** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**Registrant meets the conditions set forth inGeneral Instruction H (1)(a) and (b) of Form 10-Q and istherefore filing this Form with the reduced disclosure format.**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)**  | ** ** |
|------------|------------|-------------------------------------------------------------|------------|
| ** ** | ** ** | **OF**                                                      | ** ** |
| ** ** | ** ** | **THE  SECURITIES EXCHANGE ACT OF 1934**                    | ** ** |
| ** ** | ** ** | ** **                                                  | ** ** |
| ** ** | ** ** | **FOR THE QUARTERLY PERIOD ENDED JUNE 30,  2005**           | ** ** |
|       |       |                                                        |       |
| ** ** | ** ** | **OR**                                                      | ** ** |
|       |       |                                                        |       |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)** | ** ** |
| ** ** | ** ** | **OF**                                                      | ** ** |
| ** ** | ** ** | **THE  SECURITIES EXCHANGE ACT OF 1934**                    | ** ** |

 

**Commission file number: 000-31248**

 

**ALLSTATE LIFE INSURANCE COMPANY**

(Exact name of registrant asspecified in its charter)

 
| **Illinois**                                                              | ** ** | **36-2554642**                       |
|---------------------------------------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                                                  | ** ** | (I.R.S. Employer Identification No.) |
|                                                                      |       |                                 |
| **3100 Sanders Road  Northbrook, Illinois**                               | ** ** | **60062**                            |
| (Address of principal executive offices)                                  |       | (Zip code)                           |
|                                                                      |       |                                 |
| **Registrant’s  telephone number, including area code:**847/402-5000 |

 

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

 
| **Yes****ý** | ** ** | **No****o** |
|-------------------|------------|-------------|

 

**Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).**

 
| **Yes****o** | ** ** | **No****ý** |
|--------------|------------|------------------|

 

**As of July 29, 2005, the registrant had23,800 common shares, $227 par value, outstanding, all of which are held byAllstate Insurance Company.**

 

 

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**ALLSTATE LIFE INSURANCE COMPANY**

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

##### **June 30, 2005**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                                | **PAGE**   |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
|             |                                                                                                                                     |       |
| Item 1.          | Financial Statements                                                                                                                     |       |
|             |                                                                                                                                     |       |
|             | Condensed Consolidated Statements of Operations for the Three-Month  and Six-Month Periods Ended June 30, 2005 and 2004 (unaudited) | 1          |
|             |                                                                                                                                     |       |
|             | Condensed Consolidated Statements of Financial Position as of  June 30, 2005 (unaudited) and December 31, 2004                 | 2          |
|             |                                                                                                                                     |       |
|             | Condensed Consolidated Statements of Cash Flows for the Six-Month  Periods Ended June 30, 2005 and 2004 (unaudited)                 | 3          |
|             |                                                                                                                                     |       |
|             | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                         | 4          |
|             |                                                                                                                                     |       |
|             | Report of Independent Registered Public Accounting Firm                                                                                  | 10         |
|             |                                                                                                                                     |       |
| Item 2.          | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                                              | 11         |
|             |                                                                                                                                     |       |
| Item 4.          | Controls and Procedures                                                                                                                  | 26         |
|             |                                                                                                                                     |       |
| **PART II** | **OTHER INFORMATION**                                                                                                                    | ** ** |
|             |                                                                                                                                     |       |
| Item 1.          | Legal Proceedings                                                                                                                        | 27         |
|             |                                                                                                                                     |       |
| Item 6.          | Exhibits                                                                                                                                 | 27         |

 

----

 

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

**ITEM 1. FINANCIAL STATEMENTS**

 

**ALLSTATE LIFE INSURANCE COMPANY ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                                                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                               | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(in millions)**                                                                                                        | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                               | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)**      | ** ** |
| **Revenues**                                                                                                             |       |                   |       |                 |       |   |   |   |   |
| Premiums                                                                                                                 |       | $                      | 113        |                 | $          | 151 |   | $ | 255 |   | $ | 302 |   |
| Contract charges                                                                                                         |       | 263                    |       | 236                  |       | 522 |   | 470 |   |
| Net investment income                                                                                                    |       | 915                    |       | 795                  |       | 1,803 |   | 1,578 |   |
| Realized capital gains and losses                                                                                        |       | 24                     |       | (68                  | )          | 25 |   | (95 | ) |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
|                                                                                                                     |       | 1,315                  |       | 1,114                |       | 2,605 |   | 2,255 |   |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| **Costs and expenses**                                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Contract benefits                                                                                                        |       | 337                    |       | 313                  |       | 684 |   | 649 |   |
| Interest credited to contractholder funds                                                                                |       | 571                    |       | 463                  |       | 1,147 |   | 912 |   |
| Amortization of deferred policy acquisition  costs                                                                       |       | 164                    |       | 109                  |       | 333 |   | 224 |   |
| Operating costs and expenses                                                                                             |       | 110                    |       | 123                  |       | 226 |   | 225 |   |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
|                                                                                                                     |       | 1,182                  |       | 1,008                |       | 2,390 |   | 2,010 |   |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| Loss on disposition of operations                                                                                        |       | (3                     | )          | (14                  | )          | (8 | ) | (17 | ) |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| **Income from operations before income tax  expense and cumulative effect of change in accounting principle, after-tax** |       | 130                    |       | 92                   |       | 207 |   | 228 |   |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| Income tax expense                                                                                                       |       | 43                     |       | 37                   |       | 52 |   | 82 |   |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| **Income before cumulative effect of change  in accounting principle, after-tax**                                        |       | 87                     |       | 55                   |       | 155 |   | 146 |   |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| Cumulative effect of change in accounting  principle, after-tax                                                          |       | —                 |       | —               |       | — |   | (175 | ) |
|                                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| **Net income (loss)**                                                                                                    |       | $                      | 87         |                 | $          | 55 |   | $ | 155 |   | $ | (29 | ) |

 

See notes to condensed consolidated financialstatements.

 

1

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**ALLSTATE LIFE INSURANCE COMPANY ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFFINANCIAL POSITION**

 
| **($ in millions, except par  value data)**                                                                               | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                     | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
|                                                                                                                           |       |                    |       |                        |       |
| **Assets**                                                                                                                     |       |                    |       |                        |       |
| Investments                                                                                                                    |       |                    |       |                        |       |
| Fixed income securities, at fair value  (amortized cost $60,678 and $55,964)                                                   |       | $                       | 64,453     |                        | $          | 59,291 |   |
| Mortgage loans                                                                                                                 |       | 7,598                   |       | 7,318                       |       |
| Equity securities                                                                                                              |       | 272                     |       | 214                         |       |
| Short-term                                                                                                                     |       | 1,194                   |       | 1,440                       |       |
| Policy loans                                                                                                                   |       | 716                     |       | 722                         |       |
| Other                                                                                                                          |       | 529                     |       | 704                         |       |
|                                                                                                                           |       |                    |       |                        |       |
| Total investments                                                                                                              |       | 74,762                  |       | 69,689                      |       |
|                                                                                                                           |       |                    |       |                        |       |
| Cash                                                                                                                           |       | 194                     |       | 241                         |       |
| Deferred policy acquisition costs                                                                                              |       | 3,297                   |       | 3,176                       |       |
| Reinsurance recoverables, net                                                                                                  |       | 1,591                   |       | 1,507                       |       |
| Accrued investment income                                                                                                      |       | 631                     |       | 593                         |       |
| Other assets                                                                                                                   |       | 404                     |       | 818                         |       |
| Separate Accounts                                                                                                              |       | 14,341                  |       | 14,377                      |       |
|                                                                                                                           |       |                    |       |                        |       |
| **Total assets**                                                                                                               |       | $                       | 95,220     |                        | $          | 90,401 |   |
|                                                                                                                           |       |                    |       |                        |       |
| **Liabilities**                                                                                                                |       |                    |       |                        |       |
| Contractholder funds                                                                                                           |       | $                       | 57,328     |                        | $          | 53,939 |   |
| Reserve for life-contingent contract  benefits                                                                                 |       | 12,058                  |       | 11,203                      |       |
| Unearned premiums                                                                                                              |       | 33                      |       | 31                          |       |
| Payable to affiliates, net                                                                                                     |       | 120                     |       | 79                          |       |
| Other liabilities and accrued expenses                                                                                         |       | 4,407                   |       | 3,721                       |       |
| Deferred income taxes                                                                                                          |       | 521                     |       | 638                         |       |
| Long-term debt                                                                                                                 |       | 92                      |       | 104                         |       |
| Separate Accounts                                                                                                              |       | 14,341                  |       | 14,377                      |       |
|                                                                                                                           |       |                    |       |                        |       |
| **Total liabilities**                                                                                                          |       | 88,900                  |       | 84,092                      |       |
|                                                                                                                           |       |                    |       |                        |       |
| **Commitments and Contingent Liabilities  (Note 4)**                                                                           |       |                    |       |                        |       |
|                                                                                                                           |       |                    |       |                        |       |
| **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                                                                                                                |       | 4,250                   |       | 4,178                       |       |
| Accumulated other comprehensive income:                                                                                        |       |                    |       |                        |       |
| Unrealized net capital gains and losses                                                                                        |       | 952                     |       | 1,013                       |       |
|                                                                                                                           |       |                    |       |                        |       |
| **Total accumulated other comprehensive  income**                                                                              |       | 952                     |       | 1,013                       |       |
|                                                                                                                           |       |                    |       |                        |       |
| **Total shareholder’s equity**                                                                                            |       | 6,320                   |       | 6,309                       |       |
|                                                                                                                           |       |                    |       |                        |       |
| **Total liabilities and shareholder’s equity**                                                                            |       | $                       | 95,220     |                        | $          | 90,401 |   |

See notes to condensed consolidated financialstatements.

 

2

----

 

**ALLSTATE LIFE INSURANCE COMPANY ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                                                                  | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                     | ** ** |
| **Cash flows from operating activities**                                           |       |                                |       |   |   |
| Net income (loss)                                                                  |       | $                                   | 155        |   | $ | (29 | ) |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                |       |   |   |
| Amortization and other non-cash items                                              |       | (83                                 | )          | (66 | ) |
| Realized capital gains and losses                                                  |       | (25                                 | )          | 95 |   |
| Loss on disposition of operations                                                  |       | 8                                   |       | 17 |   |
| Cumulative effect of change in accounting  principle                               |       | —                              |       | 175 |   |
| Interest credited to contractholder funds                                          |       | 1,147                               |       | 912 |   |
| Changes in:                                                                        |       |                                |       |   |   |
| Contract benefit and other insurance  reserves                                     |       | (87                                 | )          | (120 | ) |
| Unearned premiums                                                                  |       | 2                                   |       | 1 |   |
| Deferred policy acquisition costs                                                  |       | (57                                 | )          | (146 | ) |
| Reinsurance recoverables, net                                                      |       | (87                                 | )          | (96 | ) |
| Income taxes payable                                                               |       | (57                                 | )          | (64 | ) |
| Other operating assets and liabilities                                             |       | 14                                  |       | 13 |   |
|                                                                               |       |                                |       |   |   |
| Net cash provided by operating activities                                          |       | 930                                 |       | 692 |   |
|                                                                               |       |                                |       |   |   |
| **Cash flows from investing activities**                                           |       |                                |       |   |   |
| Proceeds from sales                                                                |       |                                |       |   |   |
| Fixed income securities                                                            |       | 4,872                               |       | 4,317 |   |
| Equity securities                                                                  |       | 31                                  |       | 115 |   |
| Investment collections                                                             |       |                                |       |   |   |
| Fixed income securities                                                            |       | 2,289                               |       | 2,196 |   |
| Mortgage loans                                                                     |       | 532                                 |       | 302 |   |
| Investment purchases                                                               |       |                                |       |   |   |
| Fixed income securities                                                            |       | (10,403                             | )          | (9,998 | ) |
| Equity securities                                                                  |       | (82                                 | )          | (165 | ) |
| Mortgage loans                                                                     |       | (798                                | )          | (844 | ) |
|                                                                               |       |                                |       |   |   |
| Change in short-term investments, net                                              |       | (95                                 | )          | (2 | ) |
| Change in other investments, net                                                   |       | (18                                 | )          | (47 | ) |
|                                                                               |       |                                |       |   |   |
| Net cash used in investing activities                                              |       | (3,672                              | )          | (4,126 | ) |
|                                                                               |       |                                |       |   |   |
| **Cash flows from financing activities**                                           |       |                                |       |   |   |
| Change in short-term debt, net                                                     |       | —                              |       | 55 |   |
| Redemption of mandatorily redeemable  preferred stock                              |       | (12                                 | )          | (7 | ) |
| Contractholder fund deposits                                                       |       | 6,513                               |       | 6,331 |   |
| Contractholder fund withdrawals                                                    |       | (3,781                              | )          | (2,907 | ) |
| Dividends paid                                                                     |       | (25                                 | )          | (51 | ) |
|                                                                               |       |                                |       |   |   |
| Net cash provided by financing activities                                          |       | 2,695                               |       | 3,421 |   |
|                                                                               |       |                                |       |   |   |
| **Net decrease in cash**                                                           |       | (47                                 | )          | (13 | ) |
| **Cash at beginning of the period**                                                |       | 241                                 |       | 121 |   |
| **Cash at end of period**                                                          |       | $                                   | 194        |   | $ | 108 |   |

See notes to condensed consolidated financialstatements.

 

3

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**1.     Basis of Presentation**

 

The accompanying condensed consolidatedfinancial statements include the accounts of Allstate Life Insurance Company (“ALIC”)and its wholly owned subsidiaries (together with ALIC, the “Company”). ALIC iswholly owned by Allstate Insurance Company (“AIC”), a wholly owned subsidiaryof The Allstate Corporation (the “Corporation”).

 

The condensed consolidated financialstatements and notes as of June 30, 2005 and for the three-month andsix-month periods ended June 30, 2005 and 2004 are unaudited.  The condensed consolidated financialstatements reflect all adjustments (consisting only of normal recurringaccruals), which are, in the opinion of management, necessary for the fairpresentation of the financial position, results of operations and cash flowsfor the interim periods.  These condensedconsolidated financial statements and notes should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31,2004.  The results of operations for theinterim periods should not be considered indicative of results to be expectedfor the full year.

 

To conform to the 2005 presentation, certainamounts in the prior year’s condensed consolidated financial statements andnotes have been reclassified.

 

Equity securities include common stocks,non-redeemable preferred stocks and limited partnership interests.  Common stocks and non-redeemable preferredstocks had a carrying value of $49 million and $42 million, and cost of $40million and $33 million at June 30, 2005 and December 31, 2004,respectively.  Investments in limitedpartnership interests had a carrying value of $223 million and $172 million at June 30,2005 and December 31, 2004, respectively.

 

Non-cash investment exchanges andmodifications, which primarily reflect refinancings of fixed income securities,totaled $19 million and $33 million for the six months ended June 30, 2005and 2004, respectively.

 

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

 

**Reinsurance**

 

In the first quarter of 2005, theCompany received fixed income securities with a fair value and amortized costof $381 million and $358 million, respectively, and $5 million of accruedinvestment income for the settlement of a $386 million premiumreceivable due from AmericanHeritage Life Insurance Company (“AHL”), an unconsolidated affiliate of theCompany.  The receivable related to twocoinsurance agreements entered into in 2004 whereby the Company assumed certain interest-sensitive lifeinsurance and fixed annuity contracts from AHL. Since the transaction was between affiliates under common control, thesecurities were recorded at amortized cost as of the date of settlement.   The difference between the amortized costand fair value of the securities was recorded as a non-cash dividend of $23million ($15 million, after-tax).

 

**Investments**

 

In the first quarter of 2005, the Company purchased fixed incomesecurities from AIC.  The Company paid$655 million in cash for the securities, which includes the fair value of thesecurities of $649 million and $6 million for accrued investment income.  Since the transaction was between affiliatesunder common control, the securities were recorded at the amortized cost of$623 million as of the date of sale.  The difference between the amortized cost and fair value of thesecurities was recorded as a dividend of $26 million ($16 million, after-tax).

 

**Debt**

 

In the second quarter of 2005, the Company repaid the $75 million ofshort-term debt issued to the Corporation in the first quarter of 2005 pursuantto an intercompany loan agreement.

 

**Surplus Notes**

 

On August 1, 2005, ALIC entered into an agreementwith Kennett Capital, Inc. (“Kennett”), an unconsolidated affiliate ofALIC, whereby ALIC sold to Kennett $100 million 5.06% surplus notes due July 1,2035 issued by ALIC Reinsurance Company (“ALIC Re”), a wholly owned subsidiaryof ALIC.   As payment, Kennett issued afull recourse 4.86% note due July 1, 2035 to ALIC for the sameamount.  As security for the performance of Kennett’sobligations under the agreement and note, Kennett granted ALIC a pledge of andsecurity interest in Kennett’s right, title and interest in the surplus notesand their proceeds. Under the terms of

 

4

----

 

the agreement,ALIC may sell and Kennett may choose to buy additional surplus notes, if andwhen additional surplus notes are issued by ALIC Re and purchased from ALIC Reby ALIC.  No surplus notes had beenissued or sold as of June 30, 2005.

 

**3.****             ****Reinsurance**

 

The effects of reinsurance on premiums and contract charges are asfollows:

 
| ** **                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                                  | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| **Premiums and contract charges**                  |       |                                  |       |                                |       |   |   |   |   |
| Direct                                             |       | $                                     | 516        |                                | $          | 509 |   | $ | 1,054 |   | $ | 1,025 |   |
| Assumed                                            |       |                                  |       |                                |       |   |   |   |   |
| Affiliate                                          |       | 4                                     |       | 5                                   |       | 8 |   | 9 |   |
| Non-affiliate                                      |       | 7                                     |       | (1                                  | )          | 13 |   | 4 |   |
| Ceded—non-affiliate (1)                       |       | (151                                  | )          | (126                                | )          | (298 | ) | (266 | ) |
|                                               |       |                                  |       |                                |       |   |   |   |   |
| Premiums and contract charges, net of  reinsurance |       | $                                     | 376        |                                | $          | 387 |   | $ | 777 |   | $ | 772 |   |

 

----

(1) Cedednon-affiliate is comprised of only premiums.

 

The effects of reinsurance on contract benefits are as follows:

 
| ** **                            | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                     | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| **Contract benefits**                 |       |                                  |       |                                |       |   |   |   |   |
| Direct                                |       | $                                     | 437        |                                | $          | 416 |   | $ | 924 |   | $ | 831 |   |
| Assumed                               |       |                                  |       |                                |       |   |   |   |   |
| Affiliate                             |       | 3                                     |       | 5                                   |       | 6 |   | 7 |   |
| Non-affiliate                         |       | 7                                     |       | 3                                   |       | 11 |   | 3 |   |
| Ceded                                 |       |                                  |       |                                |       |   |   |   |   |
| Non-affiliate                         |       | (110                                  | )          | (111                                | )          | (257 | ) | (192 | ) |
|                                  |       |                                  |       |                                |       |   |   |   |   |
| Contract benefits, net of reinsurance |       | $                                     | 337        |                                | $          | 313 |   | $ | 684 |   | $ | 649 |   |

 

Effective January 1, 2004, the Company adopted Statement ofPosition 03-1, “Accounting and Reporting by Insurance Enterprises forcertain Nontraditional Long Duration Contracts and for Separate Accounts” and,in connection therewith, recorded a cumulative effect of change in accountingprinciple due to an increase in benefit reserves of $94 million, after-tax($145 million, pre-tax).  The increase inbenefit reserves was comprised of direct, assumed non-affiliate and cedednon-affiliate benefit reserves of $155 million, $4 million and $14 million,respectively.

 

**4.****             ****Guarantees and Contingent Liabilities**

 

**Guarantees**

 

The Companyowns certain fixed income securities that obligate the Company to exchangecredit risk or to forfeit principal due, depending on the nature or occurrenceof specified credit events for the referenced entities.  In the event all such specified credit eventswere to occur, the Company’s maximum amount at risk on these fixed incomesecurities, as measured by their par value was $143 million at June 30,2005.  The obligations associated withthese fixed income securities expire at various times during the next sevenyears.

 

5

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Lincoln Benefit Life Company (“LBL”), awholly owned subsidiary of ALIC, has issued universal life insurance contractsto third parties who finance the premium payments on the universal lifeinsurance contracts through a commercial paper program.  LBL has issued a repayment guarantee on theoutstanding commercial paper balance that is fully collateralized by the cashsurrender value of the universal life insurance contracts.  At June 30, 2005, the amount due underthe commercial paper program is $301 million and the cash surrender value ofthe policies is $306 million.  Therepayment guarantee expires April 30, 2006.

 

In the normal course of business, the Companyprovides standard indemnifications to counterparties in contracts in connectionwith numerous transactions, including acquisitions and divestitures.  The types of indemnifications typicallyprovided include indemnifications for breaches of representations andwarranties, taxes and certain other liabilities, such as third partylawsuits.  The indemnification clausesare often standard contractual terms and were entered into in the normal courseof business based on an assessment that the risk of loss would be remote.  The terms of the indemnifications vary induration and nature.  In many cases, themaximum obligation is not explicitly stated and the contingencies triggeringthe obligation to indemnify have not occurred and are not expected tooccur.  Consequently, the maximum amountof the obligation under such indemnifications is not determinable.  Historically, the Company has not made anymaterial payments pursuant to these obligations.

 

The aggregate liability balance related toall guarantees was not material as of June 30, 2005.

 

**Regulation**

 

The Company issubject to changing social, economic and regulatory conditions.  Recent state and federal regulatoryinitiatives and proceedings have included efforts to impose additionalregulations regarding agent and broker compensation and otherwise expandoverall regulation of insurance products and the insurance industry. Theultimate changes and eventual effects of these initiatives on the Company’sbusiness, if any, are uncertain.

 

**Legal and Regulatory Proceedings and Inquiries**

 

**Background**

 

The Company and certain of its affiliates are named as defendants in anumber of lawsuits and other legal proceedings arising out of various aspectsof its business.  In addition, from timeto time regulatory examinations or inquiries are pending involving theCompany.  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, differences in applicable laws and judicialinterpretations, the length of time before many of these matters might beresolved by settlement or through litigation and, in some cases, the timing oftheir resolutions relative to other similar cases brought against othercompanies, the fact that some of these matters are putative class actions inwhich a class has not been certified and in which the purported class may notbe clearly defined, the fact that some of these matters involve multi-stateclass actions in which the applicable law(s) for the claims at issue is indispute and therefore unclear, and the current challenging legal environmentfaced by large corporations and insurance companies.

 

•             In these matters,plaintiffs seek a variety of remedies including equitable relief in the form ofinjunctive and other remedies and monetary relief in the form of contractualand extra-contractual damages.  In somecases, the monetary damages sought include punitive damages or are notspecified.  Often more specificinformation beyond the type of relief sought is not available because plaintiffshave not requested more specific relief in their court pleadings.  In those cases where plaintiffs have made aspecific demand for monetary damages, they often specify damages just below ajurisdictional limit regardless of the facts of the case.  This represents the maximum they can seekwithout risking removal from state court to federal court.  In our experience, monetary demands inplaintiffs’ court pleadings bear little relation to the ultimate loss, if any,to the Company.

 

6

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•             For the reasonsspecified above, it is not possible to make meaningful estimates of the amountor range of loss that could result from these matters at this time.  The Company reviews these matters on anon-going basis and follows the provisions of Statement of Financial AccountingStandards 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.  

 

•             In the opinion of theCompany’s management, while the ultimate liability in some of these matters inexcess of amounts currently reserved may be material to the Company’s operatingresults for any particular period if an unfavorable outcome results, none willhave a material adverse effect on the consolidated financial condition of theCompany.

 

**Proceedings**

 

Legal proceedings involving Allstate agencies andAIC may impact the Company, even when the Company is not directly involved,because the Company sells its products through a variety of distributionchannels including Allstate agencies. Consequently, information about the moresignificant of these proceedings is provided in the following paragraph.

 

AIC is defending certain matters relating toits agency 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 contract and ERISA violations, and a lawsuit filed in October 2004by the EEOC alleging age discrimination with respect to a policy limiting therehire of agents affected by the agency program reorganization.  AIC is also defending another action, inwhich a class was certified, filed by former employee agents who terminatedtheir employment 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 EEOClawsuit and class action lawsuit, the trial court issued a memorandum and orderthat, among other things, certified classes of agents, including a mandatoryclass of agents 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 bythe trial court, was the subject of further proceedings on appeal, and has beenreversed and remanded to the trial court in April 2005.  In these matters, plaintiffs seekcompensatory and punitive damages, and equitable relief.  AIC has been vigorously defending theselawsuits and other matters related to its agency program reorganization. Inaddition, AIC has been defending certain matters relating to its life agencyprogram reorganization announced in 2000. These matters have been the subjectof an investigation by the EEOC with respect to allegations of age discriminationand retaliation and conciliation discussions between AIC and the EEOC.   The outcome of these disputes is currentlyuncertain.

 

The Company is defending a number of lawsuitsbrought by plaintiffs challenging trading restrictions the Company adopted inan effort to limit market-timing activity in its variable annuitysub-accounts.  In one case, plaintiffs’motion for summary judgment on their breach of contract claims was granted andthe matter will proceed to trial on damages. In these various lawsuits, plaintiffs seek a variety of remediesincluding monetary and equitable relief. The Company has been vigorously defending these matters, but theiroutcome is currently uncertain.

 

7

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**Other Matters**

 

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 actionsare currently pending that involve the Company and specific aspects of itsconduct of business. Like other members of the insurance industry, the Companyis the target of a number of class action lawsuits and other types ofproceedings, some of which involve claims for substantial or indeterminateamounts.  These actions are based on avariety of issues and target a range of the Company’s practices. The outcome ofthese disputes is currently unpredictable.

 

However, at this time, based on their presentstatus, it is the opinion of management that the ultimate liability, if any, inone or more of the actions described in this “Other Matters” subsection inexcess of amounts currently reserved is not expected to have a material effecton the results of operations, liquidity or financial condition of the Company.

 

**5.  Other Comprehensive Income**

 

The components of other comprehensive incomeon a pretax and after-tax basis are as follows:

 
| ** **                                | ** ** | **Three months ended  June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|
| ** **                                | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **(in millions)**                         | ** ** | **Pretax**                            | ** ** | **Tax** | ** ** | **After -  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After -  tax** | ** ** |
| ** **                                | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized holding gains (losses) arising |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| during the period, net of related offsets |       | $                                     | 618        |   | $ | (216 | ) | $ | 402 |   | $ | (907 | ) | $ | 317 |   | $ | (590 | ) |
| Less: reclassification adjustments        |       | 110                                   |       | (38 | ) | 72 |   | (62 | ) | 21 |   | (41 | ) |
|                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)         |       | $                                     | 508        |   | $ | (178 | ) | 330 |   | $ | (845 | ) | $ | 296 |   | (549 | ) |
|                                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                |       |                                  |       |   |   | 87 |   |   |   |   |   | 55 |   |
| Comprehensive income (loss)               |       |                                  |       |   |   | $ | 417 |   |   |   |   |   | $ | (494 | ) |

 
| ** **                                | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| **(in millions)**                         | ** ** | **Pretax**                          | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains (losses) arising |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| during the period, net of related offsets |       | $                                   | (77        | ) | $ | 27 |   | $ | (50 | ) | $ | (657 | ) | $ | 230 |   | $ | (427 | ) |
| Less: reclassification adjustments        |       | 17                                  |       | (6 | ) | 11 |   | (63 | ) | 22 |   | (41 | ) |
|                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)         |       | $                                   | (94        | ) | $ | 33 |   | (61 | ) | $ | (594 | ) | $ | 208 |   | (386 | ) |
|                                      |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                         |       |                                |       |   |   | 155 |   |   |   |   |   | (29 | ) |
| Comprehensive income (loss)               |       |                                |       |   |   | $ | 94 |   |   |   |   |   | $ | (415 | ) |

 

8

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**6.**              Disposition

** **

In the second quarter of2005, the Company entered into negotiations to sell two of its wholly ownedsubsidiaries, Charter National Life Insurance Company (“Charter”) andIntramerica Life Insurance Company (“Intramerica”), and recognized an estimatedloss on disposition of $5 million ($2 million, after-tax). In August 2005, theCompany reached a definitive agreement to sell Charter and Intramerica.  The sale is pending regulatory approval andis expected to be completed prior to the end of the year.   Upon completion of the sale, existing assetswill decrease by approximately $468 million ($118 million and $291 million areclassified as reinsurance recoverables and separate accounts, respectively) andliabilities will decrease by approximately $445 million ($114 million and $291million are classified as contractholder funds and separate accounts,respectively).   The Company expects toreceive proceeds of approximately $25 million upon closing.

 

9

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Shareholder of

Allstate Life Insurance Company:

 

We havereviewed the accompanying condensed consolidated statement of financialposition of Allstate Life Insurance Company and subsidiaries (the “Company”, anaffiliate of The Allstate Corporation) as of June 30, 2005, and therelated condensed consolidated statements of operations for the three-month andsix-month periods ended June 30, 2005 and 2004, and the condensedconsolidated statements of cash flows for the six-month periods ended June 30,2005 and 2004.  These interim financialstatements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  A review of interim financial informationconsists principally of applying analytical procedures and making inquiries ofpersons 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 awhole.  Accordingly, we do not expresssuch an opinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to such condensed consolidated interim financial statementsfor them to be in conformity with accounting principles generally accepted inthe United States of America.

 

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedstatement of financial position of Allstate Life Insurance Company andsubsidiaries as of December 31, 2004, 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 February 24, 2005,which report includes an explanatory paragraph relating to a change in theCompany’s method of accounting for certain nontraditional long-durationcontracts and separate accounts in 2004 and changes in the methods of accountingfor embedded derivatives in modified coinsurance agreements and variableinterest entities in 2003, we expressed an unqualified opinion on thoseconsolidated financial statements.  Inour opinion, the information set forth in the accompanying condensedconsolidated statement of financial position as of December 31, 2004 isfairly stated, in all material respects, in relation to the consolidatedstatement of financial position from which it has been derived.

 

 
| /s/ Deloitte & Touche LLP |   |
|------------------------------------|--------|
|                               |
|                               |
| Chicago, Illinois                  |
| August 8, 2005                |

 

10

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30,2005 AND 2004**

 

**OVERVIEW**

 

The following discussion highlightssignificant factors influencing the consolidated financial position and resultsof operations of Allstate Life Insurance Company (referred to in this documentas “we”, “our”, “us”, or the “Company”). It should be read in conjunction withthe condensed consolidated financial statements and notes thereto found under Part I.Item 1. contained herein, and with the discussion, analysis, consolidatedfinancial statements and notes thereto in Part I. Item 1. and Part II.Item 7. and Item 8. of the Allstate Life Insurance Company Annual Report on Form 10-Kfor 2004.  We operate as a single segmententity, based on the manner in which financial information is used internallyto evaluate performance and determine the allocation of resources.

 

**HIGHLIGHTS**

 

•                  Revenues increased 18.0% and 15.5% in thesecond quarter and first six months of 2005, respectively, compared to the sameperiods in the prior year.  The increasesin both periods were due to higher net investment income, improved realizedcapital gains and losses and increased contract charges, partially offset bylower premiums.

•                  Net income increased 58.2% in the secondquarter of 2005 compared to the same period in the prior year.  The increase was primarily attributable toimproved realized capital gains and losses and lower operating costs andexpenses, partially offset by higher amortization of DAC and lower grossmargin.  Net income improved by $184million in the first six months of 2005 compared to the same period in the prioryear due to an unfavorable cumulative effect of a change in accountingprinciple of $175 million that contributed to a net loss in the first sixmonths of the prior year of $29 million.

•                  Totalinvestments increased 7.3% to $74.76 billion at June 30, 2005 compared to December 31,2004, due primarily to increased contractholder funds and, to a lesser extent,increased balances associated with securities lending.

•                  Contractholderfund deposits totaled $3.29 billion and $6.54 billion for the second quarterand first six months of 2005, respectively, compared to $3.59 billion and $6.33billion for the second quarter and first six months of 2004, respectively.

 

**OPERATIONS**

** **

We will pursue the following to improvereturn on equity: maintain and develop focused top-tier products, deependistribution partner relationships, improve our cost structure, advance ourenterprise risk management program and leverage the strength of the Allstatebrand name across products and distribution channels.  The execution of our business strategies hasand may continue to involve simplifying our business model by changing thenumber and selection of products being marketed, for example, through suchactions as our previously announced exit from the guaranteed investmentcontract market and the long-term care product market and the sale ofsubstantially all of our direct response distribution business in 2004;terminating underperforming distribution relationships; merging or disposing ofunnecessary and/or non-strategic legal entities, such as the merger ofGlenbrook Life and Annuity Company in 2005 and dispositions for which theanticipated losses are currently reflected in the financial statements;reducing policy administration software systems; and other actions that we maydetermine are appropriate to successfully execute our business strategies.

 

**Premiums** represent revenues generated fromtraditional life, immediate annuities with life contingencies and otherinsurance products that have significant mortality or morbidity risk.

 

**Contract charges** arerevenues generated from interest-sensitive life, variable annuities, fixedannuities and institutional products for which deposits are classified ascontractholder funds or separate accounts liabilities.  Contract charges are assessed against thecontractholder account values for maintenance, administration, cost ofinsurance and surrender prior to contractually specified dates.   As a result, changes in contractholder fundsand separate accounts liabilities are considered in the evaluation of growthand as indicators of future levels of revenues.

 

11

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The following table summarizes premiums and contract charges byproduct.

 
| ** **                                  | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                           | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums**                                |       |                                   |       |                                 |       |   |   |   |   |
| Traditional life                            |       | $                                      | 57         |                                 | $          | 80 |   | $ | 121 |   | $ | 149 |   |
| Immediate annuities with life contingencies |       | 50                                     |       | 66                                   |       | 123 |   | 143 |   |
| Other                                       |       | 6                                      |       | 5                                    |       | 11 |   | 10 |   |
| **Total premiums**                          |       | 113                                    |       | 151                                  |       | 255 |   | 302 |   |
|                                        |       |                                   |       |                                 |       |   |   |   |   |
| **Contract charges**                        |       |                                   |       |                                 |       |   |   |   |   |
| Interest-sensitive life                     |       | 181                                    |       | 161                                  |       | 358 |   | 321 |   |
| Fixed annuities                             |       | 16                                     |       | 14                                   |       | 33 |   | 28 |   |
| Variable annuities                          |       | 66                                     |       | 61                                   |       | 131 |   | 121 |   |
| **Total contract charges**                  |       | 263                                    |       | 236                                  |       | 522 |   | 470 |   |
| **Total premiums and contract charges**     |       | $                                      | 376        |                                 | $          | 387 |   | $ | 777 |   | $ | 772 |   |

 

The following table summarizes premiums and contract charges bydistribution channel.

 
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                       | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              |       |                                  |       |                                |       |   |   |   |   |
| **Premiums**                            |       |                                  |       |                                |       |   |   |   |   |
| Allstate agencies                       |       | $                                     | 67         |                                | $          | 74 |   | $ | 133 |   | $ | 127 |   |
| Independent agents                      |       | 6                                     |       | 11                                  |       | 27 |   | 31 |   |
| Specialized brokers                     |       | 39                                    |       | 51                                  |       | 93 |   | 114 |   |
| Other                                   |       | 1                                     |       | 15                                  |       | 2 |   | 30 |   |
| **Total premiums**                      |       | 113                                   |       | 151                                 |       | 255 |   | 302 |   |
| ** **                              |       |                                  |       |                                |       |   |   |   |   |
| **Contract charges**                    | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate agencies                       |       | 128                                   |       | 116                                 |       | 259 |   | 229 |   |
| Independent agents                      |       | 63                                    |       | 58                                  |       | 119 |   | 117 |   |
| Broker dealers                          |       | 54                                    |       | 48                                  |       | 106 |   | 97 |   |
| Banks                                   |       | 12                                    |       | 9                                   |       | 23 |   | 14 |   |
| Specialized brokers                     |       | 6                                     |       | 5                                   |       | 14 |   | 12 |   |
| Other                                   |       | —                                |       | —                              |       | 1 |   | 1 |   |
| **Total contract charges**              |       | 263                                   |       | 236                                 |       | 522 |   | 470 |   |
| **Total premiums and contract charges** |       | $                                     | 376        |                                | $          | 387 |   | $ | 777 |   | $ | 772 |   |

 

Total premiums declined 25.2% and 15.6% in the second quarter and firstsix months of 2005, respectively, compared to the same periods of 2004.  In both periods, the decline was due to lowerpremiums on traditional life and immediate annuities with life contingencies.

 

Contract charges increased 11.4% and 11.1% in the second quarter andfirst six months of 2005, respectively, compared to the same periods of2004.  These increases were primarily dueto higher contract charges on interest-sensitive life and, to a lesser extent,variable and fixed annuities.  Theincreases in the interest-sensitive life contract charges were attributable toin-force business growth resulting from deposits and credited interest morethan offsetting surrenders and benefits. Higher variable annuity contract charges were the result of increasedaverage account values during the current periods of 2005 compared to the same periodsof 2004, reflecting positive investment results during the second half of 2004in addition to net deposits on variable contracts and higher fees for contractguarantees during 2005.  Fixed annuity

 

12

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contract charges for the secondquarter and first six months of 2005 reflect higher surrender charges comparedwith the same periods in the prior year.

 

*Contractholder funds* representinterest-bearing liabilities arising from the sale of individual andinstitutional products, such as interest-sensitive life, fixed annuities andfunding agreements. The balance of contractholder funds is equal to thecumulative deposits received and interest credited to the contractholder lesscumulative contract maturities, benefits, surrenders, withdrawals and contractcharges for mortality or administrative expenses.

 

The following table shows the changes in contractholder funds.

 
| ** **                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                                               | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      |       |                                  |       |                                |       |   |   |   |   |
| **Contractholder funds, beginning balance**                     |       | $                                     | 55,666     |                                | $          | 46,997 |   | $ | 53,939 |   | $ | 44,914 |   |
|                                                            |       |                                  |       |                                |       |   |   |   |   |
| Impact of adoption of SOP 03-1(1)                               |       | —                                |       | —                              |       | — |   | 421 |   |
|                                                            |       |                                  |       |                                |       |   |   |   |   |
| **Deposits**                                                    |       |                                  |       |                                |       |   |   |   |   |
| Fixed annuities (immediate and deferred)                        |       | 1,527                                 |       | 1,635                               |       | 3,273 |   | 2,851 |   |
| Institutional products (primarily funding  agreements)          |       | 1,325                                 |       | 1,499                               |       | 2,423 |   | 2,600 |   |
| Interest-sensitive life                                         |       | 326                                   |       | 303                                 |       | 638 |   | 609 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | 112                                   |       | 151                                 |       | 206 |   | 271 |   |
| Total deposits                                                  |       | 3,290                                 |       | 3,588                               |       | 6,540 |   | 6,331 |   |
|                                                            |       |                                  |       |                                |       |   |   |   |   |
| **Interest credited**                                           |       | 574                                   |       | 463                                 |       | 1,127 |   | 907 |   |
|                                                            |       |                                  |       |                                |       |   |   |   |   |
| **Maturities, benefits, withdrawals and other  adjustments**    |       |                                  |       |                                |       |   |   |   |   |
| Maturities of institutional products                            |       | (589                                  | )          | (584                                | )          | (1,293 | ) | (1,095 | ) |
| Benefits                                                        |       | (253                                  | )          | (165                                | )          | (470 | ) | (332 | ) |
| Surrenders and partial withdrawals                              |       | (1,076                                | )          | (663                                | )          | (1,863 | ) | (1,251 | ) |
| Contract charges                                                |       | (160                                  | )          | (145                                | )          | (319 | ) | (287 | ) |
| Net transfers to separate accounts                              |       | (77                                   | )          | (103                                | )          | (155 | ) | (234 | ) |
| Fair value hedge adjustments for  institutional products        |       | (53                                   | )          | (135                                | )          | (173 | ) | (112 | ) |
| Other adjustments                                               |       | 6                                     |       | 112                                 |       | (5 | ) | 103 |   |
| Total maturities, benefits, withdrawals and  other adjustments  |       | (2,202                                | )          | (1,683                              | )          | (4,278 | ) | (3,208 | ) |
| ** **                                                      |       |                                  |       |                                |       |   |   |   |   |
| **Contractholder funds, ending balance**                        |       | $                                     | 57,328     |                                | $          | 49,365 |   | $ | 57,328 |   | $ | 49,365 |   |

 

----

(1) The increasein contractholder funds due to the adoption of SOP 03-1 reflects thereclassification of certain products previously included as a component ofseparate accounts to contractholder funds, the reclassification of deferredsales inducements (“DSI”) from contractholder funds to other assets and theestablishment of reserves for certain liabilities that are primarily related toincome and other guarantees provided under fixed annuity, variable annuity andinterest-sensitive life contracts.

 

Contractholderdeposits decreased 8.3% in the second quarter and increased 3.3% in the firstsix months of 2005 compared to the same periods of 2004.  The decline in the second quarter was dueprimarily to lower deposits on institutional products and fixed annuities.  The increase in the first six months was dueprimarily to higher deposits on fixed annuities, partially offset by lowerdeposits on institutional products. Average contractholder funds, excluding the impact of adopting SOP 03-1,increased 17.3% in the second quarter and 17.5% in the first six months of 2005compared to the same periods of 2004. Fixed annuity deposits declined 6.6% in the second quarter and increased14.8% in the first six months of 2005 compared to the same periods in the prioryear.  The decline in the second quarterwas mostly attributable to lower deposits on market value adjusted annuities asa result of increased competition from certificates of deposit.  The increase in the first six months wasprimarily as a result of higher deposits on deferred fixed annuities due tostrong competitive position.  Deposits oninstitutional

 

13

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products declined 11.6% in the second quarterand 6.8% in the first six months of 2005 compared to the same periods in theprior year based on management’s assessment of current marketopportunities.  Increases inshort-term interest rates without corresponding increases in longer term rateshas generally reduced the competitiveness of fixed annuity products relative toshorter term deposit products such as money market funds and certificates ofdeposit.  A continuation of thisenvironment could reduce the level of expected fixed annuity deposits.  In addition, the continuing decline incorporate debt issuances reduces the supply of fixed income securitiesavailable to meet return requirements on institutional product issuances.  This could result in decreased institutionalproduct deposits.

 

Surrenders and partial withdrawals increased 62.3% in the secondquarter and 48.9% in the first six months of 2005 compared to the same periodsof 2004 reflecting an annualized withdrawal rate of 9.9% for the second quarterand 8.9% for the first six months of 2005 based on the beginning of periodcontractholder funds balance excluding institutional product reserves.  This compares to an annualized withdrawalrate of 7.3% for the second quarter and 7.2% for the first six months of2004.  These increases were primarilyattributable to higher surrenders of market value adjusted annuities as aportion of these contracts entered a 30-45 day window in which there wereno surrender charges or market value adjustments during the period.  Surrenders and withdrawals may vary withchanges in interest rates and equity market conditions and the aging of ourin-force contracts.

 

***Separate accountsliabilities***represent contractholders’ claims to the related separate accounts assets.  Separate accounts liabilities primarily arisefrom the sale of variable annuity contracts and variable life insurancepolicies.

 

**The following table shows the changes inseparate accounts liabilities.**

 
| ** **                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                                               | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Separate accounts liabilities, beginning  balance**           |       | $                                     | 14,087     |                                | $          | 13,550 |   | $ | 14,377 |   | $ | 13,425 |   |
|                                                            |       |                                  |       |                                |       |   |   |   |   |
| Impact of adoption of SOP 03-1(1)                               |       | —                                |       | —                              |       | — |   | (204 | ) |
|                                                            |       |                                  |       |                                |       |   |   |   |   |
| Variable annuity and life deposits                              |       | 491                                   |       | 474                                 |       | 928 |   | 961 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | (112                                  | )          | (151                                | )          | (206 | ) | (271 | ) |
| Net deposits                                                    |       | 379                                   |       | 323                                 |       | 722 |   | 690 |   |
| Investment results                                              |       | 296                                   |       | 45                                  |       | 78 |   | 361 |   |
| Contract charges                                                |       | (69                                   | )          | (63                                 | )          | (136 | ) | (125 | ) |
| Net transfers from fixed accounts                               |       | 77                                    |       | 103                                 |       | 155 |   | 234 |   |
| Surrenders and benefits                                         |       | (429                                  | )          | (394                                | )          | (855 | ) | (817 | ) |
| **Separate accounts liabilities, ending  balance**              |       | $                                     | 14,341     |                                | $          | 13,564 |   | $ | 14,341 |   | $ | 13,564 |   |

 

----

(1)  Thedecrease in separate accounts due to the adoption of SOP 03-1 reflectsthe reclassification of certain products previously included as a component ofseparate accounts to contractholder funds.

 

Separate accountsliabilities declined slightly as of June 30, 2005 compared to December 31,2004.  The decrease was attributable tonet deposits, transfers from fixed accounts and modest investment results beingmore than offset by surrenders and benefits and contract charges.  Variable annuity and life deposits in thesecond quarter of 2005 increased 3.6% compared to the same period in the prioryear due to higher variable annuity deposits. The impact of recent enhancements to the underlying investment funds,the guaranteed accumulation benefit, the guaranteed withdrawal benefit and ournew marketing approach are beginning to have a positive impact on variableannuity deposits.  Variable annuitycontractholders often allocate a significant portion of their initial variableannuity contract deposit into a fixed rate investment option.  The level of this activity is reflected abovein the deposits allocated to fixed accounts, while all other transfer activitybetween the fixed and separate accounts investment options is reflected in net

 

14

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transfers from fixed accounts.  The liability for the fixed portion ofvariable annuity contracts is reflected in contractholder funds.

 

**Net investment income**increased 15.1% in the three months ended June 30, 2005 and 14.3% in thefirst six months of 2005 compared to the same periods of 2004.   The increases in both periods were primarilydue to the effect of higher portfolio balances, partially offset by lowerportfolio yields.  Higher portfoliobalances resulted from the investment of cash flows from operating andfinancing activities related primarily to deposits from fixed annuities, institutionalfunding agreements and interest-sensitive life policies.  Investments as of June 30, 2005increased 7.3% from December 31, 2004. The lower portfolio yields were primarily due to purchases, includingreinvestments, of fixed income securities with yields lower than the currentportfolio average.

 

**Net income** analysisis presented in the following table.

 
| ** **                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                                                                                     | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Premiums                                                                                              |       | $                                     | 113        |                                | $          | 151 |   | $ | 255 |   | $ | 302 |   |
| Contract charges                                                                                      |       | 263                                   |       | 236                                 |       | 522 |   | 470 |   |
| Net investment income                                                                                 |       | 915                                   |       | 795                                 |       | 1,803 |   | 1,578 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments (1)                       |       | 16                                    |       | 12                                  |       | 35 |   | 18 |   |
| Contract benefits                                                                                     |       | (337                                  | )          | (313                                | )          | (684 | ) | (649 | ) |
| Interest credited to contractholder funds(2)                                                          |       | (556                                  | )          | (455                                | )          | (1,093 | ) | (891 | ) |
| **Gross margin**                                                                                      |       | 414                                   |       | 426                                 |       | 838 |   | 828 |   |
|                                                                                                  |       |                                  |       |                                |       |   |   |   |   |
| Amortization of DAC and DSI                                                                           |       | (113                                  | )          | (112                                | )          | (227 | ) | (225 | ) |
| Operating costs and expenses                                                                          |       | (110                                  | )          | (123                                | )          | (226 | ) | (225 | ) |
| Income tax expense                                                                                    |       | (65                                   | )          | (73                                 | )          | (116 | ) | (136 | ) |
| Realized capital gains and losses,  after-tax                                                         |       | 15                                    |       | (44                                 | )          | 16 |   | (61 | ) |
| DAC and DSI amortization relating to  realized capital gains and losses, after-tax                    |       | (43                                   | )          | (3                                  | )          | (104 | ) | (13 | ) |
| Reclassification of periodic settlements  and accruals on non-hedge derivative instruments, after-tax |       | (10                                   | )          | (7                                  | )          | (22 | ) | (11 | ) |
| Loss on disposition of operations,  after-tax                                                         |       | (1                                    | )          | (9                                  | )          | (4 | ) | (11 | ) |
| Cumulative effect of change in accounting  principle, after-tax                                       |       | —                                |       | —                              |       | — |   | (175 | ) |
| **Net income (loss)**                                                                                 |       | $                                     | 87         |                                | $          | 55 |   | $ | 155 |   | $ | (29 | ) |

 

----

(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)          Amortizationof DSI is excluded from interest credited to contractholder funds for purposesof calculating gross margin. Amortization of DSI totaled $15 million and $8 million in the threemonths ended June 30, 2005 and 2004, respectively, and $54 million and $21million in first six months of 2005 and 2004, respectively.

 

*Gross margin*,a non-GAAP measure, represents premiums and contract charges, net investmentincome and periodic settlements and accruals on non-hedge derivativeinstruments, less contract benefits and interest credited to contractholderfunds excluding amortization of DSI.  Wereclassify periodic settlements and accruals on non-hedge derivativeinstruments into gross margin to report them in a manner consistent with theeconomically hedged investments, replicated assets or product attributes (e.g.net investment income or interest credited to contractholder funds) and bydoing so, appropriately reflect trends in product performance.  We use gross margin as a component of ourevaluation of the profitability of our life insurance and financial productportfolio.  Additionally, for many of ourproducts, including fixed annuities, variable life and annuities, andinterest-sensitive life insurance, the amortization of DAC and DSI isdetermined based on actual and expected gross margin.  Gross margin is comprised of three componentsthat are utilized to further analyze the business: investment margin, benefitmargin, and contract charges

 

15

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and fees.  We believe grossmargin and its components are useful to investors because they allow for theevaluation of income components separately and in the aggregate when reviewingperformance.  Gross margin, investmentmargin and benefit margin should not be considered as a substitute for netincome and do not reflect 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 previous table.

 

The components of gross margin are reconciled to the correspondingfinancial statement line items in the following tables.

 
| ** **                                                                       | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                       | ** ** | **Investment  Margin**               | ** ** | **Benefit  Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in millions)**                                                                | ** ** | **2005**                             | ** ** | **2004 ****(3)** | ** ** | **2005** | ** ** | **2004 ****(3)** | ** ** | **2005** | ** ** | **2004 ****(3)** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Premiums                                                                         |       | $                                    | —     |   | $ | — |   | $ | 113 |   | $ | 151 |   | $ | — |   | $ | — |   | $ | 113 |   | $ | 151 |   |
| Contract charges                                                                 |       | —                               |       | — |   | 153 |   | 136 |   | 110 |   | 100 |   | 263 |   | 236 |   |
| Net investment income                                                            |       | 915                                  |       | 795 |   | — |   | — |   | — |   | — |   | 915 |   | 795 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments  (1) |       | 16                                   |       | 12 |   | — |   | — |   | — |   | — |   | 16 |   | 12 |   |
| Contract benefits                                                                |       | (129                                 | )          | (125 | ) | (208 | ) | (188 | ) | — |   | — |   | (337 | ) | (313 | ) |
| Interest credited to contractholder  funds(2)                                    |       | (556                                 | )          | (455 | ) | — |   | — |   | — |   | — |   | (556 | ) | (455 | ) |
|                                                                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                             |       | $                                    | 246        |   | $ | 227 |   | $ | 58 |   | $ | 99 |   | $ | 110 |   | $ | 100 |   | $ | 414 |   | $ | 426 |   |

 
| ** **                                                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | **Investment  Margin**             | ** ** | **Benefit  Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in millions)**                                                                | ** ** | **2005**                           | ** ** | **2004 ****(3)** | ** ** | **2005** | ** ** | **2004 ****(3)** | ** ** | **2005** | ** ** | **2004 ****(3)** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Premiums                                                                         |       | $                                  | —     |   | $ | — |   | $ | 255 |   | $ | 302 |   | $ | — |   | $ | — |   | $ | 255 |   | $ | 302 |   |
| Contract charges                                                                 |       | —                             |       | — |   | 303 |   | 265 |   | 219 |   | 205 |   | 522 |   | 470 |   |
| Net investment income                                                            |       | 1,803                              |       | 1,578 |   | — |   | — |   | — |   | — |   | 1,803 |   | 1,578 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments  (1) |       | 35                                 |       | 18 |   | — |   | — |   | — |   | — |   | 35 |   | 18 |   |
| Contract benefits                                                                |       | (263                               | )          | (256 | ) | (421 | ) | (393 | ) | — |   | — |   | (684 | ) | (649 | ) |
| Interest credited to contractholder  funds(2)                                    |       | (1,093                             | )          | (891 | ) | — |   | — |   | — |   | — |   | (1,093 | ) | (891 | ) |
|                                                                             |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                             |       | $                                  | 482        |   | $ | 449 |   | $ | 137 |   | $ | 174 |   | $ | 219 |   | $ | 205 |   | $ | 838 |   | $ | 828 |   |

 

----

(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)          Amortization of DSI is excluded from interestcredited to contractholder funds for purposes of calculating gross margin.  Amortization of DSI totaled $15 million and$8 million in the three months ended June 30, 2005 and 2004, respectively,and $54 million and $21 million in the first six months of 2005 and 2004,respectively.

(3)          The prior period has been restated to conformto the current period presentation.  Inconnection therewith, contract charges related to guaranteed minimum death,income, accumulation and withdrawal benefits on variable annuities have beenreclassified to benefit margin from maintenance charges.  Additionally, amounts previously presented asmaintenance charges and surrender charges are now presented in the aggregate ascontract charges and fees.  Thesereclassifications did not result in a change in gross margin.

 

16

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Gross margin declined 2.8% in the second quarter of 2005 and increased1.2% in the first six months of 2005 compared to the same periods of 2004.  The decline in the three-month period was theresult of a decrease in the benefit margin, partially offset by a higherinvestment margin and contract charges and fees.  The increase in the six-month period was dueto a higher investment margin and contract charges and fees, partially offsetby a lower benefit margin.

 

*Investment margin* is a component of grossmargin, both of which are non-GAAP measures. Investment margin represents the excess of net investment income andperiodic settlements and accruals on non-hedge derivative instruments overinterest credited to contractholder funds and the implied interest onlife-contingent immediate annuities included in the reserve for life-contingentcontract benefits.  Amortization of DSIis excluded from interest credited to contractholder funds for purposes ofcalculating investment margin.  We useinvestment margin to evaluate our profitability related to the differencebetween investment returns on assets supporting certain products and amountscredited to customers (“spread”) during a fiscal period.

 

Investmentmargin by product group is shown in the following table.

 
| ** **              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**       | ** ** | **2005**                              | ** ** | **2004****(1)**                     | ** ** | **2005** | ** ** | **2004****(1)** | ** ** |
| Annuities               |       | $                                     | 174        |                                | $          | 156 |   | $ | 333 |   | $ | 304 |   |
| Life insurance          |       | 45                                    |       | 41                                  |       | 92 |   | 85 |   |
| Institutional products  |       | 27                                    |       | 30                                  |       | 57 |   | 60 |   |
| Total investment margin |       | $                                     | 246        |                                | $          | 227 |   | $ | 482 |   | $ | 449 |   |

 

----

(1) The prior period has beenrestated to conform to the current period presentation.

 

Investment margin increased 8.4% in thesecond quarter of 2005 and 7.3% in the first six months of 2005 compared to thesame periods of 2004 due to higher average contractholder funds, partiallyoffset by lower weighted average investment spreads on interest-sensitive life.  As of June 30, 2005, 75% of ourinterest-sensitive life and fixed annuity contracts, excluding market valueadjusted annuities and equity indexed annuities, have a guaranteed creditingrate of 3% or higher.  Of thesecontracts, 76% have crediting rates that are at the minimum as of June 30,2005.  For all interest-sensitive lifeand fixed annuity contracts, excluding market value adjusted annuities andequity indexed annuities, the approximate difference between the weightedaverage crediting rate and the average guaranteed crediting rate is 49 basispoints as of June 30, 2005 compared to 51 basis points as of March 31,2005.

 

The following table summarizes the annualizedweighted average investment yield, interest crediting rates and investmentspreads for the three months ended June 30.

 
| ** **                                                                      | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spreads** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                               | ** ** | **2004**                                      | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest-sensitive life                                                         |       | 6.3                                    | %          | 6.6                                           | %          | 4.8                                      | %          | 4.7 | % | 1.5 | % | 1.9 | % |
| Fixed annuities – deferred annuities                                       |       | 5.5                                    |       | 5.8                                           |       | 3.8                                      |       | 4.1 |   | 1.7 |   | 1.7 |   |
| Fixed annuities – immediate annuities with  and without life contingencies |       | 7.4                                    |       | 7.6                                           |       | 6.7                                      |       | 6.9 |   | 0.7 |   | 0.7 |   |
| Institutional                                                                   |       | 4.2                                    |       | 2.8                                           |       | 3.3                                      |       | 1.8 |   | 0.9 |   | 1.0 |   |
| Investments supporting capital, traditional  life and other products            |       | 7.1                                    |       | 6.8                                           |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

17

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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 Spreads** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                               | ** ** | **2004**                                      | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest-sensitive life                                                         |       | 6.3                                    | %          | 6.6                                           | %          | 4.7                                      | %          | 4.7 | % | 1.6 | % | 1.9 | % |
| Fixed annuities – deferred annuities                                       |       | 5.5                                    |       | 5.8                                           |       | 3.8                                      |       | 4.1 |   | 1.7 |   | 1.7 |   |
| Fixed annuities – immediate annuities with  and without life contingencies |       | 7.4                                    |       | 7.6                                           |       | 6.7                                      |       | 6.9 |   | 0.7 |   | 0.7 |   |
| Institutional                                                                   |       | 4.1                                    |       | 2.9                                           |       | 3.1                                      |       | 1.9 |   | 1.0 |   | 1.0 |   |
| Investments supporting capital, traditional  life and other products            |       | 7.0                                    |       | 6.9                                           |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

The following table summarizes the liabilities for these contracts andpolicies.

 
| ** **                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                                                      | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Fixed annuities – immediate annuities with  life contingencies    |       | $                                   | 7,823      |   | $ | 7,549 |   |
| Other life contingent contracts and other                              |       | 4,235                               |       | 2,984 |   |
| Reserve for life-contingent contract  benefits                         |       | $                                   | 12,058     |   | $ | 10,533 |   |
|                                                                   |       |                                |       |   |   |
| Interest-sensitive life                                                |       | $                                   | 7,832      |   | $ | 6,886 |   |
| Fixed annuities – deferred annuities                              |       | 33,031                              |       | 27,742 |   |
| Fixed annuities – immediate annuities  without life contingencies |       | 3,341                               |       | 3,041 |   |
| Institutional                                                          |       | 12,609                              |       | 11,180 |   |
| Market value adjustments related to  derivative instruments and other  |       | 515                                 |       | 516 |   |
| Contractholder funds                                                   |       | $                                   | 57,328     |   | $ | 49,365 |   |

 

*Benefit margin*is a component of gross margin,both of which are non-GAAP measures. Benefit margin represents life and life-contingent immediate annuitypremiums, cost of insurance contract charges and variable annuity contract chargesfor contract guarantees less contract benefits. Benefit margin excludes the implied interest on life-contingentimmediate annuities, which is included in the calculation of investment margin.  We use the benefit margin to evaluate ourunderwriting performance, as it reflects the profitability of our products withrespect to mortality or morbidity risk during a fiscal period.

 

Benefit marginby product group is shown in the following table.

 
| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**    | ** ** | **2005**                              | ** ** | **2004****(1)**                     | ** ** | **2005** | ** ** | **2004****(1)** | ** ** |
| Life insurance       |       | $                                     | 83         |                                | $          | 104 |   | $ | 176 |   | $ | 194 |   |
| Annuities            |       | (25                                   | )          | (5                                  | )          | (39 | ) | (20 | ) |
| Total benefit margin |       | $                                     | 58         |                                | $          | 99 |   | $ | 137 |   | $ | 174 |   |

 

----

(1) Theprior period has been restated to conform to the current period presentation.

 

Benefit margin declined 41.4% in the secondquarter of 2005 and 21.3% in the first six months of 2005 compared to the sameperiods of 2004.  The decline in bothperiods was primarily attributable to

 

18

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unfavorable mortality experience on immediate annuities with lifecontingences and the effect of the disposal of substantially all of our directresponse distribution business in the prior year, partially offset by growth ofour in force business.  In addition, thesix-month period was unfavorably impacted by an increase in the reserve forguarantees related to variable contracts of $9 million.  This increase resulted from our annualcomprehensive evaluation of the assumptions used in our valuation models whichresulted in a refined measurement of exposure, partially offset by better thananticipated equity market performance. There was no comparable 2004 adjustment to reserves for variablecontract guarantees, because the reserves were established in the first quarterof 2004 as part of the cumulative effect of the change in accounting for suchguarantees.

 

Upon the adoption of Statement of Position No. 03-1,“Accounting and Reporting by Insurance Enterprises for Certain NontraditionalLong-Duration Contracts and for Separate Accounts”, on January 1, 2004,reserves were established for death and income benefits provided under variableannuities and secondary guarantees on certain interest-sensitive life contractsand fixed annuities.

 

Annuity benefit margin will continue to beadversely impacted by certain closed blocks of life-contingent immediateannuities whose benefit payments are anticipated to extend beyond theiroriginal pricing expectations.  The annuitybenefit margin in future periods will fluctuate based on the timing ofannuitant deaths on these life-contingent immediate annuities and the annual evaluation of assumptions used in ourvaluation models for variable and fixed annuity guarantees.

 

*Amortization of DAC and DSI*,excluding amortization related to realized capital gains and losses, for thesecond quarter and first six months of 2005, were consistent with the sameperiods in the prior year.  DAC and DSIamortization related to realized capital gains and losses, after-tax, increased$40 million and $91 million in the three and six month periods ended June 30,2005, respectively, compared to the same periods in the prior year due toincreased realized capital gains on investments supporting certain fixedannuities.

 

In the first quarter of 2005, we performedour annual comprehensive evaluation of the assumptions used in our valuationmodels for all investment products, including variable and fixed annuities andinterest-sensitive and variable life products, which resulted in net DAC andDSI amortization acceleration of $7 million (commonly referred to as “DAC andDSI unlocking”).  The DAC and DSIunlocking includes amortization acceleration on fixed annuities of $62 millionand $3 million on interest-sensitive and variable life products, partiallyoffset by amortization deceleration on variable annuities of $58 million.  The amortization acceleration on fixedannuities was primarily due to higher than expected lapses on market valueadjusted annuities and faster than anticipated portfolio yield declines.  The amortization deceleration on variableannuities was mostly attributable to better than anticipated equity marketperformance and persistency.

 

In the prior year, the comparable DAC and DSIunlocking was a net acceleration of amortization of $0.5 million, whichincluded deceleration of amortization related to interest-sensitive life andacceleration of amortization related to fixed annuities.

 

*Operating costs and expenses* declined 10.6% inthe three months ended June 30, 2005 and increased 0.4% in the first sixmonths of 2005 compared to the same periods in the prior year.  The following table summarizes operatingcosts and expenses.

 
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in millions)**                  | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                               |       |                                  |       |                                |       |   |   |   |   |
| Non-deferrable acquisition costs   |       | $                                     | 37         |                                | $          | 38 |   | $ | 76 |   | $ | 69 |   |
| Other operating costs and expenses |       | 73                                    |       | 85                                  |       | 150 |   | 156 |   |
| Total operating costs and expenses |       | $                                     | 110        |                                | $          | 123 |   | $ | 226 |   | $ | 225 |   |

 

19

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The decline in other operating costs andexpenses in the second quarter of 2005 compared to the same period in the prioryear was attributable to initiatives to reduce back office expenses and theeffect of a change in the financial statement classification of a reinsuranceceding allowance, partially offset by higher litigation expenses.  Total operating costs and expenses in thefirst six months of 2005 were consistent with the same period in the prior yearas the items noted for the second quarter of 2005 were almost entirely offsetby the effect of administrative expense reimbursements recorded in 2004 relatedto our direct response distribution business that was sold in 2004 and higherlicensing, distribution and guaranty fund expenses in 2005.

 

**INVESTMENTS**

 

An important component of our financial results is the return on ourinvestment portfolio.  The composition ofthe investment portfolio at June 30, 2005 is presented in the table below.

 
| **(in millions)**           | ** ** | **Investments** | ** ** | **Percent to  total** | ** ** |
|-----------------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                  | ** ** | ** **      | ** ** | ** **            | ** ** |
| Fixed income securities (1) |       | $               | 64,453     |                  | 86.2       | % |
| Mortgage loans              |       | 7,598           |       | 10.2                  |       |
| Equity securities           |       | 272             |       | 0.4                   |       |
| Short-term                  |       | 1,194           |       | 1.6                   |       |
| Policy loans                |       | 716             |       | 0.9                   |       |
| Other                       |       | 529             |       | 0.7                   |       |
| Total                       |       | $               | 74,762     |                  | 100.0      | % |

 

----

(1)  Fixed income securities are carried at fair value.  Amortized cost basis for these securities was$60.7 billion.

 

Total investments increased to $74.76 billion at June 30, 2005from $69.69 billion at December 31, 2004, primarily due to positive cashflows from operating and financing activities and increased funds associatedwith securities lending.

 

Total investments at amortized cost related to collateral, due tosecurities lending and other security repurchase and resale transactions,increased to $3.49 billion at June 30, 2005, from $2.93 billion at December 31,2004.

 

At June 30, 2005, 93.6% of the fixed income securities portfoliowas rated investment grade, which is defined as a security having a rating fromthe National Association of Insurance Commissioners (“NAIC”) of 1 or 2; arating of Aaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBB fromS&P, Fitch or Dominion; or a comparable internal rating if an externallyprovided rating is not available.

 

The unrealized net capital gains on fixedincome and equity securities at June 30, 2005 were $3.78 billion, anincrease of $448 million or 13.4% since December 31, 2004.  The net unrealized gain for the fixed incomeportfolio totaled $3.78 billion, comprised of $3.93 billion of unrealized gainsand $154 million of unrealized losses at June 30, 2005.  This is compared to a net unrealized gain forthe fixed income portfolio totaling $3.33 billion at December 31, 2004,comprised of $3.49 billion of unrealized gains and $163 million of unrealizedlosses.

 

Of the gross unrealized losses in the fixedincome portfolio at June 30, 2005, $112 million or 72.7% were related toinvestment grade securities and are believed to be primarily a result of arising interest rate environment.  Of theremaining $42 million of losses in the fixed income portfolio, $29 million or69.0% were in the corporate fixed income portfolio and $13 million or 31.0%were in the asset-backed securities portfolio. The $29 million of corporate fixed income gross unrealized losses were primarilycomprised of securities in the consumer goods, communications, financialservices and transportation sectors.  Thegross unrealized losses in these sectors were primarily company specific andinterest rate related.  Approximately$16.4 million of the total gross unrealized losses in the corporate fixedincome portfolio were associated with the automobile industry, which includesdirect debt issuances of automobile manufacturers, captive automotive financingcompanies and automobile parts and equipment sellers.  Values in the automobile industry wereprimarily depressed due to company specific conditions.  Additionally, approximately $7

 

20

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million of the total gross unrealized losses in the corporate fixedincome portfolio and $11 million of the total gross unrealized losses in theasset-backed securities portfolio were associated with the airline industry forwhich values were depressed due to company or issue specific conditions andeconomic issues, including fuel costs. We expect eventual recovery of these securities.  Every security was included in our portfoliomonitoring process.

 

The unrealized gain for the common andnon-redeemable preferred stock portfolio totaled $9 million at June 30,2005 and was comprised entirely of unrealized gains.  This is compared to an unrealized gaintotaling $9 million at December 31, 2004, which was also comprisedentirely of unrealized gains.

 

Our portfolio monitoring process identifiesand evaluates fixed income and equity securities whose carrying value may beother than temporarily impaired.  Theprocess includes a quarterly review of all securities using a screening processto identify those securities whose fair value compared to amortized cost forfixed income securities or cost for equity securities is below establishedthresholds for certain time periods, or which are identified through othermonitoring criteria such as ratings downgrades or payment defaults.  We also recognize impairment on securities inan unrealized loss position for which we do not have the intent and ability tohold until recovery.

 

We also monitor the quality of our fixedincome portfolio by categorizing certain investments as “problem”, “restructured”or “potential problem.”  Problem fixedincome securities are securities in default with respect to principal orinterest and/or securities issued by companies that have gone into bankruptcysubsequent to our acquisition of the security. Restructured fixed income securities have rates and terms that are notconsistent with market rates or terms prevailing at the time of 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.

 

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

 
| ** **                                 | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **(in millions)**                          | ** ** | **Amortized  cost**    | ** ** | **Fair  value**            | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** |
| Problem                                    |       | $                      | 89         |                       | $          | 97 |   | 0.1 | % | $ | 71 |   | $ | 71 |   | 0.1 | % |
| Restructured                               |       | 11                     |       | 12                         |       | 0.0 |   | 43 |   | 46 |   | 0.1 |   |
| Potential problem                          |       | 160                    |       | 175                        |       | 0.3 |   | 168 |   | 179 |   | 0.3 |   |
| Total net carrying value                   |       | $                      | 260        |                       | $          | 284 |   | 0.4 | % | $ | 282 |   | $ | 296 |   | 0.5 | % |
| Cumulative write-downs recognized (1) |       | $                      | 223        |                       |       |   |   |   | $ | 231 |   |   |   |   |   |

 

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

 

We have experienced an increase in the amortized cost of fixed incomesecurities categorized as problem as of June 30, 2005 compared to December 31,2004.  The increase was primarily relatedto the addition of a security to the problem category as a result of companyspecific liquidity issues as well as an additional investment in a securitypreviously categorized as problem.  Thedecrease in the amortized cost of fixed income securities categorized asrestructured and potential problem as of June 30, 2005 compared to December 31,2004 was primarily related to dispositions in the potential problemcategory.  Dispositions included sales,where specific developments caused a change in our outlook and intent to holdthe security, and calls.

 

We also evaluated each of these securities through our portfoliomonitoring process at June 30, 2005 and recorded write-downs whenappropriate.  We further concluded thatany remaining unrealized losses on these securities were temporary in natureand that we have the intent and ability to hold until recovery.  While these balances may increase in thefuture, particularly if economic conditions are unfavorable, management expectsthat****the total amount ofsecurities in these categories will remain low relative to the total fixedincome securities portfolio.

 

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**Net Realized Capital Gains and Losses **The following tablepresents the components of realized capital gains and losses and the relatedtax effect.

 
| ** **                                    | ** ** | **Three Months Ended****June 30,** | ** ** | **Six Months Ended****June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                             | ** ** | **2005**                                | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                                    |       |                                  |       |   |   |   |   |
| Write-downs                                   |       | $                                       | (6         | )                                     | $          | (11 | ) | $ | (13 | ) | $ | (45 | ) |
| Dispositions                                  |       | 58                                      |       | (47                                   | )          | 98 |   | (12 | ) |
| Valuation of derivative instruments           |       | (11                                     | )          | (18                                   | )          | (69 | ) | (38 | ) |
| Settlement of derivative instruments          |       | (17                                     | )          | 8                                     |       | 9 |   | — |   |
| Realized capital gains and losses, pretax     |       | 24                                      |       | (68                                   | )          | 25 |   | (95 | ) |
| Income tax (expense) benefit                  |       | (9                                      | )          | 24                                    |       | (9 | ) | 34 |   |
| Realized capital gains and losses,  after-tax |       | $                                       | 15         |                                  | $          | (44 | ) | $ | 16 |   | $ | (61 | ) |

 

Dispositions in the above table includesales, losses recognized in anticipation of dispositions and other transactionssuch as calls and prepayments.  We maysell securities during the period in which fair value has declined belowamortized cost for fixed income securities or cost for equity securities.  In certain situations, new factors such asnegative developments, subsequent credit deterioration, relative valueopportunities, market liquidity concerns and portfolio reallocations cansubsequently change our previous intent to continue holding a security.

 

A changing interest rate environment willalso drive changes in our portfolio duration targets at a tactical level.  A duration target and range is establishedwith an economic view of liabilities relative to a long-term portfolioview.  Tactical duration adjustmentswithin management’s approved ranges are accomplished through both cash markettransactions and derivative activities that generate realized gains and lossesand through new purchases.  As acomponent of our approach to managing portfolio duration, realized gains andlosses on derivative instruments are most appropriately considered in conjunctionwith the unrealized gains and losses on the fixed income portfolio.  This approach mitigates the impacts ofgeneral interest rate changes to the overall financial condition of theCompany.

 

Inthe first quarter of 2005, because of an anticipated rise in interest rates aswell as changes in existing market conditions and long term asset returnassumptions, certain changes were planned within various portfolios.  These included continued asset-liabilitymanagement strategies; on-going comprehensive reviews of our portfolios; andchanges being made to our strategic asset allocation, including a decision topursue yield enhancement strategies.  Atthat time, we identified, in total, approximately $1.3 billion of securities wewould consider selling to achieve these objectives.  Of that $1.3 billion, approximately $1.1billion of securities were in an unrealized loss position, for which werecognized $30 million of write-downs due to a change in intent to hold thesesecurities until recovery.  Securities relatedto $5 million of the write-downs were sold during the second quarter, and wecontinue to consider selling securities with a carrying value of approximately$57 million having write-downs of $2 million. The remaining securities with $23 million of write-downs recognized inthe first quarter have been re-designated as being held to recovery within theavailable-for-sale category, primarily as a consequence of the lower thanexpected interest rate environment.  Ofthis amount, $21 million of write-downs relates to $827 million of affectedsecurities that were identified in connection with yield enhancementstrategies.  The difference between thecurrent carrying value and par value of the re-designated securities will berecognized in net investment income over the remaining life of the securities,pursuant to the guidance in Statement of Position 03-3, “Accounting forCertain Loans or Debt Securities Acquired in a Transfer”.

 

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**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, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Redeemable preferred stock                                                 |       | $                      | 5          |                       | $          | 5 |   |
| Common stock, retained earnings and other  Shareholder’s equity items |       | 5,363                  |       | 5,291                      |       |
| Accumulated other comprehensive income                                     |       | 952                    |       | 1,013                      |       |
| Total shareholder’s equity                                            |       | 6,320                  |       | 6,309                      |       |
| Debt                                                                       |       | 92                     |       | 104                        |       |
| Total capital resources                                                    |       | $                      | 6,412      |                       | $          | 6,413 |   |

 

*Shareholder’s equity*increased $11 million as of June 30, 2005 when compared to December 31,2004, as a result of net income, partially offset by dividends and lowerunrealized capital gains.  The Companyrecorded dividends of $50 million to Allstate Insurance Company (“AIC”, theCompany’s parent) in the first six months of 2005.  In addition, a dividend of $16 million wasrecorded in connection with the purchase of fixed income securities from AICand a non-cash dividend of $15 million was recorded as a result of thesettlement of certain reinsurance transactions with an unconsolidated affiliate(see Note 2 to the condensed consolidated financial statements).

 

*Debt* decreased $12million as of June 30, 2005 compared to December 31, 2004 due to theredemption of mandatorily redeemable preferred stock.  During the second quarter of 2005, $75million of short-term debt that was issued during the first quarter of 2005 toThe Allstate Corporation (“the Corporation”) was repaid.  The short-term debt was issued in accordancewith an intercompany loan agreement.

 

The amount of funds available under the intercompany loan agreement isat the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to allits eligible subsidiaries at any given point in time is limited to $1.00billion.

 

**Financial Ratings and Strength **Our ratings areinfluenced by many factors including our operating and financial performance,asset quality, liquidity, asset/liability management, overall portfolio mix,financial leverage (i.e., debt), and the current level of operatingleverage.  There have been no changes toour insurance financial strength ratings since December 31, 2004.

 

**Liquidity Sources and Uses** As reflected in our Condensed Consolidated Statements of Cash Flows,****higher operating cash flows in the firstsix months of 2005 when compared to the first six months of 2004 primarilyrelated to higher investment income, partially offset by higher policy benefitsand lower life and annuity premiums. Cash flows used in investing activities decreased in the first sixmonths of 2005 due to increased proceeds from sales of securities and higherinvestment collections, partially offset by the investment of higher operatingcash flows.

 

# **Lower cash flow from financing activities during the first six monthsof 2005 when compared to the first six months of 2004 reflect higher fixedannuity withdrawals, institutional product maturities and increased surrendersof market value adjusted annuities.  Forquantification of the changes in contractholder funds, see the operations section ofthe MD&A.**

# ** **

We have accessto additional borrowing to support liquidity through the Corporation asfollows:

 

•                  A commercialpaper program with a borrowing limit of $1.00 billion to cover short-term cashneeds.  As of June 30, 2005, therewere no balances outstanding and therefore the remaining borrowing capacity was$1.00 billion; however, the outstanding balance fluctuates daily.

 

•                  A five-yearrevolving credit facility expiring in 2009 totaling $1.00 billion to covershort-term liquidity requirements.  Thisfacility contains an increase provision that would make up to an additional$500 million available for borrowing provided the increased portion could befully syndicated at a later date among existing or new lenders.  Although the right to borrow under thefacility is not subject to a minimum rating requirement, the costs ofmaintaining the facility and borrowing under it are based on the ratings of oursenior, unsecured, nonguaranteed long-term debt.  There were no borrowings during the first sixmonths of 2005. The total amount outstanding at any point in time under thecombination of the

 

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commercial paper program and the credit facility cannot exceed theamount that can be borrowed under the credit facilities.

 

•                  The capacity ofthe Corporation to issue up to an additional $1.35 billion of debt securities,equity securities, warrants for debt and equity securities, trust preferredsecurities, stock purchase contracts and stock purchase units utilizing theshelf registration statement filed with the Securities and Exchange Commission(“SEC”) in August 2003.

 

**FORWARD-LOOKINGSTATEMENTS AND RISK FACTORS**

** **

This documentcontains “forward-looking statements” that anticipate results based on ourestimates, assumptions and plans that are subject to uncertainty.  These statements are made subject to thesafe-harbor provisions of the Private Securities Litigation Reform Act of1995.  We assume no obligation to updateany forward-looking statements as a result of new information or future eventsor developments.

 

Theseforward-looking statements do not relate strictly to historical or currentfacts and may be identified by their use of words like “plans,” “seeks,” “expects,”“will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets”and other words with similar meanings. 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 statements are 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 coulddiffer materially from those communicated in these forward-lookingstatements.  Factors which could causeactual results to differ materially from those suggested by suchforward-looking statements include but are not limited to those discussed oridentified in this document (including the risks described below) and areincorporated in this Part I, Item 2 by reference to the information setforth in our Annual Report on Form 10-K, Part II, Item 7, underthe caption “Forward-Looking Statements and Risk Factors”.

 

**Actions taken to simplify our business modeland improve profitability may not be successful and may result in losses andcosts.**

 

We are pursuing strategies intended toimprove our return on equity.  Actionsthat we have taken and may continue to take include changing the number andselection of products being marketed, terminating underperforming distributionrelationships, merging or disposing of unnecessary and/or non-strategic legalentities, reducing policy administration software systems, and other actionsthat we may determine are appropriate to successfully execute our businessstrategies.  The actions that we havetaken and may take in the future may not achieve their intended outcome andcould result in lower premiums and contract charges, restructuring costs,losses on disposition or losses related to the discontinuance of individualproducts or distribution relationships.

 

## **Changesin market interest rates may lead to a significant decrease in the sales andprofitability of spread-based products**

##  

Our ability tomanage the  investment margin forspread-based products is dependent upon maintaining profitable spreads betweeninvestment yields and interest crediting rates. As interest rates decrease or remain at low levels, proceeds frominvestments that have matured, prepaid or sold may be reinvested at loweryields, reducing investment margin. Lowering interest-crediting rates can offset decreases in investmentmargin on some products.  However, thesechanges could be limited by market conditions, regulatory or contractualminimum rate guarantees on many contracts and may not match the timing ormagnitude of changes in asset yields. Decreases in the rates offered on products could make those productsless attractive, leading to lower sales and/or changes in the level ofsurrenders and withdrawals for these products. Non-parallel shifts in interest rates, such as increases in short-termrates without accompanying increases in medium- and long-term rates, caninfluence customer demand for fixed annuities, which could impact the level andprofitability of new customer deposits. Increases in market interest rates can also have negative effects, forexample by increasing the attractiveness of other investments, which can leadto higher surrenders at a time when the investment asset values are lower as aresult of the increase in interest rates. For certain products, principally fixed annuity and interest-sensitivelife products, the earned rate on assets could lag behind market yields.  We may react to market conditions byincreasing crediting rates, which

 

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could narrowspreads.  Unanticipated surrenders couldresult in DAC unlocking or affect the recoverability of DAC and therebyincrease expenses and reduce profitability.

 

25

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**Item 4. Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures. *We maintaindisclosure controls and procedures as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934. Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based upon this evaluation, the principalexecutive officer and the principal financial officer concluded that ourdisclosure 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 over Financial Reporting. *During the fiscalquarter ended June 30, 2005, there were no changes in our internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item1.    Legal Proceedings**

 

Information required for this Part II,Item 1, is incorporated by reference to the discussion under the heading “Regulation”and under the heading “Legal and regulatory proceedings and inquiries” in Note4 of the Company’s Condensed Consolidated Financial Statements in Part I,Item 1 of this Form 10-Q.

 

**Item 6.  Exhibits**

 

(a)                                  Exhibits

 

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

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                |   | Allstate Life Insurance Company       |
|---------------------|--------|---------------------------------------|
|                |   | (Registrant)                          |
|                |   |                                  |
|                |   |                                  |
| August 8, 2005 |   | 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**                                                                                                                                                                                                                                                           |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                      |
| 10.1                 |       | Amended  and Restated Service and Expense Agreement between Allstate Insurance  Company, The Allstate Corporation and certain affiliates, effective  January 1, 2004, and effective March 5, 2005 with respect to  Allstate Life Insurance Company of New York. |
|                 |       |                                                                                                                                                                                                                                                                      |
| 10.2                 |       | New  York Insurer Supplement to Amended and Restated Service and Expense Agreement  between Allstate Insurance Company, The Allstate Corporation, Allstate Life  Insurance Company of New York and Intramerica Life Insurance Company,  effective March 5, 2005.     |
|                 |       |                                                                                                                                                                                                                                                                      |
|   15            |       | Acknowledgment  of awareness from Deloitte & Touche LLP, dated  August 8, 2005, concerning unaudited  interim financial information.                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                      |
| 31.1                 |       | Rule 13a-14(a) Certification of Principal Executive  Officer                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                      |
| 31.2                 |       | Rule 13a-14(a) Certification of Principal Financial  Officer                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                      |
|   32            |       | Section 1350 Certifications                                                                                                                                                                                                                                          |

 

E-1

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