** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

 

**x****           QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED MARCH 31,2008**

 

**OR**

 

**o****            TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number: 000-31248**

 

**ALLSTATELIFE INSURANCE COMPANY**

(Exact name of registrant asspecified in its charter)

 

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

 

**Registrant’s telephone number, including areacode:  (847) 402-5000**

 

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

**                                                                                                Yes****x   No****o**

 

**Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):**

** **

| **Large accelerated filer****o** | ** ** | **Accelerated filer ****o** | **Non-accelerated  filer****x**                    | ** ** | **Smaller reporting company ****o** |
|----------------------------------|------------|----------------------------------|----------------------------------------------------|------------|------------------------------------------|
| ** **                       | ** ** | ** **                       | **(Do not check if a smaller  reporting company)** |

 

**Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).**

**Yes****o    No****x**

 

**As of May 13, 2008, the registrant had 23,800 commonshares, $227 par value, outstanding, all of which are held by AllstateInsurance Company.**

 

 

----

 

**ALLSTATE LIFE INSURANCE COMPANY**

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

##### **March 31, 2008**

 

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                          | **PAGE**   |
|-------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
|        |                                                                                                                               |       |
| Item 1.     | Financial Statements                                                                                                               |       |
|        |                                                                                                                               |       |
|        | Condensed  Consolidated Statements of Operations for the Three-Month Periods Ended  March 31, 2008 and 2007 (unaudited)       |  

1  |
|        |                                                                                                                               |       |
|        | Condensed Consolidated Statements of Financial Position as of  March 31, 2008 (unaudited) and December 31, 2007          |  

2  |
|        |                                                                                                                               |       |
|        | Condensed Consolidated Statements of Cash Flows for the  Three-Month  Periods Ended  March 31, 2008 and 2007 (unaudited) |  

3  |
|        |                                                                                                                               |       |
|        | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                   | 4          |
|        |                                                                                                                               |       |
|        | Report of Independent Registered Public Accounting Firm                                                                            | 19         |
|        |                                                                                                                               |       |
| Item 2.     | Management’s Discussion  and Analysis of Financial Condition and Results of Operations                                        | 20         |
|        |                                                                                                                               |       |
| Item 4.     | Controls  and Procedures                                                                                                           | 43         |
|        |                                                                                                                               |       |
| **PART II** | **OTHER INFORMATION**                                                                                                              | ** ** |
|        |                                                                                                                               |       |
| Item 1.     | Legal Proceedings                                                                                                                  | 44         |
|        |                                                                                                                               |       |
| Item 1A.    | Risk Factors                                                                                                                       | 44         |
|        |                                                                                                                               |       |
| Item 5.     | Other Information                                                                                                                  | 44         |
|        |                                                                                                                               |       |
| Item 6.     | Exhibits                                                                                                                           | 44         |

 

----

 

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

**ITEM 1.FINANCIAL STATEMENTS**

 

**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

** **
| ** **                                                   | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(Unaudited)**                  | ** ** |
| **Revenues**                                                 |       |                             |       |   |   |
| Premiums                                                     |       | $                                | 111        |   | $ | 155 |   |
| Contract charges                                             |       | 241                              |       | 228 |   |
| Net investment income                                        |       | 992                              |       | 1,030 |   |
| Realized capital gains and losses                            |       | (428                             | )          | 22 |   |
|                                                         |       | 916                              |       | 1,435 |   |
|                                                         |       |                             |       |   |   |
| **Costs and expenses**                                       |       |                             |       |   |   |
| Contract benefits                                            |       | 341                              |       | 374 |   |
| Interest credited to contractholder funds                    |       | 610                              |       | 635 |   |
| Amortization of deferred policy acquisition costs            |       | 50                               |       | 115 |   |
| Operating costs and expenses                                 |       | 90                               |       | 87 |   |
|                                                         |       | 1,091                            |       | 1,211 |   |
|                                                         |       |                             |       |   |   |
| (Loss) gain on disposition of operations                     |       | (9                               | )          | 1 |   |
|                                                         |       |                             |       |   |   |
| **(Loss) income from operations before income tax  expense** |       | (184                             | )          | 225 |   |
|                                                         |       |                             |       |   |   |
| Income tax (benefit) expense                                 |       | (69                              | )          | 76 |   |
|                                                         |       |                             |       |   |   |
| **Net (loss) income**                                        |       | $                                | (115       | ) | $ | 149 |   |

 

See notes to condensed consolidated financial statements.

 

1

----

 

**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL POSITION**

** **
| ** **                                                                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions, except par value data)**                              | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                            | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                            |       |               |       |                  |       |
| Investments                                                                                           |       |               |       |                  |       |
| Fixed income securities, at fair value (amortized cost $55,116 and  $58,020)                          |       | $                  | 54,282     |                  | $          | 58,469 |   |
| Mortgage loans                                                                                        |       | 10,186             |       | 9,901                 |       |
| Equity securities, at fair value (cost $150 and $102)                                                 |       | 143                |       | 102                   |       |
| Limited partnership interests                                                                         |       | 1,059              |       | 994                   |       |
| Short-term                                                                                            |       | 3,264              |       | 386                   |       |
| Policy loans                                                                                          |       | 772                |       | 770                   |       |
| Other                                                                                                 |       | 1,512              |       | 1,792                 |       |
|                                                                                                  |       |               |       |                  |       |
| Total investments                                                                                     |       | 71,218             |       | 72,414                |       |
|                                                                                                  |       |               |       |                  |       |
| Cash                                                                                                  |       | 150                |       | 185                   |       |
| Deferred policy acquisition costs                                                                     |       | 4,495              |       | 3,905                 |       |
| Reinsurance recoverables                                                                              |       | 3,434              |       | 3,410                 |       |
| Accrued investment income                                                                             |       | 663                |       | 652                   |       |
| Other assets                                                                                          |       | 983                |       | 622                   |       |
| Separate Accounts                                                                                     |       | 13,132             |       | 14,929                |       |
|                                                                                                  |       |               |       |                  |       |
| **Total assets**                                                                                      |       | $                  | 94,075     |                  | $          | 96,117 |   |
|                                                                                                  |       |               |       |                  |       |
| **Liabilities**                                                                                       |       |               |       |                  |       |
| Contractholder funds                                                                                  |       | $                  | 60,191     |                  | $          | 60,464 |   |
| Reserve for life-contingent contract benefits                                                         |       | 12,604             |       | 12,598                |       |
| Unearned premiums                                                                                     |       | 32                 |       | 33                    |       |
| Payable to affiliates, net                                                                            |       | 118                |       | 206                   |       |
| Other liabilities and accrued expenses                                                                |       | 3,478              |       | 2,823                 |       |
| Deferred income taxes                                                                                 |       | 55                 |       | 101                   |       |
| Long-term debt                                                                                        |       | 200                |       | 200                   |       |
| Separate Accounts                                                                                     |       | 13,132             |       | 14,929                |       |
|                                                                                                  |       |               |       |                  |       |
| **Total liabilities**                                                                                 |       | 89,810             |       | 91,354                |       |
|                                                                                                  |       |               |       |                  |       |
| **Commitments and Contingent Liabilities (Note 6)**                                                   |       |               |       |                  |       |
|                                                                                                  |       |               |       |                  |       |
| **Shareholder’s Equity**                                                                         |       |               |       |                  |       |
| Redeemable preferred stock – series A, $100 par value, 1,500,000  shares authorized, none issued |       | —             |       | —                |       |
| 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                                                                            |       | 1,126              |       | 1,108                 |       |
| Retained income                                                                                       |       | 3,619              |       | 3,734                 |       |
| Accumulated other comprehensive income:                                                               |       |               |       |                  |       |
| Unrealized net capital gains and losses                                                               |       | (485               | )          | (84                   | )          |
|                                                                                                  |       |               |       |                  |       |
| **Total accumulated other comprehensive income**                                                      |       | (485               | )          | (84                   | )          |
|                                                                                                  |       |               |       |                  |       |
| **Total shareholder’s equity**                                                                   |       | 4,265              |       | 4,763                 |       |
|                                                                                                  |       |               |       |                  |       |
| **Total liabilities and shareholder’s equity**                                                   |       | $                  | 94,075     |                  | $          | 96,117 |   |

 

See notes to condensed consolidated financial statements.****

 

2

----

 

**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                                      | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                  | ** ** |
| **Cash flows from operating activities**                                           |       |                             |       |   |   |
| Net (loss) income                                                                  |       | $                                | (115       | ) | $ | 149 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                             |       |   |   |
| Amortization and other non-cash items                                              |       | (79                              | )          | (71 | ) |
| Realized capital gains and losses                                                  |       | 428                              |       | (22 | ) |
| Gain (loss) on disposition of operations                                           |       | 9                                |       | (1 | ) |
| Interest credited to contractholder funds                                          |       | 610                              |       | 635 |   |
| Changes in:                                                                        |       |                             |       |   |   |
| Contract benefit and other insurance reserves                                      |       | (93                              | )          | (51 | ) |
| Unearned premiums                                                                  |       | (2                               | )          | (1 | ) |
| Deferred policy acquisition costs                                                  |       | (85                              | )          | (6 | ) |
| Reinsurance recoverables, net                                                      |       | (46                              | )          | (59 | ) |
| Income taxes                                                                       |       | (69                              | )          | 52 |   |
| Other operating assets and liabilities                                             |       | (92                              | )          | (45 | ) |
| Net cash provided by operating activities                                          |       | 466                              |       | 580 |   |
|                                                                               |       |                             |       |   |   |
| **Cash flows from investing activities**                                           |       |                             |       |   |   |
| Proceeds from sales:                                                               |       |                             |       |   |   |
| Fixed income securities                                                            |       | 4,205                            |       | 1,891 |   |
| Equity securities                                                                  |       | 24                               |       | 21 |   |
| Limited partnerships                                                               |       | 25                               |       | 58 |   |
| Other investments                                                                  |       | 80                               |       | 38 |   |
| Investment collections:                                                            |       |                             |       |   |   |
| Fixed income securities                                                            |       | 579                              |       | 775 |   |
| Mortgage loans                                                                     |       | 127                              |       | 494 |   |
| Other investments                                                                  |       | 25                               |       | 107 |   |
| Investment purchases:                                                              |       |                             |       |   |   |
| Fixed income securities                                                            |       | (2,093                           | )          | (2,819 | ) |
| Equity securities                                                                  |       | (53                              | )          | (24 | ) |
| Limited partnerships                                                               |       | (106                             | )          | (186 | ) |
| Mortgage loans                                                                     |       | (344                             | )          | (534 | ) |
| Other investments                                                                  |       | (19                              | )          | (179 | ) |
| Change in short-term investments, net                                              |       | (2,216                           | )          | 91 |   |
| Change in other investments, net                                                   |       | (132                             | )          | 53 |   |
| Net cash provided by (used in) investing activities                                |       | 102                              |       | (214 | ) |
|                                                                               |       |                             |       |   |   |
| **Cash flows from financing activities**                                           |       |                             |       |   |   |
| Note payable to parent                                                             |       | —                           |       | (500 | ) |
| Redemption of redeemable preferred stock                                           |       | —                           |       | (11 | ) |
| Contractholder fund deposits                                                       |       | 2,722                            |       | 2,223 |   |
| Contractholder fund withdrawals                                                    |       | (3,325                           | )          | (2,155 | ) |
| Net cash used in financing activities                                              |       | (603                             | )          | (443 | ) |
|                                                                               |       |                             |       |   |   |
| **Net decrease in cash**                                                           |       | (35                              | )          | (77 | ) |
| **Cash at beginning of the period**                                                |       | 185                              |       | 273 |   |
| **Cash at end of period**                                                          |       | $                                | 150        |   | $ | 196 |   |

 

See notes to condensed consolidated financial statements.

 

3

----

** **

**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.   General**

 

**Basis of presentation**

 

The accompanying condensed consolidated financialstatements include the accounts of Allstate Life InsuranceCompany (“ALIC”) and its wholly owned subsidiaries (collectively referred to asthe “Company”). ALIC is wholly owned by Allstate Insurance Company (“AIC”), awholly owned subsidiary of The Allstate Corporation (the “Corporation”).

 

The condensedconsolidated financial statements and notes as of March 31, 2008, and forthe three-month periods ended March 31, 2008 and 2007 are unaudited.  The condensed consolidated financialstatements reflect all adjustments (consisting only of normal recurring accruals),which are, in the opinion of management, necessary for the fair presentation ofthe financial position, results of operations and cash flows for the interimperiods.  These condensed consolidatedfinancial statements and notes should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.  The results of operations for the interimperiods should not be considered indicative of results to be expected for thefull year.

 

To conform to the 2008 presentation, certainamounts in the prior year condensed consolidated financial statements and noteshave been reclassified.

 

**Premiums and Contract Charges**

 

The following table summarizes premiums and contract charges byproduct.

 
| ** **                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** |
| **($ in millions)**               | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Premiums**                                |       |                             |       |   |   |
| Traditional life insurance                  |       | $                                | 60         |   | $ | 69 |   |
| Immediate annuities with life contingencies |       | 30                               |       | 77 |   |
| Other                                       |       | 21                               |       | 9 |   |
| Total premiums                              |       | 111                              |       | 155 |   |
|                                        |       |                             |       |   |   |
| **Contract charges**                        |       |                             |       |   |   |
| Interest-sensitive life insurance           |       | 228                              |       | 210 |   |
| Fixed annuities                             |       | 13                               |       | 18 |   |
| Total contract charges                      |       | 241                              |       | 228 |   |
| Total premiums and contract charges         |       | $                                | 352        |   | $ | 383 |   |

 

**Adopted accounting standards**

 

*Statement of Position05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs inConnection with Modifications or Exchanges of Insurance Contracts (“SOP 05-1”)*

 

In October 2005,the American Institute of Certified Public Accountants (“AICPA”) issued SOP 05-1.  SOP 05-1 provides accounting guidance fordeferred policy acquisition costs (“DAC”) associated with internal replacementsof insurance and investment contracts other than those set forth in Statementof Financial Accounting Standards (“SFAS”) No. 97, “Accounting andReporting by Insurance Enterprises for Certain Long-Duration Contracts and forRealized Gains and Losses from the Sale of Investments”.  SOP 05-1 defines an internal replacement as amodification in product benefits, features, rights or coverages that occursthrough the exchange of an existing contract for a new contract, or byamendment, endorsement or rider to an existing contract, or by the election ofa feature or coverage within an existing contract.  The Company adopted the provisions of SOP05-1 on January 1, 2007 for internal replacements occurring in fiscalyears beginning after December 15, 2006. The adoption resulted in an $8 million after-tax reduction to retainedincome to reflect the impact on estimated future gross profits (“EGP”) from thechanges in accounting for certain costs associated with contract continuationsthat no longer qualify for deferral under SOP 05-1 and a reduction of DAC anddeferred sales inducement balances of $13 million pre-tax as of January 1,2007.

 

4

----

* *

*SFAS No. 155, Accounting for Certain Hybrid FinancialInstruments – an amendment**of FASBStatements No. 133 and 140 (“SFAS No. 155”)*

 

In February 2006, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 155, which permits the fair value remeasurement at thedate of adoption of any hybrid financial instrument containing an embedded derivative thatotherwise would require bifurcation under paragraph 12 or 13 of SFAS No. 133,“*Accounting for Derivative Instruments andHedging Activities”***(“SFAS No. 133”);clarifies which interest-only strips and principal-only strips are not subjectto the requirements of SFAS No. 133; establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or hybrid financial instruments that containembedded derivatives requiring bifurcation; and clarifies that concentrations of credit risk in the formof subordination are not embedded derivatives.  The Company adopted the provisions of SFAS No. 155on January 1, 2007, which were effective for all financial instrumentsacquired, issued or subject to a remeasurement event occurring after thebeginning of the first fiscal year beginning after September 15,2006.  The Company elected not toremeasure existing hybrid financial instruments that contained embeddedderivatives requiring bifurcation at the date of adoption pursuant to paragraph12 or 13 of SFAS No. 133.  Theadoption of SFAS No. 155 did not have a material effect on the results ofoperations or financial position of the Company.

 

*FASB Interpretation No. 48, Accounting for Uncertaintyin Income Taxes – an interpretation of FASB Statement No. 109 and FASBStaff Position No. FIN 48-1, Definition of Settlement in FASBInterpretation No. 48 (“FIN 48”)*

 

TheFASB issued the interpretation in July 2006 and the staff position in May 2007.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with SFAS 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. On January 1, 2007, theCompany adopted the provisions of FIN 48, which were effective for fiscal yearsbeginning after December 15, 2006. No cumulative effect of a change in accounting principle or adjustmentto the liability for unrecognized tax benefits was recognized as a result ofthe adoption of FIN 48.  Accordingly, theadoption of FIN 48 did not have an effect on the results of operations orfinancial position of the Company.

 

*SEC StaffAccounting Bulletin No. 109, Written Loan Commitments That are Recorded AtFair Value Through Earnings (“SAB 109”)*

 

In October 2007, theSEC issued SAB 109, a replacement of SAB 105, “Application of AccountingPrinciples to Loan Commitments”.  SAB 109is applicable to both loan commitments accounted for under SFAS No. 133,and other loan commitments for which the issuer elects fair value accountingunder SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities”.  SAB 109 statesthat the expected net future cash flows related to the servicing of a loanshould be included in the fair value measurement of a loan commitment accountedfor at fair value through earnings.  Theexpected net future cash flows associated with loan servicing should bedetermined in accordance with the guidance in SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities”, as amended by SFAS No. 156, “Accounting for Servicing ofFinancial Assets”.  SAB 109 should beapplied on a prospective basis to loan commitments accounted for under SFAS No. 133that were issued or modified in fiscal quarters beginning after December 15,2007.  Earlier adoption is notpermitted.  The adoption of SAB 109 didnot have a material impact on the Company’s results of operations or financialposition.

 

5

----

* *

*SFAS No. 157,Fair Value Measurements (“SFAS No. 157”)*

 

In September 2006,the FASB issued SFAS No. 157, which redefines fair value as the price thatwould be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date, establishes aframework for measuring fair value in GAAP, and expands disclosures about fairvalue measurements.  SFAS No. 157establishes a three-level hierarchy for fair value measurements based upon thenature of the inputs to the valuation of an asset or liability.  SFAS No. 157 applies where otheraccounting pronouncements require or permit fair value measurements.  In February 2008, theFASB issued FASB Staff Position No. 157-2, “Effective Date of FASBStatement No. 157” (“FSP 157-2”), which permits the deferral of theeffective date of SFAS No. 157 to fiscal years beginning after November 15,2008 for all non-financial assets and liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis.  The Company adopted the provisions of SFAS No. 157for financial assets and liabilities recognized or disclosed at fair value on arecurring and non-recurring basis as of January 1, 2008.  Consistent with the provisions of FSP 157-2,the Company decided to defer the adoption of SFAS No. 157 fornon-financial assets and liabilities measured at fair value on a non-recurringbasis until January 1, 2009.  Theadoption of SFAS No. 157 did not have a material effect on the Company’sresults of operations or financial position (see Note 4).

 

*SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities –Including an amendment of FASB Statement No. 115 (“SFAS No. 159”)*

 

In February 2007,the FASB issued SFAS No. 159 which provides reporting entities, on anongoing basis, an option to report selected financial assets, includinginvestment securities, and financial liabilities, including most insurancecontracts, at fair value through earnings. SFAS No. 159 establishes presentation and disclosure requirementsdesigned to facilitate comparisons between companies that choose differentmeasurement alternatives for similar types of financial assets andliabilities.  The standard also requiresadditional information to aid financial statement users’ understanding of theimpacts of a reporting entity’s decision to use fair value on its earnings andrequires entities to display, on the face of the statement of financialposition, the fair value of those assets and liabilities for which thereporting entity has chosen to measure at fair value.  SFAS No. 159 is effective as of thebeginning of a reporting entity’s first fiscal year beginning after November 15,2007.  The Company did not apply the fair value option to any existingfinancial assets or liabilities as of January 1, 2008.  Consequently, the initial adoption of SFAS No. 159had no impact on the Company’s results of operations or financial position.

 

*FASB Staff Position No. FIN 39-1, Amendment of FASB InterpretationNo. 39 (“FSP FIN 39-1”)*

 

In April 2007, theFASB issued FSP FIN 39-1, which amends FASB Interpretation No. 39, “Offsettingof Amounts Related to Certain Contracts”. FSP FIN 39-1 replaces the terms “conditional contracts” and “exchangecontracts” with the term “derivative instruments” and requires a reportingentity to offset fair value amounts recognized for the right to reclaim cashcollateral or the obligation to return cash collateral against fair valueamounts recognized for derivative instruments executed with the samecounterparty under the same master netting arrangement that have been offset inthe statement of financial position. FSP FIN 39-1 is effective for fiscal yearsbeginning after November 15, 2007, with early adoption permitted.  The adoption of FSP FIN 39-1 did not have amaterial impact on the Company’s results of operations or financial position.

 

## **Pending accounting standards**

## ** **

*SFAS No. 141(R), BusinessCombinations (“SFAS No. 141R”)*

 

In December 2007,the FASB issued SFAS No. 141R which replaces SFAS No. 141, “BusinessCombinations” (“SFAS No. 141”). Among other things, SFAS No. 141R broadens the scope of SFAS No. 141to include all transactions where an acquirer obtains control of one or moreother businesses; retains the guidance to recognize intangible assetsseparately from goodwill; requires, with limited exceptions, that all assetsacquired and liabilities assumed, including certain of those that arise fromcontractual contingencies, be measured at their acquisition date fair values;requires most acquisition and restructuring-related costs to be expensed asincurred; requires that step acquisitions, once control is acquired, to berecorded at the full amounts of the fair values of the identifiable assets,liabilities and the noncontrolling interest in the acquiree; and replaces thereduction of asset values and recognition of negative goodwill with arequirement to recognize a gain in earnings. The provisions of SFAS No. 141R are effective for fiscal yearsbeginning after December 15, 2008 and are to be applied prospectivelyonly.  Early adoption is not permitted.The Company will apply the provisions of SFAS 141R as required when effective.

 

6

----

* *

*SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements – an amendment ofARB No. 51 (“SFAS No. 160”)*

 

In December 2007,the FASB issued SFAS No. 160 which clarifies that a noncontrollinginterest in a subsidiary is that portion of the subsidiary’s equity that isattributable to owners of the subsidiary other than its parent or parent’saffiliates.  Noncontrolling interests arerequired to be reported as equity in the consolidated financial statements andas such net income will include amounts attributable to both the parent and thenoncontrolling interest with disclosure of the amounts attributable to each onthe face of the consolidated statement of operations.  SFAS No. 160 requires that all changesin a parent’s ownership interest in a subsidiary when control of the subsidiaryis retained, be accounted for as equity transactions.  In contrast, SFAS No. 160 requires aparent to recognize a gain or loss in net income when control over a subsidiaryis relinquished and the subsidiary is deconsolidated, as well as providecertain associated expanded disclosures. SFAS No. 160 is effective as of the beginning of a reporting entity’sfirst fiscal year beginning after December 15, 2008.  Early adoption is prohibited.  SFAS No. 160 requires prospectiveapplication as of the beginning of the fiscal year in which the standard isinitially applied, except for the presentation and disclosure requirementswhich are to be applied retrospectively for all periods presented.  The adoption of SFAS No. 160 is notexpected to have a material effect on the Company’s results of operations orfinancial position.

 

*SOP 07**-1, Clarification ofthe Scope of the Audit and Accounting Guide, Investment Companies (“the Guide”)and Accounting by Parent Companies and Equity Method Investors for Investmentsin Investment Companies (“SOP 07-1”)*

 

In June 2007, theAICPA issued SOP 07-1 which provides guidance for determining whether an entityfalls within the scope of the Guide and whether investment company accountingshould be retained by a parent company upon consolidation of an investmentcompany subsidiary or by an equity-method investor in an investment company.SOP 07-1 was to be effective for fiscal years beginning on or after December 15,2007, however in February 2008, the FASB issued FASB Staff Position No. SOP07-1-1, “Effective Date of AICPA Statement of Position 07-1”, which amends SOP07-1 to (1) delay indefinitely the effective date of the SOP and (2) prohibitadoption of the SOP for an entity that did not early adopt the SOP before December 15,2007.  The Company did not early adoptSOP 07-1.  Consequently, the Company isnot permitted to adopt the statement.

 

*SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities – an amendmentof FASB Statement No. 133 (“SFAS No. 161”)*

 

In March 2008, theFASB issued SFAS No. 161, which amends and expands the disclosurerequirements for derivatives currently accounted for in accordance with SFAS No. 133. The new disclosures are designed to enhance the understanding of how and why anentity uses derivative instruments; and how derivative instruments affect anentity’s financial position, results of operations, and cash flows.  Thestandard requires, on a quarterly basis, quantitative disclosures about the potentialcash outflows associated with the triggering of credit-related contingentfeatures, if any; tabular disclosures about the classification and fair valueamounts of derivative instruments reported in the statement of financialposition; disclosure of the location and amount of gains and losses onderivative instruments reported in the statement of operations; and qualitativeinformation about how and why an entity uses derivative instruments and howderivative instruments and related hedged items affect the entity’s financialstatements.  SFAS No. 161 is effective for fiscal periods beginningafter November 15, 2008, and is to be applied on a prospective basisonly.  SFAS No. 161 affects disclosures and therefore will not impactthe Company’s results of operations or financial position.

 

7

----

** **

**2.    Related Party Transactions**

 

**Reinsurancetransactions**

 

Effective January 1,2008, the Company’s coinsurance reinsurance agreement with its unconsolidatedaffiliate American Heritage Life Insurance Company (“AHL”), which went intoeffect in 2004, was amended to include the assumption by the Company of certainaccident and health insurance policies. In accordance with this amendment, the Company recorded cash of $16million, a premium installment receivable of $5 million, DAC of $32 million,reserves for life-contingent contract benefits of $24 million and accruedliabilities of $2 million.  Since theCompany received assets in excess of net liabilities from an affiliate undercommon control, the Company recognized a gain of $27 million ($18 millionafter-tax), which was recorded as a non-cash capital contribution resulting inan increase to additional capital paid-in on the Company’s CondensedConsolidated Statements of Financial Position.

 

**Debt**

 

Effective May 8,2008, the Company, AIC and the Corporation entered into a one-year Amended andRestated Intercompany Liquidity Agreement (“Liquidity Agreement”) replacing theIntercompany Liquidity Agreement between the Company and AIC, dated January 1,2008.  The agreement allows forshort-term advances of funds to be made between parties for liquidity and othergeneral corporate purposes. It shall be automatically renewed for subsequentone-year terms unless terminated by the parties.  The Liquidity Agreement does not establish acommitment to advance funds on the part of either party.  The Company and AIC each serve as a lenderand borrower and the Corporation serves only as a lender.  The maximum amount of advances each party maymake or receive is limited to $1 billion. Netting or offsetting of advances made and received is notpermitted.  Advances between the partiesare required to have specified due dates less than or equal to 364 days fromthe date of the advance and be payable upon demand by written request from thelender at least ten business days prior to the demand date.  The borrower may make prepayments of theoutstanding principal balance of an advance without penalty. Advances will bearinterest equal to or greater than the rate applicable to 30-day commercialpaper issued by the Corporation on the date the advance is made with anadjustment on the first day of each month thereafter.

 

**3.    Supplemental Cash FlowInformation**

 

Non-cash investment exchanges and modifications,which primarily reflect refinancings of fixed income securities and mergerscompleted with equity securities, totaled $29 million for the three-monthperiod ended March 31, 2007.

 

In the first quarter of 2008, the Companyreceived a non-cash capital contribution of $18 million related to areinsurance transaction with AHL, an unconsolidated affiliate of the Company.

 

Liabilities for collateral received inconjunction with the Company’s securities lending and other business activitiesand for funds received from the Company’s security repurchase businessactivities are reported in other liabilities and accrued expenses in theCondensed Consolidated Statements of Financial Position. The accompanying cashflows are included in cash flows from operating activities in the CondensedConsolidated Statements of Cash Flows along with the activities resulting frommanagement of the proceeds, which are as follows:

 
| ** **                                                            | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net change in fixed income securities                                 |       | $                                | 93         |   | $ | (926 | ) |
| Net change in short-term investments                                  |       | (652                             | )          | (594 | ) |
| Operating cash flow (used)                                            |       | $                                | (559       | ) | $ | (1,520 | ) |
|                                                                  |       |                             |       |   |   |
| Liabilities for collateral and security repurchase, beginning of year |       | $                                | (1,817     | ) | $ | (2,294 | ) |
| Liabilities for collateral and security repurchase, end of period     |       | (2,376                           | )          | (3,814 | ) |
| Operating cash flow provided                                          |       | $                                | 559        |   | $ | 1,520 |   |

 

8

----

** **

**4.  Fair Value ofFinancial Assets and Financial Liabilities**

 

The measurement basis fora significant amount of the Company’s financial assets is fair value. Financialinstruments measured at fair value on a recurring basis include:

 

*FinancialAssets*   Primarily investments including U.S.treasuries, U.S. equities, international equities, money market funds,corporates, municipals, U.S. government and agencies, commercialmortgage-backed securities (“CMBS”), preferred stock,  mortgage-backed securities (“MBS”), foreigngovernments, asset-backed securities (“ABS”), commercial paper, derivatives (exchangetraded and over-the-counter (“OTC”)), and separate account assets.

 

*FinancialLiabilities*   Primarily free-standing derivatives(exchange listed and OTC) and derivatives embedded in certain contractholderliabilities.

 

Financial instrumentsmeasured at fair value on a non–recurring basis include:

 

*FinancialAssets*   Primarily mortgage loans and otherinvestments written-down to fair value in connection with recognizing other–than–temporaryimpairments.

 

*FinancialLiabilities*   Includes certain reserves on a closed blockof policies expected to be transferred through a future reinsurance agreementto an unrelated third party.

 

SFASNo. 157 is effective for fiscal years beginning after November 15,2007. The Company adopted the provisions of SFAS No. 157 as of January 1,2008 for its financial assets and financial liabilities that are measured atfair value.  SFAS No. 157:

 

·                  Defines fair value as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date, andestablishes a framework for measuring fair value;

 

·                  Establishes a three-level hierarchy for fairvalue measurements based upon the transparency of inputs to the valuation as ofthe measurement date;

 

·                  Expands disclosures about financialinstruments measured at fair value.

 

In determining fair value, the Company principallyuses the market approach which generally utilizes market data for the same orsimilar instruments.  To a lesser extent,the Company uses the income approach which involves determining fair valuesfrom discounted cash flow methodologies. SFAS No. 157 establishes a hierarchy for inputs used in determiningfair value that maximizes the use of observable inputs and minimizes the use ofunobservable inputs by requiring that observable inputs be used whenavailable.  Certain financial assets arenot carried at fair value on a recurring basis, including investments such asmortgage loans, limited partnership interests, bank loans and policy loans, andthus are only categorized in the fair value hierarchy when held at fair valueon a non-recurring basis.  In addition,equity options embedded in fixed income securities are not disclosed in thehierarchy with free-standing derivatives as the embedded derivatives arepresented as combined instruments in fixed income securities.

 

Observable inputs arethose used by market participants in valuing financial instruments that aredeveloped based on market data obtained from independent sources.  In the absence of observable inputs,unobservable inputs reflect the Company’s estimates of the assumptions marketparticipants would use in valuing financial assets and financial liabilitiesand are developed based on the best information available in the circumstances.

 

Pursuant to SFAS No. 157,fair value is a market-based measure considered from the perspective of amarket participant who owns an asset or owes a liability.  Accordingly, when market observable data isnot readily available, the Company’s own assumptions are set to reflect thosethat market participants would be presumed to use in pricing the asset orliability at the measurement date.  TheCompany uses prices and inputs that are current as of the measurement date,including during periods of market disruption. In periods of market disruption, the ability to observe prices andinputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1to Level 2, or from Level 2 to Level 3.

 

Financial assets andfinancial liabilities recorded on the Condensed Consolidated Statements ofFinancial Position at fair value are categorized based on the reliability ofinputs to the valuation techniques as follows:

 

9

----

* *

*Level 1**        *Financial assets and financial liabilities whosevalues are based on unadjusted quoted prices for identical assets orliabilities in an active market that the Company can access.

 

*Level 2***        **Financial assets and financial liabilities whosevalues are based on the following:

 

a)  Quoted prices for similar assets orliabilities in active markets;

b)  Quoted prices for identical or similar assetsor liabilities in non-active markets; or

c)  Valuation models whose inputs are observable,directly or indirectly, for substantially the full term of the asset orliability

 

*Level 3**        *Financial assets and financial liabilities whosevalues are based on prices or valuation techniques that require inputs that areboth unobservable and significant to the overall fair value measurement.  These inputs may reflect the Company’sestimates of the assumptions that market participants would use in valuing thefinancial assets and financial liabilities.

 

The availability ofobservable inputs varies by instrument. In situations where fair value is basedon internally developed pricing models or inputs that are unobservable in themarket, the determination of fair value requires more judgment.  The degree of judgment exercised by theCompany in determining fair value is typically greatest for instrumentscategorized in Level 3. In many instances, inputs used to measure fair valuefall into different levels of the fair value hierarchy.  In thoseinstances, for disclosure purposes, the level in the fair value hierarchywithin which the fair value measurement is categorized is determined based onthe lowest level input that is significant to the fair valuemeasurement in its entirety.

 

**Summary of Valuation Techniquesfor Classes of Financial Assets and Financial Liabilities**

 

Level 1 Measurements

 

U.S. Treasuries: Valuation is based on unadjusted quoted prices for identical assets inactive markets that the Company can access.

 

Equity Securities: Actively traded, exchange listed U.S. and international equitysecurities; valuation is based on unadjusted quoted prices for identical assetsin active markets that the Company can access.

 

Short-term: Money MarketFunds; Separate Account Assets:  Comprised ofactively traded mutual funds that have daily quoted net asset values foridentical assets that the Company can access. Net asset values for the actively traded mutual funds in which theseparate account assets are invested are obtained daily from the fund managers.

 

Level 2 Measurements

 

Corporate, includingprivately placed:  Valued based on inputs including quotedprices for identical or similar assets in markets that are not active.  Privately placed securities in Level 2 of$4.0 billion are those that are valued based on market-observable externalratings from independent third party rating agencies.

 

Municipal: Externally rated municipals are valued based on inputs including quotedprices for identical or similar assets in markets that are not active.  Other municipal securities are categorized asLevel 3.

 

U.S. Government andAgencies:  Valued based on inputs including quotedprices for identical or similar assets in markets that are not active.

 

CMBS: Valuation is principally based on inputs including quoted prices foridentical or similar assets in markets that are not active and are categorizedas Level 2.  Other CMBS are reported inLevel 3.

 

Preferred Stock; MBS;Foreign Government; ABS – credit card and auto loans: Valued based on inputs including quoted prices for identical or similarassets in markets that are not active.

 

Short-term:  Commercial Paper and Other: Valued based on inputs including amortized cost, which approximates fairvalue, and quoted prices for identical or similar assets in markets that arenot active.

 

Free-StandingDerivatives:  Exchange listed derivatives that are notactively traded are valued based on quoted prices for identical instruments inmarkets that are not active.  Otherderivatives are reported in Level 3.

 

OTC derivatives includinginterest rate swaps, foreign currency swaps, foreign exchange forwardcontracts, certain credit default swaps, and commodity swaps are valued usingmodels that rely on inputs such as interest rate yield curves, currency rates,counterparty credit risk, and commodity prices that are observable forsubstantially the 

 

10

----

 

full term of thecontract.  The valuation techniquesunderlying the models are widely accepted in the financial services industryand do not involve significant judgment. Most OTC derivatives are categorized as Level 2.

 

Derivatives Embedded inAnnuity Contracts:  Embedded derivatives in certain annuitycontracts are valued based on internal models that rely on inputs such asinterest rate yield curves and equity index volatility assumptions that aremarket observable for substantially the full term of the contract.  The valuation techniques are widely acceptedin the financial services industry and do not include significantjudgment.  Other derivatives embedded inannuity contracts are categorized in Level 3.

 

Level 3 Measurements

 

Corporate PrivatelyPlaced Securities:  Valued based on non-binding broker quotes andmodels that are widely accepted in thefinancial services industry and use internally assigned credit ratings asinputs and instrument specific inputs.  Instrumentspecific inputs used in internal fair value determinations include: couponrate, weighted average life, sector of the issuer and call provisions.  Privately placed securities are categorizedas Level 3 as a result of thesignificance of non-market observable inputs. The $11.2 billion of privately placed fixed income securities includedin Level 3 comprise $9.7 billion valued using an internal model and $1.5billion valued using non-binding broker quotes. The internally modeled securities are valued based on internal ratings,which are not observable in the market. Multiple internal ratings comprise an NAIC rating category and when usedin the internal model provide a more refined determination of fair value.  The Company’s internal ratings are primarilyconsistent with the NAIC ratings which are generally updated annually.

 

ABS RMBS; Alt –A ResidentialMortgage-backed Securities (“Alt-A”):  ABS RMBS andAlt-A are principally valued based on inputs including quoted prices foridentical or similar assets in markets that exhibit less liquidity relative tothose markets supporting Level 2 fair value measurements.  Certain ABS RMBS and Alt-A are valued basedon non-binding broker quotes.  Due to thereduced availability of actual market prices or relevant observable inputs as aresult of the decrease in liquidity that has been experienced in the market forthese securities, all ABS RMBS and Alt-A are categorized as Level 3.

 

Other CDO; ABS CDO: Valued based on non-binding broker quotes received from brokers who arefamiliar with the investments.  Due tothe reduced availability of actual market prices or relevant observable inputsas a result of the decrease in liquidity that has been experienced in themarket for these securities, all CLO, ABS CDO, and Synthetic CDO arecategorized as Level 3.

 

CMBS; Commercial RealEstate Collateralized Debt Obligations (“CRE CDO”): CRE CDO, which are reported as CMBS, and other CMBS, are valued based onnon-binding broker quotes and are categorized as Level 3.  Other non-broker quoted CMBS are reported inLevel 2.

 

Free-StandingDerivatives:  Certain OTC derivatives, such as caps,floors, certain credit default swaps and OTC options (including swaptions), arevalued using valuation models that are widely accepted in the financialservices industry.  Inputs includenon-market observable inputs such as volatility assumptions that aresignificant to the valuation of the instruments.  Other derivatives are reported in Level 2.

 

Municipals: Certain distressed municipal securities for which valuation is based onvaluation models that are widely accepted in the financial services industryand require projections of future cash flows that are not market-observable areincluded in Level 3.

 

Derivatives Embedded inAnnuity Contracts:  Valued internally using models widelyaccepted in the financial services industry that determine a single best estimate of fair value for a block ofcontractholder liabilities that contain certain embedded derivatives.  The models use stochastically determined cashflows based on the contractual elements of embedded derivatives and otherapplicable market data.  These are categorizedas Level 3 as a result of thesignificance of non-market observable inputs. Other derivatives embedded in annuity contracts are reported in Level 2.

 

Non-recurring assets andliabilities:  Mortgage loans and other investmentswritten-down to fair value in connection with recognizing other-than-temporaryimpairments are primarily valued using valuation models that are widelyaccepted in the financial services industry. Inputs include non-market observable inputs such as credit spreads.

 

Reserves on a closedblock of policies expected to be transferred through a future reinsuranceagreement to an unrelated third party are valued based on significantnon-observable inputs.

 

11

----

 

The following table summarizes the Company’sfinancial assets and financial liabilities measured at fair value on arecurring and non-recurring basis as of March 31, 2008:

 
| ** **                                                 | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Balance as of**  | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|------------------------------|------------|
| **($ in millions)**                              | ** ** | **(Level 1)**                                                              | ** ** | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **March 31, 2008** | ** ** |
| ** **                                                 | ** ** | ** **                                                                      | ** ** | ** **                                 | ** ** | ** **                            | ** ** | ** **                   | ** ** |
| **Financial Assets**                                       |       |                                                                            |       |                                       |       |                                  |       |                         |       |
| U.S. Treasuries                                            |       | $                                                                               | 445        |                                       |       |                                  |       |                         | $          | 445 |   |
| U.S. Equities                                              |       | 33                                                                              |       |                                       |       |                                  |       | 33                           |       |
| Short-term: Money Market Funds                             |       | 423                                                                             |       |                                       |       |                                  |       | 423                          |       |
| **Total Level 1**                                          | ** ** | **901**                                                                         | ** ** | ** **                                 | ** ** | ** **                            | ** ** | **901**                      | ** ** |
|                                                       |       |                                                                            |       |                                       |       |                                  |       |                         |       |
| Corporate                                                  |       |                                                                            |       | $                                          | 18,205     |                                  |       |                         | 18,205     |   |
| Municipal                                                  |       |                                                                            |       | 4,125                                      |       |                                  |       | 4,125                        |       |
| U.S. Government and Agencies                               |       |                                                                            |       | 3,283                                      |       |                                  |       | 3,283                        |       |
| CMBS                                                       |       |                                                                            |       | 5,384                                      |       |                                  |       | 5,384                        |       |
| Preferred Stock                                            |       |                                                                            |       | 66                                         |       |                                  |       | 66                           |       |
| MBS                                                        |       |                                                                            |       | 2,783                                      |       |                                  |       | 2,783                        |       |
| Foreign Government                                         |       |                                                                            |       | 2,084                                      |       |                                  |       | 2,084                        |       |
| ABS – Credit card and auto loans                      |       |                                                                            |       | 223                                        |       |                                  |       | 223                          |       |
| Short-term: Commercial Paper and Other                     |       |                                                                            |       | 2,502                                      |       |                                  |       | 2,502                        |       |
| Free-Standing Derivatives                                  |       |                                                                            |       | 766                                        |       |                                  |       | 766                          |       |
| **Total Level 2**                                          | ** ** | ** **                                                                      | ** ** | **39,421**                                 | ** ** | ** **                            | ** ** | **39,421**                   | ** ** |
|                                                       |       |                                                                            |       |                                       |       |                                  |       |                         |       |
| Corporate Privately Placed Securities                      |       |                                                                            |       |                                       |       | $                                     | 11,155     |                         | 11,155     |   |
| ABS RMBS                                                   |       |                                                                            |       |                                       |       | 2,000                                 |       | 2,000                        |       |
| Alt-A                                                      |       |                                                                            |       |                                       |       | 486                                   |       | 486                          |       |
| Other CDO                                                  |       |                                                                            |       |                                       |       | 1,696                                 |       | 1,696                        |       |
| ABS CDO                                                    |       |                                                                            |       |                                       |       | 17                                    |       | 17                           |       |
| CRE CDO                                                    |       |                                                                            |       |                                       |       | 436                                   |       | 436                          |       |
| CMBS                                                       |       |                                                                            |       |                                       |       | 191                                   |       | 191                          |       |
| Free-Standing Derivatives                                  |       |                                                                            |       |                                       |       | 39                                    |       | 39                           |       |
| Municipals                                                 |       |                                                                            |       |                                       |       | 213                                   |       | 213                          |       |
| Other                                                      |       |                                                                            |       |                                       |       | 1,600                                 |       | 1,600                        |       |
| Sub-total Level 3 recurring                                | ** ** | ** **                                                                      | ** ** | ** **                                 | ** ** | **17,833**                            | ** ** | **17,833**                   | ** ** |
| Non–recurring basis                                   |       |                                                                            |       |                                       |       | 231                                   |       | 231                          |       |
| **Total Level 3**                                          | ** ** | ** **                                                                      | ** ** | ** **                                 | ** ** | **18,064**                            | ** ** | **18,064**                   | ** ** |
| Valued at cost, amortized cost or using the  equity method |       |                                                                            |       |                                       |       |                                  |       | 13,367                       |       |
| Counterparty and cash collateral netting (1)               |       |                                                                            |       |                                       |       |                                  |       | (535                         | )          |
| **Total Investments**                                      | ** ** | **901**                                                                         | ** ** | **39,421**                                 | ** ** | **18,064**                            | ** ** | **71,218**                   | ** ** |
|                                                       |       |                                                                            |       |                                       |       |                                  |       |                         |       |
| Separate Account Assets                                    |       | 13,132                                                                          |       |                                       |       |                                  |       | 13,132                       |       |
| Other Assets                                               |       | 2                                                                               |       |                                       |       | 2                                     |       | 4                            |       |
|                                                       |       |                                                                            |       |                                       |       |                                  |       |                         |       |
| **Total Financial Assets**                                 | ** ** | **$**                                                                           | **14,035** | ** **                                 | **$**      | **39,421**                            | ** ** | **$**                        | **18,066** | ** ** | **$** | **84,354** | ** ** |
| % of Total Financial Assets                                |       | 16.6                                                                            | %          | 46.7                                       | %          | 21.4                                  | %          |                         |       |
|                                                       |       |                                                                            |       |                                       |       |                                  |       |                         |       |
| **Financial Liabilities**                                  |       |                                                                            |       |                                       |       |                                  |       |                         |       |
| Derivatives:                                               |       |                                                                            |       |                                       |       |                                  |       |                         |       |
| Free-standing                                              |       |                                                                            |       | $                                          | (824       | )                                     | $          | (74                          | )          | $ | (898 | ) |
| Embedded in Annuity Contracts                              |       |                                                                            |       | (50                                        | )          | (10                                   | )          | (60                          | )          |
| Non-recurring basis                                        |       |                                                                            |       |                                       |       | (87                                   | )          | (87                          | )          |
| Counterparty and cash collateral netting (1)               |       |                                                                            |       |                                       |       |                                  |       | 459                          |       |
| **Total Financial Liabilities**                            | ** ** | ** **                                                                      | ** ** | **$**                                      | **(874**   | **)**                                 | **$**      | **(171**                     | **)**      | **$** | **(586** | **)** |
| % of Total Financial Liabilities                           |       |                                                                            |       | 149.1                                      | %          | 29.2                                  | %          | ** **                   | ** ** |

 

----

(1)   In accordance with FSP FIN 39-1, the Company nets all fair value amountsrecognized for derivative instruments and fair value amounts recognized for theright to reclaim cash collateral or the obligation to return cashcollateral executed with the same counterparty under a master nettingagreement.  At March 31, 2008, the right to reclaim cash collateralwas offset by securities held, and the obligation to return collateral was $76million.

 

----

 

 

12

----

 

Thefollowing table provides a summary of changes in fair value of Level 3 assetsand liabilities held at fair value on a recurring basis at March 31,2008.  As required by SFAS No. 157,when the inputs used to measure fair value fall within different levels of thehierarchy, the level within which the fair value measurement is categorized isbased on the lowest level input that is significant to the fair valuemeasurement in its entirety.  Thus, a Level3 fair value measurement may include inputs that are observable (Level 1 orLevel 2) and unobservable (Level 3). Gains and losses for such assets and liabilities categorized within theLevel 3 table may include changes in fair value that are attributable to bothobservable inputs (Level 1 and Level 2) and unobservable inputs (Level 3). Nettransfers in and/or out of Level 3 are reported as having occurred at thebeginning of the period; therefore, all realized and unrealized gains andlosses on these securities for the period are reflected in the tablebelow.  Further, it should be noted thatthe following table does not take into consideration the effect of offsettingLevel 1 and Level 2 financial instruments entered into that economically hedgecertain exposures to the Level 3 positions.

 
| **($ in millions)**             | ** ** | **Beginning  Balance:  January 1,  2008** | ** ** | **Total Realized  Capital Gains  and (Losses)  in Income****(1)** | ** ** | **Total  Unrealized  Capital Gains  and (Losses)  in OCI** | ** ** | **Purchases,  Sales, Issuances  and  Settlements, net** | ** ** | **Net Transfers  In and/or  (out) of Level  3 ****(2)** | ** ** | **Ending  Balance:  March 31,  2008** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Financial Assets**                      |       |                                           |       |                                                                                  |       |                                                                      |       |                                                              |       |                                                                             |       |                                       |       |
| Corporate Privately Placed Securities     |       | $                                              | 11,098     |                                                                                  | $          | 20                                                                        |       | $                                                                 | (31        | )                                                                                | $          | (71                                        | )          | $ | 139 |   | $ | 11,155 |   |
| ABS RMBS                                  |       | 2,382                                          |       | (38                                                                                   | )          | (261                                                                      | )          | (83                                                               | )          | —                                                                           |       | 2,000                                      |       |
| Alt-A                                     |       | 588                                            |       | (39                                                                                   | )          | (47                                                                       | )          | (16                                                               | )          | —                                                                           |       | 486                                        |       |
| Other CDO                                 |       | 1,961                                          |       | —                                                                                |       | (255                                                                      | )          | (10                                                               | )          | —                                                                           |       | 1,696                                      |       |
| ABS CDO                                   |       | 36                                             |       | (60                                                                                   | )          | 41                                                                        |       | —                                                            |       | —                                                                           |       | 17                                         |       |
| CRE CDO                                   |       | 566                                            |       | —                                                                                |       | (120                                                                      | )          | (10                                                               | )          | —                                                                           |       | 436                                        |       |
| CMBS                                      |       | 224                                            |       | 2                                                                                     |       | (32                                                                       | )          | (3                                                                | )          | —                                                                           |       | 191                                        |       |
| Free-Standing Derivatives, net            |       | (6                                             | )          | (31                                                                                   | )          | —                                                                    |       | 2                                                                 |       | —                                                                           |       | (35)                                       | (3)        |
| Municipals                                |       | 231                                            |       | —                                                                                |       | (1                                                                        | )          | (11                                                               | )          | (6                                                                               | )          | 213                                        |       |
| Other                                     |       | 1,805                                          |       | (45                                                                                   | )          | (38                                                                       | )          | (153                                                              | )          | 31                                                                               |       | 1,600                                      |       |
| Total Investments                         |       | 18,885                                         |       | (191                                                                                  | )          | (744                                                                      | )          | (355                                                              | )          | 164                                                                              |       | 17,759                                     | (4)        |
| Other Assets                              |       | 2                                              |       | —                                                                                |       | —                                                                    |       | —                                                            |       | —                                                                           |       | 2                                          |       |
| **Total Level 3 Financial Assets**        | ** ** | **$**                                          | **18,887** | ** **                                                                            | **$**      | **(191**                                                                  | **)**      | **$**                                                             | **(744**   | **)**                                                                            | **$**      | **(355**                                   | **)**      | **$** | **164** | ** ** | **$** | **17,761** | ** ** |
|                                      |       |                                           |       |                                                                                  |       |                                                                      |       |                                                              |       |                                                                             |       |                                       |       |
| **Financial Liabilities**                 |       |                                           |       |                                                                                  |       |                                                                      |       |                                                              |       |                                                                             |       |                                       |       |
| Derivatives Embedded in Annuity Contracts |       | $                                              | 4          |                                                                                  | $          | (14                                                                       | )          | $                                                                 | —     |                                                                             | $          | —                                     |       | $ | — |   | $ | (10 | ) |
|                                      |       |                                           |       |                                                                                  |       |                                                                      |       |                                                              |       |                                                                             |       |                                       |       |
| **Total Level 3 Financial Liabilities**   | ** ** | **$**                                          | **4**      | ** **                                                                            | **$**      | **(14**                                                                   | **)**      | **$**                                                             | **—** | ** **                                                                       | **$**      | **—**                                 | ** ** | **$** | **—** | ** ** | **$** | **(10** | **)** |

 

----

(1)   The amounts above are reportedin the Condensed Consolidated Statements of Operations as follows: $(200)million in Realized capital gains and(losses); $12 million in Net investment income; $(8) million in Interestcredited to contractholder funds and; $(9) million in contract benefits.

(2)   Transfers into and out of Level3 during the three months ended March 31, 2008 are attributable to achange in the availability of market observable information for individualsecurities within the respective categories.

(3)   Comprises $39 million ofFinancial Assets and $(74) million of Financial Liabilities.

(4)   Comprises $17,833 million ofinvestments and $(74) million Free-Standing Derivatives included in FinancialLiabilities.

----

 

13

----

 

Thefollowing table presents amounts from the table above reported in income forthe period ended March 31, 2008 attributable to those assets andliabilities still held at March 31, 2008.

 
| **($ in millions)**             | ** ** | **Total Realized  Capital Gains  and (Losses) in  Income ****(1)** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| **Financial Assets**                      |       |                                                                                        |       |
| Corporate Privately Placed Securities     |       | $                                                                                           | 14         |   |
| ABS RMBS                                  |       | (21                                                                                         | )          |
| Alt-A                                     |       | (39                                                                                         | )          |
| Other CDO                                 |       | (1                                                                                          | )          |
| ABS CDO                                   |       | (60                                                                                         | )          |
| CRE CDO                                   |       | 3                                                                                           |       |
| CMBS                                      |       | 2                                                                                           |       |
| Free-Standing Derivatives, net            |       | (18                                                                                         | )          |
| Municipals                                |       | —                                                                                      |       |
| Other                                     |       | (54                                                                                         | )          |
| **Total Financial Assets**                | ** ** | **$**                                                                                       | **(174**   | **)** |
|                                      |       |                                                                                        |       |
| **Financial Liabilities**                 |       |                                                                                        |       |
| Derivatives Embedded in Annuity Contracts |       | $                                                                                           | (14        | ) |
| **Total Financial Liabilities**           | ** ** | **$**                                                                                       | **(14**    | **)** |

 

----

(1) The amounts above are reported in the Condensed ConsolidatedStatements of Operations as follows: $(185) million in Realized capital gains and losses; $12 millionin Net investment income; $(6) million in Interest credited tocontractholder funds and; $(9) million in contract benefits.

----

 

**5. ****Reinsurance**

 

The effects of reinsurance on life and annuity premiums and contractcharges are as follows:

 
| ** **                                         | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in millions)**                      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Premiums and contract charges**                  |       |                                             |       |   |   |
| Direct                                             |       | $                                                | 559        |   | $ | 598 |   |
| Assumed                                            |       |                                             |       |   |   |
| Affiliate                                          |       | 15                                               |       | 4 |   |
| Non-affiliate                                      |       | 6                                                |       | 7 |   |
| Ceded—non-affiliate                           |       | (228                                             | )          | (226 | ) |
|                                               |       |                                             |       |   |   |
| Premiums and contract charges, net of  reinsurance |       | $                                                | 352        |   | $ | 383 |   |

 

The effects of reinsurance on contractbenefits are as follows:

 
| ** **                            | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| **($ in millions)**         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Contract benefits**                 |       |                                             |       |   |   |
| Direct                                |       | $                                                | 495        |   | $ | 499 |   |
| Assumed                               |       |                                             |       |   |   |
| Affiliate                             |       | 9                                                |       | 4 |   |
| Non-affiliate                         |       | 6                                                |       | 8 |   |
| Ceded—non-affiliate              |       | (169                                             | )          | (137 | ) |
|                                  |       |                                             |       |   |   |
| Contract benefits, net of reinsurance |       | $                                                | 341        |   | $ | 374 |   |

 

14

----

 

The effects of reinsurance on interestcredited to contractholder funds are as follows:

 
| ** **                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in millions)**                                  | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Interest credited to contractholder funds**                  |       |                                             |       |   |   |
| Direct                                                         |       | $                                                | 613        |   | $ | 641 |   |
| Assumed                                                        |       |                                             |       |   |   |
| Affiliate                                                      |       | 3                                                |       | 3 |   |
| Non-affiliate                                                  |       | 4                                                |       | 4 |   |
| Ceded—non-affiliate                                       |       | (10                                              | )          | (13 | ) |
|                                                           |       |                                             |       |   |   |
| Interest credited to contractholder funds,  net of reinsurance |       | $                                                | 610        |   | $ | 635 |   |

 

**6.   ****Guarantees and ContingentLiabilities**

 

**Guaranty funds**

 

Under state insurance guaranty fund laws, insurers doing business in astate can be assessed, up to prescribed limits, for certain obligations ofinsolvent insurance companies to policyholders and claimants.  Amounts assessed to each company are typicallyrelated to its proportion of business written in each state.

 

The New York Liquidation Bureau (“the Bureau”) has publicly reportedthat Executive Life Insurance Company of New York (“Executive Life”), currentlyunder its jurisdiction as part of a 1992 court-ordered rehabilitation plan, mayonly be able to meet future obligations of its annuity contacts for the nextfifteen years. The shortfall is estimated to be in the range of $650 million to$750 million.  If Executive Life were tobe declared insolvent in the future, the Company would likely have exposure toguaranty fund assessments or other costs.

 

Based on currently available information, the outcome of this situationis uncertain at this time.  The Bureaumay eventually take actions to address this situation that may lead to guarantyfund assessments or other costs to the Company. Under current law, the Company may be allowed to recoup a portion of theamount of any additional guaranty fund assessment in periods subsequent to therecognition of the assessment by offsetting future premium taxes.  The Company’s market share in New York wasapproximately 5.5% in 2006 based on industry annuity premium.

 

**Guarantees**

 

The Company owns certain fixed incomesecurities that obligate the Company to exchange credit risk or to forfeitprincipal due, depending on the nature or occurrence of specified credit eventsfor the referenced entities.  In theevent all such specified credit events were to occur, the Company’s maximumamount at risk on these fixed income securities, as measured by the amount ofthe aggregate initial investment was $196 million at March 31, 2008.  The obligations associated with these fixedincome securities expire at various dates during the next six years.

 

Relatedto the disposal through reinsurance of substantially all of our variableannuity business to Prudential Financial, Inc. and its subsidiary in 2006,the Company has agreed to indemnify 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 limitations or indemnificationswith regard to insurance risk transfer, and transferred all of the future risksand responsibilities for performance on the underlying variable annuitycontracts to Prudential, including those related to benefit guarantees, inaccordance with the provisions of SFAS No. 113 “Accounting and Reportingfor Reinsurance of Short–Duration and Long–Duration Contracts”.  Management does not believe this agreementwill have a material adverse effect on results of operations, cash flows orfinancial position of the Company.

 

15

----

 

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

 

The aggregate liability balance related to allguarantees was not material as of March 31, 2008.

 

**Regulation**

 

The Company is subject to changing social, economic and regulatoryconditions.  From time to time,regulatory authorities or legislative bodies seek to impose additional regulationsregarding agent and broker compensation and otherwise expand overall regulationof insurance products and the insurance industry.  The ultimate changes and eventual effects ofthese initiatives on the Company’s business, if any, are uncertain.

 

**Legal and regulatory proceedings and inquiries**

 

***Background***

 

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

 

·             These mattersraise difficult and complicated factual and legal issues and are subject tomany uncertainties and complexities, including, the underlying facts of eachmatter; novel legal issues; variations between jurisdictions in which mattersare being litigated, heard, or investigated; differences in applicable laws andjudicial interpretations; the length of time before many of these matters mightbe resolved by settlement, through litigation or otherwise; the fact that someof the lawsuits are putative class actions in which a class has not beencertified and in which the purported class may not be clearly defined; the factthat some of the lawsuits involve multi-state class actions in which theapplicable law(s) for the claims at issue is in dispute and thereforeunclear; and the current challenging legal environment faced by largecorporations and insurance companies.

 

·             The outcome on these matters may also beaffected by decisions, verdicts, and settlements, and the timing of suchdecisions, verdicts and settlements, in other individual and class actionlawsuits that involve the Company, other insurers, or other entities and byother legal, governmental, and regulatory actions that involve the Company,other insurers or other entities.

 

·             In the lawsuits, plaintiffsseek a variety of remedies including equitable relief in the form of injunctiveand other remedies and monetary relief in the form of contractual andextra-contractual damages.  In somecases, 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 Allstate’s experience, when specificmonetary demands are made in pleadings, they bear little relation to theultimate 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.

 

16

----

 

·             For the reasons specifiedabove, it is often not possible to make meaningful estimates of the amount orrange of loss that could result from the matters described below in the “Proceedings”subsection.  The Company reviews thesematters on an on-going basis and follows the provisions of SFAS No. 5, “Accountingfor Contingencies”, when making accrual and disclosure decisions.  When assessing reasonably possible andprobable outcomes, the Company bases its decisions on its assessment of theultimate outcome following all appeals.

 

·             Due to the complexity and scope of the mattersdisclosed in the “Proceedings” subsection below and the many uncertainties thatexist, the ultimate outcome of these matters cannot be reasonablypredicted.  In the event of anunfavorable outcome in one or more of these matters, the ultimate liability maybe in excess of amounts currently reserved and may be material to the Company’soperating results or cash flows for a particular quarterly or annualperiod.  However, based on informationcurrently known to it, management believes that the ultimate outcome of allmatters described below as they are resolved over time is not likely to have amaterial adverse effect on the financial position of the Company.

 

**Proceedings**

 

Legalproceedings involving Allstate agencies and AIC may impact the Company, evenwhen the Company is not directly involved, because the Company sells itsproducts through a variety of distribution channels including Allstateagencies. Consequently, information about the more significant of theseproceedings is provided in the following paragraph.

 

AIC is defending certain matters relating toits agency program reorganization announced in 1999. These matters are invarious stages of development.

 

·   Thesematters include a lawsuit filed in 2001 by the U.S. Equal EmploymentOpportunity Commission (“EEOC”) alleging retaliation under federal civil rightslaws (the “EEOC I” suit) and a class action filed in 2001 by former employeeagents alleging retaliation and age discrimination under the Age Discriminationin Employment Act (“ADEA”), breach of contract and ERISA violations (the “RomeroI” suit).  In 2004, in the consolidatedEEOC I and Romero I litigation, the trial court issued a memorandum and orderthat, among other things, certified classes of agents, including a mandatoryclass of agents who had signed a release, for purposes of effecting the court’sdeclaratory judgment that the release is voidable at the option of the releasesigner.  The court also ordered that anagent who voids the release must return to AIC “any and all benefits receivedby the [agent] in exchange for signing the release.”  The court also stated that, “on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order and in January 2007,the judge denied their request.  In June 2007,the court granted AIC’s motions for summary judgment.  Following plaintiffs’ filing of a notice ofappeal, the Third Circuit issued an order in December 2007 stating thatthe notice of appeal was not taken from a final order within the meaning of thefederal law and thus not appealable at this time.  In March 2008, the Third Circuit decidedthat the appeal should not summarily be dismissed and that the question ofwhether the matter is appealable at this time will be addressed by the Courtalong with the merits of the appeal.

 

·   TheEEOC also filed another lawsuit in 2004 alleging age discrimination withrespect to a policy limiting the rehire of agents affected by the agencyprogram reorganization (the “EEOC II” suit). In EEOC II, in 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’sinterlocutory appeal of the trial court’s summary judgment order is now pendingin the United States Court of Appeals for the Eighth Circuit.

 

·   AICis also defending a certified class action filed by former employee agents whoterminated their employment prior to the agency program reorganization.  Plaintiffs allege that they wereconstructively 

 

17

----

 

discharged sothat Allstate could avoid paying ERISA and other benefits offered under thereorganization.  They claim that theconstructive discharge resulted from the implementation of agency standards,including mandatory office hours and a requirement to have licensed staffavailable during business hours.  Thecourt approved the form of class notice which was sent to approximately 1,800potential class members in November 2007. Fifteen individuals opted out. AIC’s motions for judgment on the pleadings were partially granted andAIC’s motion for summary judgment remains pending.

 

·   Aputative nationwide class action has also been filed by former employee agentsalleging various violations of ERISA,including a worker classification issue. These plaintiffs are challenging certain amendments to the AgentsPension Plan and are seeking to have exclusive agent independent contractorstreated as employees for benefit purposes.  This matter was dismissed with prejudice bythe trial court, was the subject of further proceedings on appeal, and wasreversed and remanded to the trial court in 2005.  In June 2007, the court granted AIC’smotion to dismiss the case.  Followingplaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007stating that the notice of appeal was not taken from a final order within themeaning of the federal law and thus not appealable at this time.  In March 2008, the Third Circuit decidedthat the appeal should not summarily be dismissed and that the question ofwhether the matter is appealable at this time will be addressed by the Courtalong with the merits of the appeal.

 

In all of these various matters, plaintiffsseek compensatory and punitive damages, and equitable relief.  AIC has been vigorously defending theselawsuits and other matters related to its agency program reorganization.

 

**Other Matters**

** **

Various other legal, governmental, andregulatory actions, including state market conduct exams, and othergovernmental and regulatory inquiries are currently pending that involve theCompany and specific aspects of its conduct of business. Like other members ofthe insurance 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 ofthese disputes is currently unpredictable.

 

One or more of these matters could have anadverse effect on the Company’s operating results or cash flows for aparticular quarterly or annual period. However, based on information currently known to it, management believesthat the ultimate outcome of all matters described in this “Other Matters”subsection, in excess of amounts currently reserved, as they are resolved overtime is not likely to have a material effect on the operating results, cashflows or financial position of the Company.

 

**7.    Other Comprehensive Income**

 

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

 
| ** **                                                                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **($ in millions)**                                                        | ** ** | **Pre-tax**                                          | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pre-tax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding (losses) gains arising during the period, net of  related offsets |       | $                                                    | (799       | ) | $ | 279 |   | $ | (520 | ) | $ | 150 |   | $ | (52 | ) | $ | 98 |   |
| Less: reclassification adjustment of realized capital gains and  losses              |       | (183                                                 | )          | 64 |   | (119 | ) | 37 |   | (13 | ) | 24 |   |
| Unrealized net capital gains and losses                                              |       | (616                                                 | )          | 215 |   | (401 | ) | 113 |   | (39 | ) | 74 |   |
| Other comprehensive (loss) income                                                    |       | $                                                    | (616       | ) | $ | 215 |   | (401 | ) | $ | 113 |   | $ | (39 | ) | 74 |   |
|                                                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                                                    |       |                                                 |       |   |   | (115 | ) |   |   |   |   | 149 |   |
| Comprehensive (loss) income                                                          |       |                                                 |       |   |   | $ | (516 | ) |   |   |   |   | $ | 223 |   |

 

18

----

** **

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholder of

AllstateLife Insurance Company:

 

We have reviewed the accompanying condensedconsolidated statement of financial position of Allstate Life Insurance Companyand subsidiaries (the “Company”, an affiliate of The Allstate Corporation) asof March 31, 2008, and the related condensed consolidated statements ofoperations for the three-month periods ended March 31, 2008 and 2007, andthe condensed consolidated statements of cash flows for the three-month periodsended March 31, 2008 and 2007. These interim financial statements are the responsibility of the Company’smanagement.

 

Weconducted our reviews in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financial information consists principally ofapplying analytical procedures and making inquiries of persons responsible forfinancial and accounting matters.  It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole.  Accordingly,we do not express such an opinion.

 

Basedon our reviews, we are not aware of any material modifications that should bemade to such condensed consolidated interim financial statements for them to bein conformity with accounting principles generally accepted in the UnitedStates of America.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated statement offinancial position of Allstate Life Insurance Company and subsidiaries as of December 31,2007, and the related consolidated statements of operations and comprehensiveincome, shareholder’s equity, and cash flows for the year then ended (notpresented herein); and in our report dated March 13, 2008, which reportincludes an explanatory paragraph relating to a change in the Company’s methodof accounting for uncertainty in income taxes and accounting for deferredacquisition costs associated with internal replacements in 2007, we expressedan unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth inthe accompanying condensed consolidated statement of financial position as of December 31,2007 is fairly stated, in all material respects, in relation to the consolidatedstatement of financial position from which it has been derived.

 

 

/s/Deloitte & Touche LLP

 

Chicago,Illinois

May 12,2008

 

19

----

 

**Item2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODSENDED MARCH 31, 2008 AND 2007**

 

**OVERVIEW**

 

The following discussion highlightssignificant factors influencing the condensed consolidated financial positionand results of operations of Allstate Life Insurance Company (referred to inthis document as “we”, “our”, “us”, or the “Company”). It should be read inconjunction with the condensed consolidated financial statements and notesthereto found under Part I. Item 1. contained herein, and with thediscussion, analysis, consolidated financial statements and notes thereto in Part I.Item 1. and Part II. Item 7. and Item 8. of the Allstate Life InsuranceCompany Annual Report on Form 10-K for 2007.  We operate as a single segment entity basedon the manner in which we use financial information to evaluate businessperformance and determine the allocation of resources.

 

**HIGHLIGHTS**

 

·               Netloss of $115 million in the first quarter of 2008, driven by realized capitallosses, compared to net income totaling $149 million in the same period of2007.

 

·               Net realized capital losses were $428 million in the first quarter of2008 compared to net realized capital gains of $22 million in the first quarterof 2007.

 

·               Contractholder fund depositstotaled $2.69 billion for the first quarter of 2008 compared to $2.23 billionfor the same period of 2007.

 

·               Investments as of March 31,2008 decreased 1.7% from December 31, 2007 and net investment incomedecreased 3.7% in the first quarter of 2008 compared to the same period of2007.

 

**APPLICATION OF CRITICAL ACCOUNTING ESTIMATES**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”) requires management to adopt accountingpolicies and make estimates and assumptions that affect amounts reported in theconsolidated financial statements.

 

In applyingpolicies, management makes subjective and complex judgments that frequentlyrequire estimates about matters that are inherently uncertain. Many of thesepolicies, estimates and related judgments are common in the insurance andfinancial services industries; others are specific to our businesses andoperations.  It is reasonably likely thatchanges in these estimates could occur from period to period and result in amaterial impact on our consolidated financial statements.

 

Our critical accounting estimate for the fairvalue of financial assets and financial liabilities follows.  For a description of critical accountingestimates not discussed below, see the Application of Critical AccountingEstimates section of MD&A found under Part II. Item 7. of the AllstateLife Insurance Company Annual Report on Form 10-K for 2007.

 

**Fair Value of Financial Assets and Financial Liabilities**Financial Accounting Standards Board (“FASB”) Statement No. 157, *Fair ValueMeasurements* (“SFAS No. 157”) is effective for fiscal yearsbeginning after November 15, 2007. We adopted the provisions of SFAS No. 157as of January 1, 2008 for financial assets and financial liabilities thatare measured at fair value.

 

SFAS No. 157:

 

·                   Defines fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date, and establishes a framework for measuringfair value;

 

·                   Establishes a three-level hierarchy for fair value measurements basedupon the transparency of inputs to the valuation as of the measurement date;

 

·                   Expands disclosures about financial instruments measured at fair value.

 

We categorize our financial assets andfinancial liabilities measured at fair value based on the priority of theinputs to the valuation technique, into a three-level fair value hierarchy. Thefair value hierarchy gives the highest priority to quoted prices in activemarkets for identical assets or liabilities which we can access (Level 1); thesecond highest priority for similar assets or liabilities in active markets,quoted prices for identical or similar assets or liabilities in non-activemarkets, or valuation models whose inputs are observable (Level 2); and thelowest priority to unobservable inputs (Level 3).  If inputs used to measure a financialinstrument fall within different levels of the fair value hierarchy, thecategorization is based on the lowest level input that is significant to thefair value measurement of the entire instrument.  Certain financial assets are not carried atfair value on a recurring basis, including investments such as mortgage loans,limited partnership interests, bank loans and policy loans, and thus 

 

20

----

 

are only categorized in the fair value hierarchy when held at fairvalue on a non-recurring basis.  Inaddition, equity options embedded in fixed income securities are not disclosedin the hierarchy with free-standing derivatives as the embedded derivatives arepresented as combined instruments in fixed income securities.

 

The availability ofmarket observable information is the principal factor in determining the levelthat financial instruments are assigned in the three-level hierarchy.Observable inputs are those used by market participants in valuing financialinstruments that are developed based on market data obtained from independentsources. In the absence of observable inputs, unobservable inputs reflect ourestimates of the assumptions market participants would use in valuing financialassets and financial liabilities and are developed based on the bestinformation available in the circumstances. The degree of management judgment involved in determining fair values isinversely related to the availability of market observable information.

 

Financialassets and financial liabilities recorded on the Condensed ConsolidatedStatements of Financial Position at fair value are categorized based on thereliability of inputs to the valuation techniques as follows:

 

*Level 1:***    **Financial assets and financialliabilities whose values are based on unadjusted quoted prices for identicalassets or liabilities in an active market that we can access.

 

*Level 2:*****Financialassets and financial liabilities whose values are based on the following:

 

a)              Quoted prices for similar assets or liabilities inactive markets;

b)             Quoted prices for identical or similarassets or liabilities in non-active markets; or

c)              Valuation models whose inputs areobservable, directly or indirectly, for substantially the full term of theasset or liability

 

*Level 3:****    ***Financialassets and financial liabilities whose values are based on prices or valuationtechniques that require inputs that are both unobservable and significant tothe overall fair value measurement. These inputs may reflect our estimates ofthe assumptions that market participants would use in valuing the financialassets and financial liabilities.

 

We utilize a combination of third party valuation service providers,brokers, and internal valuation models to determine fair value.  We gain assurance on the overall reasonableness and consistentapplication of input assumptions, valuation methodologies, and compliance withaccounting standards for fair value determination through the execution ofvarious processes and controls designed to ensure that our financial assets andfinancial liabilities are appropriately valued and our ongoing monitoring ofthe fair values received or derived internally.

 

We are responsible for the determination ofthe value of the financial assets and financial liabilities carried at fairvalue and the supporting assumptions and methodologies.  In certain situations, we employ independentthird-party valuation service providers to gather, analyze, and interpretmarket information and derive fair values based upon relevant assumptions andmethodologies for individual instruments. In situations where our valuation service providers are unable to obtainsufficient market observable information upon which to estimate the fair valuefor a particular security, fair value is determined either by requestingbrokers who are knowledgeable about these securities to provide a quote or byemploying internal valuation models that are widely accepted in the financialservices industry.  Changing marketconditions in the first quarter of 2008 were incorporated into valuationassumptions and reflected in the fair values, which were validated bycalibration and other analytical techniques to available market observabledata.

 

Valuation service providers typically obtaindata about market transactions and other key valuation model inputs frommultiple sources and, through the use of proprietary algorithms, producevaluation information in the form of a single fair value for individualsecurities for which a fair value has been requested under the terms of ouragreements.  For certain equitysecurities, valuation service providers provide market quotations for completedtransactions on the measurement date. For other security types, fair values are derived from the valuationservice providers’ proprietary valuation models.  The inputs used by the valuation serviceproviders include, but are not limited to, market prices from recentlycompleted transactions and transactions of comparable securities, interest rateyield curves, credit spreads, currency rates, and other market-observableinformation, as applicable. Valuation service providers also use proprietarydiscounted cash flow models that are widely accepted in the financial servicesindustry and similar to those used by other market participants to value thesame financial instruments.  Thevaluation models take into account, among other things, market observableinformation as of the measurement date, as described above, as well as thespecific attributes of the security being valued including its term, interestrate, credit rating, industry sector, and where applicable, collateral qualityand other issue or issuer specific information. Executing valuation models effectively requires seasoned professionaljudgment and experience.  In cases wheremarket transactions or other market observable data is limited, the extent towhich judgment is applied varies inversely with the availability of marketobservable information.

 

21

----

 

For certain of our financialassets carried at fair value, where our valuation service providers cannotprovide fair value determinations, we obtain non-binding price quotes frombrokers familiar with the security who, similar to our valuation service providers,may consider transactions or activity in similar securities, as applicable,among other information.  The brokersproviding price quotes are generally from the brokerage divisions of leadingfinancial institutions with market making, underwriting and distributionexpertise.

 

The fair valueof financial assets and financial liabilities, including privately-placedsecurities and certain derivatives embedded in certain contractholderliabilities, where our valuationservice providers or brokers do not provide fair value determinations,is determined using valuation methods and models widely accepted in thefinancial services industry.  Internallydeveloped valuation models, which include inputs that may not be marketobservable and as such involve some degree of judgment, are consideredappropriate for each class of security to which they are applied.

 

Our internalpricing methods are primarily based on models using discounted cash flowmethodologies that determine a single best estimate of fair value forindividual financial instruments.  Inaddition, our models use internally assigned credit ratings as inputs (whichare generally consistent with any external ratings and those we use to reportour holdings by credit rating) and stochastically determined cash flows forcertain derivatives embedded in certain contractholder liabilities, both ofwhich are difficult to independently observe and verify.  Instrument specific inputs used in ourinternal fair value determinations include: coupon rate, weighted average life,sector of the issuer, call provisions, and the contractual elements ofderivatives embedded in certain contractholder liabilities.  Market specific inputs used in these fairvalues, which we believe are representative of inputs other market participantswould use to determine fair value of the same instruments include: interestrate yield curves, quoted market prices of comparable securities, creditspreads, estimated liquidity premiums, and other applicable market dataincluding lapse and anticipated market return estimates for derivativesembedded in certain contractholder liabilities. As a result of the significance of non-market observable inputs,including internally assigned credit ratings and stochastic cash flow estimatesas described above, judgment is required in developing these fair values. Thefair value of these financial assets and financial liabilities may differ fromthe amount received to sell an asset or the amount paid to transfer a liabilityin an orderly transaction between market participants at the measurementdate.  Moreover, the use of differentvaluation assumptions may have a material effect on the financial assets’ andfinancial liabilities’ fair values.

 

Fairvalue of our investments comprise an aggregation of numerous, single bestestimates for each security in the Condensed Consolidated Statements ofFinancial Position.  Because of thisdetailed approach, there is no single set of assumptions that determine ourfair value estimates at a consolidated level. Moreover management does not compile a range of estimates for itemsreported at fair value at the consolidated level because we do not believe thata range would provide meaningful information. Level 1 and Level 2 measurements represent valuations where all significantinputs are market observable. Level 3 measurements have one or more significantinputs that are not market observable and as a result these fair valuedeterminations have greater potential variability as it relates to theirsignificant inputs.  The Level 3principal components are privately placed securities valued using internalmodels, asset-backed residential mortgage-backed securities (“ABS RMBS”),broker quoted securities and Alt-A residential mortgage-backed securities (“Alt-A”).  In general, the greater the reliance onsignificant inputs that are not market observable, the greater potentialvariability of the fair value determinations. ABS RMBS and Alt-A reflected themost significant impacts, to their respective fair value determinations, due tothe continued illiquidity that existed for these classes of securities. Forbroker quoted securities’ fair value determinations, we believe the brokersproviding the quotes may consider market observable transactions or activity insimilar securities, as applicable, and other information as calibrationpoints.  Privately placed securities’fair value determinations, which were based on internal ratings that are notmarket observable, are calibrated to market observable information in the formof external National Association of Insurance Commissioners (“NAIC”) ratingsand credit spreads.  We believe our mostsignificant exposure to changes in fair value is due to market risk.  Our exposure to changes in market conditionsis discussed fully in the Market Risk section of the MD&A included in our2007 Form 10-K.

 

We employspecific control processes to determine the reasonableness of the fair valuesof our financial assets and financial liabilities.  Our processes are designed to ensure that thevalues received or internally estimated are accurately recorded and that thedata inputs and the valuation techniques utilized are appropriate, consistentlyapplied, and that the assumptions are reasonable and consistent with theobjective of determining fair value.  Forexample, on a continuing basis, we assess the reasonableness of individualsecurity values received from valuation service providers that exceed certainthresholds as compared to previous values received from those valuation serviceproviders. In addition, we may validate the reasonableness of fair values bycomparing information obtained from our valuation service providers to otherthird party valuation sources for selected financial assets. When fair valuedeterminations are expected to be more variable, we validate them throughreviews by members of 

 

22

----

 

management who have relevant expertise andwho are independent of those charged with executing investing transactions.

 

The following table identifies investments as of March 31,2008 by source of value determination:

 
| ** **                                                                                                                                                         | ** ** | **Investments**     | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| **(in millions)**                                                                                                                                             | ** ** | **Carrying  Value** | ** ** | **Percent  to total** | ** ** |
| Fair value based on internal sources (1)                                                                                                                           |       | $                   | 13,223     |   | 18.5 | % |
| Fair value based on external sources (2)                                                                                                                           |       | 44,127              |       | 62.0 |   |
| Total fixed income, equity and certain  short-term securities                                                                                                      |       | 57,350              |       | 80.5 |   |
| Fair value of derivatives                                                                                                                                          |       | 269                 |       | 0.4 |   |
| Mortgage loans, policy loans, bank loans  and certain limited partnership, short-term and other investments, valued at  cost, amortized cost and the equity method |       | 13,599              |       | 19.1 |   |
| Total                                                                                                                                                              |       | $                   | 71,218     |   | 100.0 | % |

 

----

(1)          Includes short-term: commercial paper and other of $2.50 billionreported in Level 2.

(2)          Includes 9% that are valued using broker quotes.

----

 

Formore detailed information on our accounting policy for the fair value offinancial assets and financial liabilities and information on the financialassets and financial liabilities included in the Levels promulgated by SFAS No. 157,see Note 4 to the Condensed Consolidated Financial Statements.

 

The following table presents fair value as a percent of amortized costfor Level 3 investments at March 31, 2008.

 
| **(in millions)**                                              | ** ** | **Fair value** | ** ** | **Fair value as a  % of  Amortized cost** | ** ** |
|---------------------------------------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------|------------|
|                                                                |       |                |       |                                                               |       |
| Corporate - privately placed securities                             |       | $                   | 11,155     |                                                               | 101.4      | % |
| ABS RMBS                                                            |       | 2,000               |       | 76.5                                                               |       |
| Alt-A                                                               |       | 486                 |       | 86.9                                                               |       |
| Other CDO                                                           |       | 1,696               |       | 77.0                                                               |       |
| Asset-backed collateralized debt  obligations (“ABS CDO”) |       | 17                  |       | 106.3                                                              |       |
| CRE CDO                                                             |       | 436                 |       | 61.4                                                               |       |
| Commercial mortgage-backed securities  (“CMBS”)           |       | 191                 |       | 74.9                                                               |       |
| Free-Standing Derivatives                                           |       | 39                  |       | N/A                                                                |       |
| Municipals                                                          |       | 213                 |       | 98.6                                                               |       |
| Other                                                               |       | 1,600               |       | 97.2                                                               |       |
| Sub-total Level 3 recurring                                         |       | 17,833              |       | 92.7                                                               |       |
| Non-recurring basis                                                 |       | 231                 |       | 100.0                                                              |       |
| **Total Level 3 investments**                                       |       | $                   | 18,064     |                                                               | 92.8       | % |

 

23

----

 

The following tables summarize Level 1, 2 and 3financial assets and financial liabilities by their classification in theCondensed Consolidated Statement of Financial Position at March 31, 2008.

 
| **(in millions)**                         | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Valued at cost,  amortized  cost or using  the equity  method** | ** ** | **Balance as of  March 31,  2008** | ** ** |
|------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Financial  Assets**                          |       |             |       |             |       |             |       |                                                                                       |       |                                              |       |
| Fixed income securities                        |       | $                | 445        |             | $          | 36,100           |       | $                                                                                          | 17,737     |                                              |       |   | $ | 54,282 |   |
| Mortgage loans                                 |       |             |       |             |       | 220              |       | $                                                                                          | 9,966      |                                              | 10,186     |   |
| Equity securities                              |       | 33               |       | 53               |       | 57               |       |                                                                                       |       |                                              | 143        |   |
| Limited partnership interests                  |       |             |       |             |       | 10               |       | 1,049                                                                                      |       | 1,059                                             |       |
| Short-term                                     |       | 423              |       | 2,502            |       |             |       | 339                                                                                        |       | 3,264                                             |       |
| Policy loans                                   |       |             |       |             |       |             |       | 772                                                                                        |       | 772                                               |       |
| Other investments                              |       |             |       | 766              |       | 40               |       | 1,241                                                                                      |       | 2,047                                             |       |
| Counterparty and cash collateral netting       |       |             |       |             |       |             |       |                                                                                       |       | (535                                              | )          |
| **Total Investments**                          |       | 901              |       | 39,421           |       | 18,064           |       | 13,367                                                                                     |       | 71,218                                            |       |
| Separate  account assets                       |       | 13,132           |       |             |       |             |       |                                                                                       |       | 13,132                                            |       |
| Other assets                                   |       | 2                |       |             |       | 2                |       |                                                                                       |       | 4                                                 |       |
| **Total  Financial Assets**                    |       | $                | 14,035     |             | $          | 39,421           |       | $                                                                                          | 18,066     |                                              | $          | 13,367 |   | $ | 84,354 |   |
|                                           |       |             |       |             |       |             |       |                                                                                       |       |                                              |       |
| **Financial  Liabilities**                     |       |             |       |             |       |             |       |                                                                                       |       |                                              |       |
| Contractholder funds                           |       |             |       | $                | (50        | )                | $          | (10                                                                                        | )          |                                              |       | $ | (60 | ) |
| Other liabilities                              |       |             |       | (824             | )          | (106             | )          |                                                                                       |       | (471                                              | )          |
| Reserve for  life-contingent contract benefits |       |             |       |             |       | (55              | )          |                                                                                       |       | (55                                               | )          |
| **Total Financial Liabilities**                |       | $                | —     |             | $          | (874             | )          | $                                                                                          | (171       | )                                                 | $          | — |   | $ | (586 | ) |

** **

Transfersinto and out of Level 3 during the quarter are attributable to a change in theavailability of market observable information for individual securities withinthe respective categories.  For a further discussion of the impact ofunrealized net capital gains and losses on our results of operations and adiscussion of the fluctuations in fair value during the quarter ended March 31,2008, see the Investments section of the MD&A.

 

24

----

** **

**OPERATIONS**

** **

Summarized financial datafor the three months ended March 31 is presented in the following table.

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                    | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Revenues**                              |       |                                             |       |   |   |
| Premiums                                  |       | $                                                | 111        |   | $ | 155 |   |
| Contract charges                          |       | 241                                              |       | 228 |   |
| Net investment income                     |       | 992                                              |       | 1,030 |   |
| Realized capital gains and losses         |       | (428                                             | )          | 22 |   |
| Total revenues                            |       | 916                                              |       | 1,435 |   |
|                                      |       |                                             |       |   |   |
| **Costs and expenses**                    |       |                                             |       |   |   |
| Contract benefits                         |       | (341                                             | )          | (374 | ) |
| Interest credited to contractholder funds |       | (610                                             | )          | (635 | ) |
| Amortization of DAC                       |       | (50                                              | )          | (115 | ) |
| Operating costs and expenses              |       | (90                                              | )          | (87 | ) |
| Total costs and expenses                  |       | (1,091                                           | )          | (1,211 | ) |
|                                      |       |                                             |       |   |   |
| (Loss) gain on disposition of operations  |       | (9                                               | )          | 1 |   |
| Income tax benefit (expense)              |       | 69                                               |       | (76 | ) |
| Net (loss) income                         |       | $                                                | (115       | ) | $ | 149 |   |
|                                      |       |                                             |       |   |   |
| Investments                               |       | $                                                | 71,218     |   | $ | 75,936 |   |

 

*Net loss* inthe first quarter of 2008 of $115 million compared to net income of $149million in the same period of 2007.  Thechange was mostly the result of the recognition of net realized capital lossesin the first quarter of 2008 compared to net realized capital gains in thefirst quarter of 2007.

 

**Analysis of Revenues**Totalrevenues decreased 36.2% or $519 million in the first quarter of 2008 comparedto the same period of 2007 due to the unfavorable change in realized capital gainsand losses and, to a lesser extent, lower premiums and net investment income,partially offset by higher contract charges.

 

*Premiums*****representrevenues generated from traditional life insurance, immediate annuities withlife contingencies and other insurance products that have significant mortalityor morbidity risk.

 

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

 

25

----

 

The following table summarizes premiums andcontract charges by product.

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Premiums**                                |       |                                             |       |   |   |
| Traditional life                            |       | $                                                | 60         |   | $ | 69 |   |
| Immediate annuities with life contingencies |       | 30                                               |       | 77 |   |
| Other                                       |       | 21                                               |       | 9 |   |
| **Total premiums**                          |       | 111                                              |       | 155 |   |
|                                        |       |                                             |       |   |   |
| **Contract charges**                        |       |                                             |       |   |   |
| Interest-sensitive life                     |       | 228                                              |       | 210 |   |
| Fixed annuities                             |       | 13                                               |       | 18 |   |
| **Total contract charges****(1)**           |       | 241                                              |       | 228 |   |
|                                        |       |                                             |       |   |   |
| **Total premiums and contract charges**     |       | $                                                | 352        |   | $ | 383 |   |

 

----

(1)          Contract charges include contract charges related to the cost ofinsurance totaling $163 million and $150 million in the three months ended March 31,2008 and 2007, respectively.

----

 

Total premiums decreased 28.4% in the firstquarter of 2008 compared to the same period of 2007 due primarily to a declinein sales of life contingent immediate annuities due to market conditions andhigher reinsurance premiums on life insurance, partially offset by increasedpremium from a reinsurance agreement with an unconsolidated affiliate.

 

Contract charges increased 5.7% in the firstquarter of 2008 compared to the same period of 2007 due to growth ininterest-sensitive life insurance policies in force, partially offset bydecreased contract charges on fixed annuities resulting primarily from lowersurrender charges.

 

*Contractholder funds*representinterest-bearing liabilities arising from the sale of individual andinstitutional products, such as interest-sensitive life insurance, fixedannuities and funding agreements. The balance of contractholder funds is equalto the cumulative deposits received and interest credited to the contractholderless cumulative contract maturities, benefits, surrenders, withdrawals andcontract charges for mortality or administrative expenses.

 

26

----

 

The following table shows thechanges in contractholder funds.

 
| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Contractholder funds, beginning balance**                    |       | $                                                | 60,464     |   | $ | 60,565 |   |
|                                                           |       |                                             |       |   |   |
| **Deposits**                                                   |       |                                             |       |   |   |
| Fixed annuities                                                |       | 686                                              |       | 696 |   |
| Institutional products (funding agreements)                    |       | 1,660                                            |       | 1,200 |   |
| Interest-sensitive life                                        |       | 340                                              |       | 332 |   |
| Total deposits                                                 |       | 2,686                                            |       | 2,228 |   |
|                                                           |       |                                             |       |   |   |
| **Interest credited**                                          |       | 611                                              |       | 645 |   |
|                                                           |       |                                             |       |   |   |
| **Maturities, benefits, withdrawals and other  adjustments**   |       |                                             |       |   |   |
| Maturities and retirements of institutional  products          |       | (1,887                                           | )          | (752 | ) |
| Benefits                                                       |       | (461                                             | )          | (415 | ) |
| Surrenders and partial withdrawals                             |       | (983                                             | )          | (991 | ) |
| Contract charges                                               |       | (197                                             | )          | (182 | ) |
| Net transfers from separate accounts                           |       | 5                                                |       | 3 |   |
| Fair value hedge adjustments                                   |       | 66                                               |       | (17 | ) |
| Other adjustments (1)                                          |       | (113                                             | )          | (70 | ) |
| Total maturities, benefits, withdrawals and  other adjustments |       | (3,570                                           | )          | (2,424 | ) |
| **Contractholder funds, ending balance**                       |       | $                                                | 60,191     |   | $ | 61,014 |   |

 

----

(1)         The table aboveillustrates the changes in contractholder funds, which are presented gross ofreinsurance recoverables on the Condensed Consolidated Statements of FinancialPosition.  The table above is intended tosupplement our discussion and analysis of revenues, which are presented net ofreinsurance on the Condensed Consolidated Statements of Operations.  As a result, the net change in contractholderfunds associated with products reinsured to third parties is reflected as acomponent of the other adjustments line.

----

 

Contractholder funds decreased 0.5% in the first quarter of 2008 andincreased 0.7% in same period of 2007. Average contractholder funds decreased 0.8% in the first quarter of 2008compared to the first quarter of 2007.

 

Contractholder deposits increased 20.6% in the first quarter of 2008compared to the same period of 2007 primarily due to higher deposits oninstitutional products, partially offset by slightly lower deposits on fixedannuities.  Deposits on institutionalproducts increased 38.3% in the first quarter of 2008 compared to the sameperiod of 2007.  Institutional productdeposits include the issuance during the first quarter of 2008 of extendiblefunding agreements backing medium-term notes totaling $1.36 billion with aninitial maturity of March 20, 2009 and a final maturity of March 20,2013.  Quarterly, beginning on June 20,2008, investors have the right to extend the maturity date of all or a portionof the medium-term notes by three additional months, up to, and in no eventlater than, the final maturity date.  Anysuch extension would also cause an extension of the related funding agreements.Deposits on fixed annuities declined 1.4% in the first quarter of 2008 comparedto the same period of 2007 due to competitive market conditions and ourobjective of meeting return targets on these products.  In addition, $1.75 billion of fundingagreements backing medium-term notes were issued in April 2008 with amaturity of April 30, 2013.

 

 Maturities and retirements of institutionalproducts increased $1.14 billion in the first quarter of 2008 compared to thesame period in the prior year primarily due to the retirement in the firstquarter of 2008 of extendible funding agreements backing medium-term notesoutstanding totaling $1.25 billion purchased in the secondary market.

 

Surrenders andpartial withdrawals decreased 0.8% in the first quarter of 2008 compared to thesame period of 2007.  This decline wasdue to lower surrenders and partial withdrawals on market value adjusted fixedannuities, partially offset by higher surrenders and partial withdrawals oninterest-sensitive life products.  Thesurrender and partial withdrawal rate on deferred fixed annuities andinterest-sensitive life insurance products, based on the beginning of periodcontractholder funds, was 9.4% in the first quarter of 2008 compared to 9.3% inthe first quarter of 2007.

 

27

----

 

*Net investment income* decreased 3.7% inthe first quarter of 2008 compared to the same period of 2007 due to lowerinvestment balances reflecting dividends paid to our parent Allstate InsuranceCompany (“AIC”) in 2007, increased short-term investment balances to mitigatereduced liquidity in some asset classes and lower investment yields,particularly on short-term and floating rate securities.

 

*Realizedcapital gains and losses* reflected net losses of $428million in the first quarter of 2008 compared with net gains of $22 million inthe first quarter of 2007.  For furtherdiscussion of realized capital gains and losses, see the Investments section ofMD&A.

 

**Analysis of Costs and Expenses** Total costs and expenses decreased 9.9% inthe first quarter of 2008 compared with the same period of 2007 as loweramortization of DAC, contract benefits and interest credited to contractholderfunds were partially offset by higher operating costs and expenses.

 

*Contract benefits* decreased 8.8% or $33 million in the firstquarter of 2008 compared to the same period in 2007 due to lower contractbenefits on annuities and, to a lesser extent, decreased contract benefits onlife insurance products.  The decline incontract benefits on annuities was mostly attributable to lower sales ofimmediate annuities with life contingencies, partially offset by unfavorablemortality experience.    The decline incontract benefits on life insurance products was due to the recognition in theprior year of litigation related costs in the form of additional policybenefits, partially offset by unfavorable mortality experience on traditionallife insurance products.

 

We analyze our mortality and morbidity results using the differencebetween premiums, contract charges earned for the cost of insurance andcontract benefits excluding the portion related to the implied interest onimmediate annuities with life contingencies (“benefit spread”).  This implied interest totaled $139 millionand $137 million in the first quarter of 2008 and 2007, respectively.  The benefit spread by product group isdisclosed in the following table.

 
| ** **             | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|
| **(in millions)** | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Life insurance         |       | $                                                | 90         |   | $ | 76 |   |
| Annuities              |       | (18                                              | )          | (8 | ) |
| Total benefit spread   |       | $                                                | 72         |   | $ | 68 |   |

 

*Interest credited tocontractholder funds*decreased 3.9% or $25 million in the first quarter of 2008 compared to the sameperiod of 2007 due primarily to a decline in contractholder funds and lowerweighted average interest crediting rates on institutional products due todeclines in market interest rates on floating rate securities.

 

In order to analyze theimpact of net investment income and interest credited to policyholders on netincome, we review the difference between net investment income and the sum ofinterest credited to contractholder funds and the implied interest on immediateannuities with life contingencies, which is included as a component of contractbenefits on the Condensed Consolidated Statements of Operations (“investmentspread”).  The investment spread byproduct group is shown in the following table.

 
| ** **                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Annuities                                                |       | $                                                | 115        |   | $ | 129 |   |
| Life insurance                                           |       | 15                                               |       | 17 |   |
| Institutional products                                   |       | 27                                               |       | 25 |   |
| Net investment income on investments  supporting capital |       | 86                                               |       | 87 |   |
| Total investment spread                                  |       | $                                                | 243        |   | $ | 258 |   |

 

28

----

 

To further analyze investment spreads thefollowing table summarizes the weighted average investment yield on assetssupporting product liabilities and capital, interest crediting rates oninvestment type products and investment spreads for the three months ended March 31.

** **
| ** **                                                           | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spreads** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                           | ** ** | **2008**                                         | ** ** | **2007**                                                     | ** ** | **2008**                                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest-sensitive life                                              |       | 6.2                                              | %          | 6.2                                                          | %          | 4.6                                                | %          | 4.5 | % | 1.6 | % | 1.7 | % |
| Deferred fixed annuities                                             |       | 5.7                                              |       | 5.7                                                          |       | 3.7                                                |       | 3.7 |   | 2.0 |   | 2.0 |   |
| Immediate fixed annuities with and without  life contingencies       |       | 6.9                                              |       | 7.1                                                          |       | 6.5                                                |       | 6.6 |   | 0.4 |   | 0.5 |   |
| Institutional products                                               |       | 5.2                                              |       | 6.1                                                          |       | 4.1                                                |       | 5.1 |   | 1.1 |   | 1.0 |   |
| Investments supporting capital, traditional  life and other products |       | 6.2                                              |       | 5.4                                                          |       | N/A                                                |       | N/A |   | N/A |   | N/A |   |

 

The following table summarizesour product liabilities as of March 31 and indicates the account value ofthose contracts and policies in which an investment spread is generated.

 
| ** **                                                     | ** ** | **As of March 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|
| **(in millions)**                                         | ** ** | **2008**                           | ** ** | **2007** | ** ** |
| Immediate fixed annuities with life  contingencies             |       | $                                  | 8,303      |   | $ | 8,202 |   |
| Other life contingent contracts and other                      |       | 4,301                              |       | 4,011 |   |
| Reserve for life-contingent contracts                          |       | $                                  | 12,604     |   | $ | 12,213 |   |
|                                                           |       |                               |       |   |   |
| Interest-sensitive life                                        |       | $                                  | 9,014      |   | $ | 8,536 |   |
| Deferred fixed annuities                                       |       | 33,838                             |       | 35,190 |   |
| Immediate fixed annuities without life  contingencies          |       | 3,879                              |       | 3,803 |   |
| Institutional products                                         |       | 12,884                             |       | 13,068 |   |
| Fair value adjustments related to fair  value hedges and other |       | 576                                |       | 417 |   |
| Contractholder funds                                           |       | $                                  | 60,191     |   | $ | 61,014 |   |

 

*Amortization of DAC* decreased 56.5% or $65 million in the firstquarter of 2008 compared to the same period of 2007.  The decrease in amortization of DAC in thefirst quarter of 2008 compared to the same period of 2007 was due to a reductionin amortization relating to realized capital gains and losses of $53 millionand an increase in amortization deceleration (credit to income) of $11 milliondue to our annual comprehensive review of DAC assumptions (commonly referred toas “DAC unlocking”).

 

The impact of realized capital gains andlosses on amortization of DAC is dependent upon the relationship between theassets that give rise to the gain or loss and the product liability supportedby the assets.  Fluctuations result fromchanges in the impact of realized capital gains and losses on actual andexpected gross profits.

 

In accordance with our annual comprehensivereview of DAC assumptions, in the first quarter of 2008, the Company recognizednet amortization deceleration totaling $23 million, including $17 million forfixed annuities and $6 million for interest-sensitive life insuranceproducts.  In the first quarter of 2007,net amortization deceleration totaled $12 million and included net amortizationdeceleration of $17 million for interest-sensitive life insurance products andnet amortization acceleration of $5 million for fixed annuities.  The first quarter 2008 net amortizationdeceleration of $17 million on fixed annuities was due primarily to higher thanexpected investment spreads partially offset by increased expenses.  The first quarter 2008 net amortizationdeceleration of $6 million on interest-sensitive life insurance products wasdue to higher than expected benefit spreads partially offset by increasedexpenses.

 

29

----

 

*Operatingcosts and expenses*increased 3.4% in the first quarter of 2008 compared to the same period of2007.   The following table summarizesoperating costs and expenses.

 
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**             | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                               |       |                                             |       |   |   |
| Non-deferrable acquisition costs   |       | $                                                | 21         |   | $ | 26 |   |
| Other operating costs and expenses |       | 69                                               |       | 61 |   |
| Total operating costs and expenses |       | $                                                | 90         |   | $ | 87 |   |

 

Non-deferrable acquisition costs decreased19.2% or $5 million in the first quarter of 2008 compared to the same period of2007 due to lower non-deferrable commissions. Other operating costs and expenses increased 13.1% or $8 million in thefirst quarter of 2008 compared to the same period of 2007 due primarily to increasedspending on consumer research, product development, marketing and technologycosts.

 

*Loss on disposition of operations*for the first quarter of 2008 totaled $9 million and was primarily comprised oflosses associated with the anticipated disposition of our direct responselong-term care business that is currently held for sale.

 

*Income tax benefit*of $69 million was recognized for the first quarter of 2008 compared to incometax expense of $76 million in the same period in the prior year.  The change reflects the shift from net pretaxincome in the prior year to a net pretax loss in the current year.

 

30

----

 

**INVESTMENTS**

 

An importantcomponent of our financial results is the return on our investmentportfolio.  The composition of theinvestment portfolio at March 31, 2008 is presented in the table below.

 
| **(in millions)**                 | ** ** | **Investments** | ** ** | **Percent to  total** | ** ** |
|-----------------------------------|------------|-----------------|------------|----------------------------|------------|
| ** **                        |       |            |       |                       |       |
| Fixed income securities (1)       |       | $               | 54,282     |                       | 76.2       | % |
| Mortgage loans (2)                |       | 10,186          |       | 14.3                       |       |
| Equity securities                 |       | 143             |       | 0.2                        |       |
| Limited partnership interests (3) |       | 1,059           |       | 1.5                        |       |
| Short-term                        |       | 3,264           |       | 4.6                        |       |
| Policy loans                      |       | 772             |       | 1.1                        |       |
| Other                             |       | 1,512           |       | 2.1                        |       |
| Total                             |       | $               | 71,218     |                       | 100.0      | % |

 

----

(1)         Fixed incomesecurities are carried at fair value. Amortized cost basis for these securities was $55.12 billion.

(2)         Equity securitiesare carried at fair value.  Cost basisfor these securities was $150 million.

(3)         We have commitmentsto invest in additional limited partnership interests totaling $1.03 billion atMarch 31, 2008.

----

 

Totalinvestments decreased to $71.22 billion at March 31, 2008 from $72.41billion at December 31, 2007, due to unrealized net capital losses and netrealized capital losses, partially offset by increased funds associated withcollateral received in conjunction with securities lending.

 

Totalinvestments at amortized cost related to collateral received in connection withsecurities lending business activities, funds received in connection withsecurities repurchase agreements and collateral posted by counterpartiesrelated to derivative transactions increased to $2.38 billion at March 31,2008 from $1.82 billion at December 31, 2007.  As of March 31, 2008 and December 31,2007, these investments were carried at fair value and classified in fixedincome securities totaling $1.43 billion and $1.57 billion, respectively, andshort-term investments totaling $878 million and $219 million, respectively.

 

Fixed incomesecurities by type are listed in the table below.

 
| **($ in millions)**                     | ** ** | **March 31,  2008** | ** ** | **% to Total  Investments** | ** ** | **December 31,  2007** | ** ** | **% to Total  Investments** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
|                                         |       |                     |       |                                  |       |                        |       |                                  |       |
| U.S. government and agencies                 |       | $                        | 3,728      |                                  | 5.3        | %                           | $          | 3,728                                 |       | 5.2 | % |
| Municipal                                    |       | 4,338                    |       | 6.1                                   |       | 4,311                       |       | 6.0                                   |       |
| Corporate                                    |       | 30,094                   |       | 42.3                                  |       | 31,735                      |       | 43.8                                  |       |
| Foreign government                           |       | 2,084                    |       | 2.9                                   |       | 2,185                       |       | 3.0                                   |       |
| Mortgage-backed securities (“MBS”) |       | 3,282                    |       | 4.6                                   |       | 3,490                       |       | 4.8                                   |       |
| CMBS                                         |       | 6,011                    |       | 8.4                                   |       | 7,388                       |       | 10.2                                  |       |
| Asset-backed securities (“ABS”)    |       | 4,732                    |       | 6.6                                   |       | 5,603                       |       | 7.7                                   |       |
| Redeemable preferred stock                   |       | 13                       |       | —                                |       | 29                          |       | —                                |       |
| Total fixed income securities                |       | $                        | 54,282     |                                  | 76.2       | %                           | $          | 58,469                                |       | 80.7 | % |

 

At March 31,2008, 95.9% of the fixed income securities portfolio was rated investmentgrade, which is defined as a security having a rating from the NAIC of 1 or 2;a rating of Aaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBBfrom Standard and Poor’s (“S&P’s”), Fitch or Dominion or a rating of aaa,aa, a or bbb from A.M. Best; or a comparable internal rating if anexternally provided rating is not available.

 

Duringthe first quarter of 2008, certain financial markets continued to experiencedecreased liquidity.   We experiencedthis illiquidity particularly in our ABS RMBS, ABS CDO, Alt-A and CRE CDOportfolios.  These portfolios totaled$2.94 billion, or less than 5.0% of our total investments at March 31,2008.  Certain other asset-backed andreal estate investment markets experienced similar illiquidity, but to a muchlesser degree.

 

31

----

 

Wedetermine the fair values of securities comprising the illiquid portfolios byobtaining information from an independent third-party valuation serviceprovider and brokers. We confirmed the reasonableness of the fair value ofthese portfolios as of March 31, 2008 by analyzing available marketinformation including, but not limited to, collateral quality, anticipated cashflows, credit enhancements, default rates, loss severities, the securities’relative position within their respective capital structures, and creditratings from statistical rating agencies.

 

As of March 31, 2008, approximately $2.31 billion or 53.1% of ourmunicipal bond portfolio is insured by seven bond insurers and 71.0% have aMoody’s equivalent rating of Aaa or Aa. Our practices for acquiring and monitoring municipal bonds primarily arebased on the quality of the underlying security.  As of March 31, 2008, we believe thatthe current valuations already reflect a decline in the value of the insurance,and further such declines if any, are not expected to be material.  While the valuation of these holdings may betemporarily impacted by negative and rapidly changing market developments, wecontinue to have the intent and ability to hold the bonds and expect to receiveall of the contractual cash flows.  As ofMarch 31, 2008, 34.7% of our insured municipal bond portfolio was insuredby MBIA, 16.1% by AMBAC, 16.5% by FSA and 21.3% by FGIC.  In total, we hold $3.03 billion of fixedincome securities that are insured by bond insurers, including $421 million ofour ABS RMBS and $255 million of our other asset-backed securities discussedbelow.  Additionally, we hold $23 millionof corporate bonds that were directly issued by these bond insurers.

 

Includedin our municipal bond portfolio at March 31, 2008 are $833 million ofauction rate securities (“ARS”) that have long-term stated maturities, with theinterest rate reset based on auctions that generally occur every 7, 28 or 35days depending on the specific security. This is compared to a balance of ARS at December 31, 2007 of $866million, with the decline representing sales and redemptions during the firstquarter of 2008.  Our holdings primarily have a Moody’sequivalent rating of Aaa and fair value is estimated at the corresponding parvalue based on market observable inputs. We make our investment decisions basedon the underlying credit of each security, which for approximately 97% of ourholdings are pools of student loans for which at least 85% of the collateral isinsured by the U.S. Department of Education at the time we purchased thesecurity.  During the first quarter of2008, all of our ARS holdings experienced failed auctions and we received thefailed auction rate or, for those which contain maximum reset rate formulas, wereceived the contractual maximum rate. We anticipate that failed auctions may persist and most of our holdingswill continue to pay the failed auction rate or, for those that contain maximumrate reset formulas, the maximum rate, as described below.  Auctions continue to be conducted asscheduled for each of the securities.

 

Weestimate that approximately one third of our student loan backed ARS includemaximum rate reset formulas whereby when the failed interest rate exceeds an annualcontractual maximum rate over a preceding stipulated period, the couponinterest rate is temporarily reset to the maximum rate, which can vary betweenzero and the failed auction rate.  Thismaximum rate formula causes the reset interest rate on these securities to belower than the failed auction rate in order to reduce the annual interest rateto not exceed the annual contractual maximum rate.  Generally, the annual contractual maximumrate is higher than the historical rates paid on these securities.  During April 2008, $96 million of ourARS reset to a period of zero coupon interest rate.

 

*MBS*totaled $3.28 billion and 100.0% were rated investment grade at March 31,2008.  The credit risk associated withour MBS is mitigated due to the fact that 58.9% of the portfolio consists ofsecurities that were issued by, or have underlying collateral that isguaranteed by U.S. government agencies or U.S. government sponsored entities (“U.S.Agency”).  The MBS portfolio is subjectto interest rate risk since price volatility and the ultimate realized yieldare affected by the rate of prepayment of the underlying mortgages.

 

The following table shows MBS by type andMoody’s equivalent rating.

 
| **(in millions) ** | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** | **Aaa** | ** ** | **Aa** | ** ** | **A**  | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|---------|------------|--------|------------|--------|------------|
| **MBS**                      |       |                                                  |       |                                  |       |    |       |   |       |   |       |
| U.S. Agency                  |       | $                                                     | 1,933      |                                  | 2.7        | %       | 100.0      | %      | —     |   | —     |   |
| Prime                        |       | 863                                                   |       | 1.2                                   |       | 99.2    |       | 0.8    | %          | — |       |
| Alt-A                        |       | 486                                                   |       | 0.7                                   |       | 91.3    |       | 8.7    |       | — |       |
| Total MBS                    |       | $                                                     | 3,282      |                                  | 4.6        | %       |       |   |       |   |       |   |

 

32

----

 

Includedin our mortgage-backed fixed income securities are Alt-A at fixed or variablerates.  The following table presentsinformation about the collateral in our Alt-A holdings.

 
| **(in millions) ** | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|
| **Alt-A**                    |       |                                                  |       |                                  |       |
| Fixed rate                   |       | $                                                     | 358        |                                  | 0.5        | % |
| Variable rate                |       | 128                                                   |       | 0.2                                   |       |
| Total Alt-A                  |       | $                                                     | 486        |                                  | 0.7        | % |

 

Alt-Amortgage-backed securities are at fixed or variable rates and include certainsecurities that are collateralized by residential mortgage loans issued toborrowers with stronger credit profiles than sub-prime borrowers, but who donot qualify for prime financing terms due to high loan-to-value ratios orlimited supporting documentation.  Fairvalue represents 86.9% of the amortized cost of these securities.  As of March 31, 2008, the Alt-Aportfolio had unrealized losses of $73 million. $293 million or 60.3% of these securities were issued during 2005, 2006and 2007.   Wecollected $16 million of principal repayments consistent with the expected cashflows.

 

*CMBS* totaled $6.01billion and 100.0% were rated investment grade at March 31, 2008.  Approximately 82.5% of the CMBS investmentsare pools of commercial mortgages, broadly diversified across property typesand geographical area.  The CMBSportfolio is subject to credit risk, but unlike other structured products, isgenerally not subject to prepayment risk due to protections within theunderlying commercial mortgages whereby borrowers are effectively restrictedfrom prepaying their mortgages due to changes in interest rates.  The following table shows CMBS by type andMoody’s equivalent rating.

 
| **(in millions)** | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** | **Aaa** | ** ** | **Aa** | ** ** | **A**  | ** ** | **Baa** | ** ** |
|------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|---------|------------|--------|------------|--------|------------|---------|------------|
| **CMBS**               |       | $                                                     | 5,575      |                                  | 7.8        | %       | 80.7       | %      | 12.9       | %      | 5.2        | %       | 1.2        | % |
| CRE CDO                |       | 436                                                   |       | 0.6                                   |       | 34.8    |       | 30.2   |       | 24.4   |       | 10.6    |       |
| Total CMBS             |       | $                                                     | 6,011      |                                  | 8.4        | %       |       |   |       |   |       |    |       |   |

 

        CRECDO are investments secured primarily by commercial mortgage-backed securitiesand other commercial mortgage debt obligations. These securities are generally less liquid and have a higher riskprofile than other commercial mortgage-backed securities.  Fair value represents 61.4% of the amortizedcost of these securities.  As of March 31,2008, CRE CDO had unrealized losses of $274 million. During the first quarter of 2008, we sold $9million of these securities, recognizing a loss of $2 million.  Wealso collected $1 million of principal repayments consistent with the expectedcash flows.

 

*ABS* totaled $4.73billion and 97.9% were rated investment grade at March 31, 2008.  ABSby type are listed in the table below.

 
| **(in millions)**                                                                | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** | **Aaa** | ** ** | **Aa** | ** ** | **A**  | ** ** | **Baa** | ** ** | **Ba or  lower** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|---------|------------|--------|------------|--------|------------|---------|------------|-----------------------|------------|
|                                                                                  |       |                                                  |       |                                  |       |    |       |   |       |   |       |    |       |                  |       |
| **ABS**                                                                               |       |                                                  |       |                                  |       |    |       |   |       |   |       |    |       |                  |       |
| ABS RMBS                                                                              |       | $                                                     | 2,000      |                                  | 2.8        | %       | 60.1       | %      | 27.0       | %      | 6.2        | %       | 5.5        | %                     | 1.2        | % |
| ABS CDO                                                                               |       | 17                                                    |       | —                                |       | —  |       | — |       | — |       | 35.3    |       | 64.7                  |       |
| Total asset-backed securities  collateralized by sub-prime residential mortgage loans |       | 2,017                                                 |       | 2.8                                   |       |    |       |   |       |   |       |    |       |                  |       |
|                                                                                  |       |                                                  |       |                                  |       |    |       |   |       |   |       |    |       |                  |       |
| Other collateralized debt obligations                                                 |       | 1,696                                                 |       | 2.4                                   |       | 36.9    |       | 26.4   |       | 26.1   |       | 8.1     |       | 2.5                   |       |
| Other asset-backed securities                                                         |       | 1,019                                                 |       | 1.4                                   |       | 51.6    |       | 7.9    |       | 22.5   |       | 13.9    |       | 4.1                   |       |
| Total ABS                                                                             |       | $                                                     | 4,732      |                                  | 6.6        | %       |       |   |       |   |       |    |       |                  |       |   |

 

33

----

 

Thefollowing table presents additional information about our ABS RMBS portfolioincluding a summary by first and second lien collateral.

 
| **(in millions)** | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** |
|------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|
| **ABS RMBS**           |       |                                                  |       |                                  |       |
| First lien:            |       |                                                  |       |                                  |       |
| Fixed rate (1)         |       | $                                                     | 621        |                                  | 0.9        | % |
| Variable rate (1)      |       | 982                                                   |       | 1.4                                   |       |
| Total first lien (2)   |       | 1,603                                                 |       | 2.3                                   |       |
| Second lien:           |       |                                                  |       |                                  |       |
| Insured                |       | 309                                                   |       | 0.4                                   |       |
| Other                  |       | 88                                                    |       | 0.1                                   |       |
| Total second lien (3)  |       | 397                                                   |       | 0.5                                   |       |
| Total ABS RMBS         |       | $                                                     | 2,000      |                                  | 2.8        | % |

 

----

(1) Fixed rate and variable rate refer to theprimary interest rate characteristics of the underlying mortgages at the timeof issuance.

(2) The credit ratingsof the first lien ABS RMBS were 59.2% Aaa, 33.0% Aa, 7.1% A and 0.7% Baa at March 31,2008.

(3) The credit ratingsof the second lien ABS RMBS were 63.7% Aaa, 2.8% Aa, 2.3% A, 25.2% Baa and 6.0%Ba or lower at March 31, 2008.

----

 

ABSRMBS portfolio includes securities that are collateralized by mortgage loansissued to borrowers that cannot qualify for prime or Alt-A financing terms duein part to an impaired or limited credit history.  It also includes securities that arecollateralized by certain second lien mortgages regardless of the borrower’scredit history.  Fair value represents76.4% of the amortized cost of these securities.  As of March 31, 2008, the ABS RMBSportfolio had net unrealized losses of $616 million.

 

At March 31, 2008, $421 million or 21.2% of the total ABS RMBSsecurities that are rated Aaa, Aa, A, Baa and Ba are insured by 4 bondinsurers.  $1.60 billion or 80.0% of theportfolio consisted of securities that were issued during 2005, 2006 and 2007.  At March 31, 2008, 67.9% of securitiesissued during 2005, 2006 and 2007 were rated Aaa, 20.8% rated Aa, 3.4% rated A,6.3% rated Baa and 1.6% rated Ba or lower.

 

Duringthe first quarter of 2008, we sold $19 million of ABS RMBS, upon which werecognized a loss of $17 million.  Wealso collected $65 million of principal repayments consistent with the expectedcash flows.

 

ABSCDO are securities collateralized by a variety of residential mortgage-backedsecurities and other securities, which may include sub-prime RMBS.  Fair value represents 106.3% of the amortizedcost of these securities.  Asof March 31, 2008, the ABS CDO portfolio had unrealized gains of $1million.

 

Impairmentwrite-downs during the first quarter of 2008 were recorded on our Alt-A, ABSRMBS and ABS CDO totaling $39 million, $21 million and $60 million,respectively.  We did not record anywrite-downs related to our CRE CDO.  Wecontinue to believe that the unrealized losses on these securities are notnecessarily predictive of the ultimate performance of the underlyingcollateral.  In the absence of furtherdeterioration in the collateral relative to our positions in the securities’respective capital structures, which could be other-than-temporary, theunrealized losses should reverse over the remaining lives of the securities.

 

*Other collateralized debt obligations* totaled $1.70 billion and 97.5% are ratedinvestment grade at March 31, 2008. Other collateralized debt obligations consist primarily of obligationssecured by high yield and investment grade corporate credits including $1.01billion of collateralized loan obligations; $234 million of synthetic CDOs;$171 million of primarily bank trust preferred CDOs; $96 million of marketvalue CDOs; $45 million of CDOs that invest in other CDOs (“CDO squared”); and$32 million of collateralized bond obligations. As of March 31, 2008, net unrealized losses on the othercollateralized debt obligations were $508 million.

 

*Other asset-backed securities* consist primarily of investments secured by portfolios of credit cardloans, auto loans, student loans and other consumer and corporate obligations.As of March 31, 2008, the net unrealized losses on these securities were$62 million. Additionally, 25.0% of the other asset-backed securities that arerated Aaa were insured by four bond insurers.

 

34

----

 

*Unrealized net capital losses* totaled $878 million as of March 31, 2008, compared to unrealizednet capital gains of $417 million at December 31, 2007.  The decline was primarily due to unrealizednet capital losses on investment grade fixed income securities as the yieldssupporting fair values increased, resulting from widening credit spreads thatmore than offset the effects of declining risk free interest rates, and higherunrealized net capital losses on equity securities totaling $7 million.  Wecontinue to experience volatility in the balance of our unrealized net capitalgains and losses as we did between the years 2004/2005 and 2006/2007.  The following table presents total unrealizedgains and losses.

 
| ** **                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in millions)**                | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| U.S. government and agencies          |       | $                  | 974        |                  | $          | 880 |   |
| Municipal                             |       | 58                 |       | 76                    |       |
| Corporate                             |       | (179               | )          | 111                   |       |
| Foreign government                    |       | 427                |       | 371                   |       |
| Mortgage-backed securities            |       | (62                | )          | (9                    | )          |
| Commercial mortgage-backed securities |       | (865               | )          | (310                  | )          |
| Asset-backed securities               |       | (1,185             | )          | (670                  | )          |
| Redeemable preferred stock            |       | (2                 | )          | —                |       |
| Fixed income securities               |       | (834               | )          | 449                   |       |
| Equity securities                     |       | (7                 | )          | —                |       |
| Derivatives                           |       | (37                | )          | (32                   | )          |
| **Unrealized gains and losses**       |       | $                  | (878       | )                     | $          | 417 |   |

 

The netunrealized loss for the fixed income portfolio totaled $834 million, comprisedof $2.48 billion of unrealized gains and $3.31 billion of unrealized losses at March 31,2008.  This is compared to a netunrealized gain for the fixed income portfolio totaling $449 million at December 31,2007, comprised of $2.26 billion of unrealized gains and $1.81 billion ofunrealized losses.

 

Of the grossunrealized losses in the fixed income portfolio at March 31, 2008, $3.09billion or 93.3% were related to investment grade securities and are believedto be primarily interest rate related. Of the remaining $221 million of unrealized losses in the fixed incomeportfolio, $183 million or 82.8% were in the corporate fixed income portfolioand primarily comprised securities in the consumer goods, financial services,banking, communications and capital goods sectors.  The gross unrealized losses in these sectorswere primarily company specific and interest rate related.

 

The net unrealized loss for the equityportfolio totaled $7 million, comprised of $5 million of unrealized gains and$12 million of unrealized losses at March 31, 2008.  This is compared to unrealized gains of $5million and unrealized losses of $5 million at December 31, 2007.  Within the equity portfolio, the losses wereprimarily concentrated in the financial services and banking sectors.  The unrealized losses in these sectors werecompany and sector specific.

 

We have acomprehensive portfolio monitoring process to identify and evaluate, on acase-by-case basis, fixed income and equity securities whose carrying value maybe other-than-temporarily impaired.  Theprocess includes a quarterly review of all securities using a screening processto identify situations where the fair value, compared to amortized cost forfixed income securities, and cost for equity securities is below establishedthresholds for certain time periods, or which are identified through othermonitoring criteria such as ratings downgrades or payment defaults.  The securities identified, in addition toother securities for which we may have a concern, are evaluated based on factsand circumstances for inclusion on our watch-list.  We also conduct a portfolio review torecognize impairment on securities in an unrealized loss position for which wedo not have the intent and ability to hold until recovery as a result ofapproved programs involving the disposition of investments for reasons such aschanges in duration, revisions to strategic asset allocations and liquidityactions, as well as certain dispositions anticipated by portfoliomanagers.  All investments in anunrealized loss position at March 31, 2008 were included in our portfoliomonitoring process for determining whether declines in value were other-than-temporary.

 

35

----

 

The following table summarizes fixed incomeand equity securities in a gross unrealized loss position according tosignificance, aging and investment grade classification.

 
| ** **                                                                                                                                                       | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **Fixed Income**        | ** ** | ** **                      | ** ** | ** ** | ** ** | **Fixed Income** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in millions, except number  of issues)**                                                                                                  | ** ** | **Investment  Grade**        | ** ** | **Below  Investment  Grade**    | ** ** | **Equity** | ** ** | **Total** | ** ** | **Investment  Grade** | ** ** | **Below  Investment  Grade** | ** ** | **Equity** | ** ** | **Total** | ** ** |
|                                                                                                                                                             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Category (I): Unrealized loss less  than 20% of cost(1)                                                                                                     |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                                                                 |       | 1,833                        |       | 229                             |       | 25 |   | 2,087 |   | 2,403 |   | 227 |   | 9 |   | 2,639 |   |
| Fair Value                                                                                                                                                       |       | $                            | 18,514     |                            | $          | 1,388 |   | $ | 102 |   | $ | 20,004 |   | $ | 22,615 |   | $ | 1,517 |   | $ | 64 |   | $ | 24,196 |   |
| Unrealized                                                                                                                                                       |       | $                            | (1,175     | )                               | $          | (122 | ) | $ | (8 | ) | $ | (1,305 | ) | $ | (1,129 | ) | $ | (106 | ) | $ | (5 | ) | $ | (1,240 | ) |
|                                                                                                                                                             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Category (II): Unrealized loss greater than  or equal to 20% of cost for a period of less than 6 consecutive months(1)                                           |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                                                                 |       | 512                          |       | 42                              |       | 1 |   | 555 |   | 156 |   | 18 |   | — |   | 174 |   |
| Fair Value                                                                                                                                                       |       | $                            | 3,681      |                            | $          | 238 |   | $ | 8 |   | $ | 3,927 |   | $ | 945 |   | $ | 107 |   | $ | — |   | $ | 1,052 |   |
| Unrealized                                                                                                                                                       |       | $                            | (1,910     | )                               | $          | (99 | ) | $ | (4 | ) | $ | (2,013 | ) | $ | (514 | ) | $ | (62 | ) | $ | — |   | $ | (576 | ) |
|                                                                                                                                                             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Category (III): Unrealized loss greater  than or equal to 20% of cost for a period of 6 or more consecutive months,  but less than 12 consecutive months(1) |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                                                                 |       | 1                            |       | —                          |       | — |   | 1 |   | — |   | — |   | — |   | — |   |
| Fair Value                                                                                                                                                       |       | $                            | 5          |                            | $          | — |   | $ | — |   | $ | 5 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Unrealized                                                                                                                                                       |       | $                            | (7         | )                               | $          | — |   | $ | — |   | $ | (7 | ) | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                                                                                                             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Category (IV): Unrealized loss greater than  or equal to 20% of cost for 12 or more consecutive months(1)                                                        |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                                                                 |       | —                       |       | —                          |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Fair Value                                                                                                                                                       |       | $                            | —     |                            | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Unrealized                                                                                                                                                       |       | $                            | —     |                            | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                                                                                                             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Number of Issues                                                                                                                                           |       | 2,346                        |       | 271                             |       | 26 |   | 2,643 |   | 2,559 |   | 245 |   | 9 |   | 2,813 |   |
| Total Fair Value                                                                                                                                                 |       | $                            | 22,200     |                            | $          | 1,626 |   | $ | 110 |   | $ | 23,936 |   | $ | 23,560 |   | $ | 1,624 |   | $ | 64 |   | $ | 25,248 |   |
| Total Unrealized Losses                                                                                                                                          |       | $                            | (3,092     | )                               | $          | (221 | ) | $ | (12 | ) | $ | (3,325 | ) | $ | (1,643 | ) | $ | (168 | ) | $ | (5 | ) | $ | (1,816 | ) |

 

----

(1)   For fixed income securities, cost representsamortized cost.

----

 

The largest individual unrealized loss was$13 million for category (I) and $25 million for category (II) as of March 31,2008.

 

Categories (I) and (II) havegenerally been adversely affected by overall economic conditions includinginterest rate increases and the market’s evaluation of certain sectors.  The degree to which and/or length of timethat the securities have been in an unrealized loss position does not suggestthat these securities pose a high risk of being other-than-temporarilyimpaired.  Categories (III) and (IV) haveprimarily been historically adversely affected by industry and issue specific,or issuer specific conditions.  All ofthe securities in these categories are monitored for other-than-temporaryimpairment.  We expect that the fairvalues of these securities will recover over time.

 

Whenever our initialanalysis indicates that a fixed income security’s unrealized loss of 20% ormore for at least 36 months or any equity security’s unrealized loss of 20% ormore for at least 12 months is temporary, additional evaluations and managementapprovals are required to substantiate that a write-down is notappropriate.  As of March 31, 2008,no securities met these criteria.

 

Asof March 31, 2008, we recorded a deferred tax asset of $508 millionrelating to unrealized and unrecognized net capital losses.  Although realization is not assured,management believes it is more likely than not that this deferred tax assetwill be realized based on our assumption that we will be able to fully utilizenet capital losses that are ultimately recognized for tax purposes.

 

36

----

 

We also monitor the quality of our fixedincome and bank loan portfolios by categorizing certain investments as “problem”,“restructured” or “potential problem.” Problem fixed income securities and bank loans are in default withrespect to principal or interest and/or are investments issued by companiesthat have gone into bankruptcy subsequent to our acquisition or loan.  Restructured fixed income and bank loaninvestments have rates and terms that are not consistent with market rates orterms prevailing at the time of the restructuring.  Potential problem fixed income or bank loaninvestments are current with respect to contractual principal and/or interest,but because of other facts and circumstances, we have concerns regarding theborrower’s ability to pay future principal and interest, which causes us tobelieve these investments may be classified as problem or restructured in thefuture.

 

        Thefollowing table summarizes problem, restructured and potential problem fixedincome securities and bank loans.

 
| ** **                             | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **(in millions)**                 | ** ** | **Amortized  cost**          | ** ** | **Fair  value**                 | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Percent of  total Fixed  Income  portfolio** | ** ** |
| Problem                                |       | $                            | 8          |                            | $          | 8 |   | — | % | $ | 14 |   | $ | 14 |   | — | % |
| Restructured                           |       | 5                            |       | 5                               |       | — |   | 5 |   | 6 |   | — |   |
| Potential problem                      |       | 407                          |       | 391                             |       | 0.7 |   | 218 |   | 172 |   | 0.3 |   |
| Total net carrying value               |       | $                            | 420        |                            | $          | 404 |   | 0.7 | % | $ | 237 |   | $ | 192 |   | 0.3 | % |
| Cumulative write- downs recognized (1) |       | $                            | 443        |                            |       |   |   |   | $ | 261 |   |   |   |   |   |

 

----

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

----

 

        Wehave experienced an increase in the amortized cost of investments categorizedas potential problem as of March 31, 2008 compared to December 31,2007.  The increase was primarilydue to additions of certain residential mortgage-backed securities, includingAlt-A, Prime and ABS RMBS.  Partlyoffsetting the increase were impairment write-downs of investments categorizedas potential problem at December 31, 2007, including certain ABSCDOs.

 

        Wealso evaluated each of these investments through our portfolio monitoringprocess at March 31, 2008 and recorded write-downs when appropriate.  We further concluded that any remainingunrealized losses on these investments were temporary in nature and that wehave the intent and ability to hold the securities until recovery.  While these balances may increase in thefuture, particularly if economic conditions are unfavorable, management expectsthat****the total amount ofinvestments in these categories will remain low relative to the total fixedincome securities and bank loans portfolios.

 

**Net Investment Income** The following table presents net investmentincome for the three months March 31.

 
| ** **                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March 31,**               | ** ** |
| **(in millions)**            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                              |       |                             |       |   |   |
| Fixed income securities           |       | $                                | 826        |   | $ | 888 |   |
| Equity securities                 |       | 1                                |       | 1 |   |
| Mortgage loans                    |       | 146                              |       | 132 |   |
| Limited partnership interests     |       | 24                               |       | 12 |   |
| Short-term                        |       | 16                               |       | 23 |   |
| Other                             |       | 20                               |       | 41 |   |
| Investment income, before expense |       | 1,033                            |       | 1,097 |   |
| Investment expense                |       | 41                               |       | 67 |   |
| Net investment income             |       | $                                | 992        |   | $ | 1,030 |   |

 

37

----

 

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

 
| ** **                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| **(in millions)**                       | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                         |       |                                             |       |   |   |
| Investment write-downs                       |       | $                                                | (204       | ) | $ | (1 | ) |
| Dispositions                                 |       | (67                                              | )          | 34 |   |
| Valuation of derivative instruments          |       | (202                                             | )          | (20 | ) |
| Settlements of derivative instruments        |       | 45                                               |       | 9 |   |
| Realized capital gains and losses, pretax    |       | (428                                             | )          | 22 |   |
| Income tax benefit (expense)                 |       | 150                                              |       | (8 | ) |
| Realized capital gains and losses, after-tax |       | $                                                | (278       | ) | $ | 14 |   |

 

        Dispositions in theabove 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, or other investments where the fair value has declined below the carryingvalue, in situations where new factors such as negative developments,subsequent credit deterioration, liquidity needs, and newly identified marketopportunities cause a change in our previous intent to hold a security torecovery or maturity.

 

        In the first quarter of 2008, werecognized $24 million of losses related to a change in our intent to holdcertain investments with unrealized losses until they recover in value.  The change in our intent was primarilyrelated to strategic asset allocation decisions and ongoing comprehensivereviews of our portfolios as well as a liquidity strategy.  At March 31, 2008, the fair value ofsecurities for which we did not have the intent to hold until recovery totaled$1.01 billion.

 

38

----

 

Impairment write-downs for the three months ended March 31,2008 were as follows:

 
| **(in millions)**                                                   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|
| **Performing in accordance with anticipated  or contractual cash flows** |       |       |       |
| *Prime*                                                                  |       | $          | (9         | ) |
| *Alt–A*                                                             |       |       |       |
| No defaults in underlying collateral                                     |       | (30        | )          |
| Defaults lower in capital structure                                      |       | (9         | )          |
| Subtotal                                                                 |       | (39        | )          |
| *ABS RMBS*                                                               |       | (21        | )          |
| *ABS CDO*                                                                |       | (60        | )          |
| *Corporate*                                                              |       |       |       |
| Mortgage lender                                                          |       | (17        | )          |
| Bond insurer                                                             |       | (9         | )          |
| Bond reinsurer – convertible to perpetual  security                 |       | (20        | )          |
| *Other*                                                                  |       | (3         | )          |
| Subtotal (1)                                                             |       | (178       | )          |
| **Departure from anticipated or contractual  cash flows**                |       |       |       |
| Future cash flows expected –                                        |       |       |       |
| *Residual interest trust security*(2)                                    |       | —     |       |
| *Other*                                                                  |       | (1         | )          |
| Subtotal(3)                                                              |       | (1         | )          |
| Future cash flows very uncertain -                                       |       |       |       |
| *Other CDO*                                                              |       | (18        | )          |
| Subtotal                                                                 |       | (19        | )          |
| **Total fixed income securities**                                        |       | $          | (197       | ) |
| **Total equity securities**                                              |       | $          | (1         | ) |
| **Total limited partnership interests**                                  |       | $          | (3         | ) |
| **Total other investments**                                              |       | $          | (3         | ) |

 

----

(1)          Written down primarily because of expected deterioration in theperformance of the underlying collateral. For the securities with direct interest in the lender, there havebeen no defaults, and for securities supported by collateral, defaults haveoccurred lower in the capital structure.

(2)          Anticipated cash flow on unwind of trust is extended and contingent onrecovery to par of the underlying perpetual preferred.

(3)          While $1 million of these fixed income securities write-downs werevalued at a significant discount to cost, we believe these securities retaineconomic value.

----

 

Notwithstanding our intent and ability to hold suchsecurities, we concluded that we could not reasonably assert that the recoveryperiod would be temporary.

 

Net realized capital losses on the valuation andsettlement of derivative instruments totaled $157 million for the quarter,primarily comprised $111 million for the valuation of embedded equity optionsin fixed income securities and $31 million for the valuation of risk reductionprograms.

 

At March 31, 2008, our securities with embeddedoptions totaled $1.38 billion and decreased in fair value from December 31,2007 by $83 million, primarily comprising realized capital losses related tothe valuation of embedded options of $111 million and unrealized net capitalgains reported in other comprehensive income (“OCI”) of $28 million for thehost security.  The change in the fairvalue of embedded options is bifurcated from the host securities, separatelyvalued and reported in realized capital gains and losses, while the change invalue of the host securities is reported in OCI.  Total fair value exceeded total amortizedcost by $37 million at March 31, 2008. Valuation gains and losses are converted into cash for securities withembedded options upon our election to sell these securities.  In the event the economic value of theoptions is not realized, we will recover the par value if held tomaturity.  Total fair value exceeded parvalue by $78 million at March 31, 2008.

 

Losses from the risk reduction programs, primarilyin our duration management programs, were related to changing interest ratesand credit spreads as rates declined during the period.

 

A changing interest rate environment willdrive changes in our portfolio duration targets at a tactical level.  A duration target and range is establishedwith an economic view of liabilities relative to a long-term portfolioview.  Tactical duration management isaccomplished through both cash market transactions including new purchases andderivative activities that generate realized gains and losses.  As a component of our approach to managingportfolio duration, realized gains and losses on certain derivative instrumentsare most appropriately considered in 

 

39

----

 

conjunction with the unrealized gains and losses on the fixed incomeportfolio.  This approach mitigates theimpacts of general interest rate changes to the overall financial condition ofthe Company.

 

        The table below presents therealized capital gains and losses (pretax) on the valuation and settlement ofderivative instruments shown by underlying exposure and derivative strategy.

 
| ** **                                              | ** ** | **2008**      | ** ** | **2007**        | ** ** | **2008 Explanations** | ** ** |
|---------------------------------------------------------|------------|---------------|------------|-----------------|------------|----------------------------|------------|
| **($ in millions)**                           | ** ** | **Valuation** | ** ** | **Settlements** | ** ** | **Total**                  | ** ** | **Total** | ** ** | ** ** | ** ** |
| **Risk  Reduction**                                     |       |          |       |            |       |                       |       |   |   |   |   |
| Duration gap  management                                |       | (46           | )          | 8               |       | (38                        | )          | 1 |   | Interest rate caps, floors and swaps are used to align  interest-rate sensitivities of assets and liabilities. The 2008 loss resulted  from declining interest rates. The contracts settle based on differences  between current market rates and a contractually specified fixed rate through  expiration. The change in valuation reflects the changing value of expected  future settlements, which may vary over the period of the contracts. The loss  should be offset in unrealized gain in OCI to the extent it relates to  changes in risk-free rates, however any offset was reduced by the impact of  widening credit spreads. |   |
|                                                    |       |          |       |            |       |                       |       |   |   |   |   |
| Anticipatory  hedging                                   |       | —        |       | 37              |       | 37                         |       | (4 | ) | Futures used to protect investment spread from  interest rate changes during mismatches in the timing of cash flows between  product sales and the related investment activity. 2008 amounts reflect  decreases in risk–free interest rates on a net long position as liability  issuances exceeded asset acquisitions. The contracts are cash settled daily  and can be exited at any time for a minimal additional cost. If the cash flow  mismatches are such that a positive net investment position is being hedged,  there is an offset for the related investments’ unrealized gain or loss in  OCI. |   |
|                                                    |       |          |       |            |       |                       |       |   |   |   |   |
| Hedging of  interest rate exposure in annuity contracts |       | (13           | )          | 3               |       | (10                        | )          | (5 | ) | Interest rate caps used to hedge the effect of  changing crediting rates that are indexed to changes in treasury rates on  certain annuity contracts. The change in valuation reflects the changing  value of expected future settlements including the underlying cost to hedge  the treasury-rate index feature. The offset to the product hedging cost is  reflected in the base crediting rates on the underlying annuity policies,  which is reported in credited interest. The value of expected future settlements  and the associated value of future credited interest, which is reportable in  future periods when incurred, decreased due to the decline in interest rates. |   |
|                                                    |       |          |       |            |       |                       |       |   |   |   |   |
| Hedge  ineffectiveness                                  |       | (14           | )          | (2              | )          | (16                        | )          | (1 | ) |   |   |
|                                                    |       |          |       |            |       |                       |       |   |   |   |   |
| Foreign currency  contracts                             |       | —        |       | (3              | )          | (3                         | )          | — |   |   |   |
|                                                    |       |          |       |            |       |                       |       |   |   |   |   |
| Other                                                   |       | (1            | )          | —          |       | (1                         | )          | — |   |   |   |
| **Total  Risk reduction**                               |       | $             | (74        | )               | $          | 43                         |       | $ | (31 | ) | $ | (9 | ) |   |   |
|                                                    |       |          |       |            |       |                       |       |   |   |   |   |
| **Income  generation**                                  |       |          |       |            |       |                       |       |   |   |   |   |
| Asset replication  – credit exposure               |       | $             | (17        | )               | $          | 2                          |       | $ | (15 | ) | $ | — |   | Credit default swaps are used to replicate fixed  income securities and to complement the cash market when credit exposure to  certain issuers is not available or when the derivative alternative is less  expensive than the cash market alternative. The credit default swaps  typically have five–year terms  for which we receive periodic premiums through expiration. The changes in  valuation are due to the widening credit spreads, and would only be converted  to cash upon disposition or a default on an underlying credit obligation.  Valuation gains and losses will reverse if allowed to expire. |   |

 

40

----

 
| ** **                    | ** ** | **2008**      | ** ** | **2007**        | ** ** | **2008 Explanations** | ** ** |
|-------------------------------|------------|---------------|------------|-----------------|------------|----------------------------|------------|
| **($ in millions)** | ** ** | **Valuation** | ** ** | **Settlements** | ** ** | **Total**                  | ** ** | **Total** | ** ** | ** ** | ** ** |
| **Accounting**                |       |          |       |            |       |                       |       |   |   |   |   |
| Equity indexed  notes –  |       | $             | (86        | )               | $          | —                     |       | $ | (86 | ) | $ | (4 | )  | Equity–indexed notes are fixed income securities that  contain embedded options. The changes in valuation of the embedded equity  indexed call options are reported in realized capital gains and losses. The  results generally track the performance of underlying equity indices.  Valuation gains and losses are converted into cash upon sale. In the event  the economic value of the options is not realized, we will recover the par  value if held to maturity. Fair value exceeded par value by $65 million at  March 31, 2008. The following table compares the March 31, 2008  holdings to their December 31, 2007 values. |   |
|                               |            |               |            |                 |            |                            |            |  |  |  |  |  |  |  |  |

 
| **($ in millions)**                  | ** ** | **March 31,  2008** | ** ** | **March 31, 2008  holdings @  December 31,  2007** | ** ** | **Change** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|------------------------------------------------------------------------|------------|------------|------------|
| Par value                                      |       | $                        | 800        |                                                                   | $          | 800        |       | $ | — |   |
| Amortized cost of  host contract               |       | $                        | 500        |                                                                   | $          | 497        |       | $ | 3 |   |
| Fair value of  equity–indexed call option |       | 336                      |       | 422                                                                    |       | (86        | )          |
| Total amortized  cost                          |       | $                        | 836        |                                                                   | $          | 919        |       | $ | (83 | ) |
| Total Fair value                               |       | $                        | 865        |                                                                   | $          | 924        |       | $ | (59 | ) |
| Unrealized gain/loss                           |       | $                        | 29         |                                                                   | $          | 5          |       | $ | 24 |   |

 
| Conversion  options in fixed income securities |   | (25 | ) | — |   | (25 | ) | 2 |   | Convertible bonds are fixed income securities that  contain embedded options. Changes in valuation of the embedded option are  reported in realized capital gains and losses. The results generally track  the performance of underlying equity indices. Valuation gains and losses are  converted into cash upon our election to sell these securities. In the event  the economic value of the options is not realized, we will recover the par  value if held to maturity. Fair value exceeded par value by $13 million at  March 31, 2008. The following table compares the March 31, 2008  holdings to their December 31, 2007 values. |   |
|------------------------------------------------|--------|-----|---|--------|--------|-----|---|---|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 
|                  | **($ in millions)**    | ** ** | **March 31,  2008** | ** ** | **March 31, 2008  holdings @  December 31,  2007** | ** ** | **Change** | ** ** |
|-----------------------|----------------------------------|------------|--------------------------|------------|------------------------------------------------------------------------|------------|------------|------------|
|                  | Par value                        |       | $                        | 506        |                                                                   | $          | 506        |       | $ | — |   |
|                  | Amortized cost of  host contract |       | $                        | 348        |                                                                   | $          | 351        |       | $ | (3 | ) |
|                  | Fair value of  conversion option |       | 163                      |       | 188                                                                    |       | (25        | )          |
|                  | Total amortized  cost            |       | $                        | 511        |                                                                   | $          | 539        |       | $ | (28 | ) |
|                  | Total Fair value                 |       | $                        | 519        |                                                                   | $          | 543        |       | $ | (24 | ) |
|                  | Unrealized  gain/loss            |       | $                        | 8          |                                                                   | $          | 4          |       | $ | 4 |   |
| **Total  accounting** |                             | $          | (111                     | )          | $                                                                      | —     |       | $          | (111 | ) | $ | (2 | ) |   |
|                  |                             |       |                     |       |                                                                   |       |       |       |   |   |
| **Total**             |                             | $          | (202                     | )          | $                                                                      | 45         |       | $          | (157 | ) | $ | (11 | ) |   |
|                       |                                  |            |                          |            |                                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**CAPITAL RESOURCES AND LIQUIDITY**

 

**Capital Resources**consist of shareholder’s equity and debt, representing funds deployed oravailable to be deployed to support business operations.  The following table summarizes our capitalresources.

 
| **(in millions)**                                                   | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Common stock, retained income and other  shareholder’s equity items |       | $                            | 4,750      |                            | $          | 4,847 |   |
| Accumulated other comprehensive income                                   |       | (485                         | )          | (84                             | )          |
| Total shareholder’s equity                                          |       | 4,265                        |       | 4,763                           |       |
| Debt                                                                     |       | 200                          |       | 200                             |       |
| Total capital resources                                                  |       | $                            | 4,465      |                            | $          | 4,963 |   |

 

*Shareholder’sequity* decreased inthe first quarter of 2008, due to higher unrealized net capital losses oninvestments and a net loss for the first quarter of 2008 compared to net incomein the first quarter of 2007, partially offset by a non-cash capitalcontribution that was recorded in connection with a reinsurance transactionwith an unconsolidated affiliate.

 

**Financial Ratings andStrength **Ourratings are influenced by many factors including our operating and financialperformance, asset quality, liquidity, asset/liability management, overallportfolio mix, financial leverage (i.e., debt), exposure to risks, the currentlevel of operating leverage, AIC’s ratings and other factors.  There have been no changes to our insurancefinancial strength ratings since December 31, 2007.

 

Effective May 8, 2008, the Company, AIC and TheAllstate Corporation (“the Corporation”) entered into a one-year Amended andRestated Intercompany Liquidity Agreement (“Liquidity Agreement”) replacing theIntercompany Liquidity Agreement between the Company and AIC, dated January 1,2008.  The agreement allows forshort-term advances of funds to be made between parties for liquidity and othergeneral corporate purposes. The Company and AIC each serve as a lender andborrower and the Corporation serves only as a lender. See Note 2 to theCondensed Consolidated Financial Statements for further details.

 

**Liquidity Sources andUses** As reflected in our Condensed ConsolidatedStatements of Cash Flows,****lower operating cash flows in thefirst three months of 2008, compared to the first three months of 2007, wereprimarily related to a decrease in investment income and premiums.

 

Cash flows from investing activitiesincreased in the first three months of 2008, compared to the first three monthsof 2007, primarily due to sales of fixed income securities, reduction in fixedincome security purchases partially offset by an increase in short-termsecurity purchases.

 

41

----

 

# **Cash flows used in financing activitiesincreased in the first three months of 2008, compared to the first three monthsof 2007, primarily due to increases in maturities and retirements ofinstitutional products.  Forquantification of the changes in contractholder funds, see the Operationssection of the MD&A.**

# ** **

In addition to a capital and support agreement withAIC and intercompany liquidity agreement with AIC and the Corporation, whichprovide a maximum amount of potential funding under each agreement of $1.00billion, we also have access to additional borrowing to support liquiditythrough The Allstate Corporation as follows:

 

·                  A commercial paper program with a borrowinglimit of $1.00 billion to cover short-term cash needs.  As of March 31, 2008, there were nobalances outstanding and therefore the remaining borrowing capacity was $1.00billion; however, the outstanding balance can fluctuate daily.

 

·                  The primary creditfacility covers short-term liquidity requirements.  The $1.00 billion unsecured revolving creditfacility, has an initial term of five years expiring in 2012 with an extensionthat can be exercised in 2009 upon approval of existing or replacement lendersproviding more than two thirds of the commitments to lend.  This facility contains an increase provisionthat would allow up to an additional $500 million of borrowing provided theincreased portion could be fully syndicated at a later date among existing ornew lenders.  This facility has a financialcovenant requiring that The Allstate Corporation not exceed a 37.5% debt tocapital resources ratio as defined in the agreement.  This ratio at March 31, 2008 was21.2%.  Although the right to borrowunder the facility is not subject to a minimum rating requirement, the costs ofmaintaining the facility and borrowing under it are based on the ratings of oursenior, unsecured, nonguaranteed long-term debt.  There were no borrowings under this line ofcredit during the first three months of 2008. The total amount outstanding atany point in time under the combination of the commercial paper program and thecredit facility cannot exceed the amount that can be borrowed under the creditfacility.

 

·                  A universal shelf registration statementwas filed by The Allstate Corporation with the Securities and ExchangeCommission in May 2006.  TheAllstate Corporation can use it to issue an unspecified amount of debtsecurities, common stock (including 346 million shares of treasury stock as of March 31,2008), preferred stock, depositary shares, warrants, stock purchase contracts,stock purchase units and securities of subsidiaries.  The specific terms of any securities TheAllstate Corporation issues under this registration statement will be providedin the applicable prospectus supplements.

 

42

----

** **

**Item 4. Controls and Procedures**

** **

*Evaluationof Disclosure Controls and Procedures. *We maintaindisclosure controls and procedures as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934.  Under the supervision and with theparticipation of our management, including our principalexecutive officer and principal financial officer, we conducted an evaluationof the effectiveness of our disclosure controls and procedures as of the end ofthe period covered by this report.  Basedupon this evaluation, the principal executive officer and the principalfinancial officer concluded that our disclosure controls and procedures areeffective in providing reasonable assurance that material information requiredto be disclosed in our reports filed with or submitted to the Securities andExchange Commission under the Securities Exchange Act is made known tomanagement, including the principal executive officer and the principalfinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

*Changes inInternal Control over Financial Reporting. *During the fiscal quarter ended March 31, 2008, there have been nochanges in our internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

43

----

 

**PART II.  OTHER INFORMATION**

 

**Item 1.   Legal Proceedings**

 

Information required forthis Part II, Item 1 is incorporated by reference to the discussion underthe heading “Regulation” and under the heading “Legal and regulatoryproceedings and inquiries” in Note 6 of the Condensed Consolidated FinancialStatements in Part I, Item 1 of this Form 10-Q.

 

**Item 1A.  Risk Factors**

 

This document contains “forward-lookingstatements” that anticipate results based on our estimates, assumptions andplans that are subject to uncertainty. These statements are made subject to thesafe-harbor provisions of the Private Securities Litigation Reform Act of 1995.We assume no obligation to update any forward-looking statements as a result ofnew information or future events or developments.

 

        Theseforward-looking statements do not relate strictly to historical or currentfacts and may be identified by their use of words like “plans,” “seeks,” “expects,”“will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets”and other words with similar meanings. These statements may address, amongother things, our strategy for growth, product development, regulatoryapprovals, market position, expenses, financial results, litigation andreserves.  We believe that thesestatements are based on reasonable estimates, assumptions and plans. However,if the estimates, assumptions or plans underlying the forward-lookingstatements prove inaccurate or if other risks or uncertainties arise, actualresults could differ materially from those communicated in theseforward-looking statements.  Risk factorswhich could cause actual results to differ materially from those suggested bysuch forward-looking statements include but are not limited to those discussedor identified in this document, in our public filings with the Securities andExchange Commission, and those incorporated by reference in Part I, Item1A of Allstate Life Insurance Company Annual Report on Form 10-K for 2007.

 

**Item5.  Other Information**

 

OnMay 9, 2008, the Registrant entered into an Amended Intercompany LiquidityAgreement effective as of May 8, 2008. This agreement amends and restates theIntercompany Liquidity Agreement between the Registrant and Allstate InsuranceCompany effective as of January 1, 2008. Pursuant to this amended and restatedagreement attached hereto as Exhibit 10.2, The Allstate Corporation is added asa party to the agreement, as a lender only. The Registrant is a wholly ownedsubsidiary of Allstate Insurance Company, a wholly owned subsidiary of TheAllstate Corporation.

 

**Item6.  Exhibits**

 
|   | (a)    | Exhibits                                                                       |   |   |
|--------|--------|--------------------------------------------------------------------------------|--------|--------|
|   |   | An  Exhibit Index has been filed as part of this report on page E-1. |   |   |

 

44

----

 

**SIGNATURE**

 

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

 
|              | Allstate Life Insurance Company    |
|-------------------|------------------------------------|
|              | (Registrant)                       |
| May 13, 2008 |                               |
|              | By                                 | /s/ Samuel H. Pilch |
|              | Samuel H. Pilch                    |
|              | (chief accounting officer and duly |
|              | authorized officer of  Registrant) |

 

45

----

** **
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                           |
| 10.1                 |       | Investment  Sub-Advisory Agreement between Allstate Institutional Advisors, LLC and  Allstate Investment Management Company effective as of March 30, 2008.  Incorporated herein by reference to Exhibit 10.1 to Allstate Life  Insurance Company’s Current Report on Form 8-K filed April 24,  2008. |
|                 |       |                                                                                                                                                                                                                                                                                                                           |
| 10.2                 |       | Amended  and Restated Intercompany Liquidity Agreement between Allstate Insurance  Company, Allstate Life Insurance Company and The Allstate Corporation  effective as of May 8, 2008.                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                           |
| 15                   |       | Acknowledgment  of awareness from Deloitte & Touche LLP, datedMay 12, 2008, concerning unaudited  interim financial information.                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                           |
| 31.1                 |       | Rule 13a-14(a) Certification  of Principal Executive Officer                                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                           |
| 31.2                 |       | Rule 13a-14(a) Certification  of Principal Financial Officer                                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                           |
| 32                   |       | Section 1350  Certifications                                                                                                                                                                                                                                                                                              |

 

E-1

----