**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

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

 

**ý****          ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006**

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number: 000-31248**

 

**ALLSTATE LIFE INSURANCE COMPANY**

(Exact name of registrant asspecified in its charter)

 

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

 

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

**Yes  ****ý    No  ****o**

 

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

** **

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

 

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

**Yes  ****o    No  ****ý**

 

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

 

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

 

 

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**ALLSTATE LIFE INSURANCE COMPANY**

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

##### **March 31, 2006**

 
| ** **  | ** **                                                                                                                | **PAGE**   |
|-------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                 | ** ** |
|        |                                                                                                                      |       |
| Item 1.     | Financial Statements                                                                                                      |       |
|        |                                                                                                                      |       |
|        | Condensed  Consolidated Statements of Operations for the Three-Month Periods Ended March  31, 2006   and 2005 (unaudited) | 1          |
|        |                                                                                                                      |       |
|        | Condensed Consolidated Statements of Financial Position as of March  31, 2006 (unaudited) and   December 31, 2005         | 2          |
|        |                                                                                                                      |       |
|        | Condensed Consolidated Statements of Cash Flows for the Three-Month  Periods Ended March 31, 2006   and 2005 (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                                                                                                  | 24         |
|        |                                                                                                                      |       |
| **PART II** | **OTHER INFORMATION**                                                                                                     | ** ** |
|        |                                                                                                                      |       |
| Item 1.     | Legal Proceedings                                                                                                         | 25         |
|        |                                                                                                                      |       |
| Item 1A.    | Risk Factors                                                                                                              | 25         |
|        |                                                                                                                      |       |
| Item 6.     | Exhibits                                                                                                                  | 25         |

 

----

 

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

**ITEM 1. FINANCIAL STATEMENTS**

 

**ALLSTATE LIFE INSURANCE COMPANY ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                                  | ** ** |
| **Revenues**                                          |       |                                             |       |   |   |
| Premiums                                              |       | $                                                | 117        |   | $ | 142 |   |
| Contract charges                                      |       | 285                                              |       | 259 |   |
| Net investment income                                 |       | 974                                              |       | 888 |   |
| Realized capital gains and losses                     |       | (27                                              | )          | 1 |   |
|                                                  |       |                                             |       |   |   |
|                                                  |       | 1,349                                            |       | 1,290 |   |
|                                                  |       |                                             |       |   |   |
| **Costs and expenses**                                |       |                                             |       |   |   |
| Contract benefits                                     |       | 326                                              |       | 347 |   |
| Interest credited to contractholder funds             |       | 603                                              |       | 576 |   |
| Amortization of deferred policy acquisition  costs    |       | 105                                              |       | 169 |   |
| Operating costs and expenses                          |       | 103                                              |       | 116 |   |
| Restructuring and related charges                     |       | 15                                               |       | — |   |
|                                                  |       |                                             |       |   |   |
|                                                  |       | 1,152                                            |       | 1,208 |   |
|                                                  |       |                                             |       |   |   |
| Loss on disposition of operations                     |       | (53                                              | )          | (5 | ) |
|                                                  |       |                                             |       |   |   |
| **Income from operations before income tax  expense** |       | 144                                              |       | 77 |   |
|                                                  |       |                                             |       |   |   |
| Income tax expense                                    |       | 48                                               |       | 9 |   |
|                                                  |       |                                             |       |   |   |
| **Net income**                                        |       | $                                                | 96         |   | $ | 68 |   |

 

See notes to condensed consolidated financialstatements.

 

1

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**ALLSTATE LIFE INSURANCE COMPANY ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFFINANCIAL POSITION**

 
| **($ in millions, except par value data)**                                                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                     | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                     |       |                     |       |                        |       |
| Investments                                                                                                                    |       |                     |       |                        |       |
| Fixed income securities, at fair value  (amortized cost $59,624 and $59,717)                                                   |       | $                        | 60,666     |                        | $          | 61,977 |   |
| Mortgage loans                                                                                                                 |       | 8,480                    |       | 8,108                       |       |
| Equity securities                                                                                                              |       | 360                      |       | 324                         |       |
| Short-term                                                                                                                     |       | 2,016                    |       | 927                         |       |
| Policy loans                                                                                                                   |       | 731                      |       | 729                         |       |
| Other                                                                                                                          |       | 795                      |       | 691                         |       |
|                                                                                                                           |       |                     |       |                        |       |
| Total investments                                                                                                              |       | 73,048                   |       | 72,756                      |       |
|                                                                                                                           |       |                     |       |                        |       |
| Cash                                                                                                                           |       | 186                      |       | 154                         |       |
| Deferred policy acquisition costs                                                                                              |       | 4,388                    |       | 3,948                       |       |
| Reinsurance recoverables, net                                                                                                  |       | 1,746                    |       | 1,699                       |       |
| Accrued investment income                                                                                                      |       | 672                      |       | 648                         |       |
| Other assets                                                                                                                   |       | 695                      |       | 582                         |       |
| Separate Accounts                                                                                                              |       | 15,817                   |       | 15,235                      |       |
|                                                                                                                           |       |                     |       |                        |       |
| **Total assets**                                                                                                               |       | $                        | 96,552     |                        | $          | 95,022 |   |
|                                                                                                                           |       |                     |       |                        |       |
| **Liabilities**                                                                                                                |       |                     |       |                        |       |
| Contractholder funds                                                                                                           |       | $                        | 58,412     |                        | $          | 58,190 |   |
| Reserve for life-contingent contract  benefits                                                                                 |       | 11,681                   |       | 11,881                      |       |
| Unearned premiums                                                                                                              |       | 35                       |       | 35                          |       |
| Payable to affiliates, net                                                                                                     |       | 115                      |       | 98                          |       |
| Other liabilities and accrued expenses                                                                                         |       | 4,353                    |       | 3,054                       |       |
| Deferred income taxes                                                                                                          |       | 192                      |       | 340                         |       |
| Long-term debt                                                                                                                 |       | 174                      |       | 181                         |       |
| Separate Accounts                                                                                                              |       | 15,817                   |       | 15,235                      |       |
|                                                                                                                           |       |                     |       |                        |       |
| **Total liabilities**                                                                                                          |       | 90,779                   |       | 89,014                      |       |
|                                                                                                                           |       |                     |       |                        |       |
| **Commitments and Contingent Liabilities  (Note 5)**                                                                           |       |                     |       |                        |       |
|                                                                                                                           |       |                     |       |                        |       |
| **Shareholder’s Equity**                                                                                                  |       |                     |       |                        |       |
| Redeemable preferred stock – series A, $100  par value, 1,500,000 shares authorized, 49,230 shares issued and outstanding |       | 5                        |       | 5                           |       |
| Redeemable preferred stock – series B, $100  par value, 1,500,000 shares authorized, none issued                          |       | —                   |       | —                      |       |
| Common stock, $227 par value, 23,800 shares  authorized and outstanding                                                        |       | 5                        |       | 5                           |       |
| Additional capital paid-in                                                                                                     |       | 1,108                    |       | 1,108                       |       |
| Retained income                                                                                                                |       | 4,398                    |       | 4,302                       |       |
| Accumulated other comprehensive income:                                                                                        |       |                     |       |                        |       |
| Unrealized net capital gains and losses                                                                                        |       | 257                      |       | 588                         |       |
|                                                                                                                           |       |                     |       |                        |       |
| **Total accumulated other comprehensive  income**                                                                              |       | 257                      |       | 588                         |       |
|                                                                                                                           |       |                     |       |                        |       |
| **Total shareholder’s equity**                                                                                            |       | 5,773                    |       | 6,008                       |       |
|                                                                                                                           |       |                     |       |                        |       |
| **Total liabilities and shareholder’s equity**                                                                            |       | $                        | 96,552     |                        | $          | 95,022 |   |

 

See notes to condensed consolidated financialstatements.****

 

2

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**ALLSTATE LIFE INSURANCE COMPANY ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

** **
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                                                             | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                                  | ** ** |
| **Cash flows from operating activities**                                           |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 96         |   | $ | 68 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                             |       |   |   |
| Amortization and other non-cash items                                              |       | (58                                              | )          | (46 | ) |
| Realized capital gains and losses                                                  |       | 27                                               |       | (1 | ) |
| Loss on disposition of operations                                                  |       | 53                                               |       | 5 |   |
| Interest credited to contractholder funds                                          |       | 603                                              |       | 576 |   |
| Changes in:                                                                        |       |                                             |       |   |   |
| Contract benefit and other insurance  reserves                                     |       | (92                                              | )          | (17 | ) |
| Unearned premiums                                                                  |       | —                                           |       | — |   |
| Deferred policy acquisition costs                                                  |       | (82                                              | )          | (26 | ) |
| Reinsurance recoverables, net                                                      |       | (49                                              | )          | (80 | ) |
| Income taxes payable                                                               |       | 48                                               |       | (36 | ) |
| Other operating assets and liabilities                                             |       | (55                                              | )          | (29 | ) |
| Net cash provided by operating activities                                          |       | 491                                              |       | 414 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash flows from investing activities**                                           |       |                                             |       |   |   |
| Proceeds from sales                                                                |       |                                             |       |   |   |
| Fixed income securities                                                            |       | 3,183                                            |       | 2,366 |   |
| Equity securities                                                                  |       | 44                                               |       | 16 |   |
| Investment collections                                                             |       |                                             |       |   |   |
| Fixed income securities                                                            |       | 800                                              |       | 1,036 |   |
| Mortgage loans                                                                     |       | 490                                              |       | 153 |   |
| Investment purchases                                                               |       |                                             |       |   |   |
| Fixed income securities                                                            |       | (3,929                                           | )          | (5,068 | ) |
| Equity securities                                                                  |       | (46                                              | )          | (32 | ) |
| Mortgage loans                                                                     |       | (869                                             | )          | (402 | ) |
| Change in short-term investments, net                                              |       | 40                                               |       | (121 | ) |
| Change in other investments, net                                                   |       | (25                                              | )          | 22 |   |
| Net cash used in investing activities                                              |       | (312                                             | )          | (2,030 | ) |
|                                                                               |       |                                             |       |   |   |
| **Cash flows from financing activities**                                           |       |                                             |       |   |   |
| Change in short-term debt, net                                                     |       | —                                           |       | 75 |   |
| Redemption of mandatorily redeemable  preferred stock                              |       | (6                                               | )          | (6 | ) |
| Contractholder fund deposits                                                       |       | 2,013                                            |       | 3,255 |   |
| Contractholder fund withdrawals                                                    |       | (2,154                                           | )          | (1,787 | ) |
| Dividends paid                                                                     |       | —                                           |       | — |   |
| Net cash (used in) provided by financing  activities                               |       | (147                                             | )          | 1,537 |   |
|                                                                               |       |                                             |       |   |   |
| **Net increase (decrease) in cash**                                                |       | 32                                               |       | (79 | ) |
| **Cash at beginning of the period**                                                |       | 154                                              |       | 241 |   |
| **Cash at end of period**                                                          |       | $                                                | 186        |   | $ | 162 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**ALLSTATE LIFE 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 March 31, 2006 and for thethree-month periods ended March 31, 2006 and 2005 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 financialstatements and notes should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2005. The results of operationsfor the interim periods should not be considered indicative of results to beexpected for the full year.

 

To conform to the 2006 presentation, certainamounts in the prior year condensed consolidated financial statements and noteshave been reclassified.

 

Equity securities include common stocks,non-redeemable preferred stocks and limited partnership interests. Commonstocks and non-redeemable preferred stocks had a carrying value of $71 millionand $67 million, and cost of $62 million and $62 million at March 31, 2006 andDecember 31, 2005, respectively. Investments in limited partnership interestshad a carrying value of $289 million and $257 million at March 31, 2006 andDecember 31, 2005, respectively.

 

**Adopted accounting standards**

 

*Financial Accounting Standards Board StaffPosition No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments” (“FSP FAS 115-1”)*

 

The Companyadopted Financial Accounting Standards Board (“FASB”) FSP FAS 115-1 as ofJanuary 1, 2006. FSP 115-1 nullifies the guidance in paragraphs 10-18 of Emerging Issues Task Force Issue No. 03-1 (“EITFIssue 03-1”), “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments” and references existing other thantemporary impairment guidance. FSP FAS 115-1 clarifies that an investor shouldrecognize an impairment loss no later than when the impairment is deemedother-than-temporary, even if a decision to sell the security has not beenmade, and also provides guidance on the subsequent accounting for incomerecognition on an impaired debt security. The adoption of FSP FAS 115-1 wasrequired on a prospective basis and did not have a material effect on theresults of operations or financial position of the Company.

 

*Statementof Financial Accounting Standards No. 154, “Accounting Changes and ErrorCorrections” (“SFAS No. 154”)*

 

The Company adopted SFAS No. 154 on January 1, 2006. SFAS No. 154replaces Accounting Principles Board (“APB”) Opinion No. 20, “AccountingChanges”, and SFAS No. 3, “Reporting Accounting Changes in Interim FinancialStatements”.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements for changes inaccounting principle, unless determination of either the period specificeffects or the cumulative effect of the change is impracticable or otherwisepromulgated. The Company had no accounting changes or error corrections in thecurrent period affected by the new standard.

 

## **Pendingaccounting standards**

## ** **

*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 AICPA issued SOP 05-1.  SOP 05-1 provides accounting guidance fordeferred policy acquisition costs associated with internal replacements ofinsurance and investment contracts other than those already described in SFASNo. 97, “Accounting and Reporting by Insurance Enterprises for CertainLong-Duration Contracts and for Realized Gains and Losses from the Sale ofInvestments”. SOP 05-1 defines an internal replacement as a modification inproduct benefits, features, rights or coverages that occurs by the exchange ofa contract for a new contract, or by amendment, endorsement or rider to acontract, or by the election of a feature or coverage within a contract. Theprovisions of SOP 05-1 are effective for internal replacements occurring infiscal

 

4

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years beginning after December 15, 2006. TheCompany is currently assessing the impact of the SOP on its results ofoperations and financial position.

 

*SFAS No. 155, “Accounting forCertain Hybrid Financial Instruments – an amendment of FASB Statements No. 133and 140” (“SFAS No. 155”)*

 

InFebruary 2006 the FASB issued SFAS No. 155, which, among other things, permitsthe fair value remeasurement of any hybrid financial instrument that containsan embedded derivative that otherwise would require bifurcation under SFAS No.133; clarifies which interest-only strips and principal-only strips are notsubject to the requirements of SFAS No. 133; and establishes a requirement toevaluate interests in securitized financial assets to identify interests thatare freestanding derivatives or hybrid financial instruments that contain anembedded derivative requiring bifurcation. At the date of initial adoption, theCompany must decide whether or not to remeasure its hybrid financialinstruments in accordance with SFAS No. 155 or retain its current accountingunder SFAS No. 133. All securities acquired on or after January 1, 2007 must beaccounted for in accordance with the new guidance. The Company expects to adoptSFAS No. 155 as of January 1, 2007, and has not yet determined if it willutilize the option to fair value hybrid contracts owned at the date of adoptionand subject to SFAS No. 133.

 

**2.****     Related Party Transactions**

 

**Reinsurance**

 

In the first quarter of 2005, theCompany received fixed income securities with a fair value and amortized costof $381 million and $358 million, respectively, and $5 million of accruedinvestment income for the settlement of a $386 million premiumreceivable due from AmericanHeritage Life Insurance Company (“AHL”), an unconsolidated affiliate of theCompany. The receivable related to two coinsurance agreements entered into in2004 whereby the Company assumed certaininterest-sensitive life insurance and fixed annuity contracts from AHL. Sincethe transaction was between affiliates under common control, the securitieswere recorded at amortized cost as of the date of settlement. The differencebetween the amortized cost and fair value of the securities, which increasedaccumulated other comprehensive income by $23 million, was recorded as anon-cash dividend of $23 million ($15 million, after-tax). Thus, the net effecton shareholder’s equity was zero.

 

**Investments**

 

In the first quarter of 2005, the Company purchased fixed incomesecurities from AIC. The Company paid $655 million in cash for the securities,which includes the fair value of the securities of $649 million and $6 millionfor accrued investment income. Since the transaction was between affiliatesunder common control, the securities were recorded at the amortized cost of$623 million as of the date of sale. The difference between the amortized costand fair value of the securities, which increased accumulated othercomprehensive income by $26 million, was recorded as a dividend of $26 million($16 million, after-tax). Thus, the net effect on shareholder’s equity waszero.

 

5

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**3.****    ****Supplemental Cash FlowInformation**

 

Non-cash investment exchanges and modifications,which primarily reflect refinancing of fixed income securities and mergerscompleted with equity securities, totaled $18 million and $5 million for thethree months ended March 31, 2006 and 2005, respectively.

 

Liabilities for collateral received in conjunctionwith securities lending and other activities and for funds received fromsecurity repurchase activities are reported in other liabilities and accruedexpenses in the Condensed Consolidated Statements of Financial Position. Theaccompanying cash flows are included in cash flows from operating activities inthe Condensed Consolidated Statements of Cash Flows along with the relatedchanges in investments, which are as follows:

 
| ** **                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                                                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net change in fixed income securities                                  |       | $                                                | (62        | ) | $ | (231 | ) |
| Net change in short-term investments                                   |       | (1,109                                           | )          | (134 | ) |
| Operating cash flow used                                               |       | $                                                | (1,171     | ) | $ | (365 | ) |
| Liabilities for collateral and security  repurchase, beginning of year |       | $                                                | (2,231     | ) | $ | (2,928 | ) |
| Liabilities for collateral and security  repurchase, end of period     |       | (3,402                                           | )          | (3,293 | ) |
| Operating cash flow provided                                           |       | $                                                | 1,171      |   | $ | 365 |   |

 

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

 

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

 
| ** **                                         | ** ** | **Three months ended   March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in millions)**                             | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| **Premiums and contract charges**                  |       |                                                   |       |   |   |
| Direct                                             |       | $                                                      | 546        |   | $ | 538 |   |
| Assumed                                            |       |                                                   |       |   |   |
| Affiliate                                          |       | 4                                                      |       | 4 |   |
| Non-affiliate                                      |       | 7                                                      |       | 6 |   |
| Ceded–non-affiliate (1)                       |       | (155                                                   | )          | (147 | ) |
|                                               |       |                                                   |       |   |   |
| Premiums and contract charges, net of  reinsurance |       | $                                                      | 402        |   | $ | 401 |   |

 

----

(1) Ceded non-affiliate iscomprised of only premiums.

 

The effects of reinsurance on contract benefits are as follows:

 
| ** **                            | ** ** | **Three months ended   March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------|------------|
| **(in millions)**                | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                            | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| **Contract benefits**                 |       |                                                   |       |   |   |
| Direct                                |       | $                                                      | 443        |   | $ | 487 |   |
| Assumed                               |       |                                                   |       |   |   |
| Affiliate                             |       | 3                                                      |       | 3 |   |
| Non-affiliate                         |       | 5                                                      |       | 4 |   |
| Ceded–non-affiliate              |       | (125                                                   | )          | (147 | ) |
|                                  |       |                                                   |       |   |   |
| Contract benefits, net of reinsurance |       | $                                                      | 326        |   | $ | 347 |   |

 

6

----

 

On March 8, 2006, ALIC, its subsidiary,Allstate Life Insurance Company of New York (“ALNY”), and the Corporationentered into a definitive agreement (“Agreement”) with PrudentialFinancial, Inc. and its subsidiary The Prudential Insurance Company ofAmerica (collectively “Prudential”) to dispose, through a combination ofcoinsurance and modified coinsurance reinsurance, of substantially all of itsvariable annuity business.

 

As a result of the modified coinsurance reinsurance,the separate account assets will remain on the Company’s consolidatedstatements of financial position, but the related results of operations will befully reinsured to Prudential. In contrast, the assets supporting generalaccount liabilities will be transferred to Prudential, net of consideration,under the coinsurance reinsurance provisions.

 

Under the Agreement, ALIC, ALNY and the Corporationwill each indemnify Prudential for certain pre-closing contingent liabilities(including extra-contractual liabilities of ALIC and ALNY and liabilitiesspecifically excluded from the transaction) that ALIC and ALNY have agreed toretain.  In addition, ALIC, ALNY and the Corporation will each indemnifyPrudential for certain post-closing liabilities that may arise from the acts ofALIC, ALNY and their agents, including in connection with ALIC’s and ALNY’sprovision of transition services.

 

The terms of the Agreement will give Prudential theright to be the exclusive provider of its variable annuity products through theAllstate proprietary agency force for three years and a non-exclusive preferredprovider for the following two years.  During a transition period, ALICand ALNY will continue to issue new variable annuity contracts, acceptadditional deposits on existing business from existing contractholders onbehalf of Prudential and, for a period of twenty-four months or less, servicethe reinsured business while Prudential prepares for the migration of thebusiness onto its servicing platform.  ALIC and ALNY have also agreed tocontinue to issue variable annuity contracts in the financial institutionschannel for a period of at least thirty-three months and cede the results ofoperations to Prudential.

 

Total consideration is expected to beapproximately $581 million, subject to adjustment for changes in equitymarkets, interest rates and market volatility between the effective date of theAgreement and the closing of the transaction. ALIC entered into derivativetransactions to economically hedge substantially all of the exposure to thesemarket related adjustments. In the first quarter of 2006, the loss ondisposition of operations related to this transaction totaled $35 million,after-tax, comprised of the change in fair value of the derivatives hedging theconsideration as well as costs incurred to date.

 

In the first quarter of 2006, ALIC’s and ALNY’svariable annuity business generated approximately $75 million in contractcharges. The separate account balances were $14.77 billion and general accountbalances were $1.65 billion as of March 31, 2006.  Separate accountbalances totaling approximately $1.05 billion at March 31, 2006 related to thevariable life business and three companies held for sale continue to beretained by ALIC. In 2005, ALIC’s and ALNY’s variable annuity businessgenerated approximately $278 million in contract charges. The separate accountbalances were $14.23 billion and general account balances were $1.76 billion asof December 31, 2005.

 

The Agreement is subject to regulatory approval andis expected to close in the second quarter of 2006. The disposition is expectedto result in the recognition of a small deferred gain at closing related to thereinsurance agreement. This gain will be amortized over the life of theAgreement and reported as a gain on disposition. Concurrent with the closing ofthe transaction, the gain or loss on disposition of operations will be adjustedfor any additional change in fair value of the hedging derivatives as well asany additional transaction expenses incurred. Cash or cash equivalents in anaggregate amount of approximately $1 billion, net of the consideration, will beneeded to settle the obligation to Prudential at closing under the coinsuranceportion of the Agreement.  The source of these funds will primarily befrom sales of existing investments, and therefore $30 million of pre-taxrealized capital losses were recognized in the first quarter of 2006 due to achange in intent to hold the related fixed income securities.

 

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

 

**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 suchspecified credit events were to occur, the Company’s maximum amount at risk onthese fixed income securities, as

 

7

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measured by the amount of theaggregate initial investment, was $207 million at March 31, 2006. Theobligations associated with these fixed income securities expire at varioustimes during the next six years.

 

In the normal course of business, the Companyprovides standard indemnifications to counterparties in contracts in connectionwith numerous transactions, including acquisitions and divestitures. The typesof indemnifications typically provided include indemnifications for breaches ofrepresentations and warranties, taxes and certain other liabilities, such asthird party lawsuits. The indemnification clauses are often standardcontractual terms and were entered into in the normal course of business basedon an assessment that the risk of loss would be remote. The terms of theindemnifications vary in duration and nature. In many cases, the maximumobligation is not explicitly stated and the contingencies triggering theobligation to indemnify have not occurred and are not expected to occur. Consequently,the maximum amount of the obligation under such indemnifications is notdeterminable. Historically, the Company has not made any material paymentspursuant to these obligations.

 

The aggregate liability balance related toall guarantees was not material as of March 31, 2006.

 

**Regulation**

 

The Company issubject to changing social, economic and regulatory conditions. From time totime regulatory authorities seek to impose additional regulations regardingagent and broker compensation and otherwise expand overall regulation ofinsurance products and the insurance industry. The ultimate changes andeventual effects of these initiatives on the Company’s business, if any, areuncertain.

 

**Legal and Regulatory Proceedings and Inquiries**

 

**Background**

 

The Company and certain affiliates are involved in a number oflawsuits, regulatory inquiries, and other legal proceedings arising out ofvarious aspects of its business. As background to the “Proceedings” sub-sectionbelow, 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.

 

•             Inthe lawsuits, plaintiffs seek a variety of remedies including equitable reliefin the form of injunctive and other remedies and monetary relief in the form ofcontractual and extra-contractual damages. In some cases, the monetary damagessought 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, whenspecific monetary demands are made in pleadings, they bear little relation tothe ultimate loss, if any, to the Company.

 

•                  Inconnection with regulatory examinations and proceedings, government authoritiesmay seek various forms of relief, including penalties, restitution and changesin business practices. The Company may not be advised of the nature and extentof relief sought until the final stages of the examination or proceeding.

 

8

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•             Forthe reasons specified above, it is often not possible to make meaningfulestimates of the amount or range of loss that could result from the mattersdescribed below in the “Proceedings” subsection. The Company reviews thesematters on an on-going basis and follows the provisions of SFAS No. 5, “Accountingfor Contingencies” when making accrual and disclosure decisions. When assessingreasonably possible and probable outcomes, the Company bases its decisions onits assessment of the ultimate outcome following all appeals.

 

•             Dueto the complexity and scope of the matters disclosed in the “Proceedings”subsection below and the many uncertainties that exist, the ultimate outcome ofthese matters cannot be reasonably predicted. In the event of an unfavorableoutcome in one or more of these matters, the ultimate liability may be inexcess of amounts currently reserved and may be material to the Company’soperating results or cash flows for a particular quarter or annual period. However,based on information currently known to it, management believes that theultimate outcome of all matters described below as they are resolved over timeis not likely to have a material adverse effect on the financial position ofthe Company.

 

**Proceedings**

 

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

 

AIC is defending certain matters relating toits agency program reorganization announced in 1999. These matters include alawsuit filed in December 2001 by the U.S. Equal Employment OpportunityCommission (“EEOC”) alleging retaliation under federal civil rights laws, aclass action filed in August 2001 by former employee agents allegingretaliation and age discrimination under the Age Discrimination in EmploymentAct, breach of contract and ERISA violations, and a lawsuit filed in October2004 by the EEOC alleging age discrimination with respect to a policy limitingthe rehire of agents affected by the agency program reorganization. AIC is alsodefending a certified class action filed by former employee agents whoterminated their employment prior to the agency program reorganization. Theseplaintiffs have asserted breach of contract and ERISA claims and are seekingactual damages including benefits under Allstate employee benefit plans andpayments provided in connection with the reorganization, as well as punitivedamages. In late March 2004, in the first EEOC lawsuit and class actionlawsuit, the trial court issued a memorandum and order that, among otherthings, certified classes of agents, including a mandatory class of agents whohad signed a release, for purposes of effecting the court’s declaratoryjudgment that the release is voidable at the option of the release signer. Thecourt also ordered that an agent who voids the release must return to AIC “anyand all benefits received by 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 thecourt to clarify and/or reconsider its memorandum and order. The case otherwiseremains pending. A putative nationwide class action has also been filed byformer employee agents alleging various violations of ERISA, including aworker classification issue. These plaintiffs are challenging certainamendments to the Agents Pension Plan and are seeking to have exclusive agentindependent contractors treated as employees for benefit purposes. Thismatter was dismissed with prejudice by the trial court, was the subject offurther proceedings on appeal, and was reversed and remanded to the trial courtin April 2005. In these matters, plaintiffs seek compensatory and punitivedamages, and equitable relief. AIC has been vigorously defending these lawsuitsand other matters related to its agency program reorganization. In addition,AIC has been defending certain matters relating to its life agency programreorganization announced in 2000. These matters have been the subject of aninvestigation by the EEOC with respect to allegations of age discrimination andretaliation and conciliation discussions between AIC and the EEOC. The outcomeof these disputes is currently uncertain.

 

The Company has resolved through mediationand settlement all but two of its lawsuits brought by plaintiffs challengingtrading restrictions the Company adopted in an effort to limit market-timingactivity in its variable annuity sub-accounts. In the remaining lawsuits, theplaintiffs seek a variety of remedies including monetary and equitable relief. TheCompany has been vigorously defending these matters, but their outcome iscurrently uncertain.

 

9

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The Company is currently undergoing periodic market conductexaminations by state insurance regulators. Regulators in the state of New Yorkare focusing, as they have with other insurers, on the Company’s compliancewith the state’s replacement sales and record-keeping processes with regard tolife insurance and annuities among other issues. They have alleged that theCompany failed to meet the requirements of certain applicable regulations. Inrelation to this examination, the Company accrued $17 million of additionalcontractholder benefits. The outcome of these examinations including potentialNew York customer remediation related to replacement sales is currentlypending.

 

**Other Matters**

** **

The Corporation and some of its subsidiaries,including the Company, have received interrogatories and demands forinformation from regulatory and enforcement authorities relating to variousinsurance products and practices. The areas of inquiry include variable annuitymarket timing, late trading and the issuance of funding agreements backingmedium-term notes. The Corporation and some of its subsidiaries, including theCompany, have also received interrogatories and demands for information fromauthorities seeking information relevant to on-going investigations into thepossible violation of antitrust or insurance laws by unnamed parties and, inparticular, seeking information as to whether any person engaged in activitiesfor the purpose of price fixing, market allocation, or bid rigging. The Companybelieves that these inquiries are similar to those made to many financial servicescompanies as part of industry-wide investigations by various authorities intothe practices, policies and procedures relating to insurance and financialservices products. The Corporation and its subsidiaries have responded and willcontinue to respond to these inquiries.

 

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

 

One or more ofthese matters could have an adverse effect on the Company’s operating resultsor cash flows for a particular quarter or annual period. However, based oninformation currently known to it, management believes that the ultimate outcomeof all matters described in this “Other Matters” subsection in excess ofamounts currently reserved, as they are resolved over time is not likely tohave a material effect on the operating results, cash flows or financialposition of the Company.

 

**6.****     OtherComprehensive Loss**

 

The componentsof other comprehensive loss on a pretax and after-tax basis are as follows:

 
| ** **                                                                       | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **(in millions)**                                                           | ** ** | **Pretax**                                           | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                             |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized net holding losses arising  during the period, net of related offsets |       | $                                                    | (644       | ) | $ | 225 |   | $ | (419 | ) | $ | (697 | ) | $ | 244 |   | $ | (453 | ) |
| Less: reclassification adjustment of  realized capital gains and losses          |       | (135                                                 | )          | 47 |   | (88 | ) | (95 | ) | 33 |   | (62 | ) |
| Other comprehensive loss                                                         |       | $                                                    | (509       | ) | $ | 178 |   | (331 | ) | $ | (602 | ) | $ | 211 |   | (391 | ) |
|                                                                             |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                       |       |                                                 |       |   |   | 96 |   |   |   |   |   | 68 |   |
| Comprehensive loss                                                               |       |                                                 |       |   |   | $ | (235 | ) |   |   |   |   | $ | (323 | ) |

 

10

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Shareholder of

Allstate Life Insurance Company:

 

We havereviewed the accompanying condensed consolidated statement of financialposition of Allstate Life Insurance Company and subsidiaries (the “Company”, anaffiliate of The Allstate Corporation) as of March 31, 2006, and the relatedcondensed consolidated statements of operations and cash flows for the three-monthperiods ended March 31, 2006 and 2005. These interim financial statements arethe responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than an audit conducted inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the objective of which is the expression of an opinionregarding the financial statements taken as a whole. Accordingly, we do notexpress such an opinion.

 

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

 

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedstatement of financial position of Allstate Life Insurance Company and subsidiariesas of December 31, 2005, and the related consolidated statements ofoperations and comprehensive income, shareholder’s equity, and cash flows for theyear then ended, not presented herein. In our report dated March 10, 2006,which report includes an explanatory paragraph relating to a change in methodof accounting for certain nontraditional long-duration contracts and for separateaccounts in 2004 and changes in the methods of accounting for embeddedderivatives in modified coinsurance agreements and variable interest entitiesin 2003, we expressed an unqualified opinion on those consolidated financialstatements. In our opinion the information set forth in the accompanyingcondensed consolidated statement of financial position as of December 31, 2005is fairly 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             |
| May 8, 2006                   |

 

11

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| **Item 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR  THE THREE-MONTH PERIODS ENDED MARCH 31, 2006 AND 2005** |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**OVERVIEW**

 

The following discussion highlightssignificant factors influencing the consolidated financial position and resultsof operations of Allstate Life Insurance Company (referred to in this documentas “we”, “our”, “us”, or the “Company”). It should be read in conjunction withthe condensed consolidated financial statements and notes thereto found underPart I. Item 1. contained herein, and with the discussion, analysis,consolidated financial statements and notes thereto in Part I. Item 1. and PartII. Item 7. and Item 8. of the Allstate Life Insurance Company Annual Report onForm 10-K for 2005. We operate as a single segment entity, based on the mannerin which we use financial information to evaluate business performance and todetermine the allocation of resources.

 

**HIGHLIGHTS**

 

•                  Revenues increased 4.6% in the first quarterof 2006 compared to the same period of 2005.

•                  Net income increased 41.2% to $96 million inthe first quarter of 2006 compared to the same period in 2005.

•                  Contractholderfund deposits totaled $1.94 billion for the first quarter of 2006 compared to $3.25billion for the first quarter of 2005.

•                  TheCompany, including its subsidiary Allstate Life Insurance Company of New York,and The Allstate Corporation (“the Corporation”) entered into an agreement withPrudential Financial Inc. (“Prudential”) in the first quarter of 2006 todispose, through reinsurance, of substantially all of its variable annuitybusiness (see Note 4 to the Condensed Consolidated Financial Statements). Thisdisposition is expected to drive future improvements in the Company’s return onequity over time.

•                  Returnon average shareholder’s equity was 7.6% and 6.8% for the twelve months endedMarch 31, 2006 and December 31, 2005, respectively. The increase was due to loweraverage shareholder’s equity and higher net income.

 

**OPERATIONS**

** **

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

 

**Contract charges** arerevenues generated from interest-sensitive life, variable annuities, fixedannuities and institutional products for which deposits are classified ascontractholder funds or separate accounts liabilities. Contract charges are assessedagainst the contractholder account values for maintenance, administration, costof insurance and surrender prior to contractually specified dates. As a result,changes in contractholder funds and separate accounts liabilities areconsidered in the evaluation of growth and as indicators of future levels ofrevenues. After the close of our reinsurance transaction with Prudential, the reinsuredseparate account assets and liabilities will remain on the Company’sconsolidated statements of financial position, but the related contract chargeswill be fully reinsured to Prudential (see Note 4 to the Condensed ConsolidatedFinancial Statements).

 

12

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The following table summarizes premiums and contract charges byproduct.

 
| ** **                                  | ** ** | **Three Months Ended   March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in millions)**                      | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| **Premiums**                                |       |                                                   |       |   |   |
| Traditional life                            |       | $                                                      | 58         |   | $ | 64 |   |
| Immediate annuities with life contingencies |       | 49                                                     |       | 73 |   |
| Other                                       |       | 10                                                     |       | 5 |   |
| **Total premiums**                          |       | 117                                                    |       | 142 |   |
|                                        |       |                                                   |       |   |   |
| **Contract charges**                        |       |                                                   |       |   |   |
| Interest-sensitive life                     |       | 192                                                    |       | 177 |   |
| Fixed annuities                             |       | 17                                                     |       | 17 |   |
| Variable annuities                          |       | 76                                                     |       | 65 |   |
| **Total contract charges**                  |       | 285                                                    |       | 259 |   |
| ** **                                  |       |                                                   |       |   |   |
| **Total premiums and contract charges**     |       | $                                                      | 402        |   | $ | 401 |   |

 

The following table summarizes premiums and contract charges bydistribution channel.

 
| ** **                              | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|
| **(in millions)**                  | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
|                                    |       |                                                   |       |   |   |
| **Premiums**                            |       |                                                   |       |   |   |
| Allstate agencies                       |       | $                                                      | 61         |   | $ | 66 |   |
| Independent agents                      |       | 13                                                     |       | 21 |   |
| Specialized brokers                     |       | 42                                                     |       | 54 |   |
| Other                                   |       | 1                                                      |       | 1 |   |
| **Total premiums**                      |       | 117                                                    |       | 142 |   |
|                                    | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| **Contract charges**                    | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Allstate agencies                       |       | 137                                                    |       | 131 |   |
| Financial institutions                  |       | 75                                                     |       | 63 |   |
| Independent agents                      |       | 67                                                     |       | 56 |   |
| Specialized brokers                     |       | 5                                                      |       | 8 |   |
| Other                                   |       | 1                                                      |       | 1 |   |
| **Total contract charges**              |       | 285                                                    |       | 259 |   |
| ** **                              |       |                                                   |       |   |   |
| **Total premiums and contract charges** |       | $                                                      | 402        |   | $ | 401 |   |

 

Total premiums decreased 17.6% to $117 million in the first quarter of2006 compared to the same period of 2005. This decline was primarily due to lowerpremiums on immediate annuities with life contingencies and traditional lifeproducts.

 

Contract charges increased 10.0% to $285 million in the first quarter of2006 compared to the same period of 2005. The increase was due to highercontract charges on interest-sensitive life and variable annuities. Theincrease in the interest-sensitive life contract charges were attributable toin-force business growth resulting from deposits and credited interest morethan offsetting surrenders and benefits. Higher variable annuity contractcharges were primarily the result of higher account values.

 

13

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*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   March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in millions)**                                          | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| **Contractholder funds, beginning balance**                     |       | $                                                      | 58,190     |   | $ | 53,939 |   |
| ** **                                                      |       |                                                   |       |   |   |
| **Deposits**                                                    |       |                                                   |       |   |   |
| Fixed annuities                                                 |       | 1,201                                                  |       | 1,746 |   |
| Institutional products (funding agreements)                     |       | 350                                                    |       | 1,098 |   |
| Interest-sensitive life                                         |       | 322                                                    |       | 312 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | 63                                                     |       | 94 |   |
| Total deposits                                                  |       | 1,936                                                  |       | 3,250 |   |
|                                                            |       |                                                   |       |   |   |
| **Interest credited**                                           |       | 621                                                    |       | 553 |   |
|                                                            |       |                                                   |       |   |   |
| **Maturities, benefits, withdrawals and other  adjustments**    |       |                                                   |       |   |   |
| Maturities of institutional products                            |       | (704                                                   | )          | (704 | ) |
| Benefits                                                        |       | (288                                                   | )          | (217 | ) |
| Surrenders and partial withdrawals                              |       | (1,079                                                 | )          | (787 | ) |
| Contract charges                                                |       | (168                                                   | )          | (159 | ) |
| Net transfers to separate accounts                              |       | (83                                                    | )          | (78 | ) |
| Fair value hedge adjustments for  institutional products        |       | (18                                                    | )          | (120 | ) |
| Other adjustments                                               |       | 5                                                      |       | (11 | ) |
| Total maturities, benefits, withdrawals and  other adjustments  |       | (2,335                                                 | )          | (2,076 | ) |
| ** **                                                      |       |                                                   |       |   |   |
| **Contractholder funds, ending balance**                        |       | $                                                      | 58,412     |   | $ | 55,666 |   |

 

Averagecontractholder funds increased 6.4% and 18.7% in the first quarters of 2006 and2005, respectively, compared to the same periods in the prior years. Thereduction in the growth rate of contractholder funds during the first quarterof 2006 was due to lower contractholder deposits and, to a lesser extent,increased surrenders and partial withdrawals.

 

Contractholderdeposits decreased 40.4% in the first quarter of 2006 compared to the sameperiod of 2005 due to lower deposits on funding agreements and fixed annuities.Funding agreement deposits declined 68.1% in the first quarter of 2006 comparedto the same period in the prior year. The opportunistic manner in which we managethis business results in fluctuations in funding agreement deposits betweenperiods. Fixed annuity deposits declined 31.2% in the first quarter of 2006compared to the same period in the prior year. The decline was attributable toreduced consumer demand for traditional fixed annuities relative tocertificates of deposit and other short-term investments driven by increases inshort-term interest rates without increases in longer term rates of similarmagnitude, and our continued focus on improving fixed annuity product returns. Higherdeposits on equity-indexed annuities partially offset the decline in depositson traditional fixed annuities.

 

Surrenders and partial withdrawals increased 37.1% in the first quarterof 2006 compared to the same period of 2005 reflecting an annualized withdrawalrate of 9.4% for the first quarter of 2006 based on the beginning of periodcontractholder funds balance excluding institutional product reserves. Thiscompares to an annualized withdrawal rate of 7.6% for the first quarter of 2005.The declining and relatively low interest rate environment of the prior threeyears contributed to favorable withdrawal rates in 2005, and also resulted inan increased level of policies with little or no surrender charge protection. Theincrease in the withdrawal rate in the first quarter of 2006 is consistent withmanagement’s expectation that in an increasing interest rate environmentcontractholders whose contracts have relatively low surrender charges maychoose to move their funds to competing investment alternatives. The aging ofour in-force business may cause this trend to continue. In addition, we haveimplemented crediting rate strategies for renewal business to improveinvestment spreads on selected contracts that may also have contributed to theincreased withdrawal rate.

 

14

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***Separate accountsliabilities***represent contractholders’ claims to the related separate accounts assets. Separateaccounts liabilities primarily arise from the sale of variable annuitycontracts and variable life insurance policies.

 

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

 
| ** **                                                      | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in millions)**                                          | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| **Separate accounts liabilities, beginning  balance**           |       | $                                                      | 15,235     |   | $ | 14,377 |   |
|                                                            |       |                                                   |       |   |   |
| Variable annuity and life deposits                              |       | 468                                                    |       | 437 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | (63                                                    | )          | (94 | ) |
| Net deposits                                                    |       | 405                                                    |       | 343 |   |
| Investment results                                              |       | 660                                                    |       | (218 | ) |
| Contract charges                                                |       | (76                                                    | )          | (67 | ) |
| Net transfers from fixed accounts                               |       | 83                                                     |       | 78 |   |
| Surrenders and benefits                                         |       | (490                                                   | )          | (426 | ) |
| **Separate accounts liabilities, ending  balance**              |       | $                                                      | 15,817     |   | $ | 14,087 |   |

 

Separate accountsliabilities increased 3.8% as of March 31, 2006 compared to December 31, 2005. Thisis compared to a decline of 2.0% in the first quarter of 2005. The improvementwas primarily attributable to favorable investment results in the currentperiod compared to unfavorable investment results in the prior period and, to alesser extent, an 18.1% increase in net deposits. Variable annuity and lifedeposits vary with equity market conditions, product investment allocationdecisions and consumer preferences related to product features.

 

**Net investment income**increased 9.7% in the first quarter of 2006 compared to the same period of 2005due to increased investment yields and higher average portfolio balances in thefirst quarter of 2006 compared to the same period in the prior year. The higherportfolio yields were primarily due to increased yields on floating rate assetsresulting from increases in short-term market interest rates. Higher average portfoliobalances resulted from the investment of cash flows from operating andfinancing activities related primarily to deposits from fixed annuities,funding agreements and interest-sensitive life policies.

 

15

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

 
| ** **                                                                                              | ** ** | **Three Months Ended   March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in millions)**                                                                                  | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
|                                                                                                    |       |                                                   |       |   |   |
| Premiums                                                                                                |       | $                                                      | 117        |   | $ | 142 |   |
| Contract charges                                                                                        |       | 285                                                    |       | 259 |   |
| Net investment income                                                                                   |       | 974                                                    |       | 888 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments(1)                               |       | 16                                                     |       | 19 |   |
| Contract benefits                                                                                       |       | (326                                                   | )          | (347 | ) |
| Interest credited to contractholder  funds(2)                                                           |       | (596                                                   | )          | (537 | ) |
| **Gross margin**                                                                                        |       | 470                                                    |       | 424 |   |
|                                                                                                    |       |                                                   |       |   |   |
| Amortization of DAC and DSI                                                                             |       | (154                                                   | )          | (114 | ) |
| Operating costs and expenses                                                                            |       | (103                                                   | )          | (116 | ) |
| Restructuring and related charges                                                                       |       | (15                                                    | )          | — |   |
| Income tax expense                                                                                      |       | (66                                                    | )          | (51 | ) |
| Realized capital gains and losses,  after-tax                                                           |       | (18                                                    | )          | 1 |   |
| DAC and DSI amortization relating to  realized capital gains and losses, after-tax                      |       | 27                                                     |       | (61 | ) |
| Reclassification of periodic settlements  and accruals on non-hedge derivative instruments,   after-tax |       | (10                                                    | )          | (12 | ) |
| Loss on disposition of operations,  after-tax                                                           |       | (35                                                    | )          | (3 | ) |
| **Net income**                                                                                          |       | $                                                      | 96         |   | $ | 68 |   |

 

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| (1)    | Periodic settlements and accruals on  non-hedge derivative instruments are reflected as a component of realized  capital gains and losses on the Condensed Consolidated Statements of  Operations.                                                                                |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                              |
| (2)    | Amortization of deferred sales inducements  (“DSI”) is excluded from interest credited to contractholder funds for  purposes of calculating gross margin. Amortization of DSI totaled $7 million  and $39 million in the first quarters of 2006 and 2005, respectively. |

 

*Gross margin*,a non-GAAP measure, represents premiums and contract charges, net investmentincome and periodic settlements and accruals on non-hedge derivativeinstruments, less contract benefits and interest credited to contractholderfunds excluding amortization of DSI. We reclassify periodic settlements and accrualson non-hedge derivative instruments into gross margin to report them in amanner consistent with the economically hedged investments, replicated assetsor product attributes (e.g. net investment income or interest credited tocontractholder funds) and by doing so, appropriately reflect trends in productperformance. We use gross margin as a component of our evaluation of theprofitability of our life insurance and financial product portfolio. Additionally,for many of our products, including fixed annuities, variable life andannuities, and interest-sensitive life insurance, the amortization of DAC andDSI is determined based on actual and expected gross margin. Gross margin iscomprised of three components that are utilized to further analyze the business:investment margin, benefit margin, and contract charges and fees. We believegross margin and its components are useful to investors because they allow forthe evaluation of income components separately and in the aggregate whenreviewing performance. Gross margin, investment margin and benefit marginshould not be considered as a substitute for net income and do not reflect theoverall profitability of the business. Net income is the GAAP measure that ismost directly comparable to these margins. Gross margin is reconciled to GAAPnet income in the table above.

 

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

 
| ** **                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                | ** ** | **Investment   Margin**                         | ** ** | **Benefit Margin** | ** ** | **Contract Charges   and Fees** | ** ** | **Gross Margin** | ** ** |
| **(in millions)**                                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Premiums                                                                  |       | $                                                    | —     |   | $ | — |   | $ | 117 |   | $ | 142 |   | $ | — |   | $ | — |   | $ | 117 |   | $ | 142 |   |
| Contract charges                                                          |       | —                                               |       | — |   | 151 |   | 150 |   | 134 |   | 109 |   | 285 |   | 259 |   |
| Net investment income                                                     |       | 974                                                  |       | 888 |   | — |   | — |   | — |   | — |   | 974 |   | 888 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments(1) |       | 16                                                   |       | 19 |   | — |   | — |   | — |   | — |   | 16 |   | 19 |   |
| Contract benefits                                                         |       | (133                                                 | )          | (134 | ) | (193 | ) | (213 | ) | — |   | — |   | (326 | ) | (347 | ) |
| Interest credited to contractholder  funds(2)                             |       | (596                                                 | )          | (537 | ) | — |   | — |   | — |   | — |   | (596 | ) | (537 | ) |
|                                                                      |       | $                                                    | 261        |   | $ | 236 |   | $ | 75 |   | $ | 79 |   | $ | 134 |   | $ | 109 |   | $ | 470 |   | $ | 424 |   |

 

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| (1)    | Periodic settlements and accruals on  non-hedge derivative instruments are reflected as a component of realized  capital gains and losses on the Condensed Consolidated Statements of  Operations.                                       |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                     |
| (2)    | Amortization of DSI is excluded from interest credited to  contractholder funds for purposes of calculating gross margin. Amortization  of DSI totaled $7 million and $39 million in the first quarters of 2006 and  2005, respectively. |

 

Gross margin increased 10.8% in the first quarter of 2006 compared tothe same period of 2005 due to higher investment margin and contract charges andfees, partially offset by a lower benefit margin. The anticipated dispositionof substantially all of our variable annuity business is expected to result inlower gross margin in the future, which is expected to be mostly offset bylower DAC and DSI amortization and operating expenses.

 

*Investment margin* is a component of grossmargin, both of which are non-GAAP measures. Investment margin represents theexcess of net investment income and periodic settlements and accruals on certainnon-hedge derivative instruments over interest credited to contractholder fundsand the implied interest on life-contingent immediate annuities included in thereserve for life-contingent contract benefits. Amortization of DSI is excludedfrom interest credited to contractholder funds for purposes of calculatinginvestment margin. We use investment margin to evaluate our profitabilityrelated to the difference between investment returns on assets supportingcertain products and amounts credited to customers (“spread”) during a fiscalperiod.

 

Investmentmargin by product group is shown in the following table.

 
| ** **              | ** ** | **Three Months Ended   March 31,** | ** ** |
|-------------------------|------------|--------------------------------------------------------|------------|
| **(in millions)**  | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| Annuities               |       | $                                                      | 185        |   | $ | 159 |   |
| Life insurance          |       | 46                                                     |       | 47 |   |
| Institutional products  |       | 30                                                     |       | 30 |   |
| Total investment margin |       | $                                                      | 261        |   | $ | 236 |   |

 

Investment margin increased 10.6% in the firstquarter of 2006 compared to the same period of 2005 due to higher weighted averageinvestment spreads on deferred fixed annuities and in-force business growth. Futureinvestment margin will be reduced by the anticipated disposition ofsubstantially all of our variable annuity business until investment marginresulting from new sales of other products replaces the margins on the businesssubject to the disposition.

 

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The following table summarizes the annualizedweighted average investment yield, interest crediting rates and investmentspreads for the three months ended March 31.

 
| ** **                                                           | ** ** | **Weighted Average   Investment Yield** | ** ** | **Weighted Average   Interest Crediting Rate** | ** ** | **Weighted Average   Investment Spreads** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                               | ** ** | **2005**                                                           | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest-sensitive life                                              |       | 6.2                                                    | %          | 6.3                                                                | %          | 4.6                                                      | %          | 4.7 | % | 1.6 | % | 1.6 | % |
| Deferred fixed annuities                                             |       | 5.6                                                    |       | 5.6                                                                |       | 3.7                                                      |       | 4.0 |   | 1.9 |   | 1.6 |   |
| Immediate fixed annuities with and without  life contingencies       |       | 7.2                                                    |       | 7.4                                                                |       | 6.6                                                      |       | 6.8 |   | 0.6 |   | 0.6 |   |
| Institutional                                                        |       | 5.5                                                    |       | 4.0                                                                |       | 4.5                                                      |       | 3.0 |   | 1.0 |   | 1.0 |   |
| Investments supporting capital, traditional  life and other products |       | 6.8                                                    |       | 6.9                                                                |       | N/A                                                      |       | N/A |   | N/A |   | N/A |   |

 

The following table summarizes the liabilities for these contracts andpolicies.

 
| ** **                                                            | ** ** | **As of March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in millions)**                                                | ** ** | **2006**                           | ** ** | **2005** | ** ** |
| Immediate fixed annuities with life  contingencies                    |       | $                                  | 7,929      |   | $ | 7,774 |   |
| Other life contingent contracts and other                             |       | 3,752                              |       | 3,784 |   |
| Reserve for life-contingent contracts                                 |       | $                                  | 11,681     |   | $ | 11,558 |   |
|                                                                  |       |                               |       |   |   |
| Interest-sensitive life                                               |       | $                                  | 8,041      |   | $ | 7,691 |   |
| Deferred fixed annuities                                              |       | 34,128                             |       | 32,368 |   |
| Immediate fixed annuities without life  contingencies                 |       | 3,668                              |       | 3,289 |   |
| Institutional                                                         |       | 12,205                             |       | 11,759 |   |
| Market value adjustments related to  derivative instruments and other |       | 370                                |       | 559 |   |
| Contractholder funds                                                  |       | $                                  | 58,412     |   | $ | 55,666 |   |

 

*Benefit margin*is a component of gross margin,both of which are non-GAAP measures. Benefit margin represents life andlife-contingent immediate annuity premiums, cost of insurance contract chargesand variable annuity contract charges for contract guarantees less contractbenefits. Benefit margin excludes the implied interest on life-contingentimmediate annuities, which is included in the calculation of investment margin.We use benefit margin to evaluate our underwriting performance, as it reflectsthe profitability 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   March 31,** | ** ** |
|------------------------|------------|---------------------------------------------------|------------|
| **(in millions)** | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Life insurance         |       | $                                                 | 89         |   | $ | 93 |   |
| Annuities              |       | (14                                               | )          | (14 | ) |
| Total benefit margin   |       | $                                                 | 75         |   | $ | 79 |   |

 

Benefit margin declined 5.1% in the firstquarter of 2006 compared to the same period of 2005. The reduction in the lifeinsurance benefit margin was primarily related to a prospective change in ourcalculation to reclassify $13 million to contract charges and fees, partiallyoffset by in-force business growth and improved mortality. The annuity benefitmargin for the first quarter of 2006 was consistent with the first quarter of2005 as a $9 million increase in benefit reserves for guarantees related tovariable annuities that was recognized in the prior period was offset by increasedmortality losses on life contingent immediate annuities in 2006.

 

18

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*Amortization of DAC and DSI*,excluding amortization related to realized capital gains and losses, increased 35.1%in the first quarter of 2006 compared to the same period in the prior year dueto higher gross margin on fixed and variable annuities. DAC and DSIamortization related to realized capital gains and losses, after-tax, increased$88 million with an associated credit to net income of $27 million in the firstquarter of 2006 compared to an expense charge to net income of $61 million in thesame period in 2005. This fluctuation was the result of the impact of realizedcapital gains and losses on the actual and expected gross profits for certainproducts in each of the periods. In the first quarter of 2006, the credit tonet income for DAC and DSI amortization was mostly attributable to therecognition of net realized capital losses on assets that support variableannuities. The expense charge to net income in the first quarter of 2005 wasprimarily due to the recognition of net realized capital gains on assets thatsupport market value adjusted annuities. The impact of realized capital gainsand losses on amortization of DAC and DSI is dependent upon the relationshipbetween the assets that give rise to the gain or loss and the product liabilitysupported by the assets.

 

DAC and DSI amortization is expected todecline in the future as a result of the anticipated disposition of substantiallyall of our variable annuity business. This decline is expected to be offset bythe absence of gross margin on the business subject to the disposition.

 

*Operating costs and expenses* declined 11.2% inthe first quarter of 2006 compared to the same period of 2005. The followingtable summarizes operating costs and expenses.
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**             | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                               |       |                                             |       |   |   |
| Non-deferrable acquisition costs   |       | $                                                | 38         |   | $ | 39 |   |
| Other operating costs and expenses |       | 65                                               |       | 77 |   |
| Total operating costs and expenses |       | $                                                | 103        |   | $ | 116 |   |
|                               |       |                                             |       |   |   |
| Restructuring and related charges  |       | $                                                | 15         |   | $ | — |   |

 

Non-deferrable acquisition costs in the firstquarter of 2006 were comparable to the same period of 2005 as lowernon-deferrable commissions were mostly offset by higher premium taxes. Otheroperating costs and expenses declined 15.6% in the first quarter of 2006compared to 2005 due primarily to lower employee and technology expenses resultingfrom our continuing actions to simplify operations and reduce costs. Totaloperating costs and expenses are expected to decline in the future as a resultof the anticipated disposition of substantially all of our variable annuitybusiness.

 

Restructuring and related charges for thefirst quarter of 2006 reflect costs related to the Voluntary Termination Offer(“VTO”) accepted primarily by employees located at Allstate’s headquarters.

 

Net income was favorably impacted in thefirst quarter of 2005 by adjustments for prior years’ tax liabilities totaling$17 million, which were reflected as a component of income tax expense in theCondensed Consolidated Statements of Operations.

 

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**INVESTMENTS**

 

An important component of our financial results is the return on ourinvestment portfolio. The composition of the investment portfolio at March 31,2006 is presented in the table below.

 
| **(in millions)**           | ** ** | **Investments** | ** ** | **Percent to  total** | ** ** |
|-----------------------------|------------|-----------------|------------|----------------------------|------------|
| ** **                  |       |            |       |                       |       |
| Fixed income securities (1) |       | $               | 60,666     |                       | 83.0       | % |
| Mortgage loans              |       | 8,480           |       | 11.6                       |       |
| Equity securities           |       | 360             |       | 0.5                        |       |
| Short-term                  |       | 2,016           |       | 2.8                        |       |
| Policy loans                |       | 731             |       | 1.0                        |       |
| Other                       |       | 795             |       | 1.1                        |       |
| Total                       |       | $               | 73,048     |                       | 100.0      | % |

 

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(1)   Fixed incomesecurities are carried at fair value. Amortized cost basis for these securitieswas $59.62 billion.

 

Total investments increased to $73.05 billion at March 31, 2006 from $72.76billion at December 31, 2005, primarily due to positive cash flows fromoperating activities including increased funds associated with securitieslending, partially offset by decreased net unrealized gains on fixed incomesecurities.

 

Total investments at amortized cost related to collateral received inconnection with securities lending activities, funds received in connectionwith securities repurchase agreements, and collateral posted by counterpartiesrelated to derivative transactions, increased to $3.40 billion at March 31,2006, from $2.23 billion at December 31, 2005.

 

At March 31, 2006, 95.0% of the fixed income securities portfolio wasrated investment grade, which is defined as a security having a rating from theNational Association of Insurance Commissioners (“NAIC”) of 1 or 2; a rating ofAaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBB from S&P,Fitch or Dominion; or a comparable internal rating if an externally providedrating is not available.

 

The unrealized net capital gains on fixedincome and equity securities at March 31, 2006 were $1.05 billion, a decreaseof $1.22 billion or 53.6% since December 31, 2005. The net unrealized gain forthe fixed income portfolio totaled $1.04 billion, comprised of $1.96 billion ofunrealized gains and $913 million of unrealized losses at March 31, 2006. Thisis compared to a net unrealized gain for the fixed income portfolio totaling $2.26billion at December 31, 2005, comprised of $2.72 billion of unrealized gainsand $461 million of unrealized losses.

 

Of the gross unrealized losses in the fixedincome portfolio at March 31, 2006, $886 million or 97.0% were related toinvestment grade securities and are believed to be primarily a result of arising interest rate environment. Of the remaining $27 million of losses in thefixed income portfolio, $19 million or 70.4% were in the corporate fixed incomeportfolio, $7 million or 25.9% were in the asset-backed securities portfolio,and $1 million or 3.7% were in the foreign government portfolio. The $19million of corporate fixed income gross unrealized losses were primarilycomprised of securities in the consumer goods, financial services, capitalgoods, energy and transportation sectors. The gross unrealized losses in thesesectors were primarily company specific and interest rate related. Approximately$17 million of the total gross unrealized losses in the corporate fixed incomeportfolio were associated with the automobile industry, which includes directdebt issuances of automobile manufacturers, captive automotive financingcompanies and automobile parts and equipment suppliers, which are reportedabove in the consumer goods and financial services sectors. Fixed incomesecurity values in the automobile industry were primarily depressed due tocompany specific conditions. Additionally, approximately $7 million of thetotal gross unrealized losses in the asset-backed securities portfolio wereassociated with the airline industry for which values were depressed due to economicissues and industry conditions.

 

The net unrealized gain for the common andnon-redeemable preferred stock portfolio totaled $9 million at March 31,2006 and $5 million at December 31, 2005.

 

Ourportfolio monitoring process identifies and evaluates, on a case-by-case basis,fixed income and equity securities whose carrying value may be other thantemporarily impaired. The process includes a quarterly review of all securitiesusing a screening process to identify those securities whose fair valuecompared to amortized cost for fixed income securities or cost for equitysecurities is below established thresholds for certain time periods, or whichare identified through other monitoring criteria such as ratings downgrades orpayment defaults. As a result of approved programs involving the disposition ofinvestments such as changes in duration and revisions to strategic 

 

20

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asset allocations, and certain dispositionsanticipated by portfolio managers, we also conduct a portfolio review torecognize impairment on securities in an unrealized loss position for which wedo not have the intent and ability to hold until recovery. All securities in anunrealized loss position at March 31, 2006 were included in our portfoliomonitoring process wherein it was determined that the declines in value werenot other than temporary.

 

We also monitor the quality of our fixedincome portfolio by categorizing certain investments as “problem”, “restructured”or “potential problem.”  Problem fixedincome securities are securities in default with respect to principal orinterest and/or securities issued by companies that have gone into bankruptcysubsequent to our acquisition of the security. Restructured fixed incomesecurities have rates and terms that are not consistent with market rates orterms prevailing at the time of the restructuring. Potential problem fixedincome securities are current with respect to contractual principal and/orinterest, but because of other facts and circumstances, we have concernsregarding the borrower’s ability to pay future principal and interest, whichcauses us to believe these securities may be classified as problem orrestructured in the future.

 

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

 
| ** **                             | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **(in millions)**                 | ** ** | **Amortized  cost**          | ** ** | **Fair  value**                 | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** |
| Problem                                |       | $                            | 10         |                            | $          | 12 |   | — | % | $ | 70 |   | $ | 80 |   | 0.1 | % |
| Restructured                           |       | 5                            |       | 5                               |       | — |   | 4 |   | 4 |   | — |   |
| Potential problem                      |       | 122                          |       | 135                             |       | 0.2 |   | 122 |   | 135 |   | 0.2 |   |
| Total net carrying value               |       | $                            | 137        |                            | $          | 152 |   | 0.2 | % | $ | 196 |   | $ | 219 |   | 0.3 | % |
| Cumulative write- downs recognized (1) |       | $                            | 191        |                            |       |   |   |   | $ | 188 |   |   |   |   |   |

 

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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 a decrease in the amortized cost of fixed incomesecurities categorized as problem as of March 31, 2006 compared to December 31,2005. The decrease was primarily due to dispositions and the removal ofsecurities upon improving conditions.

 

We also evaluated each of these securities through our portfoliomonitoring process at March 31, 2006 and recorded write-downs when appropriate.We further concluded that any remaining unrealized losses on these securitieswere temporary in nature and that we have the intent and ability to hold untilrecovery. While these balances may increase in the future, particularly ifeconomic conditions are unfavorable, management expects that****the total amount of securities in thesecategories will remain low relative to the total fixed income securities portfolio.

 

**Net Realized Capital Gains and Losses**Thefollowing table presents the components of realized capital gains and lossesand the related tax effect.

 
| ** **                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                            | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                                         |       |                                             |       |   |   |
| Investment write-downs                       |       | $                                                | (5         | ) | $ | (7 | ) |
| Dispositions                                 |       | (75                                              | )          | 40 |   |
| Valuation of derivative instruments          |       | 36                                               |       | (58 | ) |
| Settlement of derivative instruments         |       | 17                                               |       | 26 |   |
| Realized capital gains and losses, pretax    |       | (27                                              | )          | 1 |   |
| Income tax benefit                           |       | 9                                                |       | — |   |
| Realized capital gains and losses, after-tax |       | $                                                | (18        | ) | $ | 1 |   |

 

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Dispositions in the above table includesales, losses recognized in anticipation of dispositions and other transactionssuch 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. In certain situations new factors such asnegative developments, subsequent credit deterioration, relative valueopportunities, market liquidity concerns and portfolio reallocations cansubsequently change our previous intent to continue holding a security.

 

A changing interest rate environment willdrive changes in our portfolio duration targets at a tactical level. A durationtarget and range is established with an economic view of liabilities relativeto a long-term portfolio view. Tactical duration adjustments within management’sapproved ranges are accomplished through both cash market transactions andderivative activities that generate realized gains and losses and through newpurchases. As a component of our approach to managing portfolio duration,realized gains and losses on derivative instruments are most appropriatelyconsidered in conjunction with the unrealized gains and losses on the fixedincome portfolio. This approach mitigates the impacts of general interest ratechanges to the overall financial condition of the Company.

 

In the first quarter of 2006, we recognized $52million of losses related to a change in our intent to hold certain securitieswith unrealized losses until they recover in value. The change in our intent isprimarily related to $1.01 billion of securities which had unrealized lossestotaling $30 million that may be used to fund net general account liabilitiesto be transferred at the closing of our variable annuity reinsurance agreementwith Prudential. Additionally, continued implementation of yield enhancementstrategies, strategic asset allocations and comprehensive reviews of ourportfolio resulted in the identification of $838 million of securities that hadunrealized losses of $22 million which may be sold to achieve these objectives.

 

**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 tablesummarizes our capital resources.

 
| **(in millions)**                                                     | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Redeemable preferred stock                                                 |       | $                            | 5          |                            | $          | 5 |   |
| Common stock, retained earnings and other shareholder’s  equity items |       | 5,511                        |       | 5,415                           |       |
| Accumulated other comprehensive income                                     |       | 257                          |       | 588                             |       |
| Total shareholder’s equity                                            |       | 5,773                        |       | 6,008                           |       |
| Debt                                                                       |       | 174                          |       | 181                             |       |
| Total capital resources                                                    |       | $                            | 5,947      |                            | $          | 6,189 |   |

 

*Shareholder’s equity*declined in the first quarter of 2006, due to lower unrealized net capitalgains on fixed income securities, partially offset by net income.

 

*Debt* decreased inthe first quarter of 2006, due to the redemption of mandatorily redeemablepreferred 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), exposure to risks, the current level of operatingleverage, AIC’s ratings and other factors. There have been no changes to ourinsurance financial strength ratings since December 31, 2005.

 

**Liquidity Sources and Uses** As reflected in our Condensed ConsolidatedStatements of Cash Flows,****higheroperating cash flows in the first quarter of 2006, compared to the first quarterof 2005, primarily related to higher investment income, partially offset bylower premiums.

 

Cash flows used in investing activities decreased in the first quarterof 2006 due to lower investment purchases due to cash used in financingactivities in the first quarter of 2006, partially offset by the investment of higheroperating cash flows.

 

# **Cash flows used in financing activities in the first quarter of 2006 werethe result of higher surrenders and lower deposits of fixed annuities andinstitutional products. For quantification of the changes in contractholderfunds, see the Operations section of the MD&A.**

# ** **

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

 

•      Acommercial paper program with a borrowing limit of $1.00 billion to covershort-term cash needs. As of March 31, 2006, the remaining borrowing capacitywas $980 million; however, the outstanding balance fluctuates daily.

 

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•      Afive-year revolving credit facility expiring in 2009 totaling $1.00 billion tocover short-term liquidity requirements. This facility contains an increaseprovision that would make up to an additional $500 million available forborrowing provided the increased portion could be fully syndicated at a laterdate among existing or new lenders. Although the right to borrow under thefacility is not subject to a minimum rating requirement, the costs ofmaintaining the facility and borrowing under it are based on the ratings of theCorporation’s senior, unsecured, nonguaranteed long-term debt. There were noborrowings under this line of credit during the first quarter of 2006. Thetotal amount outstanding at any point in time under the combination of thecommercial paper program and the credit facility cannot exceed the amount thatcan be borrowed under the credit facility.

 

•      Thecapacity of the Corporation to issue up to an additional $700 million of debtsecurities, equity securities, warrants for debt and equity securities, trustpreferred securities, stock purchase contracts and stock purchase unitsutilizing the shelf registration statement filed with the Securities andExchange Commission (“SEC”) in August 2003.

 

23

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**Item 4. Controls and Procedures**

** **

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

 

*Changes in Internal Control over Financial Reporting.*Duringthe fiscal quarter ended March 31, 2006, 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.

 

24

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**PART II. OTHER INFORMATION**

 

**Item 1.****    Legal Proceedings**

 

Informationrequired for this Part II, Item 1 is incorporated by reference to thediscussion under the heading “Regulation” and under the heading “Legal andregulatory proceedings and inquiries” in Note 5 of the Company’s CondensedConsolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

 

**Item 1A. Risk Factors**

 

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

 

Theseforward-looking statements do not relate strictly to historical or currentfacts and may be identified by their use of words like “plans,” “seeks,” “expects,”“will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets”and other words with similar meanings. These statements may address, amongother things, our strategy for growth, product development, regulatoryapprovals, market position, expenses, financial results, litigation andreserves. We believe that these statements are based on reasonable estimates,assumptions and plans. However, if the estimates, assumptions or plansunderlying the forward-looking statements prove inaccurate or if other risks oruncertainties arise, actual results could differ materially from thosecommunicated in these forward-looking statements. Risk factors which couldcause actual results to differ materially from those suggested by suchforward-looking statements include but are not limited to those discussed oridentified in this document, in our public filings with the Securities andExchange Commission, and those incorporated by reference in Part I, Item 1A ofAllstate Life Insurance Company Annual Report on Form 10-K for 2005. There havebeen no material changes from the risk factors previously disclosed in ourAnnual Report on Form 10-K.

 

**Item 6. Exhibits**

 

(a)                                  Exhibits

 

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

 

25

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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)                          |
|        |                                  |
|        |                                  |
| May 8, 2006 | By                                    | /s/ Samuel H. Pilch |   |
|        | Samuel H. Pilch                       |
|        | (chief accounting officer and duly    |
|        | authorized officer of the Registrant) |

 

26

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| **Exhibit No.** | ** ** | **Description**                                                                                                                      |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                 |
| 15              |       | Acknowledgment  of awareness from Deloitte & Touche LLP, dated May 8, 2006, concerning  unaudited interim financial information. |
|            |       |                                                                                                                                 |
| 31.1            |       | Rule 13a-14(a) Certification of Principal Executive Officer                                                                          |
|            |       |                                                                                                                                 |
| 31.2            |       | Rule 13a-14(a) Certification of Principal Financial Officer                                                                          |
|            |       |                                                                                                                                 |
| 32              |       | Section 1350 Certifications                                                                                                          |

 

E-1

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