**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM10-Q**

**The Registrant meets the conditions set forth inGeneral Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing thisForm with the reduced disclosure format.**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE  ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                                                 |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE  ACT OF 1934**                                          |

 

Commission file number**: 000-31248**

 

**ALLSTATELIFE INSURANCE COMPANY**

(Exactname of registrant as specified in its charter)

 

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

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

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

| **Yes****x** |   | **No****o** |
|--------------|--------|-------------|

** **

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

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

** **

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

| **Yes****o** |   | **No****x** |
|--------------|--------|-------------|

** **

**None of the common equity of the registrant isheld by non-affiliates.  Therefore, theaggregate market value of the common equity held by non-affiliates of theregistrant is zero.**

**AS OF AUGUST 8, 2006, THE REGISTRANT HAD 23,800COMMON SHARES, $227 PAR VALUE, OUTSTANDING, ALL OF WHICH ARE HELD BY ALLSTATEINSURANCE COMPANY.**

 

 

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**ALLSTATE LIFEINSURANCE COMPANYINDEX TO QUARTERLY REPORT ON FORM 10-QJune 30, 2006**

PART I           FINANCIALINFORMATION

** **
|             | ** ** | ** **                                                                                                                           | ** ** | **PAGE**   |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|        |       |                                                                                                                                 |       |       |
| Item 1.     |       | Financial Statements                                                                                                                 |       |       |
|        |       |                                                                                                                                 |       |       |
|        |       | Condensed Consolidated Statements of Operations for  the Three-Month and Six-Month Periods Ended June 30, 2006 and 2005  (unaudited) |       | 1          |
|        |       |                                                                                                                                 |       |       |
|        |       | Condensed Consolidated Statements of Financial  Position as of June 30, 2006 (unaudited) and December 31, 2005                       |       | 2          |
|        |       |                                                                                                                                 |       |       |
|        |       | Condensed Consolidated Statements of Cash Flows for  the Six-Month Periods Ended June 30, 2006 and 2005 (unaudited)                  |       | 3          |
|        |       |                                                                                                                                 |       |       |
|        |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                    |       | 4          |
|        |       |                                                                                                                                 |       |       |
|        |       | Report of Independent Registered Public Accounting  Firm                                                                             |       | 12         |
|        |       |                                                                                                                                 |       |       |
| Item 2.     |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                          |       | 13         |
|        |       |                                                                                                                                 |       |       |
| Item 4.     |       | Controls and Procedures                                                                                                              |       | 26         |
|        |       |                                                                                                                                 |       |       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                                                | ** ** | ** ** |
|        |       |                                                                                                                                 |       |       |
| Item 1.     |       | Legal Proceedings                                                                                                                    |       | 27         |
|        |       |                                                                                                                                 |       |       |
| Item 1A.    |       | Risk Factors                                                                                                                         |       | 27         |
|        |       |                                                                                                                                 |       |       |
| Item 6.     |       | Exhibits                                                                                                                             |       | 27         |
|        |       |                                                                                                                                 |       |       |

 

 

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**PART I.   FINANCIALINFORMATIONITEM 1.   FINANCIAL STATEMENTS**

**ALLSTATE LIFEINSURANCE COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
|                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(in millions)**                                | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                | ** ** |
| **Revenues**                                          |       |                             |       |                           |       |   |   |   |   |
| Premiums                                              |       | $                                | 146        |                           | $          | 113 |   | $ | 263 |   | $ | 255 |   |
| Contract charges                                      |       | 277                              |       | 263                            |       | 562 |   | 522 |   |
| Net investment  income                                |       | 1,017                            |       | 915                            |       | 1,991 |   | 1,803 |   |
| Realized capital  gains and losses                    |       | (80                              | )          | 24                             |       | (107 | ) | 25 |   |
|                                                  |       | 1,360                            |       | 1,315                          |       | 2,709 |   | 2,605 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Costs and expenses**                                | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contract  benefits                                    |       | 327                              |       | 337                            |       | 653 |   | 684 |   |
| Interest  credited to contractholder funds            |       | 635                              |       | 571                            |       | 1,238 |   | 1,147 |   |
| Amortization of  deferred policy acquisition costs    |       | 176                              |       | 164                            |       | 281 |   | 333 |   |
| Operating costs  and expenses                         |       | 98                               |       | 110                            |       | 201 |   | 226 |   |
| Restructuring  and related charges                    |       | 3                                |       | —                         |       | 18 |   | — |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
|                                                  |       | 1,239                            |       | 1,182                          |       | 2,391 |   | 2,390 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Loss on  disposition of operations                    |       | (35                              | )          | (3                             | )          | (88 | ) | (8 | ) |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Income  from operations before income tax expense** |       | 86                               |       | 130                            |       | 230 |   | 207 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Income tax  expense                                   |       | 30                               |       | 43                             |       | 78 |   | 52 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| **Net income**                                        |       | $                                | 56         |                           | $          | 87 |   | $ | 152 |   | $ | 155 |   |

 

See notes to condensed consolidated financialstatements.

 

1

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**ALLSTATE LIFEINSURANCE COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION**

** **
|                                                                                                                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **($ in millions, except par value data)**                                                        | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
|                                                                                                                            |       |              |       |                  |       |
| **Assets**                                                                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Investments                                                                                                                     |       |              |       |                  |       |
| Fixed income  securities, at fair value (amortized cost $60,114 and $59,717)                                                    |       | $                 | 60,400     |                  | $          | 61,977 |   |
| Mortgage loans                                                                                                                  |       | 8,538             |       | 8,108                 |       |
| Equity  securities                                                                                                              |       | 418               |       | 324                   |       |
| Short-term                                                                                                                      |       | 2,525             |       | 927                   |       |
| Policy loans                                                                                                                    |       | 730               |       | 729                   |       |
| Other                                                                                                                           |       | 1,012             |       | 691                   |       |
|                                                                                                                            |       |              |       |                  |       |
| Total investments                                                                                                               |       | 73,623            |       | 72,756                |       |
|                                                                                                                            |       |              |       |                  |       |
| Cash                                                                                                                            |       | 308               |       | 154                   |       |
| Deferred policy  acquisition costs                                                                                              |       | 3,902             |       | 3,948                 |       |
| Reinsurance  recoverables, net                                                                                                  |       | 3,415             |       | 1,699                 |       |
| Accrued investment  income                                                                                                      |       | 661               |       | 648                   |       |
| Deferred income taxes                                                                                                           |       | 77                |       | —                |       |
| Other assets                                                                                                                    |       | 523               |       | 582                   |       |
| Separate Accounts                                                                                                               |       | 15,372            |       | 15,235                |       |
|                                                                                                                            |       |              |       |                  |       |
| **Total  assets**                                                                                                               |       | $                 | 97,881     |                  | $          | 95,022 |   |
|                                                                                                                            |       |              |       |                  |       |
| **Liabilities**                                                                                                                 | ** ** | ** **        | ** ** | ** **            | ** ** |
| Contractholder funds                                                                                                            |       | $                 | 60,208     |                  | $          | 58,190 |   |
| Reserve for  life-contingent contract benefits                                                                                  |       | 11,588            |       | 11,881                |       |
| Unearned premiums                                                                                                               |       | 34                |       | 35                    |       |
| Payable to affiliates,  net                                                                                                     |       | 110               |       | 98                    |       |
| Other liabilities and  accrued expenses                                                                                         |       | 4,808             |       | 3,054                 |       |
| Deferred income taxes                                                                                                           |       | —            |       | 340                   |       |
| Long-term debt                                                                                                                  |       | 269               |       | 181                   |       |
| Separate Accounts                                                                                                               |       | 15,372            |       | 15,235                |       |
|                                                                                                                            |       |              |       |                  |       |
| **Total  liabilities**                                                                                                          |       | 92,389            |       | 89,014                |       |
|                                                                                                                            |       |              |       |                  |       |
| **Commitments and Contingent  Liabilities (Note 5)**                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                            |       |              |       |                  |       |
| **Shareholder’s Equity**                                                                                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| Redeemable preferred  stock — series A, $100 par value, 1,500,000 shares authorized, 49,230 shares  issued and outstanding |       | 5                 |       | 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                                                                                                                 |       | 4,329             |       | 4,302                 |       |
| Accumulated other  comprehensive income:                                                                                        |       |              |       |                  |       |
| Unrealized net  capital gains and losses                                                                                        |       | 45                |       | 588                   |       |
|                                                                                                                            |       |              |       |                  |       |
| **Total  accumulated other comprehensive income**                                                                               |       | 45                |       | 588                   |       |
|                                                                                                                            |       |              |       |                  |       |
| **Total  shareholder’s equity**                                                                                            |       | 5,492             |       | 6,008                 |       |
|                                                                                                                            |       |              |       |                  |       |
| **Total liabilities and  shareholder’s equity**                                                                            |       | $                 | 97,881     |                  | $          | 95,022 |   |

 

See notes tocondensed consolidated financial statements.

 

2

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**ALLSTATE LIFEINSURANCE COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
|                                                                                    | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| **(in millions)**                                                             | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                | ** ** |
| **Cash flows from operating  activities**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 152        |   | $ | 155 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Amortization and  other non-cash items                                             |       | (134)                          |       | (83) |   |
| Realized capital  gains and losses                                                 |       | 107                            |       | (25) |   |
| Loss on  disposition of operations                                                 |       | 88                             |       | 8 |   |
| Interest credited  to contractholder funds                                         |       | 1,238                          |       | 1,147 |   |
| Changes in:                                                                        |       |                           |       |   |   |
| Contract benefit  and other insurance reserves                                     |       | (148)                          |       | (87) |   |
| Unearned  premiums                                                                 |       | (1)                            |       | 2 |   |
| Deferred policy  acquisition costs                                                 |       | (126)                          |       | (57) |   |
| Reinsurance  recoverables, net                                                     |       | (82)                           |       | (87) |   |
| Income taxes  payable                                                              |       | 40                             |       | (57) |   |
| Other operating  assets and liabilities                                            |       | (16)                           |       | 14 |   |
|                                                                               |       |                           |       |   |   |
| Net cash  provided by operating activities                                         |       | 1,118                          |       | 930 |   |
|                                                                               |       |                           |       |   |   |
| **Cash flows from investing  activities**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Proceeds from sales                                                                |       |                           |       |   |   |
| Fixed income  securities                                                           |       | 7,143                          |       | 4,872 |   |
| Equity  securities                                                                 |       | 76                             |       | 31 |   |
| Investment collections                                                             |       |                           |       |   |   |
| Fixed income  securities                                                           |       | 1,639                          |       | 2,289 |   |
| Mortgage loans                                                                     |       | 793                            |       | 532 |   |
| Investment purchases                                                               |       |                           |       |   |   |
| Fixed income  securities                                                           |       | (9,097)                        |       | (10,403) |   |
| Equity  securities                                                                 |       | (133)                          |       | (82) |   |
| Mortgage loans                                                                     |       | (1,237)                        |       | (798) |   |
|                                                                               |       |                           |       |   |   |
| Change in short-term  investments, net                                             |       | (393)                          |       | (95) |   |
| Disposition of  operations                                                         |       | (812)                          |       | (2) |   |
| Change in other  investments, net                                                  |       | (30)                           |       | (16) |   |
|                                                                               |       |                           |       |   |   |
| Net cash used in  investing activities                                             |       | (2,051)                        |       | (3,672) |   |
|                                                                               |       |                           |       |   |   |
| **Cash flows from financing  activities**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Redemption of  mandatorily redeemable preferred stock                              |       | (13)                           |       | (12) |   |
| Contractholder fund  deposits                                                      |       | 5,644                          |       | 6,511 |   |
| Contractholder fund  withdrawals                                                   |       | (4,419)                        |       | (3,779) |   |
| Dividends paid                                                                     |       | (125)                          |       | (25) |   |
|                                                                               |       |                           |       |   |   |
| Net cash  provided by financing activities                                         |       | 1,087                          |       | 2,695 |   |
|                                                                               |       |                           |       |   |   |
| **Net increase (decrease) in cash**                                                |       | 154                            |       | (47) |   |
| **Cash at beginning of the period**                                                |       | 154                            |       | 241 |   |
| ** **                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash at end of period**                                                          |       | $                              | 308        |   | $ | 194 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**ALLSTATELIFE INSURANCE COMPANY AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.   General**

**Basis ofPresentation**

The accompanying condensedconsolidated financial statements include the accounts of Allstate LifeInsurance Company (“ALIC”) and its wholly owned subsidiaries (together withALIC, the “Company”). ALIC is wholly owned by Allstate Insurance Company (“AIC”),a wholly owned subsidiary of The Allstate Corporation (the “Corporation”).

The condensedconsolidated financial statements and notes as of June 30, 2006 and for thethree-month and six-month periods ended June 30, 2006 and 2005 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, 2005.  The results ofoperations for the interim periods should not be considered indicative ofresults to be expected for the full year.

To conform to the 2006presentation, certain amounts in the prior year condensed consolidatedfinancial statements and notes have been reclassified.

Equity securities include commonstocks, non-redeemable preferred stocks and limited partnership interests.  Common stocks and non-redeemable preferredstocks had a carrying value of $72 million and $67 million, and cost of $66million and $62 million at June 30, 2006 and December 31, 2005, respectively.  Investments in limited partnership interestshad a carrying value of $346 million and $257 million at June 30, 2006 andDecember 31, 2005, respectively.

**Adopted accounting standards**

*Financial Accounting Standards BoardStaff Position No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments” (“FSP FAS 115-1”)*

The Company adoptedFinancial Accounting Standards Board (“FASB”) FSP FAS 115-1 as of January 1,2006.  FSP FAS 115-1 nullifies theguidance in paragraphs 10-18 of EITF 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 accounting for incomerecognition on an impaired debt security. The adoption of FSP FAS 115-1 was required on a prospective basis anddid not have a material effect on the results of operations or financialposition of the Company.

*Statement of Financial Accounting Standards No. 154,Accounting Changes and Error Corrections (“SFAS No.  154”)*

TheCompany adopted SFAS No. 154 on January 1, 2006.  SFAS No. 154 replaces Accounting PrinciplesBoard (“APB”) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements”.  SFAS No. 154 requires retrospective applicationto prior periods’ financial statements for changes in accounting principle,unless determination of either the period specific effects or the cumulativeeffect of the change is impracticable or otherwise promulgated.  The Company had no accounting changes orerror corrections affected by the new standard.

4

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## **Pendingaccounting standards**

*Statementof Position 05-1, Accounting by Insurance Enterprises for Deferred AcquisitionCosts in Connection with Modifications or Exchanges of Insurance Contracts (“SOP05-1”)*

 In October 2005, the AICPA issued SOP05-1.   SOP 05-1 provides accountingguidance for deferred policy acquisition costs associated with internalreplacements of insurance and investment contracts other than those alreadydescribed in SFAS No. 97, “Accounting and Reporting by Insurance Enterprisesfor Certain Long-Duration Contracts and for Realized Gains and Losses from theSale of Investments”.  SOP 05-1 definesan internal replacement as a modification in product benefits, features, rightsor coverages that occurs by the exchange of a contract for a new contract, orby amendment, endorsement or rider to a contract, or by the election of afeature or coverage within a contract. The provisions of SOP 05-1 are effective for internal replacements occurringin fiscal years beginning after December 15, 2006.  The Company is currently assessing the impactof the SOP on its results of operations and financial position.

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

In February 2006, the FASB issued SFAS No. 155, which,among other things, permits the fair value remeasurement of any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation under SFAS No. 133; clarifies which interest-only stripsand principal-only strips are not subject to the requirements of SFAS No. 133;and establishes a requirement to evaluate interests in securitized financialassets to identify interests that are freestanding derivatives or hybridfinancial instruments that contain an embedded derivative requiringbifurcation.  At the date of initialadoption, the Company must decide whether or not to remeasure its hybridfinancial instruments in accordance with SFAS No. 155 or retain its currentaccounting under SFAS No. 133.  Allsecurities acquired on or after January 1, 2007 must be accounted for inaccordance with the new guidance.  TheCompany expects to adopt SFAS No. 155 as of January 1, 2007, and has not yetdetermined if it will utilize the option to fair value hybrid contracts ownedat the date of adoption and subject to SFAS No. 133.

*Financial Accounting Standards Board 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 FASB Statement No. 109, “Accounting for Income Taxes”.  FIN 48 requires an entity to recognize thebenefit of tax positions only when it is more likely than not, based on theposition’s technical merits, that the position would be sustained uponexamination by the respective taxing authorities.  The tax benefit is measured as the largest benefitthat is more than fifty-percent likely of being realized upon final settlementwith the respective taxing authorities.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  FIN 48 is not expected to have a materialeffect on the results of operations or financial position of the Company.

**2.****              Related PartyTransaction**

**Surplus Note**

In the secondquarter of 2006, under an existing agreement with Kennett Capital, Inc. (“Kennett”),an unconsolidated affiliate of ALIC, ALIC sold Kennett a $100 millionredeemable surplus note issued by ALIC Reinsurance Company, a wholly ownedsubsidiary of ALIC.  The surplus note isdue June 1, 2036 with an initial rate of 6.18% that will reset once every tenyears to the then current ten year Constant Maturity Treasury yield (“CMT”),plus 1.14%.   As payment, Kennett issueda full recourse note due June 1, 2036 to ALIC for the same amount with aninitial interest rate of 5.98% that will reset once every ten years to the thencurrent ten year CMT, plus 0.94%.  Thenote due from Kennett is classified as other investments and the relatedsurplus note is classified as long-term debt in the Condensed ConsolidatedStatements of Financial Position.

.

5

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**3.****                       Supplemental Cash Flow Information**

Non-cashinvestment exchanges and modifications, which primarily reflect refinancing offixed income securities and mergers completed with equity securities, totaled$18 million and $19 million for the six month periods ended June 30, 2006 and2005, respectively.

Liabilities forcollateral received in conjunction with securities lending and other activitiesand for funds received from security repurchase activities are reported inother liabilities and accrued expenses in the Condensed Consolidated Statementsof Financial Position.  The accompanyingcash flows are included in cash flows from operating activities in theCondensed Consolidated Statements of Cash Flows along with the related changesin investments, which are as follows:
|                                                                        | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **June 30,**              | ** ** |
| **(in millions)**                                                 | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net change in  fixed income securities                                 |       | $                              | (216       | ) | $ | (927 | ) |
| Net change in  short-term investments                                  |       | (1,155                         | )          | 363 |   |
| Operating cash flow used                                               |       | $                              | (1,371     | ) | $ | (564 | ) |
|                                                                   |       |                           |       |   |   |
| Liabilities for  collateral and security repurchase, beginning of year |       | $                              | (2,231     | ) | $ | (2,928 | ) |
| Liabilities for  collateral and security repurchase, end of period     |       | (3,602                         | )          | (3,492 | ) |
| Operating cash  flow provided                                          |       | $                              | 1,371      |   | $ | 564 |   |

 

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

The effects of reinsurance on premiums and contractcharges are as follows:
|                                                    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**                             | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums  and contract charges**                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                             |       | $                                               | 582        |                                          | $          | 516 |   | $ | 1,128 |   | $ | 1,054 |   |
| Assumed                                            |       |                                            |       |                                          |       |   |   |   |   |
| Affiliate                                          |       | 4                                               |       | 4                                             |       | 8 |   | 8 |   |
| Non-affiliate                                      |       | 8                                               |       | 7                                             |       | 15 |   | 13 |   |
| Ceded—non-affiliate                           |       | (171                                            | )          | (151                                          | )          | (326 | ) | (298 | ) |
|                                               |       |                                            |       |                                          |       |   |   |   |   |
| Premiums and  contract charges, net of reinsurance |       | $                                               | 423        |                                          | $          | 376 |   | $ | 825 |   | $ | 777 |   |

 

 

6

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The effects ofreinsurance on contract benefits are as follows:
|                                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**                 | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                             | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract benefits**                  | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                 |       | $                                               | 443        |                                          | $          | 437 |   | $ | 886 |   | $ | 924 |   |
| Assumed                                |       |                                            |       |                                          |       |   |   |   |   |
| Affiliate                              |       | 3                                               |       | 3                                             |       | 6 |   | 6 |   |
| Non-affiliate                          |       | 6                                               |       | 7                                             |       | 11 |   | 11 |   |
| Ceded—non-affiliate               |       | (125                                            | )          | (110                                          | )          | (250 | ) | (257 | ) |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Contract benefits, net  of reinsurance |       | $                                               | 327        |                                          | $          | 337 |   | $ | 653 |   | $ | 684 |   |

 

On June 1, 2006, ALIC, its subsidiary, Allstate LifeInsurance Company of New York (“ALNY”), and the Corporation completed thedisposal of substantially all of its variable annuity business pursuant to adefinitive agreement (the “Agreement”) with Prudential Financial, Inc. andits subsidiary, The Prudential Insurance Company of America (collectively “Prudential”),which was entered into on March 8, 2006. The disposal was effected through a combination of coinsurance andmodified coinsurance reinsurance agreements (the “Reinsurance Agreements”).

As a result of the modified coinsurance reinsurance,the separate account assets remain on the Company’s Condensed ConsolidatedStatements of Financial Position, but the related results of operations arefully reinsured to Prudential beginning on June 1, 2006 and presented net ofreinsurance on the Condensed Consolidated Statements of Operations.  In contrast, $1.36 billion of assetssupporting general account liabilities have been transferred to Prudential, netof consideration, under the coinsurance reinsurance provisions.  Thegeneral account liabilities, however, remain on the Condensed ConsolidatedStatements of Financial Position with a corresponding reinsurance recoverableand the results of operations are presented net of reinsurance.  For purposes of presentation in the CondensedConsolidated Statements of Cash Flows, the Company treated the reinsurance ofsubstantially all the variable annuity business of ALIC and ALNY to Prudentialas a disposition of operations, consistent with the substance of the transactionwhich was the disposition of a block of business accomplished throughreinsurance. Accordingly, the net consideration transferred to Prudential, $731million (computed as $1.36 billion of general account insurance liabilities transferred to Prudentialon the closing date less consideration of $628 million), the cost of hedgingthe ceding commission received from Prudential, $69 million, pre-tax, and thecosts of executing the transaction, $12 million, pre-tax, were classified as adisposition of operations in the cash flows from investing activities sectionof the Condensed Consolidated Statements of Cash Flows. The ReinsuranceAgreements do not extinguish the Company’s primary liability under the variableannuity contracts.

Under the Agreement, ALIC, ALNY and the Corporationhave indemnified Prudential for certain pre-closing contingent liabilities(including extra-contractual liabilities of ALIC and ALNY and liabilitiesspecifically excluded from the transaction) that ALIC and ALNY have agreed to retain.  In addition, ALIC, ALNY and the Corporationwill each indemnify Prudential for certain post-closing liabilities that mayarise from the acts of ALIC, ALNY and their agents, including in connectionwith ALIC’s and ALNY’s provision of transition services.

 The terms of the Agreement give Prudential theright to be the exclusive provider of its variable annuity products through theAllstate proprietary agency force for three years and a non-exclusive preferredprovider for the following two years.  During a transition period, ALICand ALNY will continue to issue new variable annuity contracts, acceptadditional deposits on existing business from existing contractholders onbehalf of Prudential and, for a period of twenty-four months or less, service thereinsured business while Prudential prepares for the migration of the businessonto its servicing platform.

The final market-adjustedconsideration was $628 million.  Thedisposal resulted in a gain of $88 million pretax for ALIC, which was deferredas a result of the disposition being executed through reinsurance. The deferredgain, which is included as a component of other liabilities and accruedexpenses on the Condensed Consolidated 

7

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Statements of Financial Position, will be amortized toloss on disposition of operations on the Condensed 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 $6 million pretax, which was recognized inthe second quarter.  ALNY’s reinsuranceloss and other amounts related to the disposal of the business, including theinitial costs and final market value settlements of the derivatives acquired byALIC to economically hedge substantially all of the exposure related to marketadjustments between the effective date of the Agreement and the closing of thetransaction, transactional expenses incurred and amortization of ALIC’sdeferred reinsurance gain, were included as a component of loss on dispositionof operations on the Condensed Consolidated Statements of Operations andamounted to $24 million and $59 million, after-tax, in the second quarter andfirst six months of 2006, respectively. DAC and DSI were reduced by $726 million and $70 million, respectively,for balances related to the variable annuity business subject to theReinsurance Agreements.

In the five-months of 2006, prior to the dispositionof substantially all of the variable annuity business, ALIC’s and ALNY’svariable annuity business generated approximately $127 million in contractcharges.  Life and annuity premiums andcontract charges, contract benefits, interest credited to contractholder fundsand operating costs and expenses ceded in June of 2006 pursuant to the ReinsuranceAgreements were $22 million, $5 million, $5 million and $10 million,respectively.  Further, general accountliabilities of $1.63 billion as of June 30, 2006 were ceded to Prudentialpursuant to the coinsurance reinsurance provisions.

The separate account balances related to the modifiedcoinsurance reinsurance were $14.35 billion as of June 30, 2006.  Separateaccount balances totaling approximately $1.02 billion at June 30, 2006 relatedto the variable life business, and three affiliated companies that the Companyplans to sell continue to be retained by ALIC. In 2005, ALIC’s and ALNY’s variable annuity business generatedapproximately $278 million in contract charges. The separate account balances were $14.23 billion and general accountbalances were $1.81 billion as of December 31, 2005.

**5.****              ****Guarantees and ContingentLiabilities**

**Guarantees**

The Company owns certainfixed income securities that obligate the Company to exchange credit risk or toforfeit principal due, depending on the nature or occurrence of specified creditevents for the referenced entities.  Inthe event 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 $229 million at June 30, 2006.  The obligations associated with these fixedincome securities expire at various times during the next seven years.

In the normal course ofbusiness, the Company provides standard indemnifications to counterparties incontracts in connection with numerous transactions, including acquisitions anddivestitures.  The types ofindemnifications 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.

The aggregate liability balancerelated to all guarantees was not material as of June 30, 2006.

**Regulation**

The Company issubject to changing social, economic and regulatory conditions.  From time to time, regulatory authorities orlegislative bodies seek to impose additional regulations regarding agent andbroker compensation and otherwise expand overall regulation of insuranceproducts and the insurance industry.  Theultimate changes and eventual effects of these initiatives on the Company’sbusiness, if any, are uncertain.

8

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**Legal and Regulatory Proceedingsand Inquiries**

**Background**

TheCompany and certain affiliates are involved in a number of lawsuits, regulatoryinquiries, and other legal proceedings arising out of various aspects of itsbusiness.  As background to the “Proceedings”sub-section below, please note the following:

·             These matters raisedifficult and complicated factual and legal issues and are subject to manyuncertainties and complexities, including but not limited to, the underlyingfacts of each matter; novel legal issues; variations between jurisdictions inwhich matters are being litigated, heard or investigated; differences in applicablelaws and judicial interpretations; the length of time before many of thesematters might be resolved by settlement, through litigation or otherwise and,in some cases, the timing of their resolutions relative to other similarmatters involving other companies; the fact that some of the lawsuits areputative class actions in which a class has not been certified and in which thepurported class may not be clearly defined; the fact that some of the lawsuitsinvolve multi-state class actions in which the applicable law(s) for the claimsat issue is in dispute and therefore unclear; and the current challenging legalenvironment faced by large corporations and insurance companies.

·             Inthe lawsuits, plaintiffs seek a variety of remedies including equitable reliefin the form of injunctive and other remedies and monetary relief in the form ofcontractual and extra-contractual damages. In some cases, 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 reasonsspecified above, it is often not possible to make meaningful estimates of theamount or range of loss that could result from the matters described below inthe “Proceedings” subsection.  TheCompany reviews these matters on an on-going basis and follows the provisionsof SFAS No. 5, “Accounting for Contingencies” when making accrual anddisclosure decisions.  When assessingreasonably possible and probable outcomes, the Company bases its decisions onits assessment of the ultimate outcome following all appeals.  

·             Dueto the complexity and scope of the matters disclosed in the “Proceedings”subsection below and the many uncertainties that exist, the ultimate outcome ofthese matters cannot be reasonably predicted. In the event of an unfavorable outcome in one or more of these matters,the ultimate liability may be in excess of amounts currently reserved and maybe material to the Company’s operating results or cash flows for a particularquarter or annual period.  However, basedon information currently known to it, management believes that the ultimateoutcome of all matters described below as they are resolved over time is notlikely to have a material adverse effect on the financial position of theCompany.

**Proceedings**

Legal proceedings involving Allstate agencies and AICmay impact the Company, even when the Company is not directly involved, becausethe Company sells its products through a variety of distribution channelsincluding Allstate agencies. Consequently, information about the moresignificant of these proceedings is provided in the following paragraph.

AIC is defending certain matters relating to itsagency program reorganization announced in 1999. These matters include alawsuit filed in December 2001 by the U.S. Equal Employment OpportunityCommission (“EEOC”) alleging retaliation under federal civil rights laws, aclass action filed in August 2001 by former employee agents allegingretaliation and age discrimination under the Age Discrimination in EmploymentAct, breach of 

9

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contract and ERISA violations, and a lawsuit filed inOctober 2004 by the EEOC alleging age discrimination with respect to a policylimiting the rehire of agents affected by the agency programreorganization.  AIC is also defending acertified class action filed by former employee agents who terminated theiremployment prior to the agency program reorganization.  These plaintiffs have asserted breach ofcontract and ERISA claims and are seeking actual damages including benefitsunder Allstate employee benefit plans and payments provided in connection withthe reorganization, as well as punitive damages.  In late March 2004, in the first EEOC lawsuitand class action lawsuit, the trial court issued a memorandum and order that,among other things, certified classes of agents, including a mandatory class ofagents who had signed a release, for purposes of effecting the court’sdeclaratory judgment that the release is voidable at the option of the releasesigner.  The court also ordered that anagent who voids the release must return to AIC “any and all benefits receivedby the [agent] in exchange for signing the release.”  The court also “concluded 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.  The case otherwise remains pending.  A putative nationwide class action has alsobeen filed by former employee agents alleging various violations of ERISA,including a worker classification issue. These plaintiffs are challenging certain amendments to the AgentsPension Plan and are seeking to have exclusive agent independent contractorstreated as employees 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 April 2005.  In thesematters, plaintiffs seek compensatory and punitive damages, and equitablerelief.  AIC has been vigorouslydefending these lawsuits and other matters related to its agency programreorganization. In addition, AIC has been defending certain matters relating toits life agency program reorganization announced in 2000. These matters havebeen the subject of an investigation by the EEOC with respect to allegations ofage discrimination and retaliation. A conciliation agreement relating tocertain of these matters has been entered into between AIC and the EEOC.   The outcome of these disputes is currentlyuncertain.

The Company has resolved through mediation andsettlement all but two of its lawsuits brought by plaintiffs challengingtrading restrictions the Company adopted in an effort to limit market-timingactivity in its variable annuity sub-accounts. In the remaining lawsuits, the plaintiffs seek a variety of remediesincluding monetary and equitable relief. The Company has been vigorously defending these matters, but theiroutcome is currently uncertain.

The Company is currently undergoing periodic marketconduct examinations by state insurance regulators.  Regulators in the state of New York arefocusing, as they have with other insurers, on the Company’s New Yorksubsidiary’s compliance with the state’s replacement sales and record-keepingprocesses with regard to life insurance and annuities among other issues.  They have alleged that the Company’s New Yorksubsidiary failed to meet the requirements of certain applicableregulations.  In relation to thisexamination, the Company accrued $17 million of additional contractholderbenefits.  The final outcomes of theseexaminations are still pending; however, the Company’s New York subsidiary hasbegun certain customer remediation steps related to replacement sales.

**OtherMatters**

The Corporation and some of its subsidiaries,including the Company, have received interrogatories and demands forinformation from regulatory and enforcement authorities relating to variousinsurance products and practices.  Theareas of inquiry include variable annuity market timing, late trading and theissuance of funding agreements backing medium-term notes.  The Corporation and some of its subsidiaries,including the Company, have also received interrogatories and demands forinformation from authorities seeking information relevant to on-goinginvestigations into the possible violation of antitrust or insurance laws byunnamed parties and, in particular, seeking information as to whether anyperson engaged in activities for the purpose of price fixing, marketallocation, or bid rigging.  The Companybelieves that these inquiries are similar to those made to many financialservices companies as part of industry-wide investigations by variousauthorities into the practices, policies and procedures relating to insuranceand financial services products.  TheCorporation and its subsidiaries have responded and will continue to respond tothese inquiries.

Various other legal and regulatory actions arecurrently pending that involve the Company and specific aspects of its conductof business. Like other members of the insurance industry, the Company is thetarget of a number of class action lawsuits and other types of proceedings,some of which involve claims for substantial or indeterminate amounts.  These actions are based on a variety ofissues and target a range of the Company’s practices. The outcome of thesedisputes is currently unpredictable.

 

10

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One or more of these matters could have an adverse effect on theCompany’s operating results or cash flows for a particular quarter or annualperiod.  However, based on informationcurrently known to it, management believes that the ultimate outcome of allmatters described in this “Other Matters” subsection in excess of amountscurrently reserved, as they are resolved over time is not likely to have amaterial effect on the operating results, cash flows or financial position ofthe Company.

**6.    Other Comprehensive Loss**

The components of other comprehensive loss on a pretaxand after-tax basis are as follows:
|                                                                                          | ** ** | **Three months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **(in millions)**                                                                   | ** ** | **Pretax**                                          | ** ** | **Tax** | ** ** | **After-tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-tax** | ** ** |
|                                                                                     |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized net holding  gains (losses) arising during the period, net of related offsets |       | $                                                   | (497       | ) | $ | 174 |   | $ | (323 | ) | $ | 618 |   | $ | (216 | ) | $ | 402 |   |
| Less: reclassification  adjustment of realized capital gains and losses                  |       | (171                                                | )          | 60 |   | (111 | ) | 110 |   | (38 | ) | 72 |   |
| Other comprehensive  income (loss)                                                       |       | $                                                   | (326       | ) | $ | 114 |   | (212 | ) | $ | 508 |   | $ | (178 | ) | 330 |   |
|                                                                                     |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                               |       |                                                |       |   |   | 56 |   |   |   |   |   | 87 |   |
| Comprehensive (loss) income                                                              |       |                                                |       |   |   | $ | (156 | ) |   |   |   |   | $ | 417 |   |

 
|                                                                                              | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **(in millions)**                                                                       | ** ** | **Pretax**                                        | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized net holding  gains (losses)   arising during the period, net of   related offsets |       | $                                                 | (1,131     | ) | $ | 396 |   | $ | (735 | ) | $ | (77 | ) | $ | 27 |   | $ | (50 | ) |
| Less:   reclassification  adjustment of   realized capital gains and losses        |       | (296                                              | )          | 104 |   | (192 | ) | 17 |   | (6 | ) | 11 |   |
| Other comprehensive  income (loss)                                                           |       | $                                                 | (835       | ) | $ | 292 |   | (543 | ) | $ | (94 | ) | $ | 33 |   | (61 | ) |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                   |       |                                              |       |   |   | 152 |   |   |   |   |   | 155 |   |
| Comprehensive (loss) income                                                                  |       |                                              |       |   |   | $ | (391 | ) |   |   |   |   | $ | 94 |   |

 

 

11

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directorsand Shareholder ofAllstate Life Insurance Company:

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 June 30, 2006, and the relatedcondensed consolidated statements of operations for the three-month andsix-month periods ended June 30, 2006 and 2005, and the condensed consolidatedstatements of cash flows for the six-month periods ended June 30, 2006 and2005.  These interim financial statementsare the responsibility of the Company’s management.

We conducted our reviews in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the objective of which is theexpression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

Based on our reviews, we are not aware of any materialmodifications that should be made to such condensed consolidated interimfinancial statements for them to be in conformity with accounting principlesgenerally accepted in the United States of America.

We have previously audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated statement of financial position of Allstate Life Insurance Companyand subsidiaries as of December 31, 2005, and the related consolidatedstatements of operations and comprehensive income, shareholder’s equity, andcash flows for the year then ended, not presented herein.  In our report dated March 10, 2006, whichreport includes an explanatory paragraph relating to a change in method ofaccounting for certain nontraditional long-duration contracts and for separateaccounts in 2004 and changes in the methods of accounting for embeddedderivatives in modified coinsurance agreements and variable interest entitiesin 2003, we expressed an unqualified opinion on those consolidated financialstatements.  In our opinion, theinformation set forth in the accompanying condensed consolidated statement offinancial position as of December 31, 2005 is fairly stated, in all materialrespects, in relation to the consolidated statement of financial position fromwhich it has been derived.

/s/ Deloitte & ToucheLLP

Chicago, IllinoisAugust 4, 2006

 

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**Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OFOPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND2005**

**OVERVIEW**

The following discussionhighlights significant factors influencing the consolidated financial positionand results of operations of Allstate Life Insurance Company (referred to inthis document as “we”, “our”, “us”, or the “Company”). It should be read inconjunction with the condensed consolidated financial statements and notesthereto found under Part I. Item 1. contained herein, and with the discussion,analysis, consolidated financial statements and notes thereto in Part I. Item1. and Part II. Item 7. and Item 8. of the Allstate Life Insurance CompanyAnnual Report on Form 10-K for 2005.  Weoperate as a single segment entity, based on the manner in which we usefinancial information to evaluate business performance and to determine theallocation of resources.

**HIGHLIGHTS**

·               OnJune 1, 2006, the Company completed the disposal of substantially all of itsvariable annuity business through reinsurance with Prudential Financial Inc. (“Prudential”).  The disposal was effected through acombination of coinsurance and modified coinsurance (see Note 4 to theCondensed Consolidated Financial Statements).

·               Net income declined 35.6% to $56 million inthe second quarter of 2006 and 1.9% to $152 million in the first six months of2006 compared to the same periods in 2005.

·               Gross margin increased 22.7% and 16.7% in thesecond quarter and first six months of 2006, respectively, compared to the sameperiods of 2005.  Gross margin, a measurethat is not based on Generally Accepted Accounting Principles (“non-GAAP”), isdefined on page 17.

·               Contractholderfund deposits totaled $3.63 billion and $5.57 billion for the second quarterand first six months of 2006, respectively, compared to $3.29 billion and$6.54 billion for the second quarter and first six months of 2005,respectively.

·               Investmentsas of June 30, 2006 decreased 1.5% from June 30, 2005.

·               Returnon average shareholder’s equity was 7.0% and 6.0% for the twelve months endedJune 30, 2006 and June 30, 2005, respectively.

**OPERATIONS**

**Premiums** represent revenues generated from traditional life, immediateannuities with life contingencies and other insurance products that havesignificant mortality or morbidity risk.

**Contract charges** are revenuesgenerated from interest-sensitive life, variable annuities, fixed annuities andinstitutional products 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 on June 1, 2006, variable annuity contract chargeson the business subject to the transaction are fully reinsured to Prudentialand presented net of reinsurance on the Condensed Consolidated Statements ofOperations (see Note 4 to the Condensed Consolidated Financial Statements).

13

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The following table summarizes premiums and contractcharges by product.
|                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**                       | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums**                                 |       |                                            |       |                                          |       |   |   |   |   |
| Traditional life                             |       | $                                               | 68         |                                          | $          | 57 |   | $ | 126 |   | $ | 121 |   |
| Immediate  annuities with life contingencies |       | 69                                              |       | 50                                            |       | 118 |   | 123 |   |
| Other                                        |       | 9                                               |       | 6                                             |       | 19 |   | 11 |   |
| **Total  premiums**                          |       | 146                                             |       | 113                                           |       | 263 |   | 255 |   |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| **Contract  charges**                        |       |                                            |       |                                          |       |   |   |   |   |
| Interest-sensitive  life                     |       | 197                                             |       | 181                                           |       | 389 |   | 358 |   |
| Fixed annuities                              |       | 19                                              |       | 16                                            |       | 36 |   | 33 |   |
| Variable  annuities                          |       | 61                                              |       | 66                                            |       | 137 |   | 131 |   |
| **Total  contract charges**                  |       | 277                                             |       | 263                                           |       | 562 |   | 522 |   |
| **Total premiums and contract  charges**     |       | $                                               | 423        |                                          | $          | 376 |   | $ | 825 |   | $ | 777 |   |

 

The following table summarizes premiums and contractcharges by distribution channel.
|                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**                   | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums**                             | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate  agencies                       |       | $                                               | 68         |                                          | $          | 67 |   | $ | 129 |   | $ | 133 |   |
| Independent  agents                      |       | 19                                              |       | 6                                             |       | 32 |   | 27 |   |
| Specialized  brokers                     |       | 59                                              |       | 39                                            |       | 101 |   | 93 |   |
| Other                                    |       | —                                          |       | 1                                             |       | 1 |   | 2 |   |
| **Total  premiums**                      |       | 146                                             |       | 113                                           |       | 263 |   | 255 |   |
|                                     |       |                                            |       |                                          |       |   |   |   |   |
| **Contract  charges**                    |       |                                            |       |                                          |       |   |   |   |   |
| Allstate  agencies                       |       | 138                                             |       | 128                                           |       | 275 |   | 259 |   |
| Financial  institutions                  |       | 67                                              |       | 66                                            |       | 142 |   | 129 |   |
| Independent  agents                      |       | 68                                              |       | 63                                            |       | 135 |   | 119 |   |
| Specialized  brokers                     |       | 4                                               |       | 6                                             |       | 9 |   | 14 |   |
| Other                                    |       | —                                          |       | —                                        |       | 1 |   | 1 |   |
| **Total  contract charges**              |       | 277                                             |       | 263                                           |       | 562 |   | 522 |   |
| **Total premiums and contract  charges** |       | $                                               | 423        |                                          | $          | 376 |   | $ | 825 |   | $ | 777 |   |

 

Total premiums increased 29.2% to $146 million in thesecond quarter of 2006 and 3.1% to $263 million in the first six months of 2006compared to the same periods of 2005. The increase in the second quarter of 2006 was attributable to increasedpremiums on immediate annuities with life contingencies and increasedtraditional life premiums due to growth of business in force and, fortraditional life products, reduced reinsurance of new term life insurance.  The increase in the first six months of 2006was due to higher other and traditional life premiums, partially offset bylower premiums on immediate annuities with life contingencies.  The increase in other premiums in the firstsix months of 2006 was due to higher premiums on accident and health productsdue to growth of business in force and the increase in traditional lifepremiums was the result of growth of business in force and reduced reinsuranceof new term life insurance.  The declinein immediate annuities with life contingencies in the first six months of 2006was the result of lower sales volume due to pricing changes and a shift in themix of business between life contingent and non-life contingent contracts.

 

14

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Contract charges increased 5.3% to $277 million in thesecond quarter of 2006 and 7.7% to $562 million in the first six months of 2006compared to the same periods of 2005. Excluding contract charges on variable annuities, substantially all ofwhich are reinsured to Prudential effective June 1, 2006, contract chargesincreased 9.6% and 8.7% in the second quarter and first six months of 2006,respectively, compared to the same periods of 2005.  These increases were mostly due to highercontract charges on interest-sensitive life products resulting from growth ofbusiness in force.

*Contractholderfunds* represent interest-bearing liabilities arising from thesale of individual and institutional products, such as interest-sensitive life,fixed annuities and funding agreements. The balance of contractholder funds isequal to the cumulative deposits received and interest credited to thecontractholder less cumulative contract maturities, benefits, surrenders,withdrawals and contract charges for mortality or administrative expenses.

The following table showsthe changes in contractholder funds.
|                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**                                          | ** ** | **2006**                                        | ** ** | **2005**(1)                                   | ** ** | **2006** | ** ** | **2005**(1) | ** ** |
| **Contractholder funds, beginning  balance**                    |       | $                                               | 58,412     |                                          | $          | 55,666 |   | $ | 58,190 |   | $ | 53,939 |   |
| ** **                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deposits**                                                    | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed annuities                                                 |       | 2,015                                           |       | 1,527                                         |       | 3,216 |   | 3,273 |   |
| Institutional products  (funding agreements)                    |       | 1,250                                           |       | 1,325                                         |       | 1,600 |   | 2,423 |   |
| Interest-sensitive life                                         |       | 334                                             |       | 326                                           |       | 656 |   | 638 |   |
| Variable annuity and life  deposits allocated to fixed accounts |       | 35                                              |       | 112                                           |       | 98 |   | 206 |   |
| Total deposits                                                  |       | 3,634                                           |       | 3,290                                         |       | 5,570 |   | 6,540 |   |
| ** **                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest credited**                                           |       | 647                                             |       | 574                                           |       | 1,268 |   | 1,127 |   |
| ** **                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Maturities, benefits,  withdrawals and other adjustments**    |       |                                            |       |                                          |       |   |   |   |   |
| Maturities of institutional  products                           |       | (559                                            | )          | (589                                          | )          | (1,263 | ) | (1,293 | ) |
| Benefits                                                        |       | (386                                            | )          | (377                                          | )          | (756 | ) | (667 | ) |
| Surrenders and partial  withdrawals                             |       | (1,257                                          | )          | (952                                          | )          | (2,254 | ) | (1,666 | ) |
| Contract charges                                                |       | (173                                            | )          | (160                                          | )          | (341 | ) | (319 | ) |
| Net transfers to  separate accounts                             |       | (62                                             | )          | (77                                           | )          | (145 | ) | (155 | ) |
| Fair value hedge  adjustments for institutional products        |       | (2                                              | )          | (53                                           | )          | (20 | ) | (173 | ) |
| Other adjustments                                               |       | (46                                             | )          | 6                                             |       | (41 | ) | (5 | ) |
| Total maturities,  benefits, withdrawals and other adjustments  |       | (2,485                                          | )          | (2,202                                        | )          | (4,820 | ) | (4,278 | ) |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Contractholder funds, ending balance**                        |       | $                                               | 60,208     |                                          | $          | 57,328 |   | $ | 60,208 |   | $ | 57,328 |   |

 

(1)    To conformto the current period presentation, certain prior period balances have beenreclassified.

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Contractholder fundsincreased 3.1% and 3.0% in the second quarter of 2006 and 2005, respectively,and increased 3.5% and 6.3% in the first six months of 2006 and 2005,respectively.   Average contractholderfunds increased 5.0% and 6.4% in the second quarter and first six months of2006, respectively, compared to the same periods in 2005.

Contractholder depositsincreased 10.5% in the second quarter and decreased 14.8% in the first sixmonths of 2006, compared to the same periods of 2005.  The increase in the second quarter was theresult of higher deposits on fixed annuities that were mostly driven by a $274million increase in deposits on Allstate® Treasury-LinkedAnnuity contracts, which providecontractholders a crediting rate that is indexed to the 5-year treasury rateresulting in upward adjusting crediting rates in a rising interest rateenvironment.  Additionally, highercrediting rates that were responsive to rising market interest rates increasedconsumer demand for other fixed annuity products.  The increase in fixed annuity deposits in thesecond quarter was partially offset by lower variable annuity and life depositsallocated to the fixed accounts due to the disposal of substantially all of ourvariable annuity business during the quarter and lower deposits on fundingagreements.  The decline in the first sixmonths of 2006 was attributable to 

15

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decreased deposits on funding agreements and, to alesser extent, lower variable annuity and life deposits allocated to fixedaccounts and decreased fixed annuity deposits. Fixed annuity deposits declined primarily from the impact of reducedconsumer demand for traditional fixed annuities relative to certificates ofdeposit and other short-term investments in the first quarter of 2006 due tothe interest rate environment and our continued focus on fixed annuity returns.  Funding agreement deposits declined 5.7% and34.0% in the second quarter and first six months of 2006, respectively,compared to the same periods in the prior year. The opportunistic manner in which we manage this business results influctuations in funding agreement deposits between periods.

Surrendersand partial withdrawals on deferred fixed annuities and interest-sensitive lifeproducts increased 32.0% in the second quarter and 35.3% in the first sixmonths of 2006, respectively, compared to the same periods of 2005.  The annualized withdrawal rate on theseproducts was 11.9% for the second quarter and 10.8% for the first six months of2006 based on the beginning of period contractholder funds balance.  This compares to an annualized withdrawalrate of 9.5% for the second quarter and 8.6% for the first six months of2005.  The declining and relatively lowinterest rate environment of the prior three years contributed to favorablewithdrawal rates in 2005, and also resulted in an increased level of policieswith little or no surrender charge protection. The increases in the withdrawal rate in the second quarter and first sixmonths of 2006 are consistent with management’s expectation that in anincreasing interest rate environment contractholders whose contracts haverelatively low surrender charges may choose to move their funds to competinginvestment alternatives.  The aging ofour in-force business may cause this trend to continue.  In addition, we have implemented creditingrate strategies for renewal business to improve investment spreads on selectedcontracts that may also have contributed to the increased withdrawal rate.

**Netinvestment income** increased 11.1% in the second quarter and10.4% in the first six months of 2006 compared to the same periods of 2005 dueto increased investment yields and higher average portfolio balances.  The higher portfolio yields were primarilydue to increased yields on floating rate instruments resulting from increasesin short-term market interest rates and,to a lesser extent, higher yields on fixed income securities.** **Higheraverage portfolio balances resulted from the investment of cash flows fromoperating and financing activities related primarily to deposits from fixedannuities, funding agreements and interest-sensitive life policies, partiallyoffset by payments related to the disposition of substantially all of ourvariable annuity business.

16

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**Net income** analysis is presentedin the following table.
|                                                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**                                                                                  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Premiums                                                                                                |       | $                                               | 146        |                                          | $          | 113 |   | $ | 263 |   | $ | 255 |   |
| Contract charges                                                                                        |       | 277                                             |       | 263                                           |       | 562 |   | 522 |   |
| Net investment income                                                                                   |       | 1,017                                           |       | 915                                           |       | 1,991 |   | 1,803 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments(1)                               |       | 14                                              |       | 16                                            |       | 30 |   | 35 |   |
| Contract benefits                                                                                       |       | (327                                            | )          | (337                                          | )          | (653 | ) | (684 | ) |
| Interest credited to  contractholder funds(2)                                                           |       | (619                                            | )          | (556                                          | )          | (1,215 | ) | (1,093 | ) |
| **Gross margin**                                                                                        |       | 508                                             |       | 414                                           |       | 978 |   | 838 |   |
|                                                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Amortization of DAC and  DSI(3)                                                                         |       | (188                                            | )          | (113                                          | )          | (342 | ) | (227 | ) |
| Operating costs and  expenses                                                                           |       | (98                                             | )          | (110                                          | )          | (201 | ) | (226 | ) |
| Restructuring and  related charges                                                                      |       | (3                                              | )          | —                                        |       | (18 | ) | — |   |
| Income tax expense                                                                                      |       | (76                                             | )          | (65                                           | )          | (142 | ) | (116 | ) |
| Realized capital gains  and losses, after-tax                                                           |       | (51                                             | )          | 15                                            |       | (69 | ) | 16 |   |
| DAC and DSI  amortization relating to realized capital   gains and losses, after-tax(3)                 |       | (3                                              | )          | (43                                           | )          | 24 |   | (104 | ) |
| Reclassification of  periodic settlements and accruals on   non-hedge derivative instruments, after-tax |       | (9                                              | )          | (10                                           | )          | (19 | ) | (22 | ) |
| Loss on disposition of  operations, after-tax                                                           |       | (24                                             | )          | (1                                            | )          | (59 | ) | (4 | ) |
| **Net income**                                                                                          |       | $                                               | 56         |                                          | $          | 87 |   | $ | 152 |   | $ | 155 |   |

(1) Periodic settlements and accruals on non-hedgederivative instruments are reflected as a component of realized capital gainsand losses on the Condensed Consolidated Statements of Operations.

(2) For purposes of calculating gross margin,amortization of deferred sales inducements (“DSI”) is excluded from interestcredited to contractholder funds and aggregated with amortization of deferred policyacquisition costs (“DAC”) dueto the similarity in the substance of the two items.  Amortization of DSI totaled $(16) million and$(15) million in the three months ended June 30, 2006 and 2005, respectively,and $(23) million and $(54) million in the first six months of 2006 and 2005,respectively.

(3)  Amortization ofDAC and DSI relating to realized capital gains and losses is analyzedseparately because realized capital gains and losses may vary significantlybetween periods and obscure trends in our business.  Amortization of DAC and DSI relating torealized capital gains and losses was $(4) million and $(66) million in thesecond quarter of 2006 and 2005, respectively, and was $38 million and $(160)million in the first six months of 2006 and 2005, respectively.

----

*Grossmargin*, a non-GAAP measure, represents premiums and contractcharges, net investment income and periodic settlements and accruals onnon-hedge derivative instruments, less contract benefits and interest creditedto contractholder funds excluding amortization of DSI.  We reclassify periodic settlements andaccruals on non-hedge derivative instruments into gross margin to report themin a manner consistent with the economically hedged investments, replicatedassets or product attributes (e.g. net investment income or interest creditedto contractholder funds) and, by doing so, appropriately reflect trends inproduct performance.  We use gross marginas a component of our evaluation of the profitability of our life insurance andfinancial product portfolio. Additionally, for many of our products, including fixed annuities,variable life and annuities, and interest-sensitive life insurance, theamortization of DAC and DSI is determined based on actual and expected grossmargin.  Gross margin is comprised ofthree components that are utilized to further analyze the business: investmentmargin, benefit margin, and contract charges and fees.  We believe gross margin and its componentsare useful to investors because they allow for the evaluation of incomecomponents separately and in the aggregate when reviewing performance.  Gross margin, investment margin and benefitmargin should not be considered as a substitute for net income and do notreflect the overall profitability of the business.  Net income is the GAAP measure that is mostdirectly comparable to these margins. Gross margin is reconciled to GAAP net income in the table above.

 

17

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The components of gross margin are reconciled to thecorresponding financial statement line items in the following tables. 
|                                                                           | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **Investment  Margin**                              | ** ** | **Benefit Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross Margin** | ** ** |
| **(in millions)**                                                    | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Premiums                                                                  |       | $                                                   | —     |   | $ | — |   | $ | 146 |   | $ | 113 |   | $ | — |   | $ | — |   | $ | 146 |   | $ | 113 |   |
| Contract charges                                                          |       | —                                              |       | — |   | 159 |   | 153 |   | 118 |   | 110 |   | 277 |   | 263 |   |
| Net investment income                                                     |       | 1,017                                               |       | 915 |   | — |   | — |   | — |   | — |   | 1,017 |   | 915 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments(1) |       | 14                                                  |       | 16 |   | — |   | — |   | — |   | — |   | 14 |   | 16 |   |
| Contract benefits                                                         |       | (134                                                | )          | (129 | ) | (193 | ) | (208 | ) | — |   | — |   | (327 | ) | (337 | ) |
| Interest credited to  contractholder funds(2)                             |       | (619                                                | )          | (556 | ) | — |   | — |   | — |   | — |   | (619 | ) | (556 | ) |
|                                                                      |       | $                                                   | 278        |   | $ | 246 |   | $ | 112 |   | $ | 58 |   | $ | 118 |   | $ | 110 |   | $ | 508 |   | $ | 414 |   |

 
|                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                | ** ** | **Investment  Margin**                            | ** ** | **Benefit Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross Margin** | ** ** |
| **(in millions)**                                                    | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Premiums                                                                  |       | $                                                 | —     |   | $ | — |   | $ | 263 |   | $ | 255 |   | $ | — |   | $ | — |   | $ | 263 |   | $ | 255 |   |
| Contract charges                                                          |       | —                                            |       | — |   | 310 |   | 303 |   | 252 |   | 219 |   | 562 |   | 522 |   |
| Net investment income                                                     |       | 1,991                                             |       | 1,803 |   | — |   | — |   | — |   | — |   | 1,991 |   | 1,803 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments(1) |       | 30                                                |       | 35 |   | — |   | — |   | — |   | — |   | 30 |   | 35 |   |
| Contract benefits                                                         |       | (267                                              | )          | (263 | ) | (386 | ) | (421 | ) | — |   | — |   | (653 | ) | (684 | ) |
| Interest credited to  contractholder funds(2)                             |       | (1,215                                            | )          | (1,093 | ) | — |   | — |   | — |   | — |   | (1,215 | ) | (1,093 | ) |
|                                                                      |       | $                                                 | 539        |   | $ | 482 |   | $ | 187 |   | $ | 137 |   | $ | 252 |   | $ | 219 |   | $ | 978 |   | $ | 838 |   |

(1) Periodicsettlements and accruals on non-hedge derivative instruments are reflected as acomponent of realized capital gains and losses on the Condensed ConsolidatedStatements of Operations.

(2) For purposes of calculating gross margin,amortization of DSI is excluded from interest credited to contractholder fundsand aggregated with amortization of DAC due to the similarity in the substanceof the two items.  Amortization of DSItotaled $(16) million and $(15) million in the three months ended June 30, 2006and 2005, respectively, and $(23) million and $(54) million in the first sixmonths of 2006 and 2005, respectively.

----

Grossmargin increased 22.7% in the second quarter of 2006 and 16.7% in the first sixmonths of 2006 compared to the same periods of 2005 due to higher benefit andinvestment margin and increased contract charges and fees.  The disposition of substantially all of ourvariable annuity business will result in lower gross margin in the future,which would be expected to be mostly offset by lower DAC and DSI amortizationand operating expenses.

18

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*Investment margin* is a component ofgross margin, both of which are non-GAAP measures.  Investment margin represents the excess ofnet investment income and periodic settlements and accruals on certainnon-hedge derivative instruments over interest credited to contractholder fundsand the implied interest on life-contingent immediate annuities included in thereserve for life-contingent contract benefits. Amortization of DSI is excluded from interest credited to contractholderfunds for purposes of calculating investment margin.  We use investment margin to evaluate ourprofitability related to the difference between investment returns on assetssupporting certain products and amounts credited to customers (“spread”) duringa fiscal period.

Investment margin by product group is shown in thefollowing table.
|                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Annuities               |       | $                                               | 206        |                                          | $          | 174 |   | $ | 391 |   | $ | 333 |   |
| Life insurance          |       | 38                                              |       | 45                                            |       | 84 |   | 92 |   |
| Institutional products  |       | 34                                              |       | 27                                            |       | 64 |   | 57 |   |
| Total investment margin |       | $                                               | 278        |                                          | $          | 246 |   | $ | 539 |   | $ | 482 |   |

 

Investment marginincreased 13.0% in the second quarter and 11.8% in the first six months of 2006compared to the same periods of 2005. The increase in both periods was primarily due to growth incontractholder funds and improved yields on assets supporting deferred fixedannuities.  Additionally, the increase inthe first six months of 2006 was impacted by lower average crediting rates ondeferred fixed annuities resulting from contract surrenders and crediting rateactions.  In the future, the investmentmargin will be reduced as a result of the disposal of substantially all of ourvariable annuity business and anticipated dividend payments until the lostmargins are replaced by sales of other products.

The followingtable summarizes the annualized weighted average investment yield, interestcrediting rates and investment spreads for the three months ended June 30.
|                                                                      | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spreads** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                         | ** ** | **2005**                                                     | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest-sensitive life                                              |       | 6.2                                              | %          | 6.3                                                          | %          | 4.7                                                | %          | 4.8 | % | 1.5 | % | 1.5 | % |
| Deferred fixed  annuities                                            |       | 5.7                                              |       | 5.5                                                          |       | 3.6                                                |       | 3.8 |   | 2.1 |   | 1.7 |   |
| Immediate fixed  annuities with and without life contingencies       |       | 7.2                                              |       | 7.4                                                          |       | 6.6                                                |       | 6.7 |   | 0.6 |   | 0.7 |   |
| Institutional                                                        |       | 6.0                                              |       | 4.2                                                          |       | 5.0                                                |       | 3.3 |   | 1.0 |   | 0.9 |   |
| Investments supporting  capital, traditional life and other products |       | 6.9                                              |       | 7.1                                                          |       | N/A                                                |       | N/A |   | N/A |   | N/A |   |

 

The followingtable summarizes the annualized weighted average investment yield, interestcrediting rates and investment spreads for the six months ended June 30.
|                                                                     | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                         | ** ** | **2005**                                                     | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest-sensitive life                                        |       | 6.2                                              | %          | 6.3                                                          | %          | 4.7                                               | %          | 4.7 | % | 1.5 | % | 1.6 | % |
| Deferred fixed  annuities                                           |       | 5.7                                              |       | 5.5                                                          |       | 3.7                                               |       | 3.8 |   | 2.0 |   | 1.7 |   |
| Immediate fixed  annuities with and without life contingencies      |       | 7.2                                              |       | 7.4                                                          |       | 6.6                                               |       | 6.7 |   | 0.6 |   | 0.7 |   |
| Institutional                                                       |       | 5.8                                              |       | 4.1                                                          |       | 4.8                                               |       | 3.1 |   | 1.0 |   | 1.0 |   |
| Investments supporting capital, traditional life and other products |       | 6.9                                              |       | 7.0                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

 

19

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The following table summarizes the liabilities for these contracts andpolicies.

 
|                                                                       | ** ** | **As of June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(in millions)**                                                | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| Immediate fixed  annuities with life contingencies                    |       | $                                 | 7,993      |   | $ | 7,823 |   |
| Other life contingent  contracts and other                            |       | 3,595                             |       | 4,235 |   |
| Reserve for  life-contingent contract benefits                        |       | $                                 | 11,588     |   | $ | 12,058 |   |
|                                                                  |       |                              |       |   |   |
| Interest-sensitive life                                               |       | $                                 | 8,117      |   | $ | 7,832 |   |
| Deferred fixed  annuities                                             |       | 34,946                            |       | 33,031 |   |
| Immediate fixed  annuities without life contingencies                 |       | 3,710                             |       | 3,341 |   |
| Institutional                                                         |       | 13,067                            |       | 12,609 |   |
| Market value  adjustments related to derivative instruments and other |       | 368                               |       | 515 |   |
| Contractholder funds                                                  |       | $                                 | 60,208     |   | $ | 57,328 |   |

 

*Benefit margin*is a component of gross margin, both of which arenon-GAAP measures.  Benefit margin represents life and life-contingent immediateannuity premiums, cost of insurance contract charges and, prior to the disposalof substantially all of our variable annuity business through reinsurance,variable annuity contract charges for contract guarantees less contractbenefits.  Benefit margin excludes theimplied interest on life-contingent immediate annuities, which is included inthe calculation of investment margin.  Weuse benefit margin to evaluate our underwriting performance, as it reflects theprofitability of our products with respect to mortality or morbidity riskduring a fiscal period.

Benefitmargin by product group is shown in the following table.  
|                        | ** ** | Three Months Ended  June 30, | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)** | ** ** | **2006**                                    | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Life insurance    |       | $                                           | 116        |                                          | $          | 83 |   | $ | 205 |   | $ | 176 | ** ** |
| Annuities              |       | (4                                          | )          | (25                                           | )          | (18 | ) | (39 | ) |
| Total benefit margin   |       | $                                           | 112        |                                          | $          | 58 |   | $ | 187 |   | $ | 137 |   |

 

Benefit margin increased93.1% in the second quarter and 36.5% in the first six months of 2006 comparedto the same periods of 2005.  Theincrease in both periods was primarily due to improved life insurance mortalityexperience, growth and a favorable impact related to the lapse of certain contractsin the second quarter of 2006.   Theseimprovements were partially offset by the impact of a prospectivereclassification of certain contract charges from benefit margin to contractcharges and fees beginning in 2006. Benefit margin for the second quarter and first six months of 2005included $13 million and $26 million, respectively, of amounts reclassified tocontract charges and fees.

*Amortization of DAC and DSI*, excludingamortization related to realized capital gains and losses, increased 66.4% inthe three months ended June 30, 2006 and 50.7% in the first six months of 2006compared to the same periods of 2005 due to higher gross margin.  DAC and DSI amortization related to realizedcapital gains and losses, after-tax, changed by a favorable $40 million and$128 million in the second quarter and first six months of 2006, respectively,compared to the same periods in 2005. The impact of realized capital gains and losses on amortization of DACand DSI is dependent upon the relationship between the assets that give rise tothe gain or loss and the product liability supported by the assets.  Fluctuations result from changes in theimpact of realized capital gains and losses on actual and expected grossprofits.  DAC and DSI were reduced by$726 million and $70 million, respectively, in the second quarter of 2006 as aresult of the disposition of substantially all of our variable annuitybusiness.  This decline will result in areduction to the amortization of DAC and DSI in the future, which is expectedto be offset by the absence of gross margin on the business subject to thedisposition.

20

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*Operating costs and expenses* declined 10.9% and 11.1% in the second quarterand first six months of 2006, respectively, compared to the same periods of2005.  The following table summarizesoperating costs and expenses.

 
|                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**              | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Non-deferrable  acquisition costs   |       | $                                               | 34         |                                          | $          | 37 |   | $ | 72 |   | $ | 76 |   |
| Other operating costs  and expenses |       | 64                                              |       | 73                                            |       | 129 |   | 150 |   |
| Total operating costs  and expenses |       | $                                               | 98         |                                          | $          | 110 |   | $ | 201 |   | $ | 226 |   |
|                                |       |                                            |       |                                          |       |   |   |   |   |
| Restructuring and related charges   |       | $                                               | 3          |                                          | $          | — |   | $ | 18 |   | $ | — |   |

 

Non-deferrableacquisition costs declined 8.1% in the second quarter of 2006 and 5.3% in thefirst six months of 2006 compared to the same periods of 2005 due to lowernon-deferrable commissions.  Otheroperating costs and expenses declined 12.3% in the second quarter of 2006 and14.0% in the first six months of 2006 compared to the same periods of2005.  The decline in other operatingcosts and expenses in the second quarter was primarily the result of a declinein employee and technology costs and the impact of a litigation related accrualrecorded in the prior year.  The declinein other operating costs and expenses in the first six months of 2006 comparedto the same period in the prior year was primarily attributable to loweremployee and technology costs.  Totaloperating costs and expenses are expected to decline in the future as a resultof the disposition of substantially all of our variable annuity business.

Restructuringand related charges for the first six months of 2006 reflect costs relatedto the Voluntary Termination Offer (“VTO”) accepted primarily by employeeslocated at Allstate’s headquarters.

**INVESTMENTS**

An important component ofour financial results is the return on our investment portfolio.  The composition of the investment portfolioat June 30, 2006 is presented in the table below.

 
|                              | ** ** | **Investments** | ** ** | **Percent to  total** | ** ** |
|------------------------------|------------|-----------------|------------|----------------------------|------------|
| **(in millions)**       | ** ** | ** **      | ** ** | ** **                 | ** ** |
| Fixed income securities  (1) |       | $               | 60,400     |                       | 82.0       | % |
| Mortgage loans               |       | 8,538           |       | 11.6                       |       |
| Equity securities            |       | 418             |       | 0.6                        |       |
| Short-term                   |       | 2,525           |       | 3.4                        |       |
| Policy loans                 |       | 730             |       | 1.0                        |       |
| Other                        |       | 1,012           |       | 1.4                        |       |
| Total                        |       | $               | 73,623     |                       | 100.0      | % |

 

(1)             Fixed incomesecurities are carried at fair value. Amortized cost basis for these securities was $60.11 billion.

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Total investments increased to $73.62 billion at June30, 2006 from $72.76 billion at December 31, 2005, primarily due to positivecash flows from operating and financing activities including increased fundsassociated with securities lending, partially offset by decreased netunrealized gains on fixed income securities and payments totaling approximately$812 million related to the disposition of substantially all of our variableannuity business.

Total investments at amortized cost related tocollateral received in connection with securities lending activities, fundsreceived in connection with securities repurchase agreements, and collateralposted by counterparties related to derivative transactions, increased to $3.60billion at June 30, 2006, from $2.23 billion at December 31, 2005.

At June 30, 2006, 94.9%of the fixed income securities portfolio was rated investment grade, which isdefined as a security having a rating from the National Association ofInsurance Commissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa, A or Baa fromMoody’s or a rating of AAA, AA, A or BBB from S&P, Fitch or Dominion; or acomparable internal rating if an externally provided rating is not available.

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The unrealized netcapital gains on fixed income and equity securities at June 30, 2006 were $292million, a decrease of $1.97 billion or 87.1% since December 31, 2005.  The net unrealized gain for the fixed incomeportfolio totaled $286 million, comprised of $1.60 billion of unrealized gainsand $1.32 billion of unrealized losses at June 30, 2006.  This is compared to a net unrealized gain forthe fixed income portfolio totaling $2.26 billion at December 31, 2005,comprised of $2.72 billion of unrealized gains and $461 million of unrealizedlosses.

Of the grossunrealized losses in the fixed income portfolio at June 30, 2006, $1.27 billionor 96.8% were related to investment grade securities and are believed to beprimarily a result of a rising interest rate environment.  Of the remaining $42 million of losses in thefixed income portfolio, $33 million or 78.6% were in the corporate fixed incomeportfolio.  The $33 million of corporatefixed income gross unrealized losses were primarily comprised of securities inthe consumer goods, communications, capital goods, energy and technologysectors.  The gross unrealized losses inthese sectors were primarily company specific and interest rate related.  Approximately $19 million of the total grossunrealized losses in the corporate fixed income portfolio were associated withthe automobile industry, which includes direct debt issuances of automobilemanufacturers, captive automotive financing companies and automobile parts andequipment suppliers, which are classified in the consumer goods and financialservices sectors.  Fixed income securityvalues in the automobile industry were depressed primarily due to companyspecific conditions.  Additionally,approximately $6 million of the total gross unrealized losses were associatedwith the airline industry for which values were depressed due to economicissues and industry conditions.

The net unrealizedgain for the common and non-redeemable preferred stock portfolio totaled $6million at June 30, 2006 and $5 million at December 31, 2005.

Our portfolio monitoring process identifies andevaluates, on a case-by-case basis, fixed income and equity securities whosecarrying value may be other-than-temporarily impaired.  The process includes a quarterly review ofall securities using a screening process to identify those securities whosefair value compared to amortized cost for fixed income securities or cost forequity securities is below established thresholds for certain time periods, orwhich are identified through other monitoring criteria such as ratingsdowngrades or payment defaults.  As aresult of approved programs involving the disposition of investments such aschanges in duration and revisions to strategic asset allocations, and certaindispositions anticipated by portfolio managers, 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.  All securities in an unrealized loss positionat June 30, 2006 were included in our portfolio monitoring process fordetermining which declines in value were not other-than-temporary.

We also monitorthe quality of our fixed income portfolio by categorizing certain investmentsas “problem”, “restructured” or “potential problem.”  Problem fixed income securities aresecurities in default with respect to principal or interest and/or securitiesissued by companies that have gone into bankruptcy subsequent to our acquisitionof the security.  Restructured fixedincome securities have rates and terms that are not consistent with marketrates or terms prevailing at the time of the restructuring.  Potential problem fixed income securities arecurrent with respect to contractual principal and/or interest, but because ofother facts and circumstances, we have concerns regarding the borrower’sability to pay future principal and interest, which causes us to believe thesesecurities may be classified as problem or restructured in the future.

 

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The following table summarizes problem, restructuredand potential problem fixed income securities.
| (in millions)                    | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Amortized  cost**         | ** ** | **Fair  value**                 | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Percent of   total Fixed  Income  portfolio** | ** ** |
| Problem                               |       | $                           | 8          |                            | $          | 11 |   | — | % | $ | 70 |   | $ | 80 |   | 0.1 | % |
| Restructured                          |       | 4                           |       | 4                               |       | — |   | 4 |   | 4 |   | — |   |
| Potential problem                     |       | 121                         |       | 138                             |       | 0.2 |   | 122 |   | 135 |   | 0.2 |   |
| Total net carrying  value             |       | $                           | 133        |                            | $          | 153 |   | 0.2 | % | $ | 196 |   | $ | 219 |   | 0.3 | % |
| Cumulative write-downs recognized (1) |       | $                           | 193        |                            |       |   |   |   | $ | 188 |   |   |   |   |   |

 

(1)                    Cumulativewrite-downs recognized only reflects write-downs related to securities withinthe problem, potential problem and restructured categories.

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We have experienced adecrease in the amortized cost of fixed income securities categorized asproblem as of June 30, 2006 compared to December 31, 2005.  The decrease was primarily due todispositions and the recategorization of securities upon improving conditions.

We also evaluated each ofthese securities through our portfolio monitoring process at June 30, 2006 andrecorded write-downs when appropriate. We further concluded that any remaining unrealized losses on thesesecurities were temporary in nature and that we have the intent and ability tohold until recovery.  While thesebalances may increase in the future, particularly if economic conditions areunfavorable, management expects that****thetotal amount of securities in these categories will remain low relative to thetotal fixed income securities portfolio.

**Net Realized Capital Gains and Losses**The following table presents the components of realizedcapital gains and losses and the related tax effect.
|                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in millions)**                       | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| Investment  write-downs                      |       | $                                               | (4         | )                                             | $          | (6 | ) | $ | (9 | ) | $ | (13 | ) |
| Dispositions                                 |       | (75                                             | )          | 58                                            |       | (150 | ) | 98 |   |
| Valuation  of derivative instruments         |       | (22                                             | )          | (11                                           | )          | 14 |   | (69 | ) |
| Settlement  of derivative instruments        |       | 21                                              |       | (17                                           | )          | 38 |   | 9 |   |
| Realized  capital gains and losses, pretax   |       | (80                                             | )          | 24                                            |       | (107 | ) | 25 |   |
| Income  tax benefit (expense)                |       | 29                                              |       | (9                                            | )          | 38 |   | (9 | ) |
| Realized capital gains and losses, after-tax |       | $                                               | (51        | )                                             | $          | 15 |   | $ | (69 | ) | $ | 16 |   |

 

Dispositions inthe above table include sales, losses recognized in anticipation ofdispositions and other transactions such as calls and prepayments.  We may sell securities during the period inwhich fair value has declined below amortized cost for fixed income securitiesor cost for equity securities.  Incertain situations new factors such as negative developments, subsequent creditdeterioration, relative value opportunities, market liquidity concerns andportfolio reallocations can subsequently change our previous intent to continueholding a security.

A changing interestrate environment will drive changes in our portfolio duration targets at atactical level.  A duration target andrange is established with an economic view of liabilities relative to along-term portfolio view.  Tacticalduration adjustments within management’s approved ranges are accomplishedthrough both cash market transactions and derivative activities that generaterealized gains and losses and through new purchases.  As a component of our approach to managingportfolio duration, realized gains and losses on derivative instruments aremost appropriately considered in conjunction with the unrealized gains andlosses on the fixed income portfolio. This approach mitigates the impacts of general interest rate changes tothe overall financial condition of the Company.

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In the second quarter of 2006, we recognized $4million of losses related to a change in our intent to hold certain securitieswith unrealized losses until they recover in value.  The change in our intent is primarily relatedto comprehensive reviews of our portfolio. We identified $167 million of securities that may be sold.

**CAPITAL RESOURCES AND LIQUIDITY**

**Capital Resources**consist of shareholder’s equity and debt, representing funds deployed oravailable to be deployed to support business operations.  The following table summarizes our capitalresources.
| (in millions)                                                         | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Redeemable preferred  stock                                                |       | $                           | 5          |                            | $          | 5 |   |
| Common stock, retained  earnings and other shareholder’s equity items |       | 5,442                       |       | 5,415                           |       |
| Accumulated other  comprehensive income                                    |       | 45                          |       | 588                             |       |
| Total  shareholder’s equity                                           |       | 5,492                       |       | 6,008                           |       |
| Debt                                                                       |       | 269                         |       | 181                             |       |
| Total capital resources                                                    |       | $                           | 5,761      |                            | $          | 6,189 |   |

 

*Shareholder’s equity*declined in the first six months of 2006, primarily due to lower unrealized netcapital gains on fixed income securities and dividends, partially offset by netincome.

*Debt*increased in the first six months of 2006, due to increases in long-term debtpartially offset by the redemption of mandatorily redeemable preferredstock.  In the second quarter of 2006,under an existing agreement with Kennett Capital, Inc. (“Kennett”), anunconsolidated affiliate of ALIC, ALIC sold Kennett a $100 million redeemablesurplus note issued by ALIC Reinsurance Company, a wholly owned subsidiary ofALIC.  The surplus note is due June 1,2036 with an initial rate of 6.18% that will reset once every ten years to thethen current ten year Constant Maturity Treasury yield (“CMT”), plus 1.14%. Aspayment, Kennett issued a full recourse note due June 1, 2036 to ALIC for thesame amount with an initial interest rate of 5.98% that will reset once everyten years to the then current ten year CMT, plus 0.94%.  The note due from Kennett is classified asother investments and the related surplus note is classified as long-term debtin the Condensed Consolidated Statements of Financial Position.

**Financial Ratings and Strength  **Ourratings are influenced by many factors including our operating and financialperformance, asset quality, liquidity, asset/liability management, overallportfolio mix, financial leverage (i.e., debt), exposure to risks, the currentlevel of operating leverage, Allstate Insurance Company’s (“AIC”) ratings andother factors.  There have been nochanges to our insurance financial strength ratings since December 31, 2005.

**Liquidity Sources and Uses**   As reflected in our Condensed Consolidated Statements of Cash Flows,****higher operating cash flows in the firstsix months of 2006, compared to the first six months of 2005 primarily relatedto higher investment income.

Cash flows used ininvesting activities decreased in the first six months of 2006 primarily due todecreased net cash provided by financing activities, partially offset by theinvestment of higher operating cash flows. Cash flows used in investing activities also include the settlement ofthe disposal of substantially all of our variable annuity business.

# Cashflows provided by financing activities declined in the first six months of 2006as a result of lower contractholder fund deposits and higher surrenders andpartial withdrawals.  For quantificationof the changes in contractholder funds, see the Operations section of theMD&A.

# During2006, as a result of the disposal of substantially all of our variable annuitybusiness, dividends of $400 million to $500 million are expected to be paid toAIC, of which $125 million was paid during the second quarter of 2006.  The payment of the additional remainingdividends in 2006 is subject to regulatory approval.

We have access to additional borrowing to supportliquidity through the Corporation as follows:

·               A commercial paperprogram with a borrowing limit of $1.00 billion to cover short-term cashneeds.  As of June 30, 2006, there wereno balances outstanding and therefore the remaining borrowing capacity was$1.00 billion; however, the outstanding balance fluctuates daily.

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·               A five-year revolving credit facility expiring in2009 totaling $1.00 billion to cover short-term liquidityrequirements.  This facility contains anincrease provision that would make up to an additional $500 million available forborrowing provided the increased portion could be fully syndicated at a laterdate among existing or new lenders. 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 Corporation’s senior, unsecured,nonguaranteed long-term debt.  There wereno borrowings under this line of credit during the first six months of 2006.The total amount outstanding at any point in time under the combination of thecommercial paper program and the credit facility cannot exceed the amount thatcan be borrowed under the credit facility.

·                  InMay 2006, the Corporation filed a universal shelf registration statement withthe Securities and Exchange Commission (“SEC”). In accordance with rules adopted by the SEC in 2005, this registrationstatement covers an unspecified amount of securities.  The Corporation can use it to issue debtsecurities, common stock, preferred stock, depositary shares, warrants, stockpurchase contracts, stock purchase units and securities of subsidiaries.  The specific terms of any securities theCorporation issues under this registration statement will be provided in theapplicable prospectus supplements.  Thisregistration statement, under which the Corporation has not yet issued anysecurities, replaced the 2003 universal shelf registration statement.

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**Item 4.   Controls and Procedures**

*Evaluation of Disclosure Controlsand Procedures.  *We maintain disclosure controls andprocedures as defined in Rule 13a-15(e) and15(d)-15(e) under the Securities Exchange Act of 1934.  Under the supervision and with the participationof our management, including our principal executive officer and principalfinancial officer, we conducted an evaluation of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport.  Based upon this evaluation, theprincipal executive officer and the principal financial officer concluded thatour disclosure controls and procedures are effective in providing reasonableassurance that material information required to be disclosed in our reportsfiled with or submitted to the Securities and Exchange Commission under theSecurities Exchange Act is made known to management, including the principalexecutive officer and the principal financial officer, as appropriate to allowtimely decisions regarding required disclosure.

*Changes in Internal Control overFinancial Reporting.  *During the fiscal quarter endedJune 30, 2006, there were no changes in our internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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** **

**PART II. OTHER INFORMATION**

**Item 1.    LegalProceedings**

Information required for this Part II, Item 1 is incorporated byreference to the discussion under the heading “Regulation” and under theheading “Legal and regulatory proceedings and inquiries” in Note 5 of theCompany’s Condensed Consolidated Financial Statements in Part I, Item 1 of thisForm 10-Q.

**Item1A.  Risk Factors**

Thisdocument contains “forward-looking statements” that anticipate results based onour estimates, assumptions and plans that are subject to uncertainty. Thesestatements are made subject to the safe-harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. We assume no obligation to update anyforward-looking statements as a result of new information or future events ordevelopments.

These forward-looking statements do not relatestrictly to historical or current facts and may be identified by their use ofwords like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,”“intends,” “believes,” “likely,” “targets” and other words with similarmeanings. These statements may address, among other things, our strategy forgrowth, product development, regulatory approvals, market position, expenses,financial results, litigation and reserves. We believe that these statementsare based on reasonable estimates, assumptions and plans. However, if theestimates, assumptions or plans underlying the forward-looking statements proveinaccurate or if other risks or uncertainties arise, actual results could differmaterially from those communicated in these forward-looking statements. Riskfactors which could cause actual results to differ materially from thosesuggested by such forward-looking statements include but are not limited tothose discussed or identified in this document, in our public filings with theSecurities and Exchange Commission, and those in Part I, Item 1A of AllstateLife Insurance Company Annual Report on Form 10-K for 2005, which are herebyincorporated herein by reference.   Therehave been no material changes from the risk factors previously disclosed in ourAnnual Report on Form 10-K.

**Item6.  Exhibits**

(a)                                  Exhibits

An Exhibit Index has beenfiled as part of this report on page E-1.

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** **

** **

**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                | Allstate Life Insurance Company       |
|----------------|---------------------------------------|
|           | (Registrant)                          |
| August 8, 2006 | By /s/ Samuel H. Pilch                |
|           | Samuel H. Pilch                       |
|           | (chief accounting officer and duly    |
|           | authorized officer of the Registrant) |

 

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| Exhibit No.    | ** ** | **Description**                                                                                                                                                                                                               | ** ** |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | ** **                                                                                                                                                                                                                    | ** ** |
| 3(ii)          |       | Amended and Restated  By-Laws of Allstate Life Insurance Company effective April 21, 2006,  incorporated herein by reference to Exhibit 3.1 to Allstate Life Insurance  Company current report on Form 8-K filed May 3, 2006. |       |
| 10.1           |       | First Amendment  to Marketing Coordination and Administrative Services Agreement among  Allstate Life Insurance Company, Allstate Financial Services, LLC and  Allstate Insurance Company dated January 1, 2006.              |       |
| 15   |       | Acknowledgment  of awareness from Deloitte & Touche LLP, dated August 4, 2006, 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                                                                                                                                                                                                  |       |
|           |       |                                                                                                                                                                                                                          |       |

 

 

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