities.

 

•             In the lawsuits, plaintiffsseek a variety of remedies including equitable relief in the form of injunctiveand other remedies and monetary relief in the form of contractual andextra-contractual damages.  In somecases, the monetary damages sought include punitive damages.  Often specific information about the reliefsought, such as the amount of damages, is not available because plaintiffs havenot requested specific relief in their pleadings.  In our experience, when specific monetarydemands are made in pleadings, they bear little relation to the ultimate loss,if any, to the Company.

 

•                  In connectionwith regulatory examinations and proceedings, government authorities may seekvarious forms of relief, including penalties, restitution and changes inbusiness practices.  The Company may notbe advised of the nature and extent of relief sought until the final stages ofthe examination or proceeding.

 

•             For the reasons specified above, it is often notpossible to make meaningful estimates of the amount or range of loss that couldresult from the matters described below in the “Proceedings” subsection.  The Company reviews these matters on an ongoingbasis and follows the provisions of SFAS No. 5, “Accounting for Contingencies”when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, the Companybases its decisions on its assessment of the ultimate outcome following allappeals.  

 

•             Due to the complexity andscope of the matters disclosed in the “Proceedings” subsection below and themany uncertainties that exist, the ultimate outcome of these matters cannot bereasonably predicted.  In the event of anunfavorable outcome in one or more of these matters, the ultimate liability maybe in excess of amounts currently reserved and may be material to the Company’soperating results or cash flows for a particular quarterly or annualperiod.  However, based on informationcurrently known to it, management believes that the ultimate outcome of allmatters described below as they are resolved over time is not likely to have amaterial adverse effect on the financial position of the Company.

**Proceedings**

Legal proceedings involving Allstate agencies and AIC may impact theCompany, even when the Company is not directly involved, because the Companysells its products through a variety of distribution channels includingAllstate agencies. Consequently, information about the more significant ofthese proceedings is provided in the following paragraph.

AIC isdefending certain matters relating to its agency program reorganizationannounced in 1999.  These matters are invarious stages of development.

•                  These matters includea lawsuit filed in 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”)alleging retaliation under federal civil rights laws (the “EEOC I” suit) and aclass action filed in 2001 by former employee agents alleging retaliation andage discrimination under the Age Discrimination

 

11

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in Employment Act (“ADEA”), breach of contract and ERISA violations(the “Romero I” suit).  In 2004, in theconsolidated EEOC I and Romero I litigation, the trial court issued amemorandum and order that, among other things, certified classes of agents,including a mandatory class of agents who had signed a release, for purposes ofeffecting the court’s declaratory judgment that the release is voidable at theoption of the release signer.  The courtalso ordered that an agent who voids the release must return to AIC “any andall benefits received by the [agent] in exchange for signing the release.”  The court also stated that, “on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order and in January 2007, thejudge denied their request.  In June2007, the court granted AIC’s motions for summary judgment.

•                  The EEOC alsofiled another lawsuit in 2004 alleging age discrimination with respect to apolicy limiting the rehire of agents affected by the agency programreorganization (the “EEOC II” suit).  InEEOC II, in 2006, the court granted partial summary judgment to the EEOC.  Although the court did not determine that AICwas liable for age discrimination under the ADEA, it determined that the rehirepolicy resulted in a disparate impact, reserving for trial the determination onwhether AIC had reasonable factors other than age to support the rehirepolicy.  AIC’s interlocutory appeal ofthe trial court’s summary judgment order is now pending in the United StatesCourt of Appeals for the Eighth Circuit.

•                  AIC is alsodefending a certified class action filed by former employee agents whoterminated their employment prior to the agency program reorganization.  These plaintiffs have asserted breach ofcontract and ERISA claims.  The courtapproved the form of class notice in October 2007 and set a December 2007deadline for filing dispositive motions.

•                  A putativenationwide class action has also been filed by former employee agents allegingvarious violations of ERISA, includinga worker classification issue.  Theseplaintiffs are challenging certain amendments to the Agents Pension Plan andare seeking to have exclusive agent independent contractors treated asemployees for benefit purposes. This matter was dismissed with prejudice by the trial court, was thesubject of further proceedings on appeal, and was reversed and remanded to thetrial court in 2005.  In June 2007, thecourt granted AIC’s motion to dismiss the case.

In all ofthese various matters, plaintiffs seek compensatory and punitive damages, andequitable relief.  AIC has been vigorouslydefending these lawsuits and other matters related to its agency programreorganization.

The Company isdefending a certified nationwide class action related to certain of itsuniversal life policies written prior to 1992. The breach of contract claim involves premium increases that the Companycharged related to those policies.  Otherlife insurance companies have faced similar suits.  The parties have reached a settlement, whichhas been approved by the court.  TheCompany is now effectuating the terms of the settlement.

**OtherMatters**

**Variousother legal, governmental, and regulatory actions, including state marketconduct exams, and other governmental and regulatory inquiries are currentlypending that involve the Company and specific aspects of its conduct ofbusiness.  Like other members of theinsurance industry, the Company is the target of a number of class actionlawsuits and other types of proceedings, some of which involve claims forsubstantial or indeterminate amounts. These actions are based on a variety of issues and target a range of theCompany’s practices. The outcome of these disputes is currentlyunpredictable.  One or more of thesematters could have an adverse effect on the Company’s operating results or cashflows for a particular quarterly or annual period.  However, based on information currently knownto it, management believes that the ultimate outcome of all matters describedin this “Other Matters” subsection in excess of amounts currently reserved, asthey are resolved over time is not likely to have a material effect on theoperating results, cash flows or financial position of the Company.**

 

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**6.****             ****Other Comprehensive Income**

The componentsof other comprehensive (loss) income on a pretax and after-tax basis are asfollows:

 
| ** **                                                                               | ** ** | **Three months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                               | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| **(in millions)**                                                                        | ** ** | **Pretax**                           | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized net holding gains (losses) arising during the period, net  of related offsets |       | $                                    | (52        | ) | $ | 18 |   | $ | (34 | ) | $ | 664 |   | $ | (233 | ) | $ | 431 |   |
| Less: reclassification adjustment of realized capital gains and  losses                  |       | 103                                  |       | (36 | ) | 67 |   | 162 |   | (57 | ) | 105 |   |
| Other comprehensive income (loss)                                                        |       | $                                    | (155       | ) | $ | 54 |   | (101 | ) | $ | 502 |   | $ | (176 | ) | 326 |   |
|                                                                                     |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                               |       |                                 |       |   |   | 56 |   |   |   |   |   | 122 |   |
| Comprehensive (loss) income                                                              |       |                                 |       |   |   | $ | (45 | ) |   |   |   |   | $ | 448 |   |

 

 
| ** **                                                                               | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                               | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| **(in millions)**                                                                        | ** ** | **Pretax**                          | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                     |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized net holding (losses) gains arising during the period, net  of related offsets |       | $                                   | (335       | ) | $ | 117 |   | $ | (218 | ) | $ | (465 | ) | $ | 162 |   | $ | (303 | ) |
| Less: reclassification adjustment of realized capital gains and  losses                  |       | 102                                 |       | (36 | ) | 66 |   | (132 | ) | 46 |   | (86 | ) |
| Other comprehensive (loss) income                                                        |       | $                                   | (437       | ) | $ | 153 |   | (284 | ) | $ | (333 | ) | $ | 116 |   | (217 | ) |
|                                                                                     |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                               |       |                                |       |   |   | 392 |   |   |   |   |   | 274 |   |
| Comprehensive income                                                                     |       |                                |       |   |   | $ | 108 |   |   |   |   |   | $ | 57 |   |

 

 

**7.****             ****Quarterly Results**

 
| ** **                                                                    | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| **(in millions)**                                                             | ** ** | **2007**          | ** ** | **2006**           | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                                      |       | $                 | 1,435      |               | $          | 1,349 |   | $ | 1,290 |   | $ | 1,509 |   | $ | 1,360 |   | $ | 1,315 |   |
| Income before cumulative effect of change in accounting principle,  after-tax |       | 149               |       | 96                 |       | 68 |   | 187 |   | 56 |   | 87 |   |
| Net income                                                                    |       | 149               |       | 96                 |       | 68 |   | 187 |   | 56 |   | 87 |   |
|                                                                               |            |                   |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                    | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| **(in millions)**                                                             | ** ** | **2007**          | ** ** | **2006**           | ** ** | **2005** | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                                      |       | $                 | 1,274      |               | $          | 1,352 |   | $ | 1,347 |   |   |   | $ | 1,502 |   | $ | 1,327 |   |
| Income before cumulative effect of change in accounting principle,  after-tax |       | 56                |       | 122                |       | 159 |   |   |   | 154 |   | 103 |   |
| Net income                                                                    |       | 56                |       | 122                |       | 159 |   |   |   | 154 |   | 103 |   |
|                                                                               |            |                   |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

13

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Shareholder of

Allstate Life InsuranceCompany:

 

We have reviewed the accompanying condensed consolidated statement offinancial position of Allstate Life Insurance Company and subsidiaries (the “Company”,an affiliate of The Allstate Corporation) as of September 30, 2007, and therelated condensed consolidated statements of operations for the three-month andnine-month periods ended September 30, 2007 and 2006, and the condensedconsolidated statements of cash flows for the nine-month periods endedSeptember 30, 2007 and 2006.  Theseinterim financial statements are the responsibility of the Company’smanagement.

 

We conducted our reviews inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters.  It is substantially less inscope than an audit conducted in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the objective of which isthe expression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not expresssuch an opinion.

 

Based on our reviews, we arenot aware of any material modifications that should be made to such condensedconsolidated interim financial statements for them to be in conformity withaccounting principles generally accepted in the United States of America.

 

We have previously audited,in accordance with the standards of the Public Company Accounting OversightBoard (United States), the consolidated statement of financial position ofAllstate Life Insurance Company and subsidiaries as of December 31, 2006,and the related consolidated statements of operations and comprehensive income,shareholder’s equity, and cash flows for the year then ended, not presentedherein.  In our report dated March 9,2007, which report includes an explanatory paragraph relating to a change inmethod of accounting for certain nontraditional long-duration contracts and forseparate accounts in 2004, we expressed an unqualified opinion on thoseconsolidated financial statements.  In ouropinion, the information set forth in the accompanying condensed consolidatedstatement of financial position as of December 31, 2006 is fairly stated, inall material respects, in relation to the consolidated statement of financialposition from which it has been derived.

 

 

/s/ Deloitte & ToucheLLP

 

Chicago, Illinois

November 2, 2007

 

 

14

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**Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDEDSEPTEMBER 30, 2007 AND 2006**

** **

**OVERVIEW**

 

The followingdiscussion highlights significant factors influencing the consolidatedfinancial position and results of operations of Allstate Life Insurance Company(referred to in this document as “we”, “our”, “us”, or the “Company”). Itshould be read in conjunction with the condensed consolidated financialstatements and notes thereto found under Part I. Item 1. contained herein, andwith the discussion, analysis, consolidated financial statements and notesthereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the AllstateLife Insurance Company Annual Report on Form 10-K for 2006.  We operate as a single segment entity, basedon the manner in which we use financial information to evaluate businessperformance and to determine the allocation of resources.

**HIGHLIGHTS**

•               Netincome declined $66 million to $56 million in the third quarter of 2007 andincreased $118 million to $392 million in the first nine months of 2007compared to the same periods in 2006.

 

•               Contractholder fund depositstotaled $1.89 billion and $6.62 billion for the third quarter and first ninemonths of 2007, respectively, compared to $2.17 billion and $7.74 billion forthe third quarter and first nine months of 2006, respectively.

 

•               Investments as of September30, 2007 declined 0.6% from September 30, 2006 and net investment incomeincreased 2.6% and 3.9% in the third quarter and first nine months of 2007,respectively, compared to the same periods of 2006.

 

•               Return on averageshareholder’s equity was 9.8% and 6.4% for the twelve months ended September30, 2007 and 2006, respectively.

 

•               Effective June 1, 2006,we disposed of substantially all of our variable annuity business throughreinsurance with Prudential Financial Inc. (“Prudential”).  The following table presents the results ofoperations attributable to our variable annuity business for the period of 2006prior to the disposition.

 
| **(in millions)**                                 | ** ** | **Nine Months Ended   September 30, 2006** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| Premiums                                          |       | $                                          | —     |   |
| Contract charges                                  |       | 136                                        |       |
| Net investment income                             |       | 16                                         |       |
| Realized capital gains and losses                 |       | (8                                         | )          |
| Total revenues                                    |       | 144                                        |       |
|                                              |       |                                       |       |
| Contract benefits                                 |       | (12                                        | )          |
| Interest credited to contractholder funds         |       | (24                                        | )          |
| Amortization of deferred policy acquisition costs |       | (44                                        | )          |
| Operating costs and expenses                      |       | (43                                        | )          |
| Total costs and expenses                          |       | (123                                       | )          |
|                                              |       |                                       |       |
| Loss on disposition of operations                 |       | (88                                        | )          |
|                                              |       |                                       |       |
| Income from operations before income tax expense  |       | $                                          | (67        | ) |

----

(1)   For the nine months endedSeptember 30, 2006, income from operations before income tax expenseattributable to the variable annuity business reinsured to Prudential includedan investment spread and benefit spread of $(8) million and $15 million,respectively.

 

 

15

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**OPERATIONS**

 

The Company’s results of operations for the three months and ninemonths ended September 30 are presented in the following table.

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                         | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                      |       |                                  |       |                                 |       |   |   |   |   |
| **Revenues**                              | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Premiums                                  |       | $                                     | 104        |                                 | $          | 129 |   | $ | 381 |   | $ | 392 |   |
| Contract charges                          |       | 236                                   |       | 218                                  |       | 694 |   | 780 |   |
| Net investment income                     |       | 1,062                                 |       | 1,035                                |       | 3,145 |   | 3,026 |   |
| Realized capital gains and losses         |       | (128                                  | )          | (30                                  | )          | (2 | ) | (137 | ) |
| Total revenues                            |       | 1,274                                 |       | 1,352                                |       | 4,218 |   | 4,061 |   |
|                                      |       |                                  |       |                                 |       |   |   |   |   |
| **Costs and expenses**                    | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contract benefits                         |       | (315                                  | )          | (336                                 | )          | (1,020 | ) | (989 | ) |
| Interest credited to contractholder funds |       | (672                                  | )          | (651                                 | )          | (1,967 | ) | (1,889 | ) |
| Amortization of DAC                       |       | (129                                  | )          | (106                                 | )          | (410 | ) | (387 | ) |
| Operating costs and expenses              |       | (84                                   | )          | (82                                  | )          | (244 | ) | (283 | ) |
| Restructuring and related charges         |       | —                                |       | (5                                   | )          | 1 |   | (23 | ) |
| Total costs and expenses                  |       | (1,200                                | )          | (1,180                               | )          | (3,640 | ) | (3,571 | ) |
|                                      |       |                                  |       |                                 |       |   |   |   |   |
| Gain (loss) on disposition of operations  |       | 6                                     |       | 3                                    |       | 9 |   | (85 | ) |
| Income tax expense                        |       | (24                                   | )          | (53                                  | )          | (195 | ) | (131 | ) |
| Net income                                |       | $                                     | 56         |                                 | $          | 122 |   | $ | 392 |   | $ | 274 |   |

 

*Net Income*****declined $66 million to $56 million in the thirdquarter of 2007 and increased $118 million to $392 million in the first ninemonths of 2007 compared to the same periods in 2006.  The decline in the third quarter was mostlythe result of lower revenues, higher amortization of deferred policyacquisition costs (“DAC”) and interest credited to contractholder funds,partially offset by lower contract benefits. Higher net income in the first nine months of 2007 was primarilyattributable to increased revenues, the recognition in the prior year of lossesrelating to the disposition of substantially all of our variable annuitybusiness, and lower operating costs and expenses, partially offset by higherinterest credited to contractholder funds, contract benefits and amortizationof DAC.

 

**Analysisof Revenues**Total revenues decreased 5.8% and increased 3.9% inthe third quarter and first nine months of 2007, respectively, compared to thesame periods in the prior year.  Thedecrease in the third quarter of 2007 was the result of higher net realizedcapital losses and lower premiums, partially offset by increased net investmentincome and contract charges.  Theincrease in the first nine months of 2007 was attributable to lower netrealized capital losses and higher net investment income, partially offset bylower contract charges and premiums.

 

*Premiums*represent revenues generated from traditional life, immediate annuitieswith life contingencies and other insurance products that have significantmortality or morbidity risk.

 

*Contract charges* are revenues generated frominterest-sensitive and variable life, fixed annuities, institutional productsand variable annuities for which deposits are classified as contractholderfunds or separate accounts liabilities. Contract charges are assessed against the contractholder account valuesfor maintenance, administration, cost of insurance and surrender prior tocontractually specified dates.  As aresult, changes in contractholder funds are considered in the evaluation ofgrowth and as indicators of future levels of revenues.  Subsequent to the close of our reinsurancetransaction with Prudential, variable annuity contract charges on the businesssubject to the transaction are fully reinsured to Prudential and presented netof reinsurance on the Condensed Consolidated Statements of Operations (see Note4 to the Condensed Consolidated Financial Statements).

 

 

16

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Thefollowing table summarizes premiums and contract charges by product.

 
| ** **                                  | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                           | ** ** | **2007**                               | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums**                                | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional life                            |       | $                                      | 62         |                                 | $          | 60 |   | $ | 192 |   | $ | 186 |   |
| Immediate annuities with life contingencies |       | 32                                     |       | 59                                   |       | 161 |   | 177 |   |
| Other                                       |       | 10                                     |       | 10                                   |       | 28 |   | 29 |   |
| **Total premiums**                          |       | 104                                    |       | 129                                  |       | 381 |   | 392 |   |
| ** **                                  | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract charges**                        | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-sensitive life                     |       | 217                                    |       | 200                                  |       | 637 |   | 589 |   |
| Fixed annuities                             |       | 19                                     |       | 17                                   |       | 56 |   | 53 |   |
| Variable annuities                          |       | —                                 |       | 1                                    |       | 1 |   | 138 |   |
| **Total contract charges****(1)**           |       | 236                                    |       | 218                                  |       | 694 |   | 780 |   |
| ** **                                  | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total premiums and contract charges**     |       | $                                      | 340        |                                 | $          | 347 |   | $ | 1,075 |   | $ | 1,172 |   |

----

(1)          Contract chargesfor the three months ended September 30, 2007 and 2006 include contract chargesrelated to the cost of insurance totaling $156 million and $142 million,respectively.  Contract charges for thenine months ended September 30, 2007 and 2006 include contract charges relatedto the cost of insurance totaling $456 million and $452 million, respectively.

 

Totalpremiums declined 19.4% and 2.8% in the third quarter and first nine months of2007, respectively, compared to the same periods of 2006.  The decline in both periods was due primarilyto lower sales of immediate annuities with life contingencies.

 

Contractcharges increased 8.3% in the third quarter of 2007 and declined 11.0% in thefirst nine months of 2007 compared to the same periods of 2006.  In the third quarter, the increase was theresult of higher contract charges on interest-sensitive life insurance policiesdue to growth in contractholder funds. The decline in contract charges in the nine month period was due to thedisposal of substantially all of our variable annuity business throughreinsurance effective June 1, 2006. Excluding contract charges on variable annuities, contract chargesincreased 7.9% in the first nine months of 2007 compared to the same period of2006.  This increase also reflects highercontract charges on interest-sensitive life insurance policies due to growth incontractholder funds.

 

 

17

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*Contractholder funds*represent interest-bearing liabilities arising from the sale of individual andinstitutional products, such as interest-sensitive life, fixed annuities andfunding agreements.  The balance ofcontractholder funds is equal to the cumulative deposits received and interestcredited to the contractholder less cumulative contract maturities, benefits,surrenders, withdrawals and contract charges for mortality or administrativeexpenses.

 

The followingtable shows the changes in contractholder funds.

 
| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                                              | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Contractholder funds, beginning balance**                    |       | $                                     | 61,173     |                                 | $          | 60,208 |   | $ | 60,565 |   | $ | 58,190 |   |
| ** **                                                     | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deposits**                                                   | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed annuities                                                |       | 1,064                                 |       | 1,838                                |       | 2,639 |   | 5,054 |   |
| Institutional products (funding agreements)                    |       | 500                                   |       | —                               |       | 3,000 |   | 1,600 |   |
| Interest-sensitive life                                        |       | 327                                   |       | 333                                  |       | 982 |   | 989 |   |
| Variable annuity and life deposits allocated to fixed accounts |       | —                                |       | —                               |       | 1 |   | 98 |   |
| Total deposits                                                 |       | 1,891                                 |       | 2,171                                |       | 6,622 |   | 7,741 |   |
| ** **                                                     | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest credited**                                          |       | 672                                   |       | 669                                  |       | 1,976 |   | 1,937 |   |
| ** **                                                     | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Maturities, benefits, withdrawals and other  adjustments**   |       |                                  |       |                                 |       |   |   |   |   |
| Maturities of institutional products                           |       | (474                                  | )          | (776                                 | )          | (2,469 | ) | (2,039 | ) |
| Benefits                                                       |       | (434                                  | )          | (376                                 | )          | (1,265 | ) | (1,132 | ) |
| Surrenders and partial withdrawals                             |       | (1,357                                | )          | (1,131                               | )          | (3,468 | ) | (3,385 | ) |
| Contract charges                                               |       | (188                                  | )          | (173                                 | )          | (553 | ) | (514 | ) |
| Net transfers from (to) separate accounts                      |       | 3                                     |       | (1                                   | )          | 9 |   | (146 | ) |
| Fair value hedge adjustments                                   |       | 61                                    |       | 16                                   |       | 27 |   | (4 | ) |
| Other adjustments                                              |       | (30                                   | )          | 15                                   |       | (127 | ) | (26 | ) |
| Total maturities, benefits, withdrawals and other adjustments  |       | (2,419                                | )          | (2,426                               | )          | (7,846 | ) | (7,246 | ) |
| **Contractholder funds, ending balance**                       |       | $                                     | 61,317     |                                 | $          | 60,622 |   | $ | 61,317 |   | $ | 60,622 |   |

 

 

Contractholder fundsincreased 0.2% and 0.7% in the third quarters of 2007 and 2006, and increased1.2% and 4.2% in the first nine months of 2007 and 2006, respectively.  Average contractholder funds increased 1.4%and 2.6% in the third quarter and first nine months of 2007, respectively,compared to the same periods in 2006. This is compared to an increase in average contractholder funds of 5.6%and 7.0% in the third quarter and first nine months of 2006, respectively,compared to the same periods in 2005.

 

Contractholder depositsdeclined 12.9% and 14.5% in the third quarter and first nine months of 2007,respectively, compared to the same periods of 2006.  These declines were primarily due to lowerdeposits on fixed annuities partially offset by higher deposits on fundingagreements.  Deferred fixed annuitydeposits were $996 million and $2.45 billion (including indexed annuities) inthe third quarter and first nine months of 2007, respectively, a decrease of43.8% and 49.1%, respectively, compared to the same periods in the prioryear.  These declines are indicative oflower industry-wide fixed annuity sales and our strategy to raise new businessreturns on capital for these products.

 

Surrenders and partialwithdrawals increased 20.0% and 2.5% in the third quarter and first nine monthsof 2007, respectively, compared to the same periods of 2006.  The increase in surrenders and partialwithdrawals in the first nine months of 2007 was lessened by the absence in2007 of surrenders and partial withdrawals related to the variable annuitybusiness that was reinsured effective June 1, 2006.  Subsequent to the effective date of thattransaction, the net change in contractholder funds attributable to thereinsured variable annuity business is included as a component of the otheradjustments line in the table above.  Surrendersand partial withdrawals for the first nine months of 2006 include $120 millionrelated to the reinsured variable annuity business.  The annualized surrender and partialwithdrawal rate on deferred fixed annuities and interest-sensitive life products,based on the beginning of period contractholder funds, was 10.9% and 11.0% forthe first nine months of 2007 and 2006, respectively.

 

18

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*Net investment income* increased 2.6%in the third quarter and 3.9% in the first nine months of 2007 compared to thesame periods of 2006.  The increase inboth periods was primarily due to increased partnership income and increasedportfolio yields, including on floating rate instruments.  For certain products, the yield changes onour floating rate instruments are primarily offset by changes in creditingrates to holders of our floating rate contracts, resulting in minimal impact onnet income.  See the Investments sectionof MD&A for further detail of net investment income.

 

*Realized capital gains and losses* reflected net losses of$128 million and $2 million in the third quarter and first nine months of 2007,respectively.  This compares to netlosses of $30 million and $137 million in the third quarter and first nine monthsof 2006, respectively.  For furtherdiscussion of realized capital gains and losses, see the Investments section ofMD&A.

 

**Analysis of Costs and Expenses**   Total costs and expenses increased 1.7% or$20 million and 1.9% or $69 million in the third quarter and first nine monthsof 2007, respectively, compared to the same periods in the prior year.  The increase in the third quarter reflectshigher amortization of DAC and interest credited to contractholder fundspartially offset by lower contract benefits. In the nine month period, the increase reflects higher interest creditedto contractholder funds, contract benefits and amortization of DAC, partiallyoffset by lower operating costs and expenses as well as restructuring andrelated charges.

 

*Contract benefits* decreased 6.3% or $21 million in the thirdquarter of 2007 and increased 3.1% or $31 million in the first nine months of2007 compared to the same periods in the prior year.  The decline in the third quarter of 2007 wasdriven primarily by favorable mortality experience on immediate annuities.  The increase in the first nine months of 2007was due to litigation related costs in the form of additional policy benefitson certain universal life policies written prior to 1992 and less favorablelife mortality in 2007, partially offset by favorable mortality experience onimmediate annuities and the absence in 2007 of contract benefits on thereinsured variable annuity business, which totaled $12 million for the ninemonths ended September 30, 2006.

 

Contract benefits include the implied interest on life-contingentimmediate annuities.  This impliedinterest totaled $137 million and $138 million in the third quarter of 2007 and2006, respectively, and totaled $412 million and $405 million in the first ninemonths of 2007 and 2006, respectively. We analyze our mortality and morbidity results using the differencebetween premiums, contract charges earned for the cost of insurance andcontract benefits excluding the portion related to the implied interest onlife-contingent immediate annuities (“benefit spread”).

 

Thebenefit spread by product group is disclosed in the following table.

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**    | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Life insurance       |       | $                                     | 86         |                                 | $          | 86 |   | $ | 247 |   | $ | 291 |   |
| Annuities            |       | (4                                    | )          | (13                                  | )          | (18 | ) | (31 | ) |
| Total benefit spread |       | $                                     | 82         |                                 | $          | 73 |   | $ | 229 |   | $ | 260 |   |

 

*Interest credited to contractholder funds* increased 3.2%or $21 million in the third quarter and 4.1% or $78 million in the first ninemonths of 2007 compared to the same periods in the prior year.  The increase in both periods was the resultof growth in contractholder funds.  Inthe first nine months of 2007, the impact of the growth in contractholder fundswas partially offset by the absence in 2007 of interest credited related to thereinsured variable annuity business. Interest credited to contractholder funds related to the reinsuredvariable annuity business totaled $24 million in the first nine months of 2006.

 

19

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In order to analyze the impact of net investmentincome and interest credited to policyholders on net income, we review thedifference between net investment income and the sum of interest credited tocontractholder funds and the implied interest on life contingent immediateannuities which is included as a component of contract benefits on theCondensed Consolidated Statements of Operations (“investment spread”).  The investment spread by product group isshown in the following table.

 
| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                                       | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Annuities                                               |       | $                                     | 126        |                                 | $          | 123 |   | $ | 384 |   | $ | 359 |   |
| Life insurance                                          |       | 13                                    |       | 12                                   |       | 42 |   | 39 |   |
| Institutional products                                  |       | 19                                    |       | 22                                   |       | 64 |   | 66 |   |
| Net investment income on investments supporting capital |       | 95                                    |       | 89                                   |       | 276 |   | 268 |   |
| Total investment spread                                 |       | $                                     | 253        |                                 | $          | 246 |   | $ | 766 |   | $ | 732 |   |

 

 

The following table summarizes the annualized weighted averageinvestment yield, interest crediting rates and investment spreads for the threemonths ended September 30.

** **
| ** **                                                          | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spreads** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                               | ** ** | **2006**                                      | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest-sensitive life                                             |       | 6.2                                    | %          | 6.2                                           | %          | 4.7                                      | %          | 4.7 | % | 1.5 | % | 1.5 | % |
| Deferred fixed annuities                                            |       | 5.9                                    |       | 5.7                                           |       | 3.8                                      |       | 3.8 |   | 2.1 |   | 1.9 |   |
| Immediate fixed annuities with and without life contingencies       |       | 7.0                                    |       | 7.2                                           |       | 6.5                                      |       | 6.7 |   | 0.5 |   | 0.5 |   |
| Institutional products                                              |       | 6.3                                    |       | 6.3                                           |       | 5.5                                      |       | 5.4 |   | 0.8 |   | 0.9 |   |
| Investments supporting capital, traditional life and other products |       | 5.9                                    |       | 6.7                                           |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

 

The following table summarizes the annualized weighted averageinvestment yield, interest crediting rates and investment spreads for the ninemonths ended September 30.

** **
| ** **                                                          | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spreads** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                               | ** ** | **2006**                                      | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest-sensitive life                                             |       | 6.2                                    | %          | 6.2                                           | %          | 4.6                                      | %          | 4.7 | % | 1.6 | % | 1.5 | % |
| Deferred fixed annuities                                            |       | 5.8                                    |       | 5.7                                           |       | 3.7                                      |       | 3.7 |   | 2.1 |   | 2.0 |   |
| Immediate fixed annuities with and without life contingencies       |       | 7.1                                    |       | 7.2                                           |       | 6.5                                      |       | 6.6 |   | 0.6 |   | 0.6 |   |
| Institutional products                                              |       | 6.1                                    |       | 6.0                                           |       | 5.2                                      |       | 5.0 |   | 0.9 |   | 1.0 |   |
| Investments supporting capital, traditional life and other products |       | 5.8                                    |       | 6.7                                           |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

 

20

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Thefollowing table summarizes the liabilities for these contracts and policies.

 
| ** **                                                           | ** ** | **As of September 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|
| **(in millions)**                                                    | ** ** | **2007**                | ** ** | **2006** | ** ** |
| Immediate fixed annuities with life contingencies                    |       | $                       | 8,249      |   | $ | 8,045 |   |
| Other life contingent contracts and other                            |       | 4,047                   |       | 4,057 |   |
| Reserve for life-contingent contracts                                |       | $                       | 12,296     |   | $ | 12,102 |   |
|                                                                 |       |                    |       |   |   |
| Interest-sensitive life                                              |       | $                       | 8,804      |   | $ | 8,286 |   |
| Deferred fixed annuities                                             |       | 34,728                  |       | 35,762 |   |
| Immediate fixed annuities without life contingencies                 |       | 3,816                   |       | 3,723 |   |
| Institutional products                                               |       | 13,500                  |       | 12,459 |   |
| Market value adjustments related to derivative instruments and other |       | 469                     |       | 392 |   |
| Contractholder funds                                                 |       | $                       | 61,317     |   | $ | 60,622 |   |

 

*Amortization of DAC*****increased 21.7% or $23 million in the third quarter of 2007 and 5.9% or$23 million in the first nine months of 2007 compared to the same periods of2006.  The components of amortization ofDAC are shown in the following table.

 
| ** **                                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                                                                                                     | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Amortization of DAC before amortization relating to realized capital  gains and losses and changes in assumptions (1) |       | $                                     | (144       | )                                    | $          | (126 | ) | $ | (417 | ) | $ | (441 | ) |
| Amortization relating to realized capital gains and losses (2)                                                        |       | 15                                    |       | 20                                   |       | (5 | ) | 56 |   |
| Changes in assumptions (“unlocking”)                                                                        |       | —                                |       | —                               |       | 12 |   | (2 | ) |
| Total amortization of DAC                                                                                             |       | $                                     | (129       | )                                    | $          | (106 | ) | $ | (410 | ) | $ | (387 | ) |

----

(1)          Amortizationof DAC before amortization relating to realized capital gains and losses andchanges in assumptions for the nine months ended September 30, 2006 includes$(72) million relating to the reinsured variable annuity business.

 

(2)          Amortizationrelating to realized capital gains and losses for the nine months endedSeptember 30, 2006 includes $28 million of amortization relating to thereinsured variable annuity business.

 

Theincrease in amortization of DAC in the third quarter of 2007 compared to thethird quarter of the prior year was primarily the result of an increase ingross profits attributable to annuities and, to a lesser extent, a reducedcredit to income resulting from amortization relating to realized capital gainsand losses.  The increase in amortizationin the first nine months of 2007 was impacted by the absence in 2007 ofamortization on the variable annuity business that was reinsured effective June1, 2006.  Excluding amortization relatingto the reinsured variable annuity business, amortization of DAC increased 19.5%in the first nine months of 2007 compared to the same period in the prioryear.  This increase was due to highergross profits attributable to annuities and an unfavorable change inamortization relating to realized capital gains and losses, partially offset bya favorable impact totaling $14 million relating to our annual comprehensivereview of DAC assumptions (commonly referred to as “unlocking”).

 

Theimpact of realized capital gains and losses on amortization of DAC is dependentupon the relationship between the assets that give rise to the gain or loss andthe product liability supported by the assets. Fluctuations result from changes in the impact of realized capital gainsand losses on actual and expected gross profits.

 

21

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*Operatingcosts and expenses*increased 2.4% in the third quarter of 2007 compared to the same period of 2006and declined 13.8% in the first nine months of 2007 compared to the sameperiods of 2006.  The following tablesummarizes operating costs and expenses.

 
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                  | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Non-deferrable acquisition costs   |       | $                                     | (24        | )                                    | $          | (23 | ) | $ | (72 | ) | $ | (95 | ) |
| Other operating costs and expenses |       | (60                                   | )          | (59                                  | )          | (172 | ) | (188 | ) |
| Total operating costs and expenses |       | $                                     | (84        | )                                    | $          | (82 | ) | $ | (244 | ) | $ | (283 | ) |
|                               |       |                                  |       |                                 |       |   |   |   |   |
| Restructuring and related charges  |       | $                                     | —     |                                 | $          | (5 | ) | $ | 1 |   | $ | (23 | ) |

 

Non-deferrable acquisition costs increased4.3% in the third quarter of 2007 compared to the same period in the prior yeardue primarily to higher premium taxes. Other operating costs and expenses increased 1.7% in the third quarterof 2007 due to increased investment in technology.  The decline in non-deferrable acquisitioncosts and other operating costs and expenses in the first nine months of 2007compared to the same period of 2006 was driven mostly by the absence ofexpenses in 2007 related to the variable annuity business reinsured effectiveJune 1, 2006.  For the first nine months of2006, non-deferrable acquisition costs and other operating costs and expensesincluded $19 million and $24 million, respectively, of expenses relating to thereinsured variable annuity business. Excluding the impact of the reinsured variable annuity business, in thefirst nine months of 2007, non-deferrable acquisition expenses decreased 5.3%due to lower premium taxes and decreased non-deferrable commissions on certainimmediate annuities while other operating costs and expenses increased 4.9% dueto increased interest expense and, to a lesser extent, increased investment intechnology.

 

Restructuringand related charges for the first nine months of 2006 reflect costs relatedto a voluntary termination offer.

 

*Gain (loss) on disposition of operations*changed by a favorable $3 million and $94 million in the third quarter andfirst nine months of 2007, respectively, compared to the same periods in theprior year.  This improvement was due tothe recognition in the prior year of losses relating to the disposition ofsubstantially all of our variable annuity business.

 

*Income tax expense* decreased by $29 million and increased by $64 million in the thirdquarter and first nine months of 2007, respectively, compared to the sameperiods in the prior year.  These changesreflect the proportional impact of changes in income before taxes.  The effective tax rates were relativelyconsistent in each of the periods.

 

 

**INVESTMENTS**

 

An important component of our financial results is the return on ourinvestment portfolio.  The composition ofthe investment portfolio at September 30, 2007 is presented in the table below.

 
| **(in millions)**           | ** ** | **Investments** | ** ** | **Percent to total** | ** ** |
|-----------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                  | ** ** | ** **      | ** ** | ** **           | ** ** |
| Fixed income securities (1) |       | $               | 61,658     |                 | 82.7       | % |
| Mortgage loans              |       | 9,543           |       | 12.8                 |       |
| Equity securities           |       | 967             |       | 1.3                  |       |
| Short-term                  |       | 748             |       | 1.0                  |       |
| Policy loans                |       | 765             |       | 1.0                  |       |
| Other                       |       | 890             |       | 1.2                  |       |
| Total                       |       | $               | 74,571     |                 | 100.0      | % |

----

(1)          Fixed income securities arecarried at fair value.  Amortized costbasis for these securities was $61.10 billion.

 

22

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Total investments increasedto $74.57 billion at September 30, 2007 from $74.16 billion at December 31,2006, primarily due to positive cash flows from operating activities, includingincreased funds associated with securities lending and securities sold with theagreement to repurchase, partially offset by decreased net unrealized gains onfixed income securities and the repayment of a note payable to our parent, AIC.

 

Totalinvestments at amortized cost related to collateral received in connection withsecurities lending business activities, funds received in connection withsecurities repurchase agreements, and collateral posted by counterpartiesrelated to derivative transactions increased to $2.73 billion at September 30,2007 from $2.29 billion at December 31, 2006. Fixed income securities by type are listed in the table below.

 
| **($ in millions)**              | ** ** | **September 30,  2007** | ** ** | **% to Total  Investments** | ** ** | **December 31,  2006** | ** ** | **% to Total  Investments** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | ** **                   | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| U.S. government and agencies          |       | $                            | 3,564      |                        | 4.8        | %                           | $          | 3,496                       |       | 4.7 | % |
| Municipal                             |       | 4,442                        |       | 6.0                         |       | 4,790                       |       | 6.5                         |       |
| Corporate                             |       | 33,596                       |       | 45.1                        |       | 34,309                      |       | 46.3                        |       |
| Asset-backed securities               |       | 6,145                        |       | 8.2                         |       | 5,681                       |       | 7.7                         |       |
| Commercial mortgage-backed securities |       | 8,076                        |       | 10.8                        |       | 7,600                       |       | 10.2                        |       |
| Mortgage-backed securities            |       | 3,700                        |       | 5.0                         |       | 4,518                       |       | 6.1                         |       |
| Foreign government                    |       | 2,108                        |       | 2.8                         |       | 2,023                       |       | 2.7                         |       |
| Redeemable preferred stock            |       | 27                           |       | —                      |       | 22                          |       | —                      |       |
| Total fixed income securities         |       | $                            | 61,658     |                        | 82.7       | %                           | $          | 62,439                      |       | 84.2 | % |

 

At September 30, 2007, 93.8% of the fixed income securities portfoliowas rated investment grade, which is defined as a security having a rating fromthe National Association of Insurance Commissioners (“NAIC”) of 1 or 2; arating of Aaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBB fromStandard and Poor’s (“S&P”), Fitch or Dominion or a rating of aaa, aa, a orbbb from A.M. Best; or a comparable internal rating if an externally providedrating is not available.

 

During the third quarter of 2007, the financialmarkets experienced liquidity declines, primarily in the residential mortgageand asset-backed commercial paper markets. Certain other asset-backed and real estate investment marketsexperienced similar illiquidity, but to a much lesser degree.  After gaining assurance as to thereasonableness of our vendor pricing services, we have been able to continue tovalue our portfolio of these securities based upon independent marketquotations.

 

Asset-backed and mortgage-backed fixed incomesecurities by type are listed in the table below.

 
| **($ in  millions)**                                                              | ** ** | **Aaa**    | ** ** | **Aa**     | ** ** | **A**      | ** ** | **Baa**    | ** ** | **Ba or lower** | ** ** | **Fair  value at  September 30,  2007** | ** ** | **% to  Total Investments** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-----------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| **Asset-backed  securities**                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                                   | ** ** | ** **                  | ** ** |
| Asset-backed  securities collateralized by sub-prime residential mortgage loans:       |       |       |       |       |       |       |       |       |       |            |       |                                         |       |                        |       |
| Asset-backed  residential mortgage-backed securities (“ABS RMBS”)            |       | 64.1       | %          | 29.9       | %          | 6.0        | %          | —     |       | —          |       | $2,689                                       |       | 3.6                         | %          |
| Asset-backed  collateralized debt obligations (“ABS CDOs”)                   |       | 67.2       |       | 26.2       |       | 4.5        |       | 0.6        |       | 1.5             |       | 84                                           |       | 0.1                         |       |
| Total  asset-backed securities collateralized by sub-prime residential mortgage  loans |       |       |       |       |       |       |       |       |       |            |       | 2,773                                        |       | 3.7                         |       |
|                                                                                   |       |       |       |       |       |       |       |       |       |            |       |                                         |       |                        |       |
| Other  collateralized debt obligations                                                 |       | 34.4       |       | 27.3       |       | 27.4       |       | 7.7        |       | 3.2             |       | 2,067                                        |       | 2.8                         |       |
| Other  asset-backed securities                                                         |       | 51.2       |       | 7.4        |       | 20.3       |       | 14.9       |       | 6.2             |       | 1,305                                        |       | 1.7                         |       |
| Total Asset-backed  securities                                                         |       |       |       |       |       |       |       |       |       |            |       | $6,145                                       |       | 8.2                         | %     |
|                                                                                   |       |       |       |       |       |       |       |       |       |            |       |                                         |       |                        |       |
| **Mortgage-backed  securities**                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **                                   | ** ** | ** **                  | ** ** |
| U.S. Agency                                                                            |       | 100.0      |       | —     |       | —     |       | —     |       | —          |       | $2,131                                       |       | 2.9                         | %          |
| Prime                                                                                  |       | 96.0       |       | 4.0        |       | —     |       | —     |       | —          |       | 965                                          |       | 1.3                         |       |
| Alt-A                                                                                  |       | 91.7       |       | 8.1        |       | 0.2        |       | —     |       | —          |       | 604                                          |       | 0.8                         |       |
| Total Mortgage-backed  securities                                                      |       |       |       |       |       |       |       |       |       |            |       | $3,700                                       |       | 5.0                         | %     |

 

 

23

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Certain of our asset-backedsecurities and mortgage-backed securities are collateralized by residentialmortgage loans that are characterized by borrowers of differing levels ofcreditworthiness: U.S. agency, prime, Alt-A and sub-prime.  Our practice for acquiring and monitoring ABS RMBS(also known as “sub-prime RMBS”) and Alt-A mortgage-backed securities takesinto consideration the quality of the originator, quality of the servicer,security credit rating, underlying characteristics of the mortgages, borrowercharacteristics, level of credit enhancement in the transaction, and bondinsurer strength, where applicable.  Theoriginators and servicers of the underlying mortgage loans are primarilysubsidiaries of large banks and broker/dealers. These securities are structured to experience losses according to theseniority level of each tranche, with the least senior tranche taking the firstloss.

 

At September 30, 2007, we did not record anyinvestment write-downs related to our ABS RMBS, ABS CDOs or Alt-A residentialmortgage-backed securities.  Although wedo not currently anticipate other-than-temporary impairments on thesesecurities, a deterioration of future market conditions could cause us to alterthat outlook.  In addition, based on ouranalysis and the seniority of our securities’ claim on the underlyingcollateral, we currently expect to receive all payments on these securities inaccordance with their original contractual terms.

 

The following table presents additional informationabout our ABS RMBS portfolio including a summary by first and second liencollateral.

 
| **($ in millions)** | ** ** | **Fair value at  September 30,  2007** | ** ** | **% to Total Investments** | ** ** |
|--------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| **ABS RMBS**             | ** ** | ** **                             | ** ** | ** **                 | ** ** |
| First lien:              |       |                                   |       |                       |       |
| Fixed rate (1)           |       | $                                      | 795        |                       | 1.1        | % |
| Variable rate (1)        |       | 1,285                                  |       | 1.7                        |       |
| Total first lien (2)     |       | 2,080                                  |       | 2.8                        |       |
| Second lien:             |       |                                   |       |                       |       |
| Insured                  |       | 470                                    |       | 0.6                        |       |
| Other                    |       | 139                                    |       | 0.2                        |       |
| Total second lien (3)    |       | 609                                    |       | 0.8                        |       |
| Total ABS RMBS           |       | $                                      | 2,689      |                       | 3.6        | % |

----

(1)  Fixed rate and variable rate refer to theprimary interest rate characteristics of the underlying mortgages at the timeof issuance.

(2) The credit ratings of the first lien ABSRMBS were 56.8% Aaa, 35.9% Aa and 7.3% A at September 30, 2007.

(3)  The credit ratings of the second lien ABSRMBS were 89.0% Aaa, 9.4% Aa and 1.6% A at September 30, 2007.

 

*ABS RMBS* includes securities that arecollateralized by mortgage loans issued to borrowers that cannot qualify forprime or alternative financing terms due in part to an impaired or limitedcredit history.  It also includes securitiesthat are collateralized by certain second lien mortgages regardless of theborrower’s credit profile.  As ofSeptember 30, 2007, the ABS RMBS portfolio had net unrealized losses of $159million, which were comprised of $1 million of unrealized gains and $160million of unrealized losses.  This iscompared to net unrealized losses of $26 million, which were comprised of $3million of unrealized gains and $29 million of unrealized losses at June 30,2007.  During the third quarter of 2007,five second lien ABS RMBS with a value of $57 million were downgraded withinthe investment grade ratings.  SinceSeptember 30, 2007, two tranches with a value of $13 million were downgradedwithin the investment grade ratings, one tranche with a value of $2 million wasdowngraded from A to Ba and one tranche with a value of $1 million wasdowngraded from Baa to Ba.  During thethird quarter of 2007, we acquired $99 million of ABS RMBS.  We also collected $128 million of principalrepayments consistent with the expected cash flows.  These repayments represent nearly 5% of theamortized cost of our outstanding ABS RMBS portfolio at June 30, 2007.

 

At September 30, 2007, $596 million or 34.6% of thetotal ABS RMBS securities that are rated Aaa are currently insured by 4 bondinsurers.  $1.66 billion or 61.5% of theportfolio consisted of securities that were issued during 2006 and 2007.  At September 30, 2007, 80.1% of thesesecurities were rated Aaa, 17.3% rated Aa, 2.5% rated A and 0.1% rated Baa.  The expected weighted average life of our2006 and 2007 ABS RMBS portfolio was estimated to be approximately 4 years atorigination.  As the underlying mortgagesare repaid,  the weighted average life atorigination of the remaining positions will lengthen.

 

 

24

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*ABS CDOs* are securities collateralized by avariety of other securities, including residential mortgage-backed securitiesthat may be sub-prime.  As of September30, 2007, this portfolio had unrealized losses of $55 million, compared tounrealized losses of $7 million at June 30, 2007.  During the third quarter of 2007, $25 millionof an Aaa rated tranche of one ABS CDO was liquidated and we received fullreturn of principal and interest.

 

*Other collateralized debtobligations*consist of investments secured primarily by corporate credit obligations,including both investment grade and high yield corporate credits.

 

*Other asset-backed securities* consist primarily of investments securedby portfolios of credit card loans, auto loans, student loans and otherconsumer and corporate obligations.

 

        Includedin our mortgage-backed fixed income securities are Alt-A mortgage-backedsecurities at fixed or variable rates. The following table presents information about the collateral in ourAlt-A holdings.

  
| **($ in  millions)** | ** ** | **September  30,**

**2007** | ** ** | **% to  Total**

**Investments** | ** ** |
|---------------------------|------------|------------------------------|------------|----------------------------------|------------|
| **Alt-A**                 | ** ** | ** **                   | ** ** | ** **                       | ** ** |
| Fixed rate                |       | $                            | 434        |                             | 0.6        | % |
| Variable rate             |       | 170                          |       | 0.2                              |       |
| Total Alt-A (1)           |       | $                            | 604        |                             | 0.8        | % |

 

        *Alt-A mortgage-backed securities* include certain securitiesthat are collateralized by residential mortgage loans issued to borrowers withstronger credit profiles than sub-prime borrowers, but who do not qualify forprime financing terms due to high loan-to-value ratios or limited supportingdocumentation.  At September 30, 2007,the Alt-A portfolio had net unrealized losses of $10 million, which werecomprised of $1 million of unrealized gains and $11 million of unrealizedlosses.  At June 30, 2007, thesesecurities had net unrealized losses of $3 million, which were comprised of $2 millionof unrealized gains and $5 million of unrealized losses.  $168 million or 27.8% of these securities were issuedduring 2006 and 2007.  During the thirdquarter of 2007, we sold $13 million of Alt-A securities recognizing a loss of$1 million.

 

*Unrealized net capital gains on fixed income**and equity**securities*at September 30, 2007 were $562 million, a decrease of $1.04 billion or 64.9%since December 31, 2006.  The netunrealized gain for the fixed income portfolio totaled $559 million, comprisedof $1.86 billion of unrealized gains and $1.30 billion of unrealized losses atSeptember 30, 2007.  This is compared toa net unrealized gain for the fixed income portfolio totaling $1.59 billion atDecember 31, 2006, comprised of $2.10 billion of unrealized gains and $507million of unrealized losses.

 

Of the gross unrealized losses in the fixedincome portfolio at September 30, 2007, $1.20 billion or 92.5% were related toinvestment grade securities and are believed to be primarily interest raterelated.  Of the remaining $98 million ofunrealized losses in the fixed income portfolio, $73 million or 74.5% were inthe corporate fixed income portfolio and were primarily comprised of securitiesin the financial services, consumer goods, utilities, communications and capital goods sectors.  The gross unrealized losses in these sectorswere primarily company specific and interest rate related.

 

The net unrealized gain for the common andnon-redeemable preferred stock portfolio totaled $3 million and $11 million atSeptember 30, 2007 and December 31, 2006, respectively.

 

Our portfoliomonitoring process identifies and evaluates, on a case-by-case basis, fixedincome and equity securities whose carrying value may be other-than-temporarilyimpaired.  The process includes aquarterly review of all securities using a screening process to identify thosesecurities whose fair value compared to amortized cost for fixed incomesecurities or cost for equity securities is below established thresholds forcertain time periods, or which are identified through other monitoring criteriasuch as ratings downgrades or payment defaults. The securities identified, and other securities for which we may have aconcern, are evaluated based on facts and circumstances for inclusion on ourwatch-list.  We also conduct a portfolioreview to recognize impairment on securities in an unrealized loss position forwhich we do not have the intent and ability to hold until recovery as a resultof approved programs involving the disposition of investments such as changesin duration, revisions to strategic asset allocations and liquidity actions, aswell as certain dispositions anticipated by portfolio managers.  All securities in an unrealized loss positionat September 30, 2007 were included in our portfolio monitoring process fordetermining which declines in value were not other-than-temporary.

 

 

25

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We also monitor the quality of our fixedincome portfolio by categorizing certain investments as “problem”, “restructured”or “potential problem.”  Problem fixedincome securities are securities in default with respect to principal orinterest and/or securities issued by companies that have gone into bankruptcysubsequent to our acquisition of the security. Restructured fixed income securities have rates and terms that are notconsistent with market rates or terms prevailing at the time of therestructuring.  Potential problem fixedincome securities are current with respect to contractual principal and/orinterest, but because of other facts and circumstances, we have concernsregarding the borrower’s ability to pay future principal and interest, whichcauses us to believe these securities may be classified as problem orrestructured in the future.

 

The following table summarizes problem, restructured and potentialproblem fixed income securities.

 
| ** **                                 | ** ** | **September  30, 2007** | ** ** | **December  31, 2006** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **(in  millions)**                         | ** ** | **Amortized  cost**     | ** ** | **Fair**

**value**    | ** ** | **Percent  of   total Fixed   Income   portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair   value** | ** ** | **Percent  of   total Fixed   Income   portfolio** | ** ** |
| Problem                                    |       | $                       | 14         |                   | $          | 14 |   | — | % | $ | 13 |   | $ | 16 |   | — | % |
| Restructured                               |       | 6                       |       | 6                      |       | — |   | 4 |   | 4 |   | — |   |
| Potential problem                          |       | 115                     |       | 101                    |       | 0.2 |   | 107 |   | 118 |   | 0.2 |   |
| Total net carrying value                   |       | $                       | 135        |                   | $          | 121 |   | 0.2 | % | $ | 124 |   | $ | 138 |   | 0.2 | % |
| Cumulative write-downs recognized (1) |       | $                       | 188        |                   |       |   |   |   | $ | 184 |   |   |   |   |   |

----

(1)  Cumulative write-downs recognized onlyreflects write-downs related to securities within the problem, potentialproblem and restructured categories.

 

We have experienced an increase in the amortized cost of each of thefixed income security categories as of September 30, 2007 compared to December31, 2006.  The increases were primarily due to certain ABS CDOs as well as bondsissued by a prime mortgage lender.

 

        We also evaluated each ofthese securities through our portfolio monitoring process at September 30, 2007and recorded write-downs if appropriate. We further concluded that any remaining unrealized losses on thesesecurities were temporary in nature and that we have the intent and ability tohold the security until recovery.  Whilethese balances may increase in the future, particularly if economic conditionsare unfavorable, management expects that****thetotal amount of securities in these categories will remain low relative to thetotal fixed income securities portfolio.

 

**Net Investment Income**The following table presents net investment income for the three months andnine months ended September 30.

 
| ** **                                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended**

**September 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| **(in millions)**                                    | ** ** | **2007**                             | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Fixed income securities                              |       | $                                    | 932        |                                     | $          | 911 |   | $ | 2,765 |   | $ | 2,663 |   |
| Equity securities (1)                                |       | 21                                   |       | 9                                        |       | 55 |   | 30 |   |
| Mortgage loans                                       |       | 140                                  |       | 127                                      |       | 406 |   | 380 |   |
| Other                                                |       | 39                                   |       | 58                                       |       | 128 |   | 139 |   |
| Investment income, before expense                    |       | 1,132                                |       | 1,105                                    |       | 3,354 |   | 3,212 |   |
| Investment expense                                   |       | (70                                  | )          | (70                                      | )          | (209 | ) | (186 | ) |
| Net investment income                                |       | $                                    | 1,062      |                                     | $          | 1,035 |   | $ | 3,145 |   | $ | 3,026 |   |
|                                                 |       |                                 |       |                                     |       |   |   |   |   |
| (1) Net investment income from partnership interests |       | $                                    | 19         |                                     | $          | 8 |   | $ | 52 |   | $ | 27 |   |

 

**       **Net investment income increased 2.6% and 3.9% in the three months andnine months ended September 30, 2007 as compared to the same periods in theprior year.

 

 

26

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**Net Realized Capital Gains and Losses**The followingtable presents the components of realized capital gains and losses and therelated tax effect.

 
| ** **                                   | ** ** | **Three Months Ended****September 30,** | ** ** | **Nine Months Ended****September 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| **(in millions)**                            | ** ** | **2007**                                | ** ** | **2006**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Investment write-downs                       |       | $                                       | (18        | )                                      | $          | (8 | ) | $ | (23 | ) | $ | (17 | ) |
| Dispositions                                 |       | (31                                     | )          | 33                                     |       | (46 | ) | (117 | ) |
| Valuation of derivative instruments          |       | (58                                     | )          | (47                                    | )          | 57 |   | (33 | ) |
| Settlement of derivative instruments         |       | (21                                     | )          | (8                                     | )          | 10 |   | 30 |   |
| Realized capital gains and losses, pretax    |       | (128                                    | )          | (30                                    | )          | (2 | ) | (137 | ) |
| Income tax benefit                           |       | 45                                      |       | 10                                     |       | — |   | 48 |   |
| Realized capital gains and losses, after-tax |       | $                                       | (83        | )                                      | $          | (20 | ) | $ | (2 | ) | $ | (89 | ) |

 

Dispositions in the above table includesales, losses recognized in anticipation of dispositions and other transactionssuch as calls and prepayments.  We maysell impaired fixed income or equity securities that were in an unrealized lossposition at the previous reporting date in situations where new factors such asnegative developments, subsequent credit deterioration, changing liquidityneeds, and newly identified market opportunities cause a change in our previousintent to hold a security until recovery or maturity.

 

A changing interest rate environment willdrive changes in our portfolio duration targets at a tactical level.  A duration target and range is established withan economic view of liabilities relative to a long-term portfolio view.  Tactical duration adjustments withinmanagement’s approved ranges are accomplished through both cash markettransactions and derivative activities that generate realized gains and lossesand through new purchases.  As acomponent of our approach to managing portfolio duration, realized gains andlosses on certain derivative instruments are most appropriately considered inconjunction with the unrealized gains and losses on the fixed incomeportfolio.  This approach mitigates theimpacts of general interest rate changes to the overall financial condition ofthe Company.

 

        In the third quarter of 2007, we recognized $6 million oflosses related to a change in our intent to hold certain securities withunrealized losses until they recover in value. The change in our intent is primarily related to strategic assetallocation decisions and ongoing comprehensive reviews of our portfolio.  We identified $906 million of securitieswhich we did not have the intent to hold until recovery.

 

        Netrealized losses related to valuations of derivative instruments in the thirdquarter of 2007 were primarily due to changes in underlying interestrates.  Approximately $25 million or43.2% of the losses relate to economic hedging instruments that supportinvestments whose valuation changes are reported in shareholders’ equity.  The improvement in realized capital gains andlosses relating to the valuation of derivative instruments in the first ninemonths of 2007 compared to the same periods in the prior year was primarily theresult of equity market fluctuations.

 

**CAPITAL RESOURCES AND LIQUIDITY**

 

**Capital Resources** consist of shareholder’sequity and debt, representing funds deployed or available to be deployed tosupport business operations.  Thefollowing table summarizes our capital resources.

 
| **(in millions)**                                                       | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| Redeemable preferred stock                                              |       | $                      | —     |                  | $          | 5 |   |
| Common stock, retained income and other shareholder’s equity items |       | 5,467                  |       | 5,168                 |       |
| Accumulated other comprehensive income                                  |       | 41                     |       | 325                   |       |
| Total shareholder’s equity                                         |       | 5,508                  |       | 5,498                 |       |
| Debt                                                                    |       | 200                    |       | 706                   |       |
| Total capital resources                                                 |       | $                      | 5,708      |                  | $          | 6,204 |   |

 

*Shareholder’s equity* increased in the first ninemonths of 2007, due primarily to net income, partially offset by lower netunrealized capital gains and dividends.

 

*Debt* decreased in the first ninemonths of 2007, due to the repayment of a $500 million intercompany note issuedto AIC and the redemption of mandatorily redeemable preferred stock.

 

 

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**Financial Ratings and Strength **Our ratings are influencedby many factors including our operating and financial performance, assetquality, liquidity, asset/liability management, overall portfolio mix,financial leverage (i.e., debt), exposure to risks, the current level ofoperating leverage, AIC’s ratings and other factors.  There have been no changes to our insurancefinancial strength ratings since December 31, 2006.

 

**Liquidity Sources and Uses** Asreflected in our Condensed Consolidated Statements of Cash Flows,****higheroperating cash flows in the first nine months of 2007, compared to the firstnine months of 2006, were primarily related to lower operating expenses and taxpayments, an increase in investment income and higher premiums received,partially offset by increased policy and contract benefit payments and theabsence in 2007 of contract charges on the reinsured variable annuity business.

 

        Decreased cash flows usedin investing activities were due to an unfavorable change in cash flows fromfinancing activities.  Also, cash flowsused in investing activities in the prior year include the settlement of thedisposal of substantially all of our variable annuity business.

 

# **        Cash flows used in financing activitiesincreased in the first nine months of 2007 compared to the first nine months of2006 primarily due to decreased contractholder fund deposits and increases incontractholder surrenders and withdrawals. For quantification of the changes in contractholder funds, see theOperations section of the MD&A.**

 

**       **Dividends of $85 million were paid to ourparent, AIC, in the third quarter of 2007. We expect to pay dividends of approximately $240 million during thefourth quarter of 2007, and may seek regulatory approval for additionaldividends.  These dividends complementother proactive efforts to improve the Company’s returns.

 

# **       **We have access toadditional borrowing to support liquidity through The Allstate Corporation asfollows:

 

•     Acommercial paper program with a borrowing limit of $1.00 billion to covershort-term cash needs.  As of September30, 2007, there were no balances outstanding and therefore the remainingborrowing capacity was $1.00 billion; however, the outstanding balancefluctuates daily.

 

•     In May 2007, The Allstate Corporation replacedits primary credit facility covering short-term liquidity requirements.  The new $1.00 billion unsecured revolvingcredit facility, has an initial term of five years expiring in 2012 with twoone year extensions that can be exercised in the first or second year of thefacility upon approval of existing or replacement lenders providing more thantwo thirds of the commitments to lend. This facility contains an increase provision that would allow up to anadditional $500 million of borrowing provided the increased portion could befully syndicated at a later date among existing or new lenders.  This facility has a financial covenantrequiring The Allstate Corporation not exceed a 37.5% debt to capital resourcesratio as defined in the agreement.  Thisratio at September 30, 2007 was 16.8%. Although the right to borrow under the facility is not subject to aminimum rating requirement, the costs of maintaining the facility and borrowingunder it are based on the ratings of The Allstate Corporation’s senior,unsecured, nonguaranteed long-term debt. There were no borrowings under this line of credit during the first ninemonths of 2007.  The total amountoutstanding at any point in time under the combination of the commercial paperprogram and the credit facility cannot exceed the amount that can be borrowedunder the credit facility.

 

•      A universal shelf registration statement was filedwith the Securities and Exchange Commission (“SEC”) in May 2006.  The Allstate Corporation can use it to issuean unspecified amount of debt securities, common stock (including 326 millionshares of treasury stock as of September 30, 2007), preferred stock, depositaryshares, warrants, stock purchase contracts, stock purchase units and securitiesof subsidiaries.  The specific terms ofany securities The Allstate Corporation issues under this registrationstatement will be provided in the applicable prospectus supplements.

 

        Asdescribed in Note 1 to the Condensed Consolidated Financial Statements, inaccordance with Financial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”), the Company had no liability forunrecognized tax benefits at January 1 or September 30, 2007.  We believe it is reasonably possible that theliability balance will not significantly increase or decrease within the next12 months.

 

 

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**Item 4. Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures. *We maintaindisclosure controls and procedures as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934.  Under the supervision and with theparticipation of our management, including our principalexecutive officer and principal financial officer, we conducted an evaluationof the effectiveness of our disclosure controls and procedures as of the end ofthe period covered by this report.  Basedupon this evaluation, the principal executive officer and the principalfinancial officer concluded that our disclosure controls and procedures areeffective in providing reasonable assurance that material information requiredto be disclosed in our reports filed with or submitted to the Securities and ExchangeCommission under the Securities Exchange Act is made known to management,including the principal executive officer and the principal financial officer,as appropriate to allow timely decisions regarding required disclosure.

 

*Changes inInternal Control over Financial Reporting. *During the fiscal quarter ended September 30, 2007, there have been nochanges in our internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.    LegalProceedings**

 

        Information required forthis Part II, Item 1 is incorporated by reference to the discussion under theheading “Regulation” and under the heading “Legal and regulatory proceedingsand inquiries” in Note 5 of the Condensed Consolidated Financial Statements inPart I, Item 1 of this Form 10-Q.

 

**Item 1A.  Risk Factors**

 

This document contains “forward-looking statements”that anticipate results based on our estimates, assumptions and plans that aresubject to uncertainty. These statements are made subject to the safe-harborprovisions of the Private Securities Litigation Reform Act of 1995. We assumeno obligation to update any forward-looking statements as a result of newinformation or future events or developments.

        These forward-lookingstatements do not relate strictly to historical or current facts and may beidentified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,”“anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” andother words with similar meanings. These statements may address, among otherthings, our strategy for growth, product development, regulatory approvals,market position, expenses, financial results, litigation and reserves.  We believe that these statements are based onreasonable estimates, assumptions and plans. However, if the estimates,assumptions or plans underlying the forward-looking statements prove inaccurateor if other risks or uncertainties arise, actual results could differmaterially from those communicated in these forward-looking statements.  Risk factors which could cause actual resultsto differ materially from those suggested by such forward-looking statementsinclude but are not limited to those discussed or identified in this document(including the risks described below), in our public filings with theSecurities and Exchange Commission, and those incorporated by reference in PartI, Item 1A of Allstate Life Insurance Company Annual Report on Form 10-K for2006.

 

**Based on our analysis and theseniority of our securities’ claim on the underlying collateral, we currentlydo not anticipate other-than-temporary impairments and we expect to receive allpayments on our asset-backed residential mortgage-backed securities (“ABS RMBS”),asset-backed collateralized debt obligations (“ABS CDO”) and Alt-Amortgage-backed securities portfolios in accordance with their originalcontractual terms.**

 

        Changesin the actual or expected performance of mortgage-related securities, theactual or perceived financial strength and claims paying ability of bondinsurers, or the valuation and market for these types of securities could leadus to reconsider our payment outlook and determine that write-downs areappropriate in the future.

 

**The change in our unrecognized tax benefit duringthe next 12 months is subject to uncertainty.**

 

        Asrequired by Financial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”), which was adopted as of January 1,2007, we have disclosed our estimate of net unrecognized tax benefits and thereasonably possible increase or decrease in its balance during the next 12months.  We believe that this estimatehas been appropriately established based on available facts and information,however, actual results may differ from our estimate for reasons such aschanges in our position on specific issues, developments with respect to the governments’ interpretations of incometax laws or changes in judgment resulting from new information obtained inaudits or the appeals process.

 

**Item 5.Other Information**

 

On July 23, 2007, theRegistrant entered into the Investment Management Agreement among AllstateInvestments, LLC and Allstate Insurance Company and The Allstate Corporationand Certain Affiliates effective as of January 1, 2007.  Pursuant to the agreement, AllstateInvestments, LLC provides investment management services to theRegistrant.  The Registrant and AllstateInvestments, LLC are wholly-owned subsidiaries of The AllstateCorporation.  A conformed copy of theagreement, attached as Exhibit 10.2 to the Registrant’s Form 10-Q for thequarter ended June 30, 2007, is incorporated herein by reference.

 

 

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**Item 6.  Exhibits**

 

                (a)           Exhibits

                        An Exhibit Index hasbeen filed as part of this report on page E-1.

 

 

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**SIGNATURE**

        Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|              |   | Allstate  Life Insurance Company                                        |
|-------------------|--------|-------------------------------------------------------------------------|
|              |   | (Registrant)                                                            |
|              |   |                                                                    |
| November 5,  2007 |   |                                                                    |
|              |   | By /s/ Samuel  H. Pilch                                                 |
|              |   | Samuel H.  Pilch                                                        |
|              |   | (chief  accounting officer and duly authorized   officer of Registrant) |

 

 

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** **
| **Exhibit  No.** | ** ** | **Description**                                                                                                                               |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                          |
| 15               |       | Acknowledgment  of awareness from Deloitte & Touche LLP, datedNovember 2,  2007, concerning unaudited interim financial information. |
|             |       |                                                                                                                                          |
| 31.1             |       | Rule  13a-14(a) Certification of Principal Executive Officer                                                                                  |
|             |       |                                                                                                                                          |
| 31.2             |       | Rule  13a-14(a) Certification of Principal Financial Officer                                                                                  |
|             |       |                                                                                                                                          |
| 32               |       | Section  1350 Certifications                                                                                                                  |

 

 

E-1

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