**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

**The Registrant meets theconditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q andis therefore filing this Form with the reduced disclosure format.**

**x****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OFTHE SECURITIES EXCHANGE ACT OF 1934**

**FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2007**

**OR**

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OFTHE SECURITIES EXCHANGE ACT OF 1934**

**Commission file number: 000-31248**

**ALLSTATE LIFE INSURANCE COMPANY**

(Exact name of registrant as specified in its charter)

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

 

**Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.**

**Yes  ****ý    No  ****o**

**Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements 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 “accelerated filer and large accelerated filer” inRule 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 of the common equity of theregistrant is held by non-affiliates. Therefore, the aggregate market value of the common equity held bynon-affiliates of the registrant is zero.**

**AS OF MAY 7, 2007, THE REGISTRANT HAD 23,800 COMMON SHARES,$227 PAR VALUE, OUTSTANDING, ALL OF WHICH ARE HELD BY ALLSTATE INSURANCECOMPANY.**

 

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**ALLSTATE LIFEINSURANCE COMPANYINDEX TO QUARTERLY REPORT ON FORM 10-QMarch 31, 2007**
|             | ** **                                                                                                                | **PAGE**   |
|-------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                 | ** ** |
|        |                                                                                                                      |       |
| Item 1.     | Financial Statements                                                                                                      |       |
|        |                                                                                                                      |       |
|        | Condensed  Consolidated Statements of Operations for the Three-Month Periods Ended March  31, 2007   and 2006 (unaudited) | 1          |
|        |                                                                                                                      |       |
|        | Condensed Consolidated  Statements of Financial Position as of March 31, 2007 (unaudited) and   December 31, 2006         | 2          |
|        |                                                                                                                      |       |
|        | Condensed Consolidated  Statements of Cash Flows for the Three-Month Periods Ended March 31, 2007   and 2006 (unaudited)  | 3          |
|        |                                                                                                                      |       |
|        | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                         | 4          |
|        |                                                                                                                      |       |
|        | Report of Independent  Registered Public Accounting Firm                                                                  | 13         |
|        |                                                                                                                      |       |
| Item 2.     | Management’s Discussion  and Analysis of Financial Condition and Results of Operation                                | 14         |
|        |                                                                                                                      |       |
| Item 4.     | Controls  and Procedures                                                                                                  | 25         |
|        |                                                                                                                      |       |
| **PART II** | **OTHER INFORMATION**                                                                                                     | ** ** |
|        |                                                                                                                      |       |
| Item 1.     | Legal Proceedings                                                                                                         | 26         |
|        |                                                                                                                      |       |
| Item 1A.    | Risk Factors                                                                                                              | 26         |
|        |                                                                                                                      |       |
| Item 6.     | Exhibits                                                                                                                  | 26         |

 

 

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

**ALLSTATE LIFE INSURANCE COMPANY ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
|                                                       | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **March 31,**               | ** ** |
| **(in millions)**                                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**                  | ** ** |
| **Revenues**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Premiums                                              |       | $                                | 155        |   | $ | 117 |   |
| Contract charges                                      |       | 228                              |       | 285 |   |
| Net investment income                                 |       | 1,030                            |       | 974 |   |
| Realized capital gains  and losses                    |       | 22                               |       | (27 | ) |
|                                                  |       |                             |       |   |   |
|                                                  |       | 1,435                            |       | 1,349 |   |
|                                                  |       |                             |       |   |   |
| **Costs and expenses**                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Contract benefits                                     |       | 374                              |       | 326 |   |
| Interest credited to  contractholder funds            |       | 635                              |       | 603 |   |
| Amortization of  deferred policy acquisition costs    |       | 115                              |       | 105 |   |
| Operating costs and  expenses                         |       | 87                               |       | 103 |   |
| Restructuring and  related charges                    |       | —                           |       | 15 |   |
|                                                  |       |                             |       |   |   |
|                                                  |       | 1,211                            |       | 1,152 |   |
|                                                  |       |                             |       |   |   |
| Gain (loss) on  disposition of operations             |       | 1                                |       | (53 | ) |
|                                                  |       |                             |       |   |   |
| **Income from operations before  income tax expense** |       | 225                              |       | 144 |   |
|                                                  |       |                             |       |   |   |
| Income tax expense                                    |       | 76                               |       | 48 |   |
|                                                  |       |                             |       |   |   |
| **Net income**                                        |       | $                                | 149        |   | $ | 96 |   |

 

See notes tocondensed consolidated financial statements.

 

1

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**ALLSTATE LIFEINSURANCE COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION**
|                                                                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                               | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **($ in millions, except par value data)**                                                                 | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
|                                                                                                                                     |       |               |       |                  |       |
| **Assets**                                                                                                                               | ** ** | ** **         | ** ** | ** **            | ** ** |
| Investments                                                                                                                              |       |               |       |                  |       |
| Fixed income  securities, at fair value (amortized cost $61,872 and $60,851)                                                             |       | $                  | 63,574     |                  | $          | 62,439 |   |
| Mortgage loans                                                                                                                           |       | 8,745              |       | 8,690                 |       |
| Equity  securities                                                                                                                       |       | 698                |       | 533                   |       |
| Short-term                                                                                                                               |       | 1,326              |       | 805                   |       |
| Policy loans                                                                                                                             |       | 748                |       | 752                   |       |
| Other                                                                                                                                    |       | 845                |       | 941                   |       |
|                                                                                                                                     |       |               |       |                  |       |
| Total investments                                                                                                                        |       | 75,936             |       | 74,160                |       |
|                                                                                                                                     |       |               |       |                  |       |
| Cash                                                                                                                                     |       | 196                |       | 273                   |       |
| Deferred policy  acquisition costs                                                                                                       |       | 3,382              |       | 3,485                 |       |
| Reinsurance  recoverables, net                                                                                                           |       | 3,368              |       | 3,392                 |       |
| Accrued investment  income                                                                                                               |       | 692                |       | 689                   |       |
| Other assets                                                                                                                             |       | 801                |       | 585                   |       |
| Separate Accounts                                                                                                                        |       | 16,030             |       | 16,174                |       |
|                                                                                                                                     |       |               |       |                  |       |
| **Total  assets**                                                                                                                        |       | $                  | 100,405    |                  | $          | 98,758 |   |
|                                                                                                                                     |       |               |       |                  |       |
| **Liabilities**                                                                                                                          | ** ** | ** **         | ** ** | ** **            | ** ** |
| Contractholder funds                                                                                                                     |       | $                  | 61,014     |                  | $          | 60,565 |   |
| Reserve for  life-contingent contract benefits                                                                                           |       | 12,213             |       | 12,204                |       |
| Unearned premiums                                                                                                                        |       | 33                 |       | 34                    |       |
| Payable to affiliates,  net                                                                                                              |       | 125                |       | 84                    |       |
| Other liabilities and  accrued expenses                                                                                                  |       | 4,790              |       | 3,235                 |       |
| Deferred income taxes                                                                                                                    |       | 293                |       | 258                   |       |
| Note payable to  parent                                                                                                                  |       | —             |       | 500                   |       |
| Long-term debt                                                                                                                           |       | 200                |       | 206                   |       |
| Separate Accounts                                                                                                                        |       | 16,030             |       | 16,174                |       |
|                                                                                                                                     |       |               |       |                  |       |
| **Total  liabilities**                                                                                                                   |       | 94,698             |       | 93,260                |       |
|                                                                                                                                     |       |               |       |                  |       |
| **Commitments and Contingent  Liabilities (Note 5)**                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                                     |       |               |       |                  |       |
| **Shareholder’s Equity**                                                                                                            | ** ** | ** **         | ** ** | ** **            | ** ** |
| Redeemable preferred  stock — series A, $100 par value, 1,500,000 shares authorized, none  and 49,230 shares issued and outstanding |       | —             |       | 5                     |       |
| Redeemable preferred  stock — series B, $100 par value, 1,500,000 shares authorized, none issued                                    |       | —             |       | —                |       |
| Common stock, $227 par  value, 23,800 shares authorized and outstanding                                                                  |       | 5                  |       | 5                     |       |
| Additional capital  paid-in                                                                                                              |       | 1,108              |       | 1,108                 |       |
| Retained income                                                                                                                          |       | 4,195              |       | 4,055                 |       |
| Accumulated other  comprehensive income:                                                                                                 |       |               |       |                  |       |
| Unrealized net  capital gains and losses                                                                                                 |       | 399                |       | 325                   |       |
|                                                                                                                                     |       |               |       |                  |       |
| **Total  accumulated other comprehensive income**                                                                                        |       | 399                |       | 325                   |       |
|                                                                                                                                     |       |               |       |                  |       |
| **Total  shareholder’s equity**                                                                                                     |       | 5,707              |       | 5,498                 |       |
|                                                                                                                                     |       |               |       |                  |       |
| **Total liabilities and  shareholder’s equity**                                                                                     |       | $                  | 100,405    |                  | $          | 98,758 |   |

 

See notes tocondensed consolidated financial statements.

 

2

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**ALLSTATE LIFEINSURANCE COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
|                                                                                    | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**               | ** ** |
| **(in millions)**                                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                  | ** ** |
| **Cash flows from operating  activities**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                | 149        |   | $ | 96 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |
| Amortization and  other non-cash items                                             |       | (71                              | )          | (58 | ) |
| Realized capital  gains and losses                                                 |       | (22                              | )          | 27 |   |
| Gain (loss) on  disposition of operations                                          |       | (1                               | )          | 53 |   |
| Interest  credited to contractholder funds                                         |       | 635                              |       | 603 |   |
| Changes in:                                                                        |       |                             |       |   |   |
| Contract benefit  and other insurance reserves                                     |       | (51                              | )          | (92 | ) |
| Unearned  premiums                                                                 |       | (1                               | )          | — |   |
| Deferred policy  acquisition costs                                                 |       | (6                               | )          | (82 | ) |
| Reinsurance  recoverables, net                                                     |       | (59                              | )          | (49 | ) |
| Income taxes  payable                                                              |       | 52                               |       | 48 |   |
| Other operating  assets and liabilities                                            |       | (45                              | )          | (55 | ) |
| Net cash  provided by operating activities                                         |       | 580                              |       | 491 |   |
|                                                                               |       |                             |       |   |   |
| **Cash flows from investing  activities**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from sales:                                                               |       |                             |       |   |   |
| Fixed income  securities                                                           |       | 1,929                            |       | 3,183 |   |
| Equity securities                                                                  |       | 79                               |       | 44 |   |
| Investment collections:                                                            |       |                             |       |   |   |
| Fixed income  securities                                                           |       | 882                              |       | 800 |   |
| Mortgage loans                                                                     |       | 494                              |       | 490 |   |
| Investment purchases:                                                              |       |                             |       |   |   |
| Fixed income  securities                                                           |       | (2,998                           | )          | (3,929 | ) |
| Equity  securities                                                                 |       | (210                             | )          | (46 | ) |
| Mortgage loans                                                                     |       | (534                             | )          | (869 | ) |
| Change in short-term  investments, net                                             |       | 91                               |       | 40 |   |
| Change in other  investments, net                                                  |       | 53                               |       | (25 | ) |
| Net cash used in  investing activities                                             |       | (214                             | )          | (312 | ) |
|                                                                               |       |                             |       |   |   |
| **Cash flows from financing  activities**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Note payable to parent                                                             |       | (500                             | )          | — |   |
| Redemption of  mandatorily redeemable preferred stock                              |       | (11                              | )          | (6 | ) |
| Contractholder fund  deposits                                                      |       | 2,223                            |       | 2,013 |   |
| Contractholder fund  withdrawals                                                   |       | (2,155                           | )          | (2,154 | ) |
| Net cash used in  financing activities                                             |       | (443                             | )          | (147 | ) |
|                                                                               |       |                             |       |   |   |
| **Net (decrease) increase in cash**                                                |       | (77                              | )          | 32 |   |
| **Cash at beginning of the period**                                                |       | 273                              |       | 154 |   |
| **Cash at end of period**                                                          |       | $                                | 196        |   | $ | 186 |   |

 

See notes tocondensed consolidated financial statements.

 

3

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**ALLSTATE LIFEINSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.   General**

**Basis of Presentation**

The accompanyingcondensed consolidated financial statements include the accounts of AllstateLife Insurance Company (“ALIC”) and its wholly owned subsidiaries (togetherwith ALIC, the “Company”). ALIC is wholly owned by Allstate Insurance Company (“AIC”),a wholly owned subsidiary of The Allstate Corporation (the “Corporation”).

The condensedconsolidated financial statements and notes as of March 31, 2007, and for thethree-month periods ended March 31, 2007 and 2006 are unaudited.  The condensed consolidated financialstatements reflect all adjustments (consisting only of normal recurringaccruals), which are, in the opinion of management, necessary for the fairpresentation of the financial position, results of operations and cash flowsfor the interim periods.  These condensedconsolidated financial statements and notes should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006.  The results of operations for the interimperiods should not be considered indicative of results to be expected for thefull year.

Equity securitiesinclude limited partnership interests and non-redeemable preferred and commonstocks.  Common stocks and non-redeemablepreferred stocks had a carrying value of $74 million and $72 million, and costof $63 million and $61 million at March 31, 2007 and December 31, 2006,respectively.  Investments in limitedpartnership interests had a carrying value of $624 million and $461 million atMarch 31, 2007 and December 31, 2006, respectively.

**Adopted accounting standards**

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

In October 2005,the AICPA issued SOP 05-1.  SOP 05-1provides accounting guidance for deferred policy acquisition costs associatedwith internal replacements of insurance and investment contracts other thanthose already described in SFAS No. 97, “Accounting and Reporting by InsuranceEnterprises for Certain Long-Duration Contracts and for Realized Gains andLosses from the Sale of Investments”. SOP 05-1 defines an internal replacement as a modification in productbenefits, features, rights or coverages that occurs through the exchange of anexisting contract for a new contract, or by amendment, endorsement or rider toan existing contract, or by the election of a feature or coverage within anexisting contract.  In February 2007, theAICPA issued Technical Practice Aids (“TPAs”) that provide interpretiveguidance to be used in applying the SOP. The Company adopted the provisions of SOP 05-1 on January 1, 2007, forinternal replacements occurring in fiscal years beginning after December 15,2006.  The adoption resulted in a $9million after-tax adjustment to unamortized DAC and DSI related to the impacton future estimated gross profits from the changes in accounting for certaincosts associated with contract continuations that no longer qualify fordeferral under SOP 05-1.  The adjustmentwas recorded as a reduction of retained income at January 1, 2007, and areduction of DAC and DSI balances of $13 million pre-tax.  The ongoing effects of SOP 05-1 are notexpected to have a material impact on the Company’s results of operations orfinancial position.

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

In February 2006,the FASB issued SFAS No. 155, which permits the fair value remeasurement at thedate of adoption of any hybrid financial instrument containing an embeddedderivative that otherwise would require bifurcation under paragraph 12 or 13 ofSFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities”*; clarifies which interest-onlystrips and principal-only strips are not subject to the requirements of SFASNo. 133; establishes a requirement to evaluate interests in securitizedfinancial assets to identify interests that are freestanding derivatives orhybrid financial instruments that contain embedded derivatives requiringbifurcation; and clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives. The Company adopted the provisionsof SFAS No. 155 on January 1, 2007, which are effective for all financialinstruments acquired, issued or subject to a remeasurement event occurringafter the beginning of the first fiscal year that begins after September 15,2006.  The Company elected not toremeasure existing hybrid financial instruments at the date of adoption thatcontained embedded derivatives requiring bifurcation pursuant to paragraph 12or 13 of SFAS No. 133.  The adoption ofSFAS No. 155 did not have a material effect on the results of operations orfinancial position of the Company.

 

4

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

In July 2006, theFASB issued FIN 48, which clarifies the accounting for uncertainty in incometaxes recognized in an entity’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes”.  FIN 48 requires an entity to recognize thetax benefit of uncertain tax positions only when it is more likely than not,based on the position’s technical merits, that the position would be sustainedupon examination by the respective taxing authorities.  The tax benefit is measured as the largestbenefit that is more than fifty-percent likely of being realized upon finalsettlement with the respective taxing authorities.  The Company adopted the provisions of FIN 48,which are effective for fiscal years beginning after December 15, 2006, onJanuary 1, 2007.  No cumulative effect ofa change in accounting principle or adjustment to the liability forunrecognized tax benefits was recognized as a result of the adoption of FIN48.  Accordingly, the adoption of FIN 48did not have an effect on the results of operations or financial position ofthe Company.

The Company had noliability for unrecognized tax benefits at January 1, 2007, and does notbelieve that it is reasonably possible that this balance will significantlychange within the next 12 months

The InternalRevenue Service (“IRS”) completed its review of the Company’s federal incometax returns through the 2002 tax year and the statute of limitations hasexpired on those years.  The IRS iscurrently examining the Company’s federal income tax returns for the 2003 and2004 tax years.

*Securities and ExchangeCommission (“SEC”) Staff Accounting Bulletin No. 108, Considering the Effectsof Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements (“SAB 108”)*

In September 2006,the SEC issued SAB 108 in order to eliminate the diversity of practice in theprocess by which misstatements are quantified for purposes of assessingmateriality on the financial statements. SAB 108 is intended to eliminate the potential for the build up ofimproper amounts on the balance sheet due to the limitations of certain methodsof materiality assessment utilized in current practice.  SAB 108 establishes a single quantificationframework wherein the significance measurement is based on the effects of themisstatements on each of the financial statements as well as the relatedfinancial statement disclosures.  If acompany’s existing methods for assessing the materiality of misstatements arenot in compliance with the provisions of SAB 108, the initial application ofthe provisions may be adopted by restating prior period financial statementsunder certain circumstances or otherwise by recording the cumulative effect ofinitially applying the provisions of SAB 108 as adjustments to the carryingvalues of assets and liabilities as of January 1, 2006 with an offsettingadjustment recorded to the opening balance of retained income.  The provisions of SAB 108 must be applied nolater than the annual financial statements issued for the first fiscal yearending after November 15, 2006. The Company’s adoption of SAB 108 in the fourthquarter of 2006 did not have any effect on its results of operations orfinancial position.

*Financial Accounting Standards Board Staff Position No. FAS115-1, The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments (“FSP FAS 115-1”)*

The Companyadopted Financial Accounting Standards Board (“FASB”) FSP FAS 115-1 as ofJanuary 1, 2006.  FSP FAS 115-1nullifies the guidance in paragraphs 10-18 of EITF Issue 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” andreferences existing other-than-temporary impairment guidance.  FSP FAS 115-1 clarifies that an investorshould recognize an impairment loss no later than when the impairment is deemedother-than-temporary, even if a decision to sell the security has not beenmade, and also provides guidance on the subsequent accounting for incomerecognition on an impaired debt security. The adoption of FSP FAS 115-1 was required on a prospective basis anddid not have a material effect on the results of operations or financialposition of the Company.

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

The Companyadopted SFAS No. 154 on January 1, 2006. SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No.20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements”.  SFAS No.154 requires retrospective application to prior periods’ financial statementsfor changes in accounting principle, unless determination of either the periodspecific effects or the cumulative effect of the change is impracticable orotherwise promulgated.  The Company hadno accounting changes or error corrections affected by the new standard.

 

5

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**Pending accountingstandards**

*SFAS No. 157, Fair ValueMeasurements (“SFAS No. 157”)*

In September 2006,the FASB issued SFAS No. 157 which redefines fair value, establishes aframework for measuring fair value in generally accepted accounting principles(“GAAP”), and expands disclosures about fair value measurements.  SFAS No. 157 applies where other accountingpronouncements require or permit fair value measurements.  SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007.  Theeffects of adoption will be determined by the types of instruments carried atfair value in the Company’s financial statements at the time of adoption aswell as the methods utilized to determine their fair values prior toadoption.  Based on the Company’s currentuse of fair value measurements, SFAS No. 157 is not expected to have amaterial effect on the results of operations or financial position of theCompany.

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

In February 2007,the FASB issued SFAS No. 159 which provides reporting entities an option toreport selected financial assets, including investment securities designated asavailable for sale, and liabilities, including most insurance contracts, atfair value.  SFAS No. 159 establishespresentation and disclosure requirements designed to facilitate comparisons betweencompanies that choose different measurement attributes for similar types ofassets and liabilities.  The standardalso requires additional information to aid financial statement users’understanding of a reporting entity’s choice to use fair value on its earningsand also requires entities to display on the face of the balance sheet the fairvalue of those assets and liabilities for which the reporting entity has chosento measure at fair value.  SFAS No. 159 iseffective as of the beginning of a reporting entity’s first fiscal yearbeginning after November 15, 2007.  Early adoption is permitted as of thebeginning of the previous fiscal year provided the entity makes that choice inthe first 120 days of that fiscal year and also elects to apply the provisionsof SFAS No. 157.  Because application ofthe standard is optional, any impacts are limited to those financial assets andliabilities to which SFAS No. 159 would be applied, which have yet to bedetermined.

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

On December 27,2006, the Company issued an intercompany note in the amount of $500 millionpayable to its parent, AIC, on demand and, in any event, by March 30,2007.  This note was fully repaid in thefirst quarter of 2007.  This note had aninterest rate of 5.25% and was reflected as note payable to parent on theCompany’s Consolidated Statements of Financial Position at December 31,2006.  Interest expense on this note,which totaled $5 million in the first quarter of 2007, is included as acomponent of operating costs and expenses on the Condensed ConsolidatedStatements of Operations.

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

Non-cashinvestment exchanges and modifications, which primarily reflect refinancings offixed income securities and mergers completed with equity securities, totaled$29 million and $18 million for the three months ended March 31, 2007 and 2006,respectively.

Liabilities forcollateral received in conjunction with the Company’s securities lending andother business activities and for funds received from the Company’s securityrepurchase business 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 activitiesresulting from management of the proceeds, which for the three months endedMarch 31 are as follows:

 

6

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|                                                                        | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                             | ** ** | **March 31,**               | ** ** |
| **(in millions)**                                                 | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Net  change in proceeds managed**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net change in  fixed income securities                                 |       | $                                | (926       | ) | $ | (62 | ) |
| Net change in  short-term investments                                  |       | (594                             | )          | (1,109 | ) |
| Operating cash flow used                                               |       | $                                | (1,520     | ) | $ | (1,171 | ) |
|                                                                   |       |                             |       |   |   |
| **Net  change in liabilities**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Liabilities for  collateral and security repurchase, beginning of year |       | $                                | (2,294     | ) | $ | (2,231 | ) |
| Liabilities for  collateral and security repurchase, end of period     |       | (3,814                           | )          | (3,402 | ) |
| Operating cash  flow provided                                          |       | $                                | 1,520      |   | $ | 1,171 |   |

 

**4.     ****Reinsurance**

Theeffects of reinsurance on premiums and contract charges are as follows:
|                                                    | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                             | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Premiums  and contract charges**                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Direct                                             |       | $                                                | 598        |   | $ | 546 |   |
| Assumed                                            |       |                                             |       |   |   |
| Affiliate                                          |       | 4                                                |       | 4 |   |
| Non-affiliate                                      |       | 7                                                |       | 7 |   |
| Ceded—non-affiliate                           |       | (226                                             | )          | (155 | ) |
|                                               |       |                                             |       |   |   |
| Premiums and  contract charges, net of reinsurance |       | $                                                | 383        |   | $ | 402 |   |

 

Theeffects of reinsurance on contract benefits are as follows:
|                                        | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                             | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Contract  benefits**                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Direct                                 |       | $                                                | 499        |   | $ | 443 |   |
| Assumed                                |       |                                             |       |   |   |
| Affiliate                              |       | 4                                                |       | 3 |   |
| Non-affiliate                          |       | 8                                                |       | 5 |   |
| Ceded—non-affiliate               |       | (137                                             | )          | (125 | ) |
|                                   |       |                                             |       |   |   |
| Contract  benefits, net of reinsurance |       | $                                                | 374        |   | $ | 326 |   |

 

Theeffects of reinsurance on interest credited to contractholder funds are asfollows:
|                                                                | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Interest  credited to contractholder funds**                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Direct                                                         |       | $                                                | 641        |   | $ | 591 |   |
| Assumed                                                        |       |                                             |       |   |   |
| Affiliate                                                      |       | 3                                                |       | 7 |   |
| Non-affiliate                                                  |       | 4                                                |       | 6 |   |
| Ceded—non-affiliate                                       |       | (13                                              | )          | (1 | ) |
|                                                           |       |                                             |       |   |   |
| Interest  credited to contractholder funds, net of reinsurance |       | $                                                | 635        |   | $ | 603 |   |

 

* *

7

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* *

*Variable Annuity Business*

On June 1, 2006,in accordance with the terms of the definitive Master Transaction Agreement andrelated agreements (collectively the “Agreement”) ALIC, its subsidiary,Allstate Life Insurance Company of New York (“ALNY”), and the Corporationcompleted the disposal through reinsurance of substantially all of our variableannuity business to Prudential Financial, Inc. and its subsidiary, ThePrudential Insurance Company of America (collectively “Prudential”).  For Allstate, this disposal achieved theeconomic benefit of transferring to Prudential the future rights andobligations associated with this business.

The disposal waseffected through reinsurance agreements (the “Reinsurance Agreements”) whichinclude both coinsurance and modified coinsurance provisions.  Coinsurance and modified coinsuranceprovisions are commonly used in the reinsurance of variable annuities becausevariable annuities generally include both separate account and general accountliabilities.  When contractholders make avariable annuity deposit, they must choose how to allocate their accountbalances between a selection of variable-return mutual funds that must be heldin a separate account and fixed-return funds held in the Company’s generalaccount.  In addition, variable annuitycontracts include various benefit guarantees that are general account obligationsof the Company.  The ReinsuranceAgreements do not extinguish the Company’s primary liability under the variableannuity contracts.

Variable annuitybalances invested in variable-return mutual funds are held in separateaccounts, which are legally segregated assets and available only to settleseparate account contract obligations. Because the separate account assets must remain with the Company underinsurance regulations, modified coinsurance is typically used when parties wishto transfer future economic benefits of such business.  Under the modified coinsurance provisions,the separate account assets remain on the Company’s Condensed ConsolidatedStatements of Financial Position, but the related results of operations arefully reinsured and presented net of reinsurance on the Condensed ConsolidatedStatements of Operations.

The coinsuranceprovisions of the Reinsurance Agreements were used to transfer the futurerights and obligations related to fixed—return fund options and benefitguarantees.  $1.37 billion of assetssupporting general account liabilities were transferred to Prudential, net ofconsideration, under the coinsurance provisions as of the transaction closingdate.  General account liabilities of $1.41 billion at March 31, 2007 and$1.49 billion as of December 31, 2006, however, remain on the CondensedConsolidated Statements of Financial Position with a corresponding reinsurancerecoverable.

For purposes ofpresentation in the Consolidated Statements of Cash Flows, the Company treatedthe reinsurance of substantially all our variable annuity business toPrudential as a disposition of operations, consistent with the substance of thetransaction which was the disposition of a block of business accomplishedthrough reinsurance. Accordingly, the net consideration transferred toPrudential of $744 million (computed as $1.37 billion of general accountliabilities transferred to Prudential on the closing date less consideration of$628 million), the cost of hedging the ceding commission received fromPrudential of $69 million, pretax, and the costs of executing the transactionof $13 million, pretax, were classified as a disposition of operations in thecash flows from investing activities section of the Consolidated Statements ofCash Flows.

Under theAgreement, the Company has indemnified Prudential for certain pre-closingcontingent liabilities (including extra-contractual liabilities of the Companyand liabilities specifically excluded from the transaction) that the Companyhas agreed to retain.  In addition, theCompany will indemnify Prudential for certain post-closing liabilities that mayarise from the acts of the Company and its agents, including in connection withthe Company’s provision of transition services. The Reinsurance Agreements contain no limits or indemnifications withregard to insurance risk transfer, and transferred all of the future risks andresponsibilities for performance on the underlying variable annuity contractsto Prudential, including those related to benefit guarantees, in accordancewith the provisions of SFAS No. 113, “Accounting and Reporting for Reinsuranceof Short-Duration and Long-Duration Contracts”.

The terms of theAgreement give Prudential the right to be the exclusive provider of itsvariable annuity products through the Allstate proprietary agency force forthree years and a non-exclusive preferred provider for the following twoyears.  During a transition period, the Company will continue to issue newvariable annuity contracts, accept additional deposits on existing businessfrom existing contractholders on behalf of Prudential and, for a period oftwenty-four months or less from the effective date of the transaction, servicethe reinsured business while Prudential prepares for the migration of the businessonto its servicing platform.

 

8

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Pursuant to theAgreement, the final market-adjusted consideration was $628 million.  The disposal resulted in a gain of $77million pretax for ALIC, which was deferred as a result of the dispositionbeing executed through reinsurance.  Thedeferred gain is included as a component of other liabilities and accruedexpenses on the Consolidated Statements of Financial Position, and is amortizedto loss on dispositions of operations on the Consolidated Statements ofOperations over the life of the reinsured business which is estimated to beapproximately 18 years.  For ALNY, thetransaction resulted in a loss of $9 million pretax.  ALNY’s reinsurance loss and other amountsrelated to the disposal of the business, including the initial costs and finalmarket value settlements of the derivatives acquired by ALIC to economicallyhedge substantially all of the exposure related to market adjustments betweenthe effective date of the Agreement and the closing of the transaction, transactionalexpenses incurred and amortization of ALIC’s deferred reinsurance gain, wereincluded as a component of loss on disposition of operations on the Company’sConsolidated Statements of Operations and amounted to $61 million, after-taxduring 2006.  For the three-month andtwelve-month periods ended March 31, 2007 and December 31, 2006, loss ondisposition of operations on the Consolidated Statements of Operations included$1 million, after-tax of amortization of ALIC’s deferred gain.  DAC and DSI were reduced by $726 million and$70 million, respectively, as of the effective date of the transaction forbalances related to the variable annuity business subject to the ReinsuranceAgreements.

The separateaccount balances related to the modified coinsurance were $14.91 billion as ofMarch 31, 2007 and $15.07 billion as of December 31, 2006.  Separateaccount balances totaling approximately $1.12 billion as of March 31, 2007 and$1.10 billion at December 31, 2006 relate primarily to the variable lifebusiness that is being retained, and the variable annuity business in threeaffiliated companies that were not included in the Agreement.  In the first quarter of 2006 prior to thisdisposition, the Company’s variable annuity business generated approximately $75million in contract charges.

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

**Guarantees**

The Company ownscertain fixed income securities that obligate the Company to exchange creditrisk or to forfeit principal due, depending on the nature or occurrence of specifiedcredit events for the referenced entities. In the event all such specified credit events were to occur, the Company’smaximum amount at risk on these fixed income securities, as measured by theamount of the aggregate initial investment was $256 million at March 31,2007.  The obligations associated withthese fixed income securities expire at various times during the next sevenyears.

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

The aggregateliability balance related to all guarantees was not material as of March 31,2007.

**Regulation**

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

**Legal and regulatory proceedingsand inquiries**

**Background**

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

 

9

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

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

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

·             For the reasonsspecified above, it is often not possible to make meaningful estimates of theamount or range of loss that could result from the matters described below inthe “Proceedings” subsection.  TheCompany reviews these matters on an on-going basis and follows the provisionsof SFAS No. 5, “Accounting for Contingencies”, when making accrual anddisclosure decisions.  When assessingreasonably possible and probable outcomes, the Company bases its decisions onits assessment of the ultimate outcome following all appeals.  

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

**Proceedings**

Legal proceedingsinvolving Allstate agencies and AIC may impact the Company, even when theCompany is not directly involved, because the Company sells its productsthrough a variety of distribution channels including Allstate agencies.Consequently, information about the more significant of these proceedings isprovided in the following paragraph.

AIC is defendingcertain matters relating to its agency program reorganization announced in 1999.These matters include a lawsuit filed in December 2001 by the U.S. EqualEmployment Opportunity Commission (“EEOC”) alleging retaliation under federalcivil rights laws (the “EEOC I” suit) and a class action filed in August 2001by former employee agents alleging retaliation and age discrimination under theAge Discrimination in Employment Act (“ADREA”), breach of contract and ERISAviolations (the “Romero I” suit). In March 2004, in the consolidated EEOC I andRomero I litigation, the trial court issued a memorandum and order that, amongother things, certified classes of agents, including a mandatory class ofagents who had signed a release, for purposes of effecting the court’sdeclaratory judgment that the release is voidable at the option of the releasesigner.  The court also ordered that anagent who voids the release must return to AIC “any and all benefits receivedby the [agent] in exchange for signing the release.”  The court also stated that, “on theundisputed facts of record, there is no basis for 

 

10

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claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order and on January 16, 2007,the judge denied their request.  On March21, 2007, the judge entered a memorandum and order tentatively indicating thathe intends to dismiss most or all of the claims asserted in the consolidatedEEOC I and Romero I litigation.  The caseotherwise remains pending.  The EEOC alsofiled another lawsuit in October 2004 alleging age discrimination with respectto a policy limiting the rehire of agents affected by the agency programreorganization (the “EEOC II” suit).  InEEOC II, in October 2006, the court granted partial summary judgment to theEEOC.  Although the court did notdetermine that AIC was liable for age discrimination under the ADEA, itdetermined that the rehire policy resulted in a disparate impact, reserving fortrial the determination on whether AIC had reasonable factors other than age tosupport the rehire policy.  AIC’s petitionsfor interlocutory review of the trial court’s summary judgment order weregranted.  AIC’s interlocutory appeal isnow pending in the Court of Appeals for the Eighth Circuit.  AIC is also defending a certified classaction filed by former employee agents who terminated their employment prior tothe agency program reorganization.  Theseplaintiffs have asserted breach of contract and ERISA claims.  A putative nationwide class action has alsobeen filed by former employee agents alleging various violations of ERISA,including a worker classification issue. These plaintiffs are challenging certain amendments to the AgentsPension Plan and are seeking to have exclusive agent independent contractorstreated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was thesubject of further proceedings on appeal, and was reversed and remanded to thetrial court in April 2005.  On March 21,2007, the trial judge entered a memorandum and order tentatively indicatingthat he intends to dismiss most or all of the claims asserted in thiscase.  In all of these various matters,plaintiffs seek compensatory and punitive damages, and equitable relief.  AIC has been vigorously defending theselawsuits and other matters related to its agency program reorganization.  The outcome of these disputes is currentlyuncertain.

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

The Company iscurrently undergoing periodic market conduct examinations by state insuranceregulators.  In a recently concludedexamination, regulators in the state of New York focused, as they have withother insurers, on one of the Company’s New York subsidiary’s compliance withthe state’s replacement sales and record-keeping processes with regard to lifeinsurance and annuities among other issues. They found that this New York subsidiary failed to meet the requirementsof certain applicable regulations.  TheNew York subsidiary has settled this examination and has substantiallycompleted customer remediation related to replacement sales and is completingits other obligations arising from the examination.

**Other Matters**

The Corporationand some of its subsidiaries, including the Company, have receivedinterrogatories and demands for information from regulatory and enforcementauthorities relating to various insurance products and practices.  An area of inquiry includes the issuance offunding agreements backing medium-term notes. The Corporation and some of its subsidiaries, including the Company,have also received interrogatories and demands for information from authoritiesseeking information relevant to on-going investigations into the possibleviolation of antitrust or insurance laws by unnamed parties and, in particular,seeking information as to whether any person engaged in activities for thepurpose of price fixing, market allocation, or bid rigging.  The Company believes that these inquiries aresimilar to those made to many financial services companies as part ofindustry-wide investigations by various authorities into the practices,policies and procedures relating to insurance and financial servicesproducts.  The Corporation and itssubsidiaries have responded and will continue to respond to these inquiries.

Various otherlegal and regulatory actions are currently pending that involve the Company andspecific aspects of its conduct of business. Like other members of theinsurance industry, the Company is the target of a number of class actionlawsuits and other types of proceedings, some of which involve claims forsubstantial or indeterminate amounts. These actions are based on a variety of issues and target a range of theCompany’s practices. The outcome of these disputes is 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 on information currently knownto it, management believes that the ultimate outcome of all matters describedin this “Other Matters” subsection, in excess of amounts currently 

 

11

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reserved, as they are resolved over time is not likelyto have a material effect on the operating results, cash flows or financialposition of the Company.

**6.      Other Comprehensive Income**

The components ofother comprehensive income (loss) on a pretax and after-tax basis are asfollows:
|                                                                                              | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **(in millions)**                                                                       | ** ** | **Pretax**                                           | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized net  holding gains and (losses) arising during the period, net of related offsets |       | $                                                    | 150        |   | $ | (52 | ) | $ | 98 |   | $ | (644 | ) | $ | 225 |   | $ | (419 | ) |
| Less:  reclassification adjustment of realized capital gains and losses                      |       | 37                                                   |       | (13 | ) | 24 |   | (135 | ) | 47 |   | (88 | ) |
| Other  comprehensive income (loss)                                                           |       | $                                                    | 113        |   | $ | (39 | )  | 74 |   | $ | (509 | ) | $ | 178 |   | (331 | ) |
|                                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                   |       |                                                 |       |   |   | 149 |   |   |   |   |   | 96 |   |
| Comprehensive  income (loss)                                                                 |       |                                                 |       |   |   | $ | 223 |   |   |   |   |   | $ | (235 | ) |

 

 

12

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Shareholder ofAllstate Life Insurance Company:

We have reviewed the accompanying condensed consolidated statement offinancial position of Allstate Life Insurance Company and subsidiaries (the “Company”,an affiliate of The Allstate Corporation) as of March 31, 2007, and the relatedcondensed consolidated statements of operations and cash flows for thethree-month periods ended March 31, 2007 and 2006.  These interim financial statements are theresponsibility of the Company’s management.

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

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

We have previously audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated statement of financial position of Allstate Life Insurance Companyand subsidiaries as of December 31, 2006, and the related consolidatedstatements of operations and comprehensive income, shareholder’s equity, andcash flows for the year then ended (not presented herein); and in our reportdated March 9, 2007, which report includes an explanatory paragraph relating toa change in method of accounting for certain nontraditional long-duration contractsand for separate accounts in 2004, we expressed an unqualified opinion on thoseconsolidated financial statements.  Inour opinion, the information set forth in the accompanying condensedconsolidated statement of financial position as of December 31, 2006 is fairlystated, in all material respects, in relation to the consolidated statement offinancial position from which it has been derived.
| /s/ Deloitte & Touche  LLP |   |
|--------------------------------|--------|
|                           |
| Chicago, Illinois              |
| May 4, 2007                    |

 

 

13

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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, 2007 AND 2006** |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**OVERVIEW**

The following discussion highlights significantfactors influencing the consolidated financial position and results ofoperations of Allstate Life Insurance Company (referred to in this document as “we”,“our”, “us”, or the “Company”). It should be read in conjunction with thecondensed consolidated financial statements and notes thereto found under PartI. Item 1. contained herein, and with the discussion, analysis,consolidated financial statements and notes thereto in Part I. Item 1. andPart II. Item 7. and Item 8. of the Allstate Life Insurance Company AnnualReport on Form 10-K for 2006.  We operateas a single segment entity, based on the manner in which we use financialinformation to evaluate business performance and to determine the allocation ofresources.

**HIGHLIGHTS**

·               Net income increased 55.2% to $149 million inthe first quarter of 2007 from $96 million in the same period in 2006.

·               Gross margin declined 10.4% to $421 millionin the first quarter of 2007 from $470 million in the same period in 2006.

·               Contractholder funddeposits totaled $2.23 billion for the first quarter of 2007 compared to $1.94billion for the first quarter of 2006.

·               Investments as ofMarch 31, 2007 increased 4.0% from March 31, 2006 and net investment incomeincreased 5.8% in the first quarter of 2007 compared to the same period in theprior year.

·               Return on averageshareholder’s equity was 8.4% and 7.6% for the twelve months ended March 31,2007 and December 31, 2006, respectively.

·                Effective June 1, 2006, we disposed of substantiallyall of our variable annuity business through reinsurance.  The following table presents the results ofoperations attributable to our variable annuity business for the period of 2006prior to the disposition.
| (in millions)                                                         | ** ** | **Three Months Ended  March 31, 2006** | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Favorable/(unfavorable)**                                                |       |                                                       |       |                                                      |       |                                                    |       |
| Life and annuity  premiums and contract charges                            |       | $                                                          | 75         |                                                      | $          | 61                                                      |       | $ | 136 |   |
| Net investment income                                                      |       | 10                                                         |       | 6                                                         |       | 16                                                      |       |
| Periodic settlements  and accruals on non- hedge derivative instruments(1) |       | 1                                                          |       | —                                                    |       | 1                                                       |       |
| Contract benefits                                                          |       | (11                                                        | )          | (1                                                        | )          | (12                                                     | )          |
| Interest credited to  contractholder funds(2)                              |       | (13                                                        | )          | (8                                                        | )          | (21                                                     | )          |
|  Gross margin(3)                                                      |       | 62                                                         |       | 58                                                        |       | 120                                                     |       |
| Realized capital gains  and losses                                         |       | (8                                                         | )          | (1                                                        | )          | (9                                                      | )          |
| Amortization of DAC and  DSI(2)                                            |       | (3                                                         | )          | (44                                                       | )          | (47                                                     | )          |
| Operating costs and  expenses                                              |       | (25                                                        | )          | (18                                                       | )          | (43                                                     | )          |
| Loss on disposition of  operations                                         |       | (53                                                        | )          | (35                                                       | )          | (88                                                     | )          |
| Income from  operations before income tax expense                          |       | $                                                          | (27        | )                                                         | $          | (40                                                     | )          | $ | (67 | ) |
|                                                                       |       |                                                       |       |                                                      |       |                                                    |       |
| Investment margin                                                          |       | $                                                          | (2         | )                                                         | $          | (2                                                      | )          | $ | (4 | ) |
| Benefit margin                                                             |       | (1                                                         | )          | 16                                                        |       | 15                                                      |       |
| Contract charges and  fees                                                 |       | 65                                                         |       | 44                                                        |       | 109                                                     |       |
| Gross margin(3)                                                            |       | $                                                          | 62         |                                                      | $          | 58                                                      |       | $ | 120 |   |

----

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

(2)          For purposes of calculating gross margin,amortization of deferred sales inducements (“DSI”) is excluded from interestcredited to contractholder funds and aggregated with amortization of DAC due tothe similarity in the substance of the two items.  Amortization of DSI for variable annuitiestotaled less than $1 million in the first quarter of 2006 and $3 millionin the second quarter of 2006.

(3)          Gross margin and its components are measuresthat are not based on GAAP.  Gross marginand investment margin are defined on page 18 and benefit margin is defined onpage 20.

14

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**OPERATIONS**

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

**Contractcharges** are revenues generated from interest-sensitive life,fixed annuities, institutional products and variable annuities for which depositsare classified as contractholder funds or separate accounts liabilities.  Contract charges are assessed against thecontractholder account values for maintenance, administration, cost ofinsurance and surrender prior to contractually specified dates.  As a result, changes in contractholder fundsare considered in the evaluation of growth and as indicators of future levelsof revenues.  Subsequent to the close ofour reinsurance transaction with Prudential Financial Inc. (“Prudential”) onJune 1, 2006, variable annuity contract charges on the business subject to thetransaction are fully reinsured to Prudential and presented net of reinsurance onthe Condensed Consolidated Statements of Operations (see Note 4 to theCondensed Consolidated Financial Statements).

Thefollowing table summarizes premiums and contract charges by product.
|                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Premiums**                                 |       |                                             |       |   |   |
| Traditional life                             |       | $                                                | 69         |   | $ | 58 |   |
| Immediate annuities  with life contingencies |       | 77                                               |       | 49 |   |
| Other                                        |       | 9                                                |       | 10 |   |
| **Total premiums**                           |       | 155                                              |       | 117 |   |
|                                         |       |                                             |       |   |   |
| **Contract charges**                         |       |                                             |       |   |   |
| Interest-sensitive life                      |       | 210                                              |       | 192 |   |
| Fixed annuities                              |       | 18                                               |       | 17 |   |
| Variable annuities                           |       | —                                           |       | 76 |   |
| **Total contract charges**                   |       | 228                                              |       | 285 |   |
| ** **                                   |       |                                             |       |   |   |
| **Total premiums and contract charges**      |       | $                                                | 383        |   | $ | 402 |   |

 

Totalpremiums increased 32.5% to $155 million in the first quarter of 2007 comparedto the same period of 2006.  Thisincrease was due to higher sales of immediate annuities with life contingenciesand traditional life products.

Contractcharges decreased 20.0% to $228 million in the first quarter of 2007 comparedto the same period of 2006.  Excludingcontract charges on variable annuities, substantially all of which arereinsured to Prudential effective June 1, 2006, contract charges increased 9.1%in the first quarter of 2007 compared to the same period of 2006.  The increase was due to higher contractcharges on interest-sensitive life products resulting from growth of businessin force.

15

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

The followingtable shows the changes in contractholder funds.
|                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                                          | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Contractholder funds, beginning  balance**                    |       | $                                                | 60,565     |   | $ | 58,190 |   |
| ** **                                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Deposits**                                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Fixed annuities                                                 |       | 696                                              |       | 1,201 |   |
| Institutional products  (funding agreements)                    |       | 1,200                                            |       | 350 |   |
| Interest-sensitive life                                         |       | 332                                              |       | 322 |   |
| Variable annuity and  life deposits allocated to fixed accounts |       | —                                           |       | 63 |   |
| Total deposits                                                  |       | 2,228                                            |       | 1,936 |   |
| ** **                                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Interest credited**                                           |       | 645                                              |       | 621 |   |
| ** **                                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Maturities, benefits,  withdrawals and other adjustments**    |       |                                             |       |   |   |
| Maturities of  institutional products                           |       | (752                                             | )          | (704 | ) |
| Benefits                                                        |       | (415                                             | )          | (370 | ) |
| Surrenders and partial  withdrawals                             |       | (991                                             | )          | (997 | ) |
| Contract charges                                                |       | (182                                             | )          | (168 | ) |
| Net transfers from (to)  separate accounts                      |       | 3                                                |       | (83 | ) |
| Fair value hedge  adjustments for institutional products        |       | (17                                              | )          | (18 | ) |
| Other adjustments                                               |       | (70                                              | )          | 5 |   |
| Total maturities,  benefits, withdrawals and other adjustments  |       | (2,424                                           | )          | (2,335 | ) |
|                                                            |       |                                             |       |   |   |
| **Contractholder funds, ending balance**                        |       | $                                                | 61,014     |   | $ | 58,412 |   |

 

Contractholder funds increased 0.7% and 0.4% in thefirst quarter of 2007 and 2006, respectively. Average contractholder funds increased 4.3% and 6.4% in the firstquarters of 2007 and 2006, respectively, compared to the same periods in theprior years.

Contractholderdeposits increased 15.1% in the first quarter of 2007 compared to the sameperiod of 2006 due primarily to higher deposits on funding agreements partiallyoffset by lower deposits on fixed annuities and the absence in the firstquarter of 2007 of variable annuity deposits allocated to fixed accounts due tothe reinsurance of substantially all of the business effective June 1,2006.  Subsequent to the effective dateof the transaction, the net change in contractholder funds due to the reinsuredvariable annuity business is reflected as a component of other adjustments inthe table above.  Deferred fixed annuitydeposits in the first quarter of 2007 were $621 million (including indexedannuities) a decrease of 43.2% compared to the same period in the prioryear.  This decrease is indicative oflower industry-wide fixed annuity sales and reflects reduced consumer demand ascompeting short-term and equity-based investment alternatives continued to berelatively attractive during the quarter. Our strategy to raise returns on the capital that supports theseproducts also contributed to the decline. The Company generally prioritizes the allocation of fixed incomeinvestments to support sales of those retail products with the best sustainablegrowth and contribution margins, and to maintain our retail marketpresence.  As a result, sales of our institutionalproducts may vary from period to period.

Surrenders andpartial withdrawals on deferred fixed annuities and interest-sensitive lifeproducts decreased 0.6% in the first quarter of 2007 compared to the sameperiod of 2006 and the annualized withdrawal rate, based on the beginning ofperiod contractholder funds, decreased to 9.3% for the first quarter of 2007compared to 9.5% for the first quarter of 2006.

16

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**Net investment income**increased 5.8% in the first quarter of 2007 compared to the same period of 2006due mostly to increased investment yields and higher average portfolio balancesin the first quarter of 2007 compared to the same period in the prioryear.  The higher portfolio yields wereprimarily due to increased yields on floating rate instruments and, to a lesserextent, improved yields on fixed rate assets supporting deferred fixedannuities.  For certain products, theyield changes on our floating rate instruments pass to our floating ratecontractholders through changes in crediting rates with minimal impact on ourgross margin.  Higher average portfoliobalances resulted from the investment of cash flows from operating andfinancing activities related primarily to deposits from fixed annuities, fundingagreements and interest-sensitive life policies, as well as the proceeds fromthe $500 million intercompany note payable to our parent, Allstate InsuranceCompany (“AIC”), which was issued in December 2006 and repaid in the firstquarter of 2007.

**Net income** analysis is presentedin the following table.
|                                                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                                                                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                                                                    |       |                                             |       |   |   |
| Premiums                                                                                                |       | $                                                | 155        |   | $ | 117 |   |
| Contract charges                                                                                        |       | 228                                              |       | 285 |   |
| Net investment income                                                                                   |       | 1,030                                            |       | 974 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments(1)                               |       | 12                                               |       | 16 |   |
| Contract benefits                                                                                       |       | (374                                             | )          | (326 | ) |
| Interest credited to  contractholder funds(2)                                                           |       | (625                                             | )          | (596 | ) |
| Interest expense(3)                                                                                     |       | (5                                               | )          | — |   |
| **Gross margin**                                                                                        |       | 421                                              |       | 470 |   |
|                                                                                                    |       |                                             |       |   |   |
| Amortization of DAC and  DSI(2) (4)                                                                     |       | (125                                             | )          | (154 | ) |
| Operating costs and expenses(3)                                                                         |       | (82                                              | )          | (103 | ) |
| Restructuring and  related charges                                                                      |       | —                                           |       | (15 | ) |
| Income tax expense                                                                                      |       | (72                                              | )          | (66 | ) |
| Realized capital gains  and losses, after-tax                                                           |       | 14                                               |       | (18 | ) |
| DAC and DSI  amortization relating to realized capital gains and losses, after-tax(4)                   |       | —                                           |       | 27 |   |
| Reclassification of  periodic settlements and accruals on non- hedge derivative instruments,  after-tax |       | (8                                               | )          | (10 | ) |
| Gain (loss) on  disposition of operations, after-tax                                                    |       | 1                                                |       | (35 | ) |
| **Net income**                                                                                          |       | $                                                | 149        |   | $ | 96 |   |

----

(1)             Periodic settlementsand accruals on non-hedge derivative instruments are reflected as a componentof realized capital gains and losses on the Condensed Consolidated Statementsof Operations.

(2)             For purposes ofcalculating gross margin, amortization of DSI is excluded from interestcredited to contractholder funds and aggregated with amortization of DAC due tothe similarity in the substance of the two items.  Amortization of DSI totaled $10 million and$7 million in the first quarters of 2007 and 2006, respectively.

(3)             For purposes ofcalculating gross margin, interest expense incurred on general borrowings usedto fund asset purchases in advance of incurring a product liability areincluded as a component of gross margin. Interest expense is included as a component of operating costs andexpenses on the Condensed Consolidated Statements of Operations.

(4)             Amortization of DACand DSI relating to realized capital gains and losses is analyzed separatelybecause realized capital gains and losses may vary significantly betweenperiods and obscure trends in our business. There was no amortization of DAC and DSI relating to realized capitalgains and losses in the first quarter of 2007. Amortization of DAC and DSI relating to realized capital gains andlosses was $42 million (favorable to income) in the first quarter of 2006.

17

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*Grossmargin*, a non-GAAP measure, is comprised of premiums andcontract charges, and net investment income, less contract benefits, interestcredited to contractholder funds excluding amortization of DSI, and interestexpense incurred on general borrowings used to fund asset purchases in advanceof incurring a product liability.  Grossmargin also includes periodic settlements and accruals on certain non-hedgederivative instruments (see additional discussion under *“investmentmargin”)*.  We use gross marginas a component of our evaluation of the profitability of our life insurance andfinancial product portfolio. Additionally, for many of our products, including fixed annuities,variable life, and interest-sensitive life insurance, the amortization of DACand DSI is determined based on actual and expected gross margin.  Gross margin is comprised of three componentsthat are utilized to further analyze the business: investment margin, benefitmargin, and contract charges and fees. We believe gross margin and its components are useful to investorsbecause they allow for the evaluation of income components separately and inthe aggregate when reviewing performance. Gross margin, investment margin and benefit margin should not beconsidered as a substitute for net income and do not reflect the overallprofitability of the business.  Netincome is the GAAP measure that is most directly comparable to thesemargins.  Gross margin is reconciled toGAAP net income in the table above.

The components of gross margin are reconciled to thecorresponding financial statement line items in the following table.
|                                                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                | ** ** | **Investment  Margin**                               | ** ** | **Benefit Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross Margin** | ** ** |
| **(in millions)**                                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Premiums                                                                  |       | $                                                    | —     |   | $ | — |   | $ | 155 |   | $ | 117 |   | $ | — |   | $ | — |   | $ | 155 |   | $ | 117 |   |
| Contract charges                                                          |       | —                                               |       | — |   | 150 |   | 151 |   | 78 |   | 134 |   | 228 |   | 285 |   |
| Net investment  income                                                    |       | 1,030                                                |       | 974 |   | — |   | — |   | — |   | — |   | 1,030 |   | 974 |   |
| Periodic  settlements and accruals on non-hedge derivative instruments(1) |       | 12                                                   |       | 16 |   | — |   | — |   | — |   | — |   | 12 |   | 16 |   |
| Contract  benefits                                                        |       | (137                                                 | )          | (133 | ) | (237 | ) | (193 | ) | — |   | — |   | (374 | ) | (326 | ) |
| Interest  credited to contractholder funds(2)                             |       | (625                                                 | )          | (596 | ) | — |   | — |   | — |   | — |   | (625 | ) | (596 | ) |
| Interest  expense(3)                                                      |       | (5                                                   | )          | — |   | — |   | — |   | — |   | — |   | (5 | ) | — |   |
|                                                                      |       | $                                                    | 275        |   | $ | 261 |   | $ | 68 |   | $ | 75 |   | $ | 78 |   | $ | 134 |   | $ | 421 |   | $ | 470 |   |

----

(1)             Periodic settlementsand accruals on non-hedge derivative instruments are reflected as a componentof realized capital gains and losses on the Condensed Consolidated Statementsof Operations.

(2)             For purposes ofcalculating gross margin, amortization of DSI is excluded from interestcredited to contractholder funds and aggregated with amortization of DAC due tothe similarity in the substance of the two items.  Amortization of DSI totaled $10 million and$7 million in the first quarters of 2007 and 2006, respectively.

(3)             For purposes ofcalculating gross margin, interest expense incurred on general borrowings usedto fund asset purchases in advance of incurring a product liability areincluded as a component of gross margin. Interest expense is included as a component of operating costs andexpenses on the Condensed Consolidated Statements of Operations.

Gross margindecreased 10.4% in the first quarter of 2007 compared to the same period of2006 due to the absence in the first quarter of 2007 of gross margin onvariable annuities that are reinsured effective June 1, 2006.   Excluding the impact of the reinsuredvariable annuity business, gross margin increased 3.2% due to higher contractcharges and fees and investment margin, partially offset by lower benefitmargin.

*Investment margin*is a component of gross margin, both of which are non-GAAP measures.  Investment margin represents the excess ofnet investment income and periodic settlements and accruals on non-hedgederivative instruments over interest credited to contractholder funds, theimplied interest on life-contingent immediate annuities included in the reservefor life-contingent contract benefits, and interest expense incurred on generalborrowings used to fund asset purchases in advance of incurring a productliability.  We utilize derivative instruments as economic hedges of investments orcontractholder funds or to replicate fixed income securities.  These instruments do not qualify for hedgeaccounting or are not designated as hedges for accounting purposes.  Such derivatives are accounted for at fairvalue, and reported in realized capital gains and losses.  Periodic settlements and accruals on thesederivative instruments are included as a component of gross margin, consistent 

18

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with their intended use to enhance or maintaininvestment income and margin, and together with the economically hedgedinvestments or product attributes (e.g., net investment income or interestcredited to contractholders funds) or replicated investments, to appropriatelyreflect trends in product performance. Amortization of DSI is excluded from interest credited to contractholderfunds for purposes of calculating investment margin.  We use investment margin to evaluate ourprofitability related to the difference between investment returns on assetssupporting certain products and amounts credited to customers (“spread”) duringa fiscal period.

Investment margin byproduct group is shown in the following table.
|                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Annuities               |       | $                                                | 192        |   | $ | 185 |   |
| Life insurance          |       | 49                                               |       | 46 |   |
| Institutional products  |       | 34                                               |       | 30 |   |
| Total investment margin |       | $                                                | 275        |   | $ | 261 |   |

 

Investment margin increased 5.4% in the first quarterof 2007 compared to the same period of 2006 primarily due to improved yields onassets supporting deferred fixed annuities and growth in contractholder funds.

The following table summarizes the annualized weightedaverage investment yield, interest crediting rates and investment spreads forthe three months ended March 31.
|                                                                      | ** ** | **Weighted Average   Investment Yield** | ** ** | **Weighted Average   Interest Crediting Rate** | ** ** | **Weighted Average   Investment Spreads** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                               | ** ** | **2006**                                                           | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest-sensitive  life                                             |       | 6.2                                                    | %          | 6.2                                                                | %          | 4.5                                                      | %          | 4.6 | % | 1.7 | % | 1.6 | % |
| Deferred fixed  annuities                                            |       | 5.7                                                    |       | 5.6                                                                |       | 3.7                                                      |       | 3.7 |   | 2.0 |   | 1.9 |   |
| Immediate fixed  annuities with and without life contingencies       |       | 7.1                                                    |       | 7.2                                                                |       | 6.6                                                      |       | 6.6 |   | 0.5 |   | 0.6 |   |
| Institutional  products                                              |       | 6.1                                                    |       | 5.5                                                                |       | 5.1                                                      |       | 4.5 |   | 1.0 |   | 1.0 |   |
| Investments  supporting capital, traditional life and other products |       | 5.4                                                    |       | 6.8                                                                |       | N/A                                                      |       | N/A |   | N/A |   | N/A |   |

 

The following table summarizes the liabilities for thesecontracts and policies.
|                                                                       | ** ** | **As of March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in millions)**                                                | ** ** | **2007**                           | ** ** | **2006** | ** ** |
| Immediate fixed  annuities with life contingencies                    |       | $                                  | 8,202      |   | $ | 7,929 |   |
| Other life contingent  contracts and other                            |       | 4,011                              |       | 3,752 |   |
| Reserve for life-contingent  contracts                                |       | $                                  | 12,213     |   | $ | 11,681 |   |
|                                                                  |       |                               |       |   |   |
| Interest-sensitive life                                               |       | $                                  | 8,536      |   | $ | 8,041 |   |
| Deferred fixed  annuities                                             |       | 35,190                             |       | 34,128 |   |
| Immediate fixed  annuities without life contingencies                 |       | 3,803                              |       | 3,668 |   |
| Institutional products                                                |       | 13,068                             |       | 12,205 |   |
| Market value  adjustments related to derivative instruments and other |       | 417                                |       | 370 |   |
| Contractholder funds                                                  |       | $                                  | 61,014     |   | $ | 58,412 |   |

 

19

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*Benefit margin*is a component of grossmargin, both of which are non-GAAP measures.  Benefit margin represents life and life-contingent immediate annuity premiums, cost ofinsurance contract charges and, prior to the disposal of substantially all ofour variable annuity business through reinsurance, variable annuity contractcharges for contract guarantees less contract benefits.  Benefit margin excludes the implied intereston life-contingent immediate annuities, which is included in the calculation ofinvestment margin.  We use benefitmargin to evaluate our underwriting performance, as it reflects theprofitability of our products with respect to mortality or morbidity riskduring a fiscal period.

Benefit margin by productgroup is shown in the following table.
|                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|
| **(in millions)** | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Life insurance         |       | $                                                | 76         |   | $ | 89 |   |
| Annuities              |       | (8                                               | )          | (14 | ) |
| Total benefit margin   |       | $                                                | 68         |   | $ | 75 |   |

 

Benefit margin declined 9.3% in the first quarter of2007 compared to the same period of 2006 due to litigation related costs in theform of additional policy benefits and unfavorable mortality experience,partially offset by growth of business in force and a favorable impact from theannual review of assumptions related to reserves for certain annuityguarantees. The litigation costs relate to the anticipated settlement of aclass action involving certain universal life policies written prior to 1992(see Note 5 to the Condensed Consolidated Financial Statements).

*Amortizationof DAC and DSI*, excluding amortization relating to realizedcapital gains and losses, declined 18.8% in the first quarter of 2007 comparedto the same period in the prior year due to the absence of amortization in thefirst quarter of 2007 on the variable annuity business that was reinsuredeffective June 1, 2006.  Excluding theimpact of the reinsured variable annuity business, DAC and DSI amortization wasflat in the first quarter of 2007 compared to the same period in the prior yearas a favorable impact totaling $15 million relating to the annual review of DACassumptions (commonly referred to as “unlocking”) offset higher amortizationresulting from improved gross margin.  There was no DAC and DSI amortization relating to realized capital gainsand losses in the first quarter of 2007 compared to a credit of $27 million,after-tax, for the first quarter of 2006. The impact of realized capital gains and losses on amortization of DACand DSI is dependent upon the relationship between the assets that give rise tothe gain or the loss and the product liability supported by the assets.  Fluctuations result from changes in theimpact of realized capital gains and losses on actual and expected grossprofits.

DAC and DSI assetswere reduced by $726 million and $70 million, respectively, in 2006 as a resultof the disposition of substantially all of our variable annuity business (seeNote 4 to the Condensed Consolidated Financial Statements).

*Operating costs and expenses* declined 20.4% in the first quarter of 2007compared to the same period of 2006.  Thefollowing table summarizes operating costs and expenses.
|                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**              | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                |       |                                             |       |   |   |
| Non-deferrable  acquisition costs   |       | $                                                | 26         |   | $ | 38 |   |
| Other operating costs  and expenses |       | 56                                               |       | 65 |   |
| Total operating costs  and expenses |       | $                                                | 82         |   | $ | 103 |   |
|                                |       |                                             |       |   |   |
| Restructuring and related charges   |       | $                                                | —     |   | $ | 15 |   |

 

The decline in totaloperating costs and expenses was primarily due to the absence of expenses inthe first quarter of 2007 related to the variable annuity business reinsuredeffective June 1, 2006.  Non-deferrableacquisition costs and other operating costs and expenses for the first quarterof 2006 included $10 million and $15 million, respectively, of expensesrelating to the reinsured variable annuity business.

Restructuringand related charges for the first quarter of 2006 reflect costs relatedto the Voluntary Termination Offer.

20

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**INVESTMENTS**

An important component ofour financial results is the return on our investment portfolio.  The composition of the investment portfolioat March 31, 2007 is presented in the table below.
| (in millions)              | ** ** | **Investments** | ** ** | **Percent to  total** | ** ** |
|----------------------------|------------|-----------------|------------|----------------------------|------------|
| ** **                 | ** ** | ** **      | ** ** | ** **                 | ** ** |
| Fixed income securities(1) |       | $               | 63,574     |                       | 83.7       | % |
| Mortgage loans             |       | 8,745           |       | 11.5                       |       |
| Equity securities          |       | 698             |       | 0.9                        |       |
| Short-term                 |       | 1,326           |       | 1.8                        |       |
| Policy loans               |       | 748             |       | 1.0                        |       |
| Other                      |       | 845             |       | 1.1                        |       |
| Total                      |       | $               | 75,936     |                       | 100.0      | % |

----

(1)                                  Fixedincome securities are carried at fair value. Amortized cost basis for these securities was $61.87 billion.

Total investmentsincreased to $75.94 billion at March 31, 2007 from $74.16 billion at December31, 2006, primarily due to positive cash flows from operating activities,including increased funds associated with securities lending and securitiessold with the agreement to repurchase, and increased net unrealized gains onfixed income securities, partially offset by the repayment of a note payable toour parent, AIC.

Total investments atamortized cost related to collateral received in connection with securitieslending business activities, funds received in connection with securitiesrepurchase agreements, and collateral posted by counterparties related toderivative transactions, increased to $3.81 billion at March 31, 2007, from$2.29 billion at December 31, 2006.

At March 31, 2007, 94.2%of the fixed income securities portfolio was rated investment grade, which isdefined as a security having a rating from the National Association ofInsurance Commissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa, A or Baa fromMoody’s or a rating of AAA, AA, A or BBB from Standard and Poor’s (“S&P”),Fitch or Dominion or a rating of aaa, aa, a or bbb from A.M. Best; or acomparable internal rating if an externally provided rating is not available.

The unrealized netcapital gains on fixed income and equity securities at March 31, 2007 were$1.71 billion, an increase of $114 million or 7.1% since December 31,2006.  The net unrealized gain for thefixed income portfolio totaled $1.70 billion, comprised of $2.11 billionof unrealized gains and $404 million of unrealized losses at March 31,2007.  This is compared to a netunrealized gain for the fixed income portfolio totaling $1.59 billion atDecember 31, 2006, comprised of $2.10 billion of unrealized gains and $507million of unrealized losses.

Of the gross unrealizedlosses in the fixed income portfolio at March 31, 2007, $378 million or 93.6%were related to investment grade securities and are believed to be primarily aresult of rising interest rates.  Of theremaining $26 million of unrealized losses in the fixed income portfolio, $24million or 92.3% were in the corporate fixed income portfolio.  The $24 million of corporate fixedincome gross unrealized losses were primarily comprised of securities in theconsumer goods, financial services, utilities, capital goods and transportationsectors.  The gross unrealized losses in thesesectors were primarily company specific and interest rate related.

The net unrealized gainfor the common and non-redeemable preferred stock portfolio totaled $11 millionat March 31, 2007 and December 31, 2006, respectively.

Our portfolio monitoringprocess identifies and evaluates, on a case-by-case basis, fixed income andequity securities whose carrying value may be other-than-temporarilyimpaired.  The process includes aquarterly review of all securities using a screening process to identify thosesecurities whose fair value compared to amortized cost for fixed incomesecurities or cost for equity securities is below established thresholds forcertain time periods, or which are identified through other monitoring criteriasuch as ratings downgrades or payment defaults. The securities identified, in addition to other securities for which wemay have a concern, are evaluated based on facts and circumstances forinclusion on our watch-list.  As a resultof approved programs involving the disposition of investments such as changesin duration, revisions to strategic asset allocations and liquidity actions, aswell as certain dispositions anticipated by portfolio managers, we also conducta portfolio review to recognize impairment on securities in an unrealized lossposition for which we do not have the intent and ability to hold untilrecovery.  All securities in anunrealized loss position at March 31, 2007 were included in our portfoliomonitoring process for determining which declines in value were notother-than-temporary.

21

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We also monitorthe quality of our fixed income portfolio by categorizing certain investmentsas “problem”, “restructured” or “potential problem.”  Problem fixed income securities aresecurities in default with respect to principal or interest and/or securitiesissued by companies that have gone into bankruptcy subsequent to ouracquisition of the security. Restructured fixed income securities have rates and terms that are notconsistent with market rates or terms prevailing at the time of the restructuring.  Potential problem fixed income securities arecurrent with respect to contractual principal and/or interest, but because ofother facts and circumstances, we have concerns regarding the borrower’sability to pay future principal and interest, which causes us to believe thesesecurities may be classified as problem or restructured in the future.

The following table summarizes problem, restructuredand potential problem fixed income securities.
|                                        | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **(in millions)**                 | ** ** | **Amortized  cost**          | ** ** | **Fair  value**                 | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** |
| Problem                                |       | $                            | 12         |                            | $          | 16 |   | — | % | $ | 13 |   | $ | 16 |   | — | % |
| Restructured                           |       | 6                            |       | 7                               |       | — |   | 4 |   | 4 |   | — |   |
| Potential problem                      |       | 105                          |       | 114                             |       | 0.2 |   | 107 |   | 118 |   | 0.2 |   |
| Total net  carrying value              |       | $                            | 123        |                            | $          | 137 |   | 0.2 | % | $ | 124 |   | $ | 138 |   | 0.2 | % |
| Cumulative  write- downs recognized(1) |       | $                            | 188        |                            |       |   |   |   | $ | 184 |   |   |   |   |   |

----

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

We also evaluated each ofthese securities through our portfolio monitoring process at March 31, 2007 andrecorded write-downs if appropriate.  Wefurther concluded that any remaining unrealized losses on these securities weretemporary in nature and that we have the intent and ability to hold untilrecovery.  While these balances mayincrease in the future, particularly if economic conditions are unfavorable,management expects that****the totalamount of securities in these categories will remain low relative to the totalfixed income securities portfolio.

**Net Realized Capital Gains and Losses**The following table presents the components of realizedcapital gains and losses and the related tax effect.
|                                              | ** ** | **Three Months EndedMarch 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|
| **(in millions)**                       | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
|                                         |       |                                           |       |   |   |
| Investment  write-downs                      |       | $                                              | (1         | ) | $ | (5 | ) |
| Dispositions                                 |       | 34                                             |       | (75 | ) |
| Valuation  of derivative instruments         |       | (20                                            | )          | 36 |   |
| Settlement  of derivative instruments        |       | 9                                              |       | 17 |   |
| Realized  capital gains and losses, pretax   |       | 22                                             |       | (27 | ) |
| Income  tax (expense) benefit                |       | (8                                             | )          | 9 |   |
| Realized capital gains and losses, after-tax |       | $                                              | 14         |   | $ | (18 | ) |

 

Dispositions inthe above table include sales, losses recognized in anticipation of dispositionsand other transactions such as calls and prepayments.  We may sell impaired fixed income or equitysecurities that were in an unrealized loss position at the previous reportingdate in situations where new factors such as negative developments, subsequentcredit deterioration, changing liquidity needs, and newly identified marketopportunities cause a change in our previous intent to hold a security untilrecovery or maturity.

A changinginterest rate environment will drive changes in our portfolio duration targetsat a tactical level.  A duration targetand range is established with an economic view of liabilities relative to along-term portfolio view.  Tactical durationadjustments within management’s approved ranges are accomplished through bothcash market transactions and derivative activities that generate realized gainsand losses and through new purchases.  Asa 

 

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component of our approach to managing portfolioduration, realized gains and losses on certain derivative instruments are mostappropriately considered in conjunction with the unrealized gains and losses onthe fixed income portfolio.  Thisapproach mitigates the impacts of general interest rate changes to the overallfinancial condition of the Company.

In the first quarter of 2007, we recognized $21million of losses related to a change in our intent to hold certain securitieswith unrealized losses until they recover in value.  The change in our intent is primarily relatedto liquidity strategies and ongoing comprehensive reviews of ourportfolio.  We identified $871 million ofsecurities for which we did not have the intent to hold until recovery toachieve these objectives.

**CAPITAL RESOURCESAND LIQUIDITY**

**Capital Resources**consist of shareholder’s equity and debt, representing funds deployed oravailable to be deployed to support business operations.  The following table summarizes our capitalresources.
| (in millions)                                                       | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Redeemable preferred  stock                                              |       | $                            | —     |                            | $          | 5 |   |
| Common stock, retained  income and other shareholder’s equity items |       | 5,308                        |       | 5,168                           |       |
| Accumulated other  comprehensive income                                  |       | 399                          |       | 325                             |       |
| Total  shareholder’s equity                                         |       | 5,707                        |       | 5,498                           |       |
| Debt                                                                     |       | 200                          |       | 706                             |       |
| Total capital resources                                                  |       | $                            | 5,907      |                            | $          | 6,204 |   |

 

*Shareholder’s equity*increased in the first quarter of 2007, due to net income and higher netunrealized capital gains.

*Debt* decreased inthe first quarter of 2007, due to the settlement of a $500 million intercompanynote issued to AIC and the redemption of mandatorily redeemable preferredstock.

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

**Liquidity Sources and Uses** Asreflected in our Condensed Consolidated Statements of Cash Flows,****higher operating cash flows in the firstquarter of 2007, compared to the first quarter of 2006 were primarily relatedto higher investment income.

Cash flows used ininvesting activities decreased in the first quarter of 2007 due to higher cashused in financing activities, partially offset by the investment of higher cashprovided by operating activities.

# Cashflows used in financing activities increased in the first quarter of 2007compared to the first quarter of 2006 primarily due to the settlement of theintercompany note with AIC, partially offset by higher contractholder  fund deposits.  For quantification of the changes incontractholder funds, see the Operations section of the MD&A.

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

·               A commercial paperprogram with a borrowing limit of $1.00 billion to cover short-term cashneeds.  As of March 31, 2007, there wereno balances outstanding and therefore the remaining borrowing capacity was$1.00 billion; however, the outstanding balance fluctuates daily.

·               A five-year revolving credit facility expiring in2009 totaling $1.00 billion to cover short-term liquidityrequirements.  This facility contains anincrease provision that would make up to an additional $500 million availablefor borrowing provided the increased portion could be fully syndicated at alater date among existing or new lenders. Although the right to borrow under the facility is not subject to aminimum rating requirement, the costs of maintaining the facility and borrowingunder it are based on the ratings of The Allstate Corporation’s senior,unsecured, nonguaranteed long-term debt. There were no borrowings under this line of credit during the first quarterof 2007. The total amount outstanding at any point in time under thecombination of the commercial paper program and the credit facility cannotexceed the amount that can be borrowed under the credit facility.

·                  A universalshelf registration statement filed with the Securities and Exchange Commission(“SEC”) in May 

 

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2006.  The Allstate Corporation can use it to issuean unspecified amount of debt securities, common stock (including 289 millionshares of treasury stock as of March 31, 2007), preferred stock,depositary shares, warrants, stock purchase contracts, stock purchase units andsecurities of subsidiaries.  The specificterms of any securities The Allstate Corporation issues under this registrationstatement will be provided in the applicable prospectus supplements.  The Allstate Corporation has not yet issuedany securities under this registration statement.

As described in Note 1 to the Condensed FinancialStatements, in accordance with Financial Accounting Standards BoardInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),the Company had no liability for unrecognized tax benefits at January 1, 2007and does not believe that it is reasonably possible that this balance willsignificantly change within the next 12 months.

 

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**Item 4.**          Controls and Procedures

*Evaluation of Disclosure Controlsand Procedures. *Wemaintain disclosure controls and procedures as defined in Rule 13a-15(e)and 15(d)-15(e) under theSecurities Exchange Act of 1934.  Underthe supervision 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, the principal executive officer and theprincipal financial officer concluded that our disclosure controls andprocedures are effective in providing reasonable assurance that material informationrequired to be disclosed in our reports filed with or submitted to theSecurities and Exchange Commission under the Securities Exchange Act is madeknown to management, including the principal executive officer and theprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

*Changes in Internal Control overFinancial Reporting. *Duringthe fiscal quarter ended March 31, 2007, there have been no changes in ourinternal control over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.  OTHER INFORMATION**

**Item 1.**                              Legal Proceedings

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

**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 (including the risks described below), in ourpublic filings with the Securities and Exchange Commission, and thoseincorporated by reference in Part I, Item 1A of Allstate Life Insurance CompanyAnnual Report on Form 10-K for 2006.

**The change in ourunrecognized tax benefit during the next 12 months is subject to uncertainty.**

As required by Financial Accounting Standards BoardInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),which was adopted as of January 1, 2007, we have disclosed that the Company hadno liability for unrecognized tax benefits at January 1, 2007 and does notbelieve that it is reasonably possible that this balance will significantlychange within the next 12 months. We believe that this estimate has beenappropriately established based on available facts and information, however,actual results may differ from our estimate for reasons such as changes in ourposition on specific issues, developments with respect to the governments’ interpretations of incometax laws or changes in judgment resulting from new information obtained inaudits or the appeals process.

**Item6.**                          Exhibits

(a)                                  Exhibits

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

 

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|             | Allstate Life  Insurance Company |
|-------------|----------------------------------|
|        | (Registrant)                     |
|        |                             |
|        |                             |
| May 7, 2007 | By                               | /s/ Samuel H.  Pilch |   |
|        | Samuel H. Pilch                  |
|        | (Controller)                     |

 

 

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                 |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                            |
| 3.2              |       | Allstate  Life Insurance Company Amended and Restated Bylaws effective March 15, 2007,  incorporated herein by reference to Exhibit 3(ii) to Allstate Life Insurance  Company’s current report on Form 8-K filed March 20, 2007. |
|             |       |                                                                                                                                                                                                                                            |
| 15               |       | Acknowledgment  of awareness from Deloitte & Touche LLP, dated May 4, 2007, concerning  unaudited interim financial information.                                                                                                            |
|             |       |                                                                                                                                                                                                                                            |
| 31.1             |       | Rule 13a-14(a)  Certification of Principal Executive Officer                                                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                            |
| 31.2             |       | Rule 13a-14(a)  Certification of Principal Financial Officer                                                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                            |
| 32               |       | Section 1350  Certifications                                                                                                                                                                                                                    |

 

 

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