**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

----

 

**FORM 10-Q**

 

**Registrantmeets the conditions set forth in General Instruction H (1)(a) and (b) ofForm 10-Q and is therefore filing this Form with the reduceddisclosure format.**

 

**ý****          ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2005**

 

**OR**

 

**o****          ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commissionfile number: 000-31248**

 

**ALLSTATE LIFE INSURANCE COMPANY**

(Exactname of registrant as specified in its charter)

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

 

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

** **

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

 

**Yes****ý****            No****o**

 

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

 

**Yes****o****            No****ý**

 

**Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).**

 

**Yes****o****            No****ý**

 

**As of October 31, 2005, the registranthad 23,800 common shares, $227 par value, outstanding, all of which are held byAllstate Insurance Company.**

 

 

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**ALLSTATELIFE INSURANCE COMPANY**

**INDEXTO QUARTERLY REPORT ON FORM 10-Q**

##### **September 30,2005**

##### ** **

| ** **       | ** **                                                                                                                                     | **PAGE**   |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                                      | ** ** |
|             |                                                                                                                                           |       |
| Item 1.          | Financial Statements                                                                                                                           |       |
|             |                                                                                                                                           |       |
|             | Condensed Consolidated Statements of Operations for the Three-Month  and Nine-Month Periods Ended September 30, 2005 and 2004 (unaudited) | 1          |
|             |                                                                                                                                           |       |
|             | Condensed Consolidated Statements of  Financial Position as of September 30, 2005 (unaudited) and December 31,  2004                 | 2          |
|             |                                                                                                                                           |       |
|             | Condensed Consolidated Statements of Cash  Flows for the Nine-Month Periods Ended September 30, 2005 and 2004  (unaudited)                | 3          |
|             |                                                                                                                                           |       |
|             | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                                              | 4          |
|             |                                                                                                                                           |       |
|             | Report of Independent Registered Public  Accounting Firm                                                                                       | 11         |
|             |                                                                                                                                           |       |
| Item 2.          | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                    | 12         |
|             |                                                                                                                                           |       |
| Item 4.          | Controls and Procedures                                                                                                                        | 27         |
|             |                                                                                                                                           |       |
| **PART II** | **OTHER INFORMATION**                                                                                                                          | ** ** |
|             |                                                                                                                                           |       |
| Item 1.          | Legal Proceedings                                                                                                                              | 28         |
|             |                                                                                                                                           |       |
| Item 6.          | Exhibits                                                                                                                                       | 28         |

 

----

 

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

**ITEM 1. FINANCIAL STATEMENTS**

 

**ALLSTATELIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                                                                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(in millions)**                                                                                                        | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                               | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)**        | ** ** |
| **Revenues**                                                                                                             |       |                   |       |                   |       |   |   |   |   |
| Premiums                                                                                                                 |       | $                      | 104        |                   | $          | 141 |   | $ | 359 |   | $ | 443 |   |
| Contract charges                                                                                                         |       | 275                    |       | 244                    |       | 797 |   | 714 |   |
| Net investment income                                                                                                    |       | 942                    |       | 828                    |       | 2,745 |   | 2,406 |   |
| Realized capital gains and losses                                                                                        |       | 26                     |       | (52                    | )          | 51 |   | (147 | ) |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
|                                                                                                                     |       | 1,347                  |       | 1,161                  |       | 3,952 |   | 3,416 |   |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
| **Costs and expenses**                                                                                                   |       |                   |       |                   |       |   |   |   |   |
| Contract benefits                                                                                                        |       | 316                    |       | 332                    |       | 1,000 |   | 981 |   |
| Interest credited to contractholder funds                                                                                |       | 589                    |       | 485                    |       | 1,736 |   | 1,397 |   |
| Amortization of deferred policy acquisition  costs                                                                       |       | 117                    |       | 126                    |       | 450 |   | 350 |   |
| Operating costs and expenses                                                                                             |       | 99                     |       | 104                    |       | 325 |   | 329 |   |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
|                                                                                                                     |       | 1,121                  |       | 1,047                  |       | 3,511 |   | 3,057 |   |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
| Gain (loss) on disposition of operations                                                                                 |       | 1                      |       | —                 |       | (7 | ) | (17 | ) |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
| **Income from operations before income tax  expense and cumulative effect of change in accounting principle, after-tax** |       | 227                    |       | 114                    |       | 434 |   | 342 |   |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
| Income tax expense                                                                                                       |       | 68                     |       | 38                     |       | 120 |   | 120 |   |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
| **Income before cumulative effect of change  in accounting principle, after-tax**                                        |       | 159                    |       | 76                     |       | 314 |   | 222 |   |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
| Cumulative effect of change in accounting  principle, after-tax                                                          |       | —                 |       | —                 |       | — |   | (175 | ) |
|                                                                                                                     |       |                   |       |                   |       |   |   |   |   |
| **Net income**                                                                                                           |       | $                      | 159        |                   | $          | 76 |   | $ | 314 |   | $ | 47 |   |

 

See notes to condensed consolidatedfinancial statements.

 

1

----

 

**ALLSTATELIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFFINANCIAL POSITION**

 
| ** **                                                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions, except par  value data)**                                                                               | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                                                     | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                     |       |                   |       |                  |       |
| Investments                                                                                                                    |       |                   |       |                  |       |
| Fixed income securities, at fair value  (amortized cost $59,867 and $55,964)                                                   |       | $                      | 62,419     |                  | $          | 59,291 |   |
| Mortgage loans                                                                                                                 |       | 7,836                  |       | 7,318                 |       |
| Equity securities                                                                                                              |       | 297                    |       | 214                   |       |
| Short-term                                                                                                                     |       | 1,404                  |       | 1,440                 |       |
| Policy loans                                                                                                                   |       | 723                    |       | 722                   |       |
| Other                                                                                                                          |       | 697                    |       | 704                   |       |
|                                                                                                                           |       |                   |       |                  |       |
| Total investments                                                                                                              |       | 73,376                 |       | 69,689                |       |
|                                                                                                                           |       |                   |       |                  |       |
| Cash                                                                                                                           |       | 257                    |       | 241                   |       |
| Deferred policy acquisition costs                                                                                              |       | 3,729                  |       | 3,176                 |       |
| Reinsurance recoverables, net                                                                                                  |       | 1,640                  |       | 1,507                 |       |
| Accrued investment income                                                                                                      |       | 653                    |       | 593                   |       |
| Other assets                                                                                                                   |       | 521                    |       | 818                   |       |
| Separate Accounts                                                                                                              |       | 14,906                 |       | 14,377                |       |
|                                                                                                                           |       |                   |       |                  |       |
| **Total assets**                                                                                                               |       | $                      | 95,082     |                  | $          | 90,401 |   |
|                                                                                                                           |       |                   |       |                  |       |
| **Liabilities**                                                                                                                |       |                   |       |                  |       |
| Contractholder funds                                                                                                           |       | $                      | 57,098     |                  | $          | 53,939 |   |
| Reserve for life-contingent contract  benefits                                                                                 |       | 11,798                 |       | 11,203                |       |
| Unearned premiums                                                                                                              |       | 33                     |       | 31                    |       |
| Payable to affiliates, net                                                                                                     |       | 82                     |       | 79                    |       |
| Other liabilities and accrued expenses                                                                                         |       | 4,427                  |       | 3,721                 |       |
| Deferred income taxes                                                                                                          |       | 370                    |       | 638                   |       |
| Long-term debt                                                                                                                 |       | 186                    |       | 104                   |       |
| Separate Accounts                                                                                                              |       | 14,906                 |       | 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                                                                                                                |       | 4,409                  |       | 4,178                 |       |
| Accumulated other comprehensive income:                                                                                        |       |                   |       |                  |       |
| Unrealized net capital gains and losses                                                                                        |       | 655                    |       | 1,013                 |       |
|                                                                                                                           |       |                   |       |                  |       |
| **Total accumulated other comprehensive  income**                                                                              |       | 655                    |       | 1,013                 |       |
|                                                                                                                           |       |                   |       |                  |       |
| **Total shareholder’s equity**                                                                                            |       | 6,182                  |       | 6,309                 |       |
|                                                                                                                           |       |                   |       |                  |       |
| **Total liabilities and shareholder’s equity**                                                                            |       | $                      | 95,082     |                  | $          | 90,401 |   |

 

See notes to condensedconsolidated financial statements.

 

2

----

 

**ALLSTATELIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| **(in millions)**                                                                  | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**        | ** ** |
| **Cash flows from operating activities**                                           |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 314        |   | $ | 47 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                   |       |   |   |
| Amortization and other non-cash items                                              |       | (125                   | )          | (104 | ) |
| Realized capital gains and losses                                                  |       | (51                    | )          | 147 |   |
| Loss on disposition of operations                                                  |       | 7                      |       | 17 |   |
| Cumulative effect of change in accounting  principle                               |       | —                 |       | 175 |   |
| Interest credited to contractholder funds                                          |       | 1,736                  |       | 1,397 |   |
| Changes in:                                                                        |       |                   |       |   |   |
| Contract benefit and other insurance  reserves                                     |       | (157                   | )          | (185 | ) |
| Unearned premiums                                                                  |       | 2                      |       | 2 |   |
| Deferred policy acquisition costs                                                  |       | (115                   | )          | (227 | ) |
| Reinsurance recoverables, net                                                      |       | (136                   | )          | (131 | ) |
| Income taxes payable                                                               |       | (33                    | )          | (26 | ) |
| Other operating assets and liabilities                                             |       | (100                   | )          | (71 | ) |
|                                                                               |       |                   |       |   |   |
| Net cash provided by operating activities                                          |       | 1,342                  |       | 1,041 |   |
|                                                                               |       |                   |       |   |   |
| **Cash flows from investing activities**                                           |       |                   |       |   |   |
| Proceeds from sales                                                                |       |                   |       |   |   |
| Fixed income securities                                                            |       | 7,695                  |       | 6,306 |   |
| Equity securities                                                                  |       | 56                     |       | 159 |   |
| Investment collections                                                             |       |                   |       |   |   |
| Fixed income securities                                                            |       | 3,507                  |       | 3,264 |   |
| Mortgage loans                                                                     |       | 894                    |       | 525 |   |
| Investment purchases                                                               |       |                   |       |   |   |
| Fixed income securities                                                            |       | (13,823                | )          | (14,315 | ) |
| Equity securities                                                                  |       | (126                   | )          | (225 | ) |
| Mortgage loans                                                                     |       | (1,420                 | )          | (1,422 | ) |
|                                                                               |       |                   |       |   |   |
| Change in short-term investments, net                                              |       | (116                   | )          | 16 |   |
| Change in other investments, net                                                   |       | (57                    | )          | (81 | ) |
|                                                                               |       |                   |       |   |   |
| Net cash used in investing activities                                              |       | (3,390                 | )          | (5,773 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash flows from financing activities**                                           |       |                   |       |   |   |
| Redemption of mandatorily redeemable  preferred stock                              |       | (19                    | )          | (13 | ) |
| Contractholder fund deposits                                                       |       | 8,175                  |       | 9,722 |   |
| Contractholder fund withdrawals                                                    |       | (6,042                 | )          | (4,680 | ) |
| Dividends paid                                                                     |       | (50                    | )          | (200 | ) |
|                                                                               |       |                   |       |   |   |
| Net cash provided by financing activities                                          |       | 2,064                  |       | 4,829 |   |
|                                                                               |       |                   |       |   |   |
| **Net increase in cash**                                                           |       | 16                     |       | 97 |   |
| **Cash at beginning of the period**                                                |       | 241                    |       | 121 |   |
|                                                                               |       |                   |       |   |   |
| **Cash at end of period**                                                          |       | $                      | 257        |   | $ | 218 |   |

 

See notes to condensedconsolidated financial statements.

 

3

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**ALLSTATELIFE INSURANCE COMPANY AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.  General**

 

**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 condensedconsolidated financial statements and notes as of September 30, 2005 andfor the three-month and nine-month periods ended September 30, 2005 and2004 are unaudited.  The condensedconsolidated financial statements reflect all adjustments (consisting only ofnormal recurring accruals), which are, in the opinion of management, necessaryfor the fair presentation of the financial position, results of operations andcash flows for the interim periods. These condensed consolidated financial statements and notes should beread in conjunction with the consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2004.  Theresults of operations for the interim periods should not be consideredindicative of results to be expected for 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 $48 million and $42 million, and cost of $38million and $33 million at September 30, 2005 and December 31, 2004,respectively.  Investments in limitedpartnership interests had a carrying value of $249 million and $172 million at September 30,2005 and December 31, 2004, respectively.

 

Non-cash investment exchanges andmodifications, which primarily reflect refinancings of fixed income securities,totaled $19 million and $38 million for the nine months ended September 30,2005 and 2004, respectively.

 

## **Pendingaccounting standards**

 

*Financial Accounting Standards Board Staff PositionNo. FAS 115-1, "The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments"("FSP FAS 115-1")*

 

InNovember 2005, the Financial Accounting Standards Board ("FASB")issued FSP FAS 115-1, which nullifies the guidance inparagraphs 10-18 of EITF Issue 03-1, "The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments" and referencesexisting other than temporary impairment guidance. FSP FAS 115-1 clarifiesthat an investor should recognize an impairment loss no later than when theimpairment is deemed other-than-temporary, even if a decision to sell thesecurity has not been made, and also provides guidance on the subsequentaccounting for an impaired debt security. FSP FAS 115-1 is effective forreporting periods beginning after December 15, 2005. The adoption of FSPFAS 115-1 is not expected to have a material impact on the Company'sCondensed Consolidated Statements of Operations or Financial Position.

 

*Statement of Position 05-1, Accounting by Insurance Enterprises forDeferred Acquisition Costs in Connection with Modifications or Exchanges ofInsurance Contracts (“SOP 05-1”)*

 

InOctober 2005, the American Institute of Certified Public Accountantsissued SOP 05-1.  SOP 05-1 providesaccounting guidance for deferred policy acquisition costs on internal replacementsof insurance and investment contracts other than those specifically describedin Statement of Financial Accounting Standards (“SFAS”) No. 97, Accountingand Reporting by Insurance Enterprises for Certain Long-Duration Contracts andfor Realized Gains and Losses from the Sale of Investments.  SOP 05-1 defines an internal replacement as amodification in product benefits, features, rights or coverages that occurs bythe exchange of a contract for a new contract, or by amendment, endorsement orrider to a contract, or by the election of a feature or coverage within acontract.  Internal replacement contractsare those that are substantially changed from the replaced contract and areaccounted for as an extinguishment of the replaced contract.  Nonintegrated contract features are accountedfor as separately issued contracts.  Modifications resulting from the electionof a feature or coverage within a contract or from an integrated contractfeature generally do not result in an internal replacement contract subject toSOP 05-1 provided certain conditions are met. Theprovisions of SOP 05-1 are effective for internal replacements occurring infiscal years beginning after December 15, 2006.  The Company’s accounting policy for internalreplacements is generally consistent with the accounting guidance prescribed inSOP 05–1; therefore, the SOP is not expected to have a material impact on theCompany’s Condensed Consolidated Statements of Operations or FinancialPosition.

 

4

----

 

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

 

In May 2005, the FASB issued SFAS No. 154,which replaces Accounting Principles Board (“APB”) Opinion No. 20,Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changesin Interim Financial Statements.  SFAS No. 154requires retrospective application to prior periods’ financial statements forchanges in accounting principle, unless determination of either the periodspecific effects or the cumulative effect of the change is impracticable.  SFAS No. 154 is effective for fiscalyears beginning after December 15, 2005. SFAS No. 154 is not expected to have a material impact on theCompany’s Condensed Consolidated Statements of Operations or FinancialPosition.

 

**2.   Related Party Transactions**

 

**Reinsurance**

 

Inthe first quarter of 2005, the Company received fixed income securities with afair value and amortized cost of $381 million and $358 million, respectively,and $5 million of accrued investment income for the settlement ofa $386 million premium receivable duefrom American Heritage Life Insurance Company (“AHL”), an unconsolidatedaffiliate of the Company.  The receivablerelated to two coinsurance agreements entered into in 2004 whereby the Companyassumed certaininterest-sensitive life insurance and fixed annuity contracts from AHL.  Since the transaction was between affiliatesunder common control, the securities were recorded at amortized cost as of thedate of settlement.   The differencebetween the amortized cost and fair value of the securities was recorded as anon-cash dividend of $23 million ($15 million, after-tax).

 

**Investments**

 

In the first quarter of 2005, the Companypurchased fixed income securities from AIC. The Company paid $655 million in cash for the securities, which includesthe fair value of the securities of $649 million and $6 million for accruedinvestment income.  Since the transactionwas between affiliates under common control, the securities were recorded atthe amortized cost of $623 million as of the date of sale.   The difference between the amortized costand fair value of the securities was recorded as a dividend of $26 million ($16million, after-tax).

 

**Surplus Notes**

 

On August 1, 2005, ALIC entered into an agreement with KennettCapital, Inc. (“Kennett”), an unconsolidated affiliate of ALIC, wherebyALIC sold to Kennett $100 million 5.06% surplus notes due July 1, 2035issued by ALIC Reinsurance Company (“ALIC Re”), a wholly owned subsidiary ofALIC.   As payment, Kennett issued a fullrecourse 4.86% note due July 1, 2035 to ALIC for the same amount.  As security for the performance of Kennett’s obligations under theagreement and note, Kennett granted ALIC a pledge of and security interest inKennett’s right, title and interest in the surplus notes and their proceeds. Underthe terms of the agreement, ALIC may sell and Kennett may choose to buyadditional surplus notes, if and when additional surplus notes are issued.   The note due from Kennett is classified asother investments and the related surplus notes are classified as long-termdebt in the Condensed Consolidated Statements of Financial Position.

 

5

----

 

**3.    ****Reinsurance**

 

The effects of reinsurance on premiums andcontract charges are as follows:

 
| ** **                                         | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                                  | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                                       |       |                                      |       |   |   |   |   |
| **Premiums  and contract charges**                 |       |                                       |       |                                      |       |   |   |   |   |
| Direct                                             |       | $                                          | 516        |                                      | $          | 516 |   | $ | 1,570 |   | $ | 1,541 |   |
| Assumed                                            |       |                                       |       |                                      |       |   |   |   |   |
| Affiliate                                          |       | 5                                          |       | 4                                         |       | 13 |   | 13 |   |
| Non-affiliate                                      |       | 7                                          |       | 2                                         |       | 20 |   | 6 |   |
| Ceded—non-affiliate  (1)                      |       | (149                                       | )          | (137                                      | )          | (447 | ) | (403 | ) |
|                                               |       |                                       |       |                                      |       |   |   |   |   |
| Premiums and contract charges, net of  reinsurance |       | $                                          | 379        |                                      | $          | 385 |   | $ | 1,156 |   | $ | 1,157 |   |

 

----

(1) Ceded non-affiliate is comprised of onlypremiums.

 

The effects of reinsurance on contractbenefits are as follows:

 
| ** **                            | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                     | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| **Contract  benefits**                |       |                                       |       |                                      |       |   |   |   |   |
| Direct                                |       | $                                          | 427        |                                      | $          | 430 |   | $ | 1,351 |   | $ | 1,261 |   |
| Assumed                               |       |                                       |       |                                      |       |   |   |   |   |
| Affiliate                             |       | 2                                          |       | 3                                         |       | 8 |   | 10 |   |
| Non-affiliate                         |       | 6                                          |       | 1                                         |       | 17 |   | 4 |   |
| Ceded                                 |       |                                       |       |                                      |       |   |   |   |   |
| Non-affiliate                         |       | (119                                       | )          | (102                                      | )          | (376 | ) | (294 | ) |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| Contract benefits, net of reinsurance |       | $                                          | 316        |                                      | $          | 332 |   | $ | 1,000 |   | $ | 981 |   |

 

Effective January 1, 2004, the Companyadopted Statement of Position 03-1, “Accounting and Reporting by InsuranceEnterprises for Certain Nontraditional Long Duration Contracts and for SeparateAccounts” and, in connection therewith, recorded a cumulative effect of changein accounting principle due to an increase in benefit reserves of $94 million,after-tax ($145 million, pre-tax).  Theincrease in benefit reserves was comprised of direct, assumed non-affiliate andceded non-affiliate benefit reserves of $155 million, $4 million and $14million, 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 $166 million at September 30,2005.  The obligations associated withthese fixed income securities expire at various times during the next sevenyears.

 

Lincoln Benefit Life Company (“LBL”), a wholly owned subsidiary ofALIC, has issued universal life insurance contracts to third parties whofinance the premium payments on the universal life insurance contracts througha commercial paper program.  LBL has issueda repayment guarantee on the outstanding commercial paper balance

 

6

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that is fully collateralized by the cashsurrender value of the universal life insurance contracts.  At September 30, 2005, the amount dueunder the commercial paper program was $302 million and the cash surrendervalue of the policies was $307 million. The repayment guarantee expires April 30, 2006.   In November of 2005, the Company receiveda request for the partial withdrawal of $248 million of the policyholderaccount value. The proceeds from these policies will be applied to the amountdue under the commercial paper program.

 

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 September 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 andInquiries**

 

**Background**

 

The Company and certain affiliates areinvolved in a number of lawsuits, regulatory inquiries, and other legalproceedings arising out of various aspects of its business.  As background to the “Proceedings” sub-section below,please note the following:

 

•      Thesematters raise difficult and complicated factual and legal issues and aresubject to many uncertainties and complexities, including but not limited to,the underlying facts of each matter; novel legal issues; variations betweenjurisdictions in which matters are being litigated, heard or investigated;differences in applicable laws and judicial interpretations; the length of timebefore many of these matters might be resolved by settlement, throughlitigation or otherwise and, in some cases, the timing of their resolutionsrelative to other similar matters involving other companies; the fact that someof the lawsuits are putative class actions in which a class has not beencertified and in which the purported class may not be clearly defined; the factthat some of the lawsuits involve multi-state class actions in which theapplicable law(s) for the claims at issue is in dispute and therefore unclear;and the current challenging legal environment faced by large corporations andinsurance companies.

 

•      In thelawsuits, plaintiffs seek a variety of remedies including equitable relief inthe form of injunctive and other remedies and monetary relief in the form ofcontractual and extra-contractual damages. In some cases, the monetary damages sought include punitive damages.  Often specific information about the reliefsought, such as the amount of damages, is not available because plaintiffs havenot requested specific relief in their pleadings.  In our experience, monetary demands inpleadings bear little relation to the ultimate loss, if any, to the Company.

 

7

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•      Inconnection with regulatory examinations and proceedings, government authoritiesmay seek various forms of relief, including penalties, restitution, and changesin business practices.  The Company maynot be advised of the nature and extent of relief sought until the final stagesof the examination or proceeding.

 

•      For the reasonsspecified above, it is not possible at this time to make meaningful estimatesof the amount or range of loss that could result from the matters describedbelow in the “Proceedings” subsection. The Company reviews these matters on an on-going basis and follows theprovisions of Statement of Financial Accounting Standards No. 5, “Accountingfor Contingencies” when making accrual and disclosure decisions.  When assessing reasonably possible andprobable outcomes, the Company bases its decisions on its assessment of theultimate outcome following all appeals.  

 

•      In the opinionof the Company’s management, while the ultimate liability in some of thematters described below in the “Proceedings” subsection in excess ofamounts currently reserved may be material to the Company’s operating resultsfor any particular period if an unfavorable outcome results, none will have amaterial adverse effect on the consolidated financial condition of the Company.

 

**Proceedings**

 

Legal proceedings involvingAllstate agencies and AIC may impact the Company, even when the Company is notdirectly involved, because the Company sells its products through a variety ofdistribution channels including Allstate agencies. Consequently, informationabout the more significant of these proceedings is provided in the followingparagraph.

 

AIC is defending certainmatters relating to its agency program reorganization announced in 1999. Thesematters include a lawsuit filed in December 2001 by the U.S. EqualEmployment Opportunity Commission (“EEOC”) alleging retaliation under federalcivil rights laws, a class action filed in August 2001 by former employeeagents alleging retaliation and age discrimination under the Age Discriminationin Employment Act, breach of contract and ERISA violations, and a lawsuit filedin October 2004 by the EEOC alleging age discrimination with respect to apolicy limiting the rehire of agents affected by the agency programreorganization.  AIC is also defending acertified class action filed by former employee agents who terminated theiremployment prior to the agency program reorganization.  These plaintiffs have asserted breach ofcontract and ERISA claims, and are seeking actual damages including benefitsunder Allstate employee benefit plans and payments provided in connection withthe reorganization, as well as punitive damages.  In late March 2004, in the first 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 wasreversed and remanded to the trial court in April 2005.  In these matters, plaintiffs seek compensatoryand punitive damages, and equitable relief. AIC has been vigorously defending these lawsuits and other mattersrelated to its agency program reorganization. In addition, AIC has beendefending certain matters relating to its life agency program reorganizationannounced in 2000. These matters have been the subject of an investigation bythe EEOC with respect to allegations of age discrimination and retaliation andconciliation discussions between AIC and the EEOC.   The outcome of these disputes is currentlyuncertain.

 

The Company has resolvedthrough mediation and settlement all but one of its lawsuits brought byplaintiffs challenging trading restrictions the Company adopted in an effort tolimit market-timing activity in its variable

 

8

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annuity sub-accounts.  In the one lawsuit the Company is stilldefending, the plaintiff seeks a variety of remedies including monetary andequitable relief.  The Company has beenvigorously defending this matter, but the outcome is currently uncertain.

 

The Company is currently undergoing periodicmarket conduct examinations by state insurance regulators.  Regulators are focusing, as they have withother insurers, on the Company’s compliance with the state’s replacement salesand record-keeping processes with regard to life insurance and annuities amongother issues.  The ultimate outcome ofthese examinations is currently uncertain.

 

**Other Matters**

** **

The Corporation and some of itssubsidiaries, including the Company, have received interrogatories and demandsfor information 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 andregulatory actions are currently pending that involve the Company and specificaspects of its conduct of business. Like other members of the insuranceindustry, the Company is the target of a number of class action lawsuits andother types of proceedings, some of which involve claims for substantial orindeterminate amounts.  These actions arebased on a variety of issues and target a range of the Company’s practices. Theoutcome of these 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.

 

9

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**5. Other Comprehensive Income**

 

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

 
| ** **                                                                           | ** ** | **Three months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| **(in millions)**                                                                    | ** ** | **Pretax**                                 | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
| ** **                                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized holding (losses) gains arising during  the period, net of related offsets |       | $                                          | (521       | ) | $ | 182 |   | $ | (339 | ) | $ | 494 |   | $ | (173 | ) | $ | 321 |   |
| Less: reclassification adjustments                                                   |       | (64                                        | )          | 22 |   | (42 | ) | (53 | ) | 19 |   | (34 | ) |
|                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive (loss) income                                                    |       | $                                          | (457       | ) | $ | 160 |   | (297 | ) | $ | 547 |   | $ | (192 | ) | 355 |   |
|                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                           |       |                                       |       |   |   | 159 |   |   |   |   |   | 76 |   |
| Comprehensive (loss) income                                                          |       |                                       |       |   |   | $ | (138 | ) |   |   |   |   | $ | 431 |   |

 
| ** **                                                                   | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **(in millions)**                                                            | ** ** | **Pretax**                                | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding losses arising during  the period, net of related offsets |       | $                                         | (596       | ) | $ | 209 |   | $ | (387 | ) | $ | (156 | ) | $ | 54 |   | $ | (102 | ) |
| Less: reclassification adjustments                                           |       | (45                                       | )          | 16 |   | (29 | ) | (109 | ) | 38 |   | (71 | ) |
|                                                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive loss                                                     |       | $                                         | (551       | ) | $ | 193 |   | (358 | ) | $ | (47 | ) | $ | 16 |   | (31 | ) |
|                                                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                   |       |                                      |       |   |   | 314 |   |   |   |   |   | 47 |   |
| Comprehensive (loss) income                                                  |       |                                      |       |   |   | $ | (44 | ) |   |   |   |   | $ | 16 |   |

 

**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).   The estimated loss was reduced by $1 millionin the third quarter of 2005 to $4 million ($1 million, after-tax).   In August 2005, the Company reached adefinitive 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 $473 million ($116 million and $297 million areclassified as reinsurance recoverables and separate accounts, respectively) andliabilities will decrease by approximately $449 million ($113 million and $297million are classified as contractholder funds and separate accounts,respectively).  The Company expects toreceive proceeds of approximately $25 million upon closing.

 

10

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING 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 September 30, 2005, and therelated condensed consolidated statements of operations for the three-month andnine-month periods ended September 30, 2005 and 2004, and the condensedconsolidated statements of cash flows for the nine-month periods ended September 30,2005 and 2004.  These interim financialstatements are the responsibility of the Company’s management.

 

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

 

Based on our reviews, we are not aware of anymaterial modifications that should be made to such condensed consolidatedinterim financial statements for them to be in conformity with accountingprinciples generally accepted in the United States of America.

 

We have previously audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated statement of financial position of Allstate LifeInsurance Company and subsidiaries as of December 31, 2004, and therelated consolidated statements of operations and comprehensive income,shareholder’s equity, and cash flows for the year then ended, not presentedherein.  In our report dated February 24,2005, which report includes an explanatory paragraph relating to a change inthe Company’s method of accounting for certain nontraditional long-durationcontracts and separate accounts in 2004 and changes in the methods ofaccounting for embedded derivatives in modified coinsurance agreements andvariable interest entities in 2003, we expressed an unqualified opinion onthose consolidated financial statements. In our 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                  |
| November 7, 2005              |

 

11

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**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDEDSEPTEMBER 30, 2005 AND 2004**

 

**OVERVIEW**

 

The followingdiscussion highlights significant factors influencing the consolidatedfinancial position and results of operations of Allstate Life Insurance Company(referred to in this document as “we”, “our”, “us”, or the “Company”). Itshould be read in conjunction with the condensed consolidated financialstatements and notes thereto found under Part I. Item 1. contained herein,and with the discussion, analysis, consolidated financial statements and notesthereto in Part I. Item 1. and Part II. Item 7. and Item 8. of theAllstate Life Insurance Company Annual Report on Form 10-K for 2004.  We operate as a single segment entity, basedon the manner in which financial information is used internally to evaluateperformance and determine the allocation of resources.

 

**HIGHLIGHTS**

 

•      Revenuesincreased 16.0% and 15.7% in the third quarter and first nine months of 2005,respectively, compared to the same periods in the prior year.  The increases in both periods were due tohigher net investment income, improved realized capital gains and losses andincreased contract charges, partially offset by lower premiums.

•      Netincome increased 109.2% in the third quarter of 2005 compared to the sameperiod in the prior year.  The increasewas primarily attributable to improved realized capital gains and losses,higher gross margin and lower taxes, partially offset by higher amortization ofDAC.  Net income improved by $267 millionin the first nine months of 2005 compared to the same period in the prior yeardue primarily to an unfavorable cumulative effect of a change in accountingprinciple of $175 million, after-tax, that was recorded in the prior year andimproved realized capital gains and loses in the current year.

•      Investmentsincreased 5.3% to $73.38 billion at September 30, 2005 compared to December 31,2004, due primarily to increased contractholder funds and increased balancesassociated with securities lending.

•      Contractholderfund deposits declined to $1.64 billion and $8.18 billion for the third quarterand first nine months of 2005, respectively, compared to $3.39 billion and$9.72 billion for the third quarter and first nine months of 2004,respectively.

 

**OPERATIONS**

** **

We arepursuing the following actions and strategies to improve return on equity:maintaining and developing focused top-tier products, deepening distributionpartner relationships, improving our cost structure, advancing our enterpriserisk management program and leveraging the strength of the Allstate brand nameacross products and distribution channels. The execution of our business strategies has and may continue to involvesimplifying our business model by changing the number and selection of productsbeing marketed, for example, through such actions as our previously announcedexit from the guaranteed investment contract market and the long-term careproduct market and the sale of our direct response distribution business in2004; terminating underperforming distribution relationships; merging ordisposing of unnecessary and/or non-strategic legal entities, such as themerger of Glenbrook Life and Annuity Company in 2005 and the pending sales oftwo legal entities for which the anticipated losses are reflected in thecurrent year financial statements; reducing policy administration softwaresystems; and other actions that we may determine are appropriate tosuccessfully execute our business strategies.

 

**Premiums** represent revenues generated fromtraditional life, immediate annuities with life contingencies and other insuranceproducts 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.

 

12

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The following table summarizes premiums andcontract charges by product.

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums**                                 |       |                                       |       |                                      |       |   |   |   |   |
| Traditional  life                            |       | $                                          | 60         |                                      | $          | 71 |   | $ | 181 |   | $ | 220 |   |
| Immediate  annuities with life contingencies | ** ** | 37                                         |       | 66                                        |       | 160 |   | 209 |   |
| Other                                        |       | 7                                          |       | 4                                         |       | 18 |   | 14 |   |
| **Total  premiums**                          |       | 104                                        |       | 141                                       |       | 359 |   | 443 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| **Contract  charges**                        |       |                                       |       |                                      |       |   |   |   |   |
| Interest-sensitive  life                     |       | 184                                        |       | 170                                       |       | 542 |   | 491 |   |
| Fixed  annuities                             |       | 16                                         |       | 13                                        |       | 49 |   | 41 |   |
| Variable  annuities                          |       | 75                                         |       | 61                                        |       | 206 |   | 182 |   |
| **Total  contract charges**                  |       | 275                                        |       | 244                                       |       | 797 |   | 714 |   |
| **Total  premiums and contract charges**     |       | $                                          | 379        |                                      | $          | 385 |   | $ | 1,156 |   | $ | 1,157 |   |

 

The following table summarizes premiums andcontract charges by distribution channel.

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| **Premiums**                             |       |                                       |       |                                      |       |   |   |   |   |
| Allstate  agencies                       |       | $                                          | 51         |                                      | $          | 67 |   | $ | 184 |   | $ | 194 |   |
| Independent  agents                      |       | 31                                         |       | 10                                        |       | 58 |   | 41 |   |
| Specialized  brokers                     |       | 22                                         |       | 51                                        |       | 115 |   | 165 |   |
| Other                                    |       | —                                     |       | 13                                        |       | 2 |   | 43 |   |
| **Total  premiums**                      |       | 104                                        |       | 141                                       |       | 359 |   | 443 |   |
|                                     | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract  charges**                    | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate  agencies                       |       | 129                                        |       | 115                                       |       | 388 |   | 344 |   |
| Independent  agents                      |       | 66                                         |       | 60                                        |       | 185 |   | 177 |   |
| Broker  dealers                          |       | 59                                         |       | 50                                        |       | 165 |   | 147 |   |
| Banks                                    |       | 14                                         |       | 11                                        |       | 37 |   | 25 |   |
| Specialized  brokers                     |       | 6                                          |       | 7                                         |       | 20 |   | 19 |   |
| Other                                    |       | 1                                          |       | 1                                         |       | 2 |   | 2 |   |
| **Total  contract charges**              |       | 275                                        |       | 244                                       |       | 797 |   | 714 |   |
| **Total  premiums and contract charges** |       | $                                          | 379        |                                      | $          | 385 |   | $ | 1,156 |   | $ | 1,157 |   |

 

Total premiums declined 26.2% and 19.0% inthe third quarter and first nine months of 2005, respectively, compared to thesame periods of 2004.  In both periods,the decline was due to lower premiums on immediate annuities with lifecontingencies and traditional life products.

 

Contract charges increased 12.7% and 11.6% inthe third quarter and first nine months of 2005, respectively, compared to thesame periods of 2004.  These increaseswere primarily due to higher contract charges on interest-sensitive life,variable annuities and, to a lesser extent, fixed annuities.  The increases in the interest-sensitive lifecontract charges were attributable to in-force business growth resulting fromdeposits and credited interest more than offsetting surrenders andbenefits.  Higher variable annuitycontract charges were primarily the result of higher account values andparticipation fees.  Fixed annuity

 

13

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contract charges for the thirdquarter and first nine 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 followingtable shows the changes in contractholder funds.

 
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                      |       |                                       |       |                                      |       |   |   |   |   |
| **Contractholder  funds, beginning balance**                    |       | $                                          | 57,328     |                                      | $          | 49,365 |   | $ | 53,939 |   | $ | 44,914 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Impact of  adoption of SOP 03-1(1)                              |       | —                                     |       | —                                    |       | — |   | 421 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| **Deposits**                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Fixed  annuities (immediate and deferred)                       |       | 1,190                                      |       | 2,114                                     |       | 4,463 |   | 4,965 |   |
| Institutional  products (primarily funding agreements)          |       | —                                     |       | 852                                       |       | 2,423 |   | 3,452 |   |
| Interest-sensitive  life                                        |       | 342                                        |       | 323                                       |       | 980 |   | 932 |   |
| Variable  annuity and life deposits allocated to fixed accounts |       | 107                                        |       | 102                                       |       | 313 |   | 373 |   |
| Total  deposits                                                 |       | 1,639                                      |       | 3,391                                     |       | 8,179 |   | 9,722 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| **Interest  credited**                                          |       | 599                                        |       | 488                                       |       | 1,726 |   | 1,395 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| **Maturities,  benefits, withdrawals and other adjustments**    |       |                                       |       |                                      |       |   |   |   |   |
| Maturities  of institutional products                           |       | (909                                       | )          | (820                                      | )          | (2,202 | ) | (1,915 | ) |
| Benefits                                                        |       | (247                                       | )          | (189                                      | )          | (717 | ) | (521 | ) |
| Surrenders  and partial withdrawals                             |       | (1,013                                     | )          | (673                                      | )          | (2,876 | ) | (1,924 | ) |
| Contract  charges                                               |       | (163                                       | )          | (155                                      | )          | (482 | ) | (442 | ) |
| Net  transfers to separate accounts                             |       | (94                                        | )          | (94                                       | )          | (249 | ) | (328 | ) |
| Fair value  hedge adjustments for institutional products        |       | (64                                        | )          | 66                                        |       | (237 | ) | (46 | ) |
| Other  adjustments                                              |       | 22                                         |       | (3                                        | )          | 17 |   | 100 |   |
| Total  maturities, benefits, withdrawals and other adjustments  |       | (2,468                                     | )          | (1,868                                    | )          | (6,746 | ) | (5,076 | ) |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| **Contractholder  funds, ending balance**                       |       | $                                          | 57,098     |                                      | $          | 51,376 |   | $ | 57,098 |   | $ | 51,376 |   |

 

----

(1)   Theincrease in 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.

 

Contractholder deposits decreased 51.7% and 15.9% in the third quarterand first nine months of 2005, respectively, compared to the same periods of2004.  The declines in both periods werethe result of lower deposits on institutional products and fixedannuities.  Fixed annuity depositsdeclined 43.7% and 10.1% in the third quarter and first nine months of 2005,respectively, due to lower deposits on traditional fixed annuities, partiallyoffset by increased deposits on equity-indexed annuities.  The declines in traditional fixed annuitieswere primarily due to lower consumer demand and our continued focus onachieving higher returns.  Increases inshort-term interest rates without corresponding increases in longer term rateshave generally reduced the competitiveness of fixed annuity products relativeto shorter term deposit products such as money market funds and certificates ofdeposit.  A continuation of thisenvironment will impact the level of expected fixed annuity deposits.  We have prioritized the allocation of fixedincome investments to support sales of retail products with the bestsustainable growth and contribution to margins and to

 

14

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maintain our retail market presence.  There were no sales of institutional productsduring the current quarter.  Ourinstitutional business sales remain opportunistic.  Average contractholder funds increased 13.6%in the third quarter and 14.8% in the first nine months of 2005 compared to thesame periods of 2004.

 

Surrenders and partial withdrawals increased50.5% in the third quarter and 49.5% in the first nine months of 2005 comparedto the same periods of 2004 reflecting an annualized withdrawal rate of 9.2%for the third quarter and 9.1% for the first nine months of 2005 based on thebeginning of period contractholder funds balance excluding institutional productreserves.  This compares to an annualizedwithdrawal rate of 7.1% for the third quarter and 7.7% for the first ninemonths of 2004.  These increases wereprimarily attributable to higher surrenders of market value adjusted annuitiesas a portion 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.

 

***Separateaccounts liabilities***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 tableshows the changes in separate accounts liabilities.**

 
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                                               | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Separate  accounts liabilities, beginning balance**           |       | $                                          | 14,341     |                                      | $          | 13,564 |   | $ | 14,377 |   | $ | 13,425 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Impact of  adoption of SOP 03-1(1)                              |       | —                                     |       | —                                    |       | — |   | (204 | ) |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Variable  annuity and life deposits                             |       | 486                                        |       | 361                                       |       | 1,414 |   | 1,322 |   |
| Variable  annuity and life deposits allocated to fixed accounts |       | (107                                       | )          | (102                                      | )          | (313 | ) | (373 | ) |
| Net deposits                                                    |       | 379                                        |       | 259                                       |       | 1,101 |   | 949 |   |
| Investment  results                                             |       | 613                                        |       | (152                                      | )          | 691 |   | 209 |   |
| Contract  charges                                               |       | (73                                        | )          | (64                                       | )          | (209 | ) | (189 | ) |
| Net  transfers from fixed accounts                              |       | 94                                         |       | 94                                        |       | 249 |   | 328 |   |
| Surrenders  and benefits                                        |       | (448                                       | )          | (388                                      | )          | (1,303 | ) | (1,205 | ) |
| **Separate  accounts liabilities, ending balance**              |       | $                                          | 14,906     |                                      | $          | 13,313 |   | $ | 14,906 |   | $ | 13,313 |   |

 

----

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

 

Separate accounts liabilities increased as of September 30, 2005compared to December 31, 2004.  Theincrease was attributable to net deposits, positive investment results andtransfers from fixed accounts more than offsetting surrenders and benefits andcontract charges.  Net variable annuityand life deposits increased 46.3% and 16.0% in the third quarter and first ninemonths of 2005.  Variable productdeposits may vary with equity market conditions and consumer preferences relatedto our product features.  Variableannuity contractholders often allocate a significant portion of their initialvariable annuity 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 nettransfers from fixed accounts.  Theliability for the fixed portion of variable annuity contracts is reflected incontractholder funds.

 

15

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**Netinvestment income** increased 13.8% in the three monthsended September 30, 2005 and 14.1% in the first nine months of 2005compared to the same periods of 2004.  The increases in both periods were primarily due to the effect of higherportfolio balances.  Portfolio yieldsincreased slightly in the third quarter of 2005 compared to the same period inthe prior year but were unchanged in the nine-month period.  Portfolio balances as of September 30,2005 increased 5.3% from December 31, 2004 due primarily to increasedcontractholder funds and increased balances associated with securities lending.

 

**Net income**analysis is presented in the following table.

 
| ** **                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                                                                                     | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Premiums                                                                                              |       | $                                          | 104        |                                      | $          | 141 |   | $ | 359 |   | $ | 443 |   |
| Contract charges                                                                                      |       | 275                                        |       | 244                                       |       | 797 |   | 714 |   |
| Net investment income                                                                                 |       | 942                                        |       | 828                                       |       | 2,745 |   | 2,406 |   |
| Periodic settlements and accruals on non-hedge  derivative instruments (1)                            |       | 14                                         |       | 15                                        |       | 49 |   | 33 |   |
| Contract benefits                                                                                     |       | (316                                       | )          | (332                                      | )          | (1,000 | ) | (981 | ) |
| Interest credited to contractholder  funds(2)                                                         |       | (578                                       | )          | (481                                      | )          | (1,671 | ) | (1,372 | ) |
| **Gross margin**                                                                                      |       | 441                                        |       | 415                                       |       | 1,279 |   | 1,243 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Amortization of DAC and DSI                                                                           |       | (125                                       | )          | (107                                      | )          | (352 | ) | (332 | ) |
| Operating costs and expenses                                                                          |       | (99                                        | )          | (104                                      | )          | (325 | ) | (329 | ) |
| Income tax expense                                                                                    |       | (63                                        | )          | (69                                       | )          | (179 | ) | (205 | ) |
| Realized capital gains and losses,  after-tax                                                         |       | 17                                         |       | (34                                       | )          | 33 |   | (95 | ) |
| DAC and DSI amortization relating to  realized capital gains and losses, after-tax                    |       | (2                                         | )          | (15                                       | )          | (106 | ) | (28 | ) |
| Reclassification of periodic settlements  and accruals on non-hedge derivative instruments, after-tax |       | (10                                        | )          | (10                                       | )          | (32 | ) | (21 | ) |
| Loss on disposition of operations,  after-tax                                                         |       | —                                     |       | —                                    |       | (4 | ) | (11 | ) |
| Cumulative effect of change in accounting  principle, after-tax                                       |       | —                                     |       | —                                    |       | — |   | (175 | ) |
| **Net income**                                                                                        |       | $                                          | 159        |                                      | $          | 76 |   | $ | 314 |   | $ | 47 |   |

 

----

(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 $11 million and $4 million in the threemonths ended September 30, 2005 and 2004, respectively, and $65 millionand $25 million in the first nine months of 2005 and 2004, respectively.

 

*Gross margin*, a non-GAAP measure, representspremiums and contract charges, net investment income and periodic settlementsand accruals on non-hedge derivative instruments, less contract benefits andinterest credited to contractholder funds excluding amortization of DSI.  We reclassify periodic settlements andaccruals on non-hedge derivative instruments into gross margin to report themin a manner consistent with the economically hedged investments, replicatedassets or product attributes (e.g. net investment income or interest creditedto contractholder funds) and by doing so, appropriately reflect trends inproduct performance.  We use gross marginas a component of our evaluation of the profitability of our life insurance andfinancial product portfolio.  Additionally,for many of our products, including fixed annuities, variable life and annuities,and interest-sensitive life insurance, 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 and fees. We believe gross margin and its components are useful to investorsbecause they allow for the evaluation of income components separately and inthe aggregate when reviewing performance. Gross margin, investment margin and benefit margin should not beconsidered as a substitute for net income and do not reflect the overallprofitability of the business.  Netincome is the GAAP measure that is most

 

16

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directly comparable to these margins. Gross margin is reconciled to GAAP net income in the previous table.

 

The components of gross margin are reconciledto the corresponding financial statement line items in the following tables.

 
| ** **                                                                 | ** ** | **Three Months Ended September 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                                                                   |       | $                                         | —     |   | $ | — |   | $ | 104 |   | $ | 141 |   | $ | — |   | $ | — |   | $ | 104 |   | $ | 141 |   |
| Contract charges                                                           |       | —                                    |       | — |   | 156 |   | 138 |   | 119 |   | 106 |   | 275 |   | 244 |   |
| Net investment income                                                      |       | 942                                       |       | 828 |   | — |   | — |   | — |   | — |   | 942 |   | 828 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments (1) |       | 14                                        |       | 15 |   | — |   | — |   | — |   | — |   | 14 |   | 15 |   |
| Contract benefits                                                          |       | (134                                      | )          | (132 | ) | (182 | ) | (200 | ) | — |   | — |   | (316 | ) | (332 | ) |
| Interest credited to contractholder  funds(2)                              |       | (578                                      | )          | (481 | ) | — |   | — |   | — |   | — |   | (578 | ) | (481 | ) |
|                                                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       | $                                         | 244        |   | $ | 230 |   | $ | 78 |   | $ | 79 |   | $ | 119 |   | $ | 106 |   | $ | 441 |   | $ | 415 |   |

 
| ** **                                                                 | ** ** | **Nine Months Ended September 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                                                                   |       | $                                        | —     |   | $ | — |   | $ | 359 |   | $ | 443 |   | $ | — |   | $ | — |   | $ | 359 |   | $ | 443 |   |
| Contract charges                                                           |       | —                                   |       | — |   | 459 |   | 403 |   | 338 |   | 311 |   | 797 |   | 714 |   |
| Net investment income                                                      |       | 2,745                                    |       | 2,406 |   | — |   | — |   | — |   | — |   | 2,745 |   | 2,406 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments (1) |       | 49                                       |       | 33 |   | — |   | — |   | — |   | — |   | 49 |   | 33 |   |
| Contract benefits                                                          |       | (397                                     | )          | (388 | ) | (603 | ) | (593 | ) | — |   | — |   | (1,000 | ) | (981 | ) |
| Interest credited to contractholder  funds(2)                              |       | (1,671                                   | )          | (1,372 | ) | — |   | — |   | — |   | — |   | (1,671 | ) | (1,372 | ) |
|                                                                       |       | $                                        | 726        |   | $ | 679 |   | $ | 215 |   | $ | 253 |   | $ | 338 |   | $ | 311 |   | $ | 1,279 |   | $ | 1,243 |   |

 

----

(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.  Amortizationof DSI totaled $11 million and $4 million in the three months ended September 30,2005 and 2004, respectively, and $65 million and $25 million in the first ninemonths of 2005 and 2004, respectively.

 

(3)   Theprior period has been restated to conform to the current periodpresentation.  In connection therewith,contract charges related to guaranteed minimum death, income, accumulation andwithdrawal benefits on variable annuities have been reclassified to benefitmargin from maintenance charges.  Additionally,amounts previously presented as maintenance charges and surrender charges arenow presented in the aggregate as contract charges and fees.  These reclassifications did not result in achange in gross margin.

 

Gross margin increased 6.3% in the thirdquarter of 2005 and increased 2.9% in the first nine months of 2005 compared tothe same periods of 2004.  The increasesin both periods were the result of higher investment margin and contractcharges and fees, partially offset by a lower benefit margin.

 

17

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*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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Annuities                |       | $                                          | 171        |                                      | $          | 161 |   | $ | 504 |   | $ | 465 |   |
| Life  insurance          |       | 41                                         |       | 37                                        |       | 133 |   | 122 |   |
| Institutional  products  |       | 32                                         |       | 32                                        |       | 89 |   | 92 |   |
| Total  investment margin |       | $                                          | 244        |                                      | $          | 230 |   | $ | 726 |   | $ | 679 |   |

 

Investmentmargin increased 6.1% in the third quarter of 2005 and 6.9% in the first ninemonths of 2005 compared to the same periods of 2004 due primarily to higheraverage contractholder funds.  As of September 30,2005, 73% of our interest-sensitive life and fixed annuity contracts, excludingmarket value adjusted annuities and equity indexed annuities, have a guaranteedcrediting rate of 3% or higher.  Of thesecontracts, 80% have crediting rates that are at the minimum as of September 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 was 48 basispoints as of September 30, 2005 compared to 49 basis points as of June 30,2005.

 

The followingtable summarizes the annualized weighted average investment yield, interestcrediting rates and investment spreads for the three months ended September 30.

 
| ** **                                                                      | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spreads** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                               | ** ** | **2004**                                      | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest-sensitive life                                                         |       | 6.2                                    | %          | 6.4                                           | %          | 4.6                                      | %          | 4.8 | % | 1.6 | % | 1.6 | % |
| Fixed annuities – deferred annuities                                       |       | 5.4                                    |       | 5.8                                           |       | 3.8                                      |       | 4.1 |   | 1.6 |   | 1.7 |   |
| Fixed annuities – immediate annuities with  and without life contingencies |       | 7.3                                    |       | 7.6                                           |       | 6.7                                      |       | 6.8 |   | 0.6 |   | 0.8 |   |
| Institutional                                                                   |       | 5.0                                    |       | 3.1                                           |       | 3.9                                      |       | 2.1 |   | 1.1 |   | 1.0 |   |
| Investments supporting capital, traditional  life and other products            |       | 6.5                                    |       | 7.0                                           |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

18

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The following tablesummarizes the annualized weighted average investment yield, interest creditingrates and investment spreads for the nine months ended September 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                                    | %          | 6.5                                           | %          | 4.7                                      | %          | 4.8 | % | 1.6 | % | 1.7 | % |
| 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                                                                   |       | 4.4                                    |       | 3.0                                           |       | 3.4                                      |       | 2.0 |   | 1.0 |   | 1.0 |   |
| Investments supporting capital, traditional  life and other products            |       | 6.8                                    |       | 7.0                                           |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

The following table summarizes theliabilities for these contracts and policies.

 
| ** **                                                             | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                                                      | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Fixed annuities – immediate annuities with  life contingencies    |       | $                                         | 7,847      |   | $ | 7,617 |   |
| Other life contingent contracts and other                              |       | 3,951                                     |       | 3,393 |   |
| Reserve for life-contingent contract  benefits                         |       | $                                         | 11,798     |   | $ | 11,010 |   |
|                                                                   |       |                                      |       |   |   |
| Interest-sensitive life                                                |       | $                                         | 8,014      |   | $ | 7,056 |   |
| Fixed annuities – deferred annuities                              |       | 33,383                                    |       | 29,357 |   |
| Fixed annuities – immediate annuities  without life contingencies |       | 3,429                                     |       | 3,110 |   |
| Institutional                                                          |       | 11,827                                    |       | 11,276 |   |
| Market value adjustments related to  derivative instruments and other  |       | 445                                       |       | 577 |   |
| Contractholder funds                                                   |       | $                                         | 57,098     |   | $ | 51,376 |   |

 

*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 contractcharges for contract guarantees less contract benefits.  Benefit margin excludes the implied intereston life-contingent immediate annuities, which is included in the calculation ofinvestment margin.  We use the benefitmargin to evaluate our underwriting performance, as it reflects theprofitability of our products with respect to mortality or morbidity riskduring a fiscal period.

 

Benefit marginby product group is shown in the following table.

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**     | ** ** | **2005**                                   | ** ** | **2004(1)**                               | ** ** | **2005** | ** ** | **2004(1)** | ** ** |
| Life  insurance       |       | $                                          | 94         |                                      | $          | 98 |   | $ | 270 |   | $ | 292 |   |
| Annuities             |       | (16                                        | )          | (19                                       | )          | (55 | ) | (39 | ) |
| Total  benefit margin |       | $                                          | 78         |                                      | $          | 79 |   | $ | 215 |   | $ | 253 |   |

 

----

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

 

Benefit margindeclined 1.3% in the third quarter of 2005 and 15.0% in the first nine monthsof 2005 compared to the same periods of 2004. The decline in the third quarter was due primarily to the absence of

 

19

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margin on certain products resulting from the disposal of our directresponse distribution business in the prior year, partially offset by improvedmortality experience on immediate annuities with life contingences.  The decline for the nine month period wasprimarily driven by the disposal of our direct response business andunfavorable mortality experience on immediate annuities with life contingences,partially offset by growth of our in-force business.  In addition, the nine-month period wasunfavorably impacted by an increase in the reserve for guarantees related tovariable contracts of $9 million that resulted from our annual comprehensiveevaluation of the assumptions used in our valuation models, partially offset bybetter than anticipated equity market performance.  The evaluation resulted in a refinedmeasurement of exposure.  There was nocomparable 2004 adjustment to reserves for variable contract guarantees,because the reserves were established in the first quarter of 2004 as part ofthe cumulative effect of the change in accounting for such guarantees.

 

Upon theadoption of Statement of Position No. 03-1, “Accounting and Reporting byInsurance Enterprises for Certain Nontraditional Long-Duration Contracts andfor Separate Accounts”, on January 1, 2004, reserves were established fordeath and income benefits provided under variable annuities and secondaryguarantees on certain interest-sensitive life contracts and fixed annuities.

 

Annuitybenefit margin will continue to be adversely impacted by certain closed blocksof life-contingent immediate annuities whose benefit payments are anticipatedto extend beyond their original pricing expectations.  The annuity benefit margin in future periodswill fluctuate based on the timing of annuitant deaths on these life-contingentimmediate annuities and the annual evaluationof assumptions used in our valuation models for variable and fixed annuityguarantees.

 

*Amortization of DACand DSI*, excluding amortization related to realizedcapital gains and losses, increased 16.8% or $18 million in the three monthsended September 30, 2005 and 6.0% or $20 million in the first nine monthsof 2005 compared to the same periods of 2004 as a result of higher grossmargin.  DAC and DSI amortization relatedto realized capital gains and losses, after-tax, decreased $13 million in thethird quarter and increased $78 million in the first nine months of 2005compared to the same periods in the prior year.   The increase in the nine-month period wasdue to increased realized capital gains on investments supporting certain fixedannuities.

 

In the firstquarter of 2005, we performed our annual comprehensive evaluation of theassumptions used in our valuation models for all investment products, includingvariable and fixed annuities and interest-sensitive and variable life products,which resulted in net DAC and DSI amortization acceleration of $7 million(commonly referred to as “DAC and DSI unlocking”).  The DAC and DSI unlocking includesamortization acceleration on fixed annuities of $62 million and $3 million oninterest-sensitive and variable life products, partially offset by amortizationdeceleration 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 investment portfolio yielddeclines.  The amortization decelerationon variable annuities was mostly attributable to better than anticipated equitymarket performance and persistency.

 

In the prioryear, the comparable DAC and DSI unlocking was a net acceleration of amortizationof $0.5 million, which included deceleration of amortization related tointerest-sensitive life and acceleration of amortization related to fixedannuities.

 

*Operating costs and expenses* declined slightlyin the three months and nine months ended September 30, 2005 compared tothe same periods in the prior year.  Thefollowing table summarizes operating costs and expenses.

 
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in millions)**                   | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                |       |                                       |       |                                      |       |   |   |   |   |
| Non-deferrable  acquisition costs   |       | $                                          | 39         |                                      | $          | 36 |   | $ | 115 |   | $ | 105 |   |
| Other  operating costs and expenses |       | 60                                         |       | 68                                        |       | 210 |   | 224 |   |
| Total  operating costs and expenses |       | $                                          | 99         |                                      | $          | 104 |   | $ | 325 |   | $ | 329 |   |

 

20

----

 

Non-deferrableacquisition costs for the third quarter of 2005 increased 8.3% and increased9.5% in the first nine months of 2005 compared to the same periods in the prioryear as a result of higher premium taxes and non-deferrable commissions.  The decline in other operating costs andexpenses in the third quarter of 2005 compared to the same period in the prioryear was attributable to lower employee and technology expenses and the effectof a change in the financial statement classification of a reinsurance cedingallowance.  In the nine-month period, theeffect of expense reimbursements in 2004 related to our direct responsedistribution business that was sold in 2004 partially offset the variancesdescribed for the third quarter.

 

**INVESTMENTS**

 

An important component of our financialresults is the return on our investment portfolio.  The composition of the investment portfolioat September 30, 2005 is presented in the table below.

 
| **(in millions)**            | ** ** | **Investments** | ** ** | **Percent to  total** | ** ** |
|------------------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                   | ** ** | ** **      | ** ** | ** **            | ** ** |
| Fixed income  securities (1) |       | $               | 62,419     |                  | 85.1       | % |
| Mortgage  loans              |       | 7,836           |       | 10.7                  |       |
| Equity  securities           |       | 297             |       | 0.4                   |       |
| Short-term                   |       | 1,404           |       | 1.9                   |       |
| Policy loans                 |       | 723             |       | 1.0                   |       |
| Other                        |       | 697             |       | 0.9                   |       |
| Total                        |       | $               | 73,376     |                  | 100.0      | % |

 

----

(1)   Fixedincome securities are carried at fair value. Amortized cost basis for these securities was $59.9 billion.

 

Total investments increased to $73.38 billionat September 30, 2005 from $69.69 billion at December 31, 2004, dueprimarily to increased contractholder funds and increased balances associatedwith securities lending.

 

Total investments at amortized cost relatedto collateral, due to securities lending and other security repurchase andresale transactions, increased to $3.65 billion at September 30, 2005,from $2.93 billion at December 31, 2004.

 

At September 30, 2005, 93.9% of thefixed income securities portfolio was rated investment grade, which is definedas a security having a rating from the National Association of InsuranceCommissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody’s ora rating of AAA, AA, A or BBB from S&P, Fitch or Dominion; or a comparableinternal rating if an externally provided rating is not available.

 

The unrealizednet capital gains on fixed income and equity securities at September 30,2005 were $2.56 billion, a decrease of $775 million or 23.2% since December 31,2004.  The net unrealized gain for thefixed income portfolio totaled $2.55 billion, comprised of $2.91 billion ofunrealized gains and $358 million of unrealized losses at September 30,2005.  This is compared to a netunrealized gain for the fixed income portfolio totaling $3.33 billion at December 31,2004, comprised of $3.49 billion of unrealized gains and $163 million ofunrealized losses.

 

Of the grossunrealized losses in the fixed income portfolio at September 30, 2005,$309 million or 86.3% were related to investment grade securities and arebelieved to be primarily a result of a rising interest rate environment.  Of the remaining $49 million of losses in thefixed income portfolio, $40 million or 81.6% were in the corporate fixed incomeportfolio, and $9 million or 18.4% were in the asset-backed securitiesportfolio.  The $40 million of corporatefixed income gross unrealized losses were primarily comprised of securities inthe consumer goods, financial services, communications, and transportationsectors.  The gross unrealized losses inthese sectors were primarily company specific and interest rate related.  Approximately $20.4 million of the totalgross unrealized losses in the corporate fixed income portfolio were associatedwith the automobile industry, which includes direct debt issuances ofautomobile manufacturers, captive automotive financing companies and automobileparts and equipment suppliers,

 

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which are reported in the consumer goods and financial servicessectors.  Values in the automobileindustry were primarily depressed due to company specific conditions.  Additionally, approximately $6 million of thetotal gross unrealized losses in the corporate fixed income portfolio and $7million of the total gross unrealized losses in the asset-backed securitiesportfolio were associated with the airline industry for which values weredepressed due to company or issue specific conditions and economic issues,including fuel costs.  We expect eventualrecovery of these securities.  Everysecurity was included in our portfolio monitoring process.

 

The gross andnet unrealized gain for the common and non-redeemable preferred stock portfoliototaled $9 million at both September 30, 2005 and December 31, 2004.

 

Our portfoliomonitoring process identifies and evaluates fixed income and equity securitieswhose carrying value may be other than temporarily impaired.  The process includes a quarterly review ofall securities using a screening process to identify those securities whosefair value compared to amortized cost for fixed income securities or cost forequity securities is below established thresholds for certain time periods, orwhich are identified through other monitoring criteria such as ratingsdowngrades or payment defaults.  We alsorecognize impairment on securities in an unrealized loss position for which wedo not have the intent and ability to hold until recovery.

 

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

 

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

 
| ** **                             | ** ** | **September 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                                |       | $                           | 108        |                       | $          | 117 |   | 0.2 | % | $ | 71 |   | $ | 71 |   | 0.1 | % |
| Restructured                           |       | —                      |       | —                     |       | — |   | 43 |   | 46 |   | 0.1 |   |
| Potential  problem                     |       | 139                         |       | 158                        |       | 0.2 |   | 168 |   | 179 |   | 0.3 |   |
| Total net  carrying value              |       | $                           | 247        |                       | $          | 275 |   | 0.4 | % | $ | 282 |   | $ | 296 |   | 0.5 | % |
| Cumulative  write-downs recognized (1) |       | $                           | 228        |                       |       |   |   |   | $ | 231 |   |   |   |   |   |

 

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

 

We have experienced an increase in theamortized cost of fixed income securities categorized as problem as of September 30,2005 compared to December 31, 2004. The increase was primarily related to the addition of securities to theproblem category as a result of company specific issues, including the thirdquarter bankruptcy filings of certain airlines. The decrease in the amortized cost of fixed income securities categorizedas restructured and potential problem as of September 30, 2005 compared toDecember 31, 2004 was primarily related to dispositions.  Dispositions included sales, where specificdevelopments caused a change in our outlook and intent to hold the security,and calls.

 

We also evaluated each of these securitiesthrough our portfolio monitoring process at September 30, 2005 andrecorded write-downs when appropriate. We further concluded that any remaining unrealized losses on thesesecurities were temporary in nature and that we have the intent and ability tohold until recovery.  While thesebalances may increase in the future, particularly if economic conditions areunfavorable, management expects that****thetotal amount of securities in these categories will remain low relative to thetotal fixed income securities portfolio.

 

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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****September 30,** | ** ** | **Nine Months Ended****September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| **(in millions)**                             | ** ** | **2005**                                     | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                                         |       |                                        |       |   |   |   |   |
| Write-downs                                   |       | $                                            | (9         | )                                           | $          | (27 | ) | $ | (22 | ) | $ | (72 | ) |
| Dispositions                                  |       | 22                                           |       | 1                                           |       | 120 |   | (11 | ) |
| Valuation of derivative instruments           |       | (32                                          | )          | (22                                         | )          | (101 | ) | (60 | ) |
| Settlement of derivative instruments          |       | 45                                           |       | (4                                          | )          | 54 |   | (4 | ) |
| Realized capital gains and losses, pretax     |       | 26                                           |       | (52                                         | )          | 51 |   | (147 | ) |
| Income tax (expense) benefit                  |       | (9                                           | )          | 18                                          |       | (18 | ) | 52 |   |
| Realized capital gains and losses,  after-tax |       | $                                            | 17         |                                        | $          | (34 | ) | $ | 33 |   | $ | (95 | ) |

 

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

 

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

 

Because of changes in existing marketconditions and asset return assumptions, certain changes are planned within theinvestment portfolio impacting approximately $118 million of securities at theend of the third quarter of 2005.  Thesechanges result from continued asset-liability management strategies, on-goingcomprehensive reviews of our portfolios, and changes being made to our strategicasset allocations.  Approximately $80million of these securities were in an unrealized loss position, and,therefore, with the change in our intent to hold these investments, werecognized $4 million of anticipated disposition write-downs during thequarter.

 

In the first quarter of 2005, because of ananticipated rise in interest rates, as well as changes in existing marketconditions and long term asset return assumptions, certain changes were plannedwithin various portfolios.  Theseincluded continued asset-liability management strategies; on-goingcomprehensive reviews of our portfolios; and changes being made to ourstrategic asset allocations, including a decision to pursue yield enhancementstrategies.  At that time, we identified,in total, approximately $1.3 billion of securities we would consider selling toachieve these objectives.  Of that $1.3billion, approximately $1.1 billion of securities were in an unrealized lossposition, for which we recognized $29 million of write-downs due to a change inintent to hold these securities until recovery. Of the $1.1 billion of securities with write-downs in the first quarter,$185 million with write-downs of $5 million have been sold and we continue toconsider selling approximately $11 million with write-downs of $1 million.  The remaining $907 million of securities withwrite-downs of $23 million have been re-designated as being held to recoverywithin the available-for-sale category, primarily as a consequence of a lowerthan expected interest rate environment. The difference between the current carrying value and par value of there-designated securities will be recognized in net investment income over theremaining life of the securities, pursuant to the guidance in Statement ofPosition 03-3, “Accounting for Certain Loans or Debt Securities Acquired in aTransfer”.

 

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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)**                                                          | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Redeemable preferred stock                                                 |       | $                           | 5          |                       | $          | 5 |   |
| Common stock, retained earnings and other Shareholder’s  equity items |       | 5,522                       |       | 5,291                      |       |
| Accumulated other comprehensive income                                     |       | 655                         |       | 1,013                      |       |
| Total shareholder’s equity                                            |       | 6,182                       |       | 6,309                      |       |
| Debt                                                                       |       | 186                         |       | 104                        |       |
| Total capital resources                                                    |       | $                           | 6,368      |                       | $          | 6,413 |   |

 

*Shareholder’s equity*declined in the first nine months of 2005 when compared to December 31,2004, due to decreases in unrealized net capital gains on investments anddividends, partially offset by net income. The Company paid dividends of $50 million to Allstate Insurance Company(“AIC”, the Company’s parent) in the first nine 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*increased $82 million as of September 30, 2005 compared to December 31,2004 as a result of the issuance of 5.06% surplus notes due July 1, 2035by ALIC Reinsurance Company (“ALIC Re”), a wholly owned subsidiary of ALIC (seeNote 2 to the condensed consolidated financial statements) partially offset bythe redemption of mandatory redeemable preferred stock.

 

**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), risk exposures, operating leverage, AIC’sratings and other factors.  There havebeen no changes to our insurance financial strength ratings since December 31,2004.

 

In connection with developments at AIC, in October 2005,Standard & Poor’s affirmed the AA insurance financial strength ratingsof the Company and our rated affiliates, with a revised rating outlook of ‘Negative’(from ‘Stable’).  Also in October 2005,Moody’s affirmed the Aa2 insurance financial strength ratings of the Companyand our rated affiliates.  Furthermore,in November 2005, A.M. Best affirmed the A+ insurance financial strengthratings of the Company and our rated affiliates.

 

**Liquidity Sources and Uses** As reflected in our Condensed Consolidated Statements of Cash Flows,****higher operating cash flows in the firstnine months of 2005 when compared to the first nine months of 2004 primarilyrelated to higher investment income, partially offset by higher policy benefitsand lower premiums.  Cash flows used ininvesting activities decreased in the first nine months of 2005 due to lowercash flows from financing activities, partially offset by higher cash flowsfrom operating activities.

 

# **Lower cash flow from financing activitiesduring the first nine months of 2005 when compared to the first nine months of2004 reflect lower institutional and fixed annuity contractholder funddeposits, higher fixed annuity withdrawals, including increased surrenders ofmarket value adjusted annuities, and institutional product maturities.  For quantification of the changes incontractholder funds, see the operations section of the 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 September 30, 2005,there were no balances outstanding and therefore the remaining borrowingcapacity 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 the facilityis not subject to a minimum rating requirement, the costs of maintaining thefacility and borrowing under it are based on the ratings of our senior,unsecured, nonguaranteed long-term debt. There were no borrowings during the first

 

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nine months of 2005. The total amountoutstanding at any point in time under the combination of the commercial paperprogram and the credit facility cannot exceed the amount that can be borrowedunder the credit facility.

 

•     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-LOOKING STATEMENTS AND RISK FACTORS**

 

This document contains “forward-looking statements” that anticipateresults based on our estimates, assumptions and plans that are subject touncertainty.  These statements are madesubject to the safe-harbor provisions of the Private Securities LitigationReform Act of 1995.  We assume no obligationto update any forward-looking statements as a result of new information orfuture events or developments.

 

These forward-looking statements do not relate strictly to historicalor current facts 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 otherthings, our strategy for growth, product development, regulatory approvals,market position, expenses, financial results, litigation and reserves.  We believe that these statements are based onreasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying theforward-looking statements prove inaccurate or if other risks or uncertaintiesarise, actual results could differ materially from those communicated in theseforward-looking statements.  Factorswhich could cause actual results to differ materially from those suggested bysuch forward-looking statements include but are not limited to those discussedor identified 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, under thecaption “Forward-Looking Statements and Risk Factors”.

 

**A decrease in our financial strength ratings may have an adverse effecton our competitive position.**

** **

Financial strength ratings are importantfactors in establishing the competitive position of insurance companies andgenerally have an effect on an insurance company’s business.  On an ongoing basis, rating agencies reviewthe financial performance and condition of insurers and could downgrade orchange the outlook on an insurer’s ratings due to, for example, a change in aninsurer’s statutory capital; a change in a rating agency’s determination of theamount of risk-adjusted capital required to maintain a particular rating; anincrease in the perceived risk of an insurer’s investment portfolio; a reducedconfidence in management or a host of other considerations that may or may notbe under the insurer’s control.  Theinsurance financial strength ratings of both AIC and ALIC are A+, AA and Aa2from A.M. Best, Standard and Poor’s and Moody’s, respectively.  Because all of these ratings are subject tocontinuous review, the retention of these ratings cannot be assured.  A multiple level downgrade in any of theseratings could have a material adverse effect on our sales, our competitiveness,the marketability of our product offerings, and our liquidity, operatingresults and financial condition.

 

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

 

We arepursuing strategies intended to improve our return on equity.  Actions that we have taken and may continueto take include changing the number and selection of products being marketed,terminating underperforming distribution relationships, merging or disposing ofunnecessary and/or non-strategic legal entities, reducing policy administrationsoftware systems, and other actions that we may determine are appropriate tosuccessfully execute our business strategies. The actions that we have taken and may take in the future may notachieve their intended outcome and could result in lower premiums and contractcharges, restructuring costs, losses on disposition or losses related to thediscontinuance of individual products or distribution relationships.

 

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## **Changes in market interest rates may lead to a significant decrease inthe sales and profitability of spread-based products**

 

Our ability to manage the investment margin for spread-based productsis dependent upon maintaining profitable spreads between investment yields andinterest crediting rates.  As interestrates decrease or remain at low levels, proceeds from investments that havematured or that have been prepaid or sold may be reinvested at lower yields,reducing investment margin.  Loweringinterest-crediting rates can offset decreases in investment margin on someproducts.  However, these changes couldbe limited by market conditions, regulatory or contractual minimum rateguarantees on many contracts and may not match the timing or magnitude ofchanges in asset yields.  Decreases inthe rates offered on products could make those products less attractive,leading to lower sales and/or changes in the level of surrenders andwithdrawals 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 could narrow spreads.  Unanticipated surrenders could result in DACunlocking or affect the recoverability of DAC and thereby increase expenses andreduce profitability.

 

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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 September 30, 2005, there were no changes in our internalcontrol over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.****    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.

 

**Item6.****    Exhibits**

 

(a)           Exhibits

 

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

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                  | Allstate Life Insurance Company       |
|-----------------------|---------------------------------------|
|                  | (Registrant)                          |
|                  |                                  |
|                  |                                  |
| November 7, 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                 |       | Investment Management Agreement between Allstate Investments, LLC and  ALIC Reinsurance Company, effective July 1, 2005.                             |
|                 |       |                                                                                                                                                      |
| 10.2                 |       | Surplus Note Purchase Agreement between Allstate Life Insurance  Company and Kennett Capital, Inc., effective August 1, 2005.                   |
|                 |       |                                                                                                                                                      |
| 10.3                 |       | Pledge and Security Agreement between Allstate Life Insurance Company  and Kennett Capital, Inc., effective August 1, 2005.                     |
|                 |       |                                                                                                                                                      |
| 15                   |       | Acknowledgment of awareness from Deloitte & Touche LLP,  dated  November 7,  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                                                                                                                          |

 

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