** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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** **

**FORM 10-Q**

** **

**The Registrantmeets the conditions set forth in General Instruction H (1)(a) and (b) of Form10-Q and is therefore 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 PERIODENDED SEPTEMBER 30, 2006**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**Commission file number:333-100029**

** **

**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

(Exact name of registrantas specified in its charter)
| **New York**                                                              | **36-2608394**                        |
|---------------------------------------------------------------------------|---------------------------------------|
| (State of  Incorporation)                                                 | (I.R.S. Employer  Identification No.) |
|                                                                      |                                  |
| **100  Motor Parkway, Suite 132  Hauppauge, New York**                    | **11788**                             |
| (Address of  principal executive offices)                                 | (Zip code)                            |
|                                                                      |                                  |
| Registrant’s telephone number, including area code: **631-357-8920** |

 

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

Yes x   Noo

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” in Rule 12b-2 of the Exchange.

| Large accelerated filer | Accelerated  filer | Non-accelerated  filer |
|-------------------------|--------------------|------------------------|
| o                       | o                  | x                      |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   Nox

None of the common equity of the registrant is held bynon-affiliates. Therefore, the aggregate market value of common equity held bynon-affiliates of the registrant is zero.

As of November 7, 2006, the registrant had 100,000common shares, $25 par value, outstanding, all of which are held by AllstateLife Insurance Company.

 

 

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##### **ALLSTATE LIFE INSURANCE COMPANY OFNEW YORKINDEX TO QUARTERLY REPORT ON FORM 10-QSeptember 30, 2006**

| **PART 1.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                     |   |   |   |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|              |       |                                                                                                                          |   |   |   |
| Item 1.      |       | Financial Statements                                                                                                          |   |   |   |
|              |       |                                                                                                                          |   |   |   |
|              |       | Condensed Statements of  Operations for the Three-Month and Nine-Month Periods Ended September 30,  2006 and 2005 (unaudited) |   | 3      |   |
|              |       |                                                                                                                          |   |   |   |
|              |       | Condensed Statements of  Financial Position as of September 30, 2006 (unaudited) and December 31, 2005                        |   | 4      |   |
|              |       |                                                                                                                          |   |   |   |
|              |       | Condensed Statements of  Cash Flows for the Nine-Month Periods Ended September 30, 2006 and 2005  (unaudited)                 |   | 5      |   |
|              |       |                                                                                                                          |   |   |   |
|              |       | Notes to Condensed  Financial Statements (unaudited)                                                                          |   | 6      |   |
|              |       |                                                                                                                          |   |   |   |
|              |       | Report of Independent  Registered Public Accounting Firm                                                                      |   | 13     |   |
|              |       |                                                                                                                          |   |   |   |
| Item 2.      |       | Management’s Discussion  and Analysis of Financial Condition and Results of Operations                                   |   | 14     |   |
|              |       |                                                                                                                          |   |   |   |
| Item 4.      |       | Controls and Procedures                                                                                                       |   | 24     |   |
|              |       |                                                                                                                          |   |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                         |   |   |   |
|              |       |                                                                                                                          |   |   |   |
| Item 1.      |       | Legal Proceedings                                                                                                             |   | 25     |   |
|              |       |                                                                                                                          |   |   |   |
| Item 1A.     |       | Risk Factors                                                                                                                  |   | 25     |   |
|              |       |                                                                                                                          |   |   |   |
| Item 6.      |       | Exhibits                                                                                                                      |   | 25     |   |

 

2

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**PART 1. FINANCIALINFORMATION**

**ITEM 1. FINANCIALSTATEMENTS**

**ALLSTATE LIFEINSURANCE COMPANY OF NEW YORKCONDENSED STATEMENTS OF OPERATIONS**
|                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)**                                     | ** ** |
| **Revenues**                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Premiums                                              |       | $                                                    | 19,211     |                                                | $          | 16,580 |   | $ | 53,963 |   | $ | 52,747 |   |
| Contract charges                                      |       | 13,740                                               |       | 16,781                                              |       | 48,582 |   | 48,016 |   |
| Net investment income                                 |       | 92,536                                               |       | 89,853                                              |       | 279,256 |   | 264,848 |   |
| Realized capital gains  and losses                    |       | (4,741                                               | )          | 4,531                                               |       | (24,093 | ) | (3,978 | ) |
|                                                  |       | 120,746                                              |       | 127,745                                             |       | 357,708 |   | 361,633 |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| **Costs and expenses**                                |       |                                                 |       |                                                |       |   |   |   |   |
| Contract benefits                                     |       | 44,348                                               |       | 41,904                                              |       | 137,904 |   | 131,888 |   |
| Interest credited to  contractholder funds            |       | 41,614                                               |       | 39,523                                              |       | 124,662 |   | 115,187 |   |
| Amortization of  deferred policy acquisition costs    |       | 8,992                                                |       | 15,878                                              |       | 20,819 |   | 27,966 |   |
| Operating costs and  expenses                         |       | 10,526                                               |       | 10,014                                              |       | 34,887 |   | 32,284 |   |
|                                                  |       | 105,480                                              |       | 107,319                                             |       | 318,272 |   | 307,325 |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| (Loss) gain on  disposition of operations             |       | (215                                                 | )          | —                                              |       | (7,963 | ) | 1 |   |
| ** **                                            | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income from operations before  income tax expense** |       | 15,051                                               |       | 20,426                                              |       | 31,473 |   | 54,309 |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax expense                                    |       | 4,844                                                |       | 6,863                                               |       | 10,409 |   | 19,921 |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| **Net income**                                        |       | $                                                    | 10,207     |                                                | $          | 13,563 |   | $ | 21,064 |   | $ | 34,388 |   |

 

See notes tocondensed financial statements.

3

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**ALLSTATE LIFEINSURANCE COMPANY OF NEW YORKCONDENSED STATEMENTS OF FINANCIAL POSITION**
|                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in thousands, except par value data)**          | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                         |       |                   |       |                  |       |
| Investments                                                                        |       |                   |       |                  |       |
| Fixed income  securities, at fair value (amortized cost $5,647,251 and $5,535,396) |       | $                      | 6,017,069  |                  | $          | 5,989,263 |   |
| Mortgage loans                                                                     |       | 672,960                |       | 633,789               |       |
| Short-term                                                                         |       | 144,438                |       | 63,057                |       |
| Policy loans                                                                       |       | 37,747                 |       | 36,698                |       |
| Other                                                                              |       | 3,525                  |       | 3,740                 |       |
| Total  investments                                                                 |       | 6,875,739              |       | 6,726,547             |       |
|                                                                               |       |                   |       |                  |       |
| Cash                                                                               |       | 8,503                  |       | 3,818                 |       |
| Deferred policy  acquisition costs                                                 |       | 276,533                |       | 318,551               |       |
| Accrued investment  income                                                         |       | 61,920                 |       | 62,452                |       |
| Reinsurance  recoverables                                                          |       | 466,358                |       | 12,729                |       |
| Current income taxes  receivable                                                   |       | 28,748                 |       | —                |       |
| Other assets                                                                       |       | 58,122                 |       | 35,760                |       |
| Separate Accounts                                                                  |       | 998,776                |       | 928,824               |       |
| **Total  assets**                                                                  |       | $                      | 8,774,699  |                  | $          | 8,088,681 |   |
|                                                                               |       |                   |       |                  |       |
| **Liabilities**                                                                    |       |                   |       |                  |       |
| Contractholder funds                                                               |       | $                      | 4,742,352  |                  | $          | 4,349,395 |   |
| Reserve for life-contingent  contract benefits                                     |       | 1,905,614              |       | 1,869,875             |       |
| Deferred income taxes                                                              |       | 51,394                 |       | 73,399                |       |
| Current income taxes  payable                                                      |       | —                 |       | 5,412                 |       |
| Other liabilities and  accrued expenses                                            |       | 416,121                |       | 188,123               |       |
| Payable to affiliates,  net                                                        |       | 8,396                  |       | 5,249                 |       |
| Reinsurance payable to  parent                                                     |       | 976                    |       | 971                   |       |
| Separate Accounts                                                                  |       | 998,776                |       | 928,824               |       |
| **Total  liabilities**                                                             |       | 8,123,629              |       | 7,421,248             |       |
|                                                                               |       |                   |       |                  |       |
| **Commitments and Contingent  Liabilities (Note 4)**                               |       |                   |       |                  |       |
| ** **                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Shareholder’s equity**                                                      |       |                   |       |                  |       |
| Common stock, $25 par  value, 100 thousand shares authorized and outstanding       |       | 2,500                  |       | 2,500                 |       |
| Additional capital paid-in                                                         |       | 140,000                |       | 140,000               |       |
| Retained income                                                                    |       | 419,180                |       | 395,965               |       |
| Accumulated other  comprehensive income:                                           |       |                   |       |                  |       |
| Unrealized net  capital gains and losses                                           |       | 89,390                 |       | 128,968               |       |
| **Total  accumulated other comprehensive income**                                  |       | 89,390                 |       | 128,968               |       |
| **Total  shareholder’s equity**                                               |       | 651,070                |       | 667,433               |       |
| **Total liabilities and  shareholder’s equity**                               |       | $                      | 8,774,699  |                  | $          | 8,088,681 |   |

 

See notes tocondensed financial statements.

4

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**ALLSTATE LIFEINSURANCE COMPANY OF NEW YORKCONDENSED STATEMENTS OF CASH FLOWS**
|                                                                                    | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **(in thousands)**                                                            | ** ** | **(unaudited)**                                     | ** ** |
| **Cash flows from operating  activities**                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                   | 21,064     |   | $ | 34,388 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                |       |   |   |
| Amortization and  other non-cash items                                             |       | (53,843                                             | )          | (43,805 | ) |
| Realized capital  gains and losses                                                 |       | 24,093                                              |       | 3,978 |   |
| Loss (gain) on  disposition of operations                                          |       | 7,963                                               |       | (1 | ) |
| Interest  credited to contractholder funds                                         |       | 124,662                                             |       | 115,187 |   |
| Changes in:                                                                        |       |                                                |       |   |   |
| Life-contingent  contract benefits and contractholder funds                        |       | 19,131                                              |       | 23,505 |   |
| Deferred policy  acquisition costs                                                 |       | (30,364                                             | )          | (25,464 | ) |
| Income taxes  payable                                                              |       | (36,012                                             | )          | 1,535 |   |
| Other operating  assets and liabilities                                            |       | (3,912                                              | )          | (14,564 | ) |
| Net cash  provided by operating activities                                         |       | 72,782                                              |       | 94,759 |   |
| ** **                                                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Cash flows from investing  activities**                                          |       |                                                |       |   |   |
| Proceeds from sales of  fixed income securities                                    |       | 710,186                                             |       | 394,169 |   |
| Investment collections                                                             |       |                                                |       |   |   |
| Fixed income  securities                                                           |       | 97,249                                              |       | 125,606 |   |
| Mortgage loans                                                                     |       | 57,960                                              |       | 44,886 |   |
| Investment purchases                                                               |       |                                                |       |   |   |
| Fixed income  securities                                                           |       | (775,808                                            | )          | (837,268 | ) |
| Mortgage loans                                                                     |       | (93,832                                             | )          | (162,189 | ) |
| Change in short-term  investments, net                                             |       | 18,952                                              |       | 14,201 |   |
| Disposition of  operations                                                         |       | (394,915                                            | )          | — |   |
| Change in other  investments, net                                                  |       | 1,685                                               |       | 365 |   |
| Net cash used in  investing activities                                             |       | (378,523                                            | )          | (420,230 | ) |
|                                                                               |       |                                                |       |   |   |
| **Cash flows from financing  activities**                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Contractholder fund  deposits                                                      |       | 668,215                                             |       | 681,725 |   |
| Contractholder fund  withdrawals                                                   |       | (357,789                                            | )          | (357,573 | ) |
| Net cash  provided by financing activities                                         |       | 310,426                                             |       | 324,152 |   |
|                                                                               |       |                                                |       |   |   |
| **Net increase (decrease) in cash**                                                |       | 4,685                                               |       | (1,319 | ) |
| **Cash at beginning of period**                                                    |       | 3,818                                               |       | 8,624 |   |
| **Cash at end of period**                                                          |       | $                                                   | 8,503      |   | $ | 7,305 |   |

 

See notes tocondensed financial statements.

5

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**ALLSTATE LIFEINSURANCE COMPANY OF NEW YORKNOTES TO CONDENSED FINANCIAL STATEMENTS(unaudited)**

### **1. General**

### **Basis of Presentation**

The accompanyingcondensed financial statements include the accounts of Allstate Life InsuranceCompany of New York (the “Company”), a wholly owned subsidiary of Allstate LifeInsurance Company (“ALIC”), which is wholly owned by Allstate Insurance Company(“AIC”), a wholly owned subsidiary of The Allstate Corporation (the “Corporation”).

The condensed financialstatements and notes as of September 30, 2006 and for the three-month andnine-month periods ended September 30, 2006 and 2005 are unaudited. Thecondensed financial statements reflect all adjustments (consisting only ofnormal recurring accruals) which are, in the opinion of management, necessaryfor the fair presentation of the financial position, results of operations andcash flows for the interim periods. These condensed financial statements andnotes should be read in conjunction with the financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005. The results of operations for the interim periods should notbe considered indicative of results to be expected for the full year.

To conform to the 2006presentation, certain amounts in the prior year condensed financial statementsand notes have been reclassified.

### **Adopted accounting standards**

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

The Company adoptedFinancial Accounting Standards Board (“FASB”) FSP FAS 115-1 as of January 1,2006. FSP 115-1 nullifies the guidance in paragraphs 10-18 of Emerging IssuesTask Force Issue No. 03-1 (“EITF Issue 03-1”), “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” andreferences existing other-than-temporary impairment guidance. FSP FAS 115-1clarifies that an investor should recognize an impairment loss no later thanwhen the impairment is deemed other-than-temporary, even if a decision to sellthe security has not been made, and also provides guidance on the subsequentaccounting for income recognition on an impaired debt security. The adoption ofFSP FAS 115-1 was required on a prospective basis and did not have a materialeffect on the results of operations or financial position of the Company.

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

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

**Pending accounting standards**

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

In October 2005,the American Institute of Certified Public Accountants (“AICPA”) issued SOP05-1. SOP 05-1 provides accounting guidance for deferred policy acquisitioncosts associated with internal replacements of insurance and investmentcontracts other than those already described in 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 aninternal replacement as a modification in product benefits, features, rights orcoverages that occurs by the exchange of a contract for a new contract, or byamendment, endorsement or rider to a contract, or by the election of a featureor coverage within a contract. The provisions of SOP 05-1 are effective forinternal replacements occurring in fiscal years beginning after December 15,2006. The Company is currently assessing the impact of the SOP on its resultsof operations and financial position. Based on the issued standard, the Companydoes not expect the impact of the adoption to have a material effect on itsresults of operations or financial position; however, the standard is currentlyunder review and clarifications or revisions may be issued by the AICPA and/orthe FASB that could affect the Company’s impact assessment.

6

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

In February 2006, theFASB issued SFAS No. 155, which permits the fair value remeasurement of anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation under SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”; clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of SFAS No. 133;establishes a requirement to evaluate interests in securitized financial assetsto identify interests that are freestanding derivatives or hybrid financial instrumentsthat contain an embedded derivative requiring bifurcation and clarifies thatconcentration of credit risk in the form of subordination are not embeddedderivatives. At the date of initial adoption, the Company must decide whetheror not to remeasure its then existing hybrid financial instruments inaccordance with SFAS No. 155 or retain its current accounting under SFAS No.133. All securities acquired on or after January 1, 2007 must be accounted forin accordance with the new guidance. The Company will adopt SFAS No.155 as ofJanuary 1, 2007, but has not yet determined if it will utilize the option toremeasure hybrid contracts owned at the date of adoption and subject to SFASNo. 133.

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

In July 2006, theFASB issued FIN 48, which clarifies the accounting for uncertainty in incometaxes recognized in an entity’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes”. FIN 48 requires an entity torecognize the benefit of 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 ismeasured as the largest benefit that is more than fifty-percent likely of beingrealized upon final settlement with the respective taxing authorities. FIN 48is effective for fiscal years beginning after December 15, 2006. FIN 48 is notexpected to have a material effect on the results of operations or financialposition of the Company.

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

In September 2006,the FASB issued SFAS No. 157 which defines fair value, establishes a frameworkfor measuring fair value in generally accepted accounting principles (“GAAP”),and expands disclosures about fair value measurements. SFAS No. 157 applieswhere other accounting pronouncements require or permit fair valuemeasurements; it does not require any new fair value measurements under GAAP.SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.The effects of adoption will be determined by the types of instruments carriedat fair value in the Company’s financial statements at the time of adoption aswell as the method utilized to determine their fair values prior to adoption.Based on the Company’s current use of fair value measurements, SFAS No. 157 isnot expected to have a material effect on the results of operations orfinancial position of the Company.

*Securities and Exchange Commission (“SEC”) StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”)*

In September 2006,the SEC issued SAB 108 in order to eliminate the diversity of practice in theprocess by which misstatements are quantified for purposes of assessingmateriality on the financial statements. SAB 108 establishes a singlequantification framework wherein the significance measurement is based on theeffects of the misstatements on each of the financial statements as well as therelated financial statement disclosures. If a company’s existing methods forassessing the materiality of misstatements are not in compliance with theprovisions of SAB 108, the initial application of the provisions may be adoptedby restating prior period financial statements under certain circumstances orotherwise by recording the cumulative effect of initially applying theprovisions of SAB 108 as adjustments to the carrying values of assets andliabilities as of January 1, 2006 with an offsetting adjustment recorded to theopening balance of retained earnings. The provisions of SAB 108 must be appliedno later than the annual financial statements issued for the first fiscal yearending after November 15, 2006. The Company’s adoption of SAB 108 in the fourthquarter of 2006 for the fiscal year then ended is not expected to have amaterial effect on its results of operations or financial position.

7

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### **2. Supplemental Cash Flow Information**

Liabilities forcollateral received in conjunction with securities lending activities arereported in other liabilities and accrued expenses in the Condensed Statementsof Financial Position. The accompanying cash flows are included in cash flowsfrom operating activities in the Condensed Statements of Cash Flows along withthe related changes in investments, which are as follows:
|                                                                        | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net change in fixed income securities                                  |       | $                                                   | (100,624   | ) | $ | (148,776 | ) |
| Net change in short-term investments                                   |       | (91,285                                             | )          | (20,038 | ) |
| Operating cash flow used                                               |       | $                                                   | (191,909   | ) | $ | (168,814 | ) |
|                                                                   |       |                                                |       |   |   |
| Liabilities for collateral and security repurchase,  beginning of year |       | $                                                   | (149,465   | ) | $ | (133,368 | ) |
| Liabilities for collateral and security repurchase,  end of period     |       | (341,374                                            | )          | (302,182 | ) |
| Operating cash flow provided                                           |       | $                                                   | 191,909    |   | $ | 168,814 |   |

 

### **3. Reinsurance**

The effects ofreinsurance on premiums and contract charges are as follows:
| **(in thousands)**                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Premiums  and contract charges**                 | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                             |       | $                                                    | 42,382     |                                                | $          | 37,036 |   | $ | 124,815 |   | $ | 112,891 |   |
| Assumed —  non-affiliate                      |       | 318                                                  |       | 200                                                 |       | 1,027 |   | 702 |   |
| Ceded                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Affiliate                                          |       | (992                                                 | )          | (1,186                                              | )          | (3,620 | ) | (3,538 | ) |
| Non-affiliate                                      |       | (8,757                                               | )          | (2,689                                              | )          | (19,677 | ) | (9,292 | ) |
| Premiums and  contract charges, net of reinsurance |       | $                                                    | 32,951     |                                                | $          | 33,361 |   | $ | 102,545 |   | $ | 100,763 |   |

 

The effects of reinsurance on contract benefits are asfollows:
| **(in thousands)**                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Contract  benefits**                 | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                 |       | $                                                    | 46,460     |                                                | $          | 43,068 |   | $ | 148,188 |   | $ | 137,938 |   |
| Assumed —  non-affiliate          |       | 108                                                  |       | 93                                                  |       | 605 |   | 249 |   |
| Ceded                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Affiliate                              |       | (44                                                  | )          | (28                                                 | )          | (225 | ) | (1,216 | ) |
| Non-affiliate                          |       | (2,176                                               | )          | (1,229                                              | )          | (10,664 | ) | (5,083 | ) |
| Contract  benefits, net of reinsurance |       | $                                                    | 44,348     |                                                | $          | 41,904 |   | $ | 137,904 |   | $ | 131,888 |   |

 

In addition toamounts included in the table above are reinsurance premiums ceded to ALIC of$771 thousand and $738 thousand for the third quarter of 2006 and 2005,respectively, and $2.26 million and $2.16 million for the first nine months of2006 and 2005, respectively, under the terms of the structured settlementannuity reinsurance agreement.

8

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On June 1, 2006,the Company, its parent ALIC, and the Corporation, completed the disposal ofits variable annuity business pursuant to a definitive agreement (the “Agreement”)with Prudential Financial, Inc. and its subsidiary, The Prudential InsuranceCompany of America (collectively “Prudential”), which was entered into on March8, 2006. The disposal was effected through a combination of coinsurance andmodified coinsurance reinsurance agreements (the “Reinsurance Agreements”).

As a result of themodified coinsurance reinsurance, the separate account assets remain on theCompany’s Condensed Statements of Financial Position, but the related resultsof operations are fully reinsured to Prudential beginning on June 1, 2006 andpresented net of reinsurance on the Condensed Statements of Operations. Incontrast, $445.2 million of assets supporting general account liabilities havebeen transferred to Prudential, net of consideration, under the coinsurancereinsurance provisions. The general account liabilities, however, remain on theCondensed Statements of Financial Position with a corresponding reinsurancerecoverable and the results of operations are presented net of reinsurance. Forpurposes of presentation in the Condensed Statements of Cash Flows, the Companytreated the reinsurance of its variable annuity business as a disposition ofoperations, consistent with the substance of the transaction which was thedisposition of a block of business accomplished through reinsurance.Accordingly, the net consideration transferred to Prudential, $393.6 million(computed as $445.2 million of general account insurance liabilitiestransferred to Prudential on the closing date less consideration of $51.6million), and the costs of executing the transaction, $1.3 million, pretax,were classified as a disposition of operations in the cash flows from investingactivities section of the Condensed Statements of Cash Flows. The ReinsuranceAgreements do not extinguish the Company’s primary liability under the variableannuity contracts.

Under theAgreement, the Company, ALIC and the Corporation have indemnified Prudentialfor certain pre-closing contingent liabilities (including extra-contractualliabilities of the Company and ALIC and liabilities specifically excluded fromthe transaction) that the Company and ALIC have agreed to retain. In addition,the Company, ALIC and the Corporation will each indemnify Prudential forcertain post-closing liabilities that may arise from the acts of the Companyand ALIC, and their agents, including in connection with the Company’s and ALIC’sprovision of transition services.

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

Pursuant to theAgreement, the consideration was $51.6 million. The disposal resulted in aninitial reinsurance loss of $6.5 million, pretax, which was included as acomponent of loss on disposition of operations on the Condensed Statements ofOperations along with other transactional expenses incurred. During the thirdquarter of 2006, the total loss for this transaction was increased $215thousand, pretax, and $140 thousand, after-tax. For the nine months endedSeptember 30, 2006, the total loss for this transaction was $8.0 million,pretax, and $5.2 million, after-tax. DAC and DSI were reduced by $79.7 millionand $6.2 million, respectively, as of the effective date of the transaction forbalances related to the variable annuity business subject to the ReinsuranceAgreements.

In the five monthsof 2006 prior to its disposition, the Company’s variable annuity businessgenerated approximately $7.5 million in contract charges. In the three-monthand nine-month periods ended September 30, 2006, premiums and contract chargesof $4.8 million and $6.5 million, contract benefits of $1.1 million and $1.3million, interest credited to contractholder funds of $4.3 million and $5.8million, and operating costs and expenses of $2.1 million and $2.9 million,respectively, were ceded to Prudential pursuant to the Reinsurance Agreements.

The separateaccount balances related to the modified coinsurance reinsurance were $996.5million as of September 30, 2006. Separate account balances totalingapproximately $2.3 million at September 30, 2006 related to the variable lifebusiness retained by the Company. In 2005, the Company’s variable annuitybusiness generated approximately $17 million in contract charges. The separateaccount balances were $927 million and general account balances were $501million as of December 31, 2005.

9

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

**Guarantees**

In the normal course ofbusiness, the Company provides standard indemnifications to counterparties in contractsin connection with numerous transactions, including acquisitions anddivestures. The types of indemnifications typically provided includeindemnifications for breaches of representations and warranties, taxes andcertain other liabilities, such as third party lawsuits. The indemnificationclauses are often standard contractual terms and were entered into in thenormal course of business based on an assessment that the risk of loss would beremote. The terms of the indemnifications vary in duration and nature. In manycases, the maximum obligation is not explicitly stated and the contingenciestriggering the obligation to indemnify have not occurred and are not expectedto occur. Consequently, the maximum amount of the obligation under such indemnificationsis not determinable. Historically, the Company has not made any materialpayments pursuant to these obligations.

The aggregate liabilitybalance related to all guarantees was not material as of September 30, 2006.

**Regulation**

The Company issubject to changing social, economic and regulatory conditions. From time totime regulatory authorities or legislative bodies seek to impose additionalregulations regarding agent and broker compensation and otherwise expandoverall regulation of insurance products and the insurance industry. Theultimate changes and eventual effects of these initiatives on the Company’sbusiness, if any, are uncertain.

**Legal andregulatory 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 thefollowing:

·                  Thesematters raise difficult and complicated factual and legal issues and aresubject to many uncertainties and complexities, including but not limited to,the underlying facts of each matter; novel legal issues; variations betweenjurisdictions in which matters are being litigated, heard or investigated; differencesin applicable laws and judicial interpretations; the length of time before manyof these matters might be resolved by settlement, through litigation orotherwise and, in some cases, the timing of their resolutions relative to othersimilar matters involving other companies; the fact that some of the lawsuitsare putative class actions in which a class has not been certified and in whichthe purported class may not be clearly defined; the fact that some of thelawsuits involve multi-state class actions in which the applicable law(s) forthe claims at issue is in dispute and therefore unclear; and the currentchallenging legal environment faced by large corporations and insurancecompanies.

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

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

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

10

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

**Proceedings**

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

AIC is defendingcertain matters relating to its agency program reorganization announced in1999. These matters include a lawsuit filed in December 2001 by the U.S. EqualEmployment Opportunity Commission (“EEOC”) alleging retaliation under federalcivil rights laws (the “EEOC I” suit) and a class action filed in August 2001by former employee agents alleging retaliation and age discrimination under theAge Discrimination in Employment Act (“ADEA”), breach of contract and ERISAviolations (the “Romero I” suit). In March 2004, in the consolidated EEOC I andRomero I litigation, the trial court issued a memorandum and order that, amongother things, certified classes of agents, including a mandatory class ofagents who had signed a release, for purposes of effecting the court’sdeclaratory judgment that the release is voidable at the option of the releasesigner. The court also ordered that an agent who voids the release must returnto AIC “any and all benefits received by the [agent] in exchange for signingthe release.” The court also stated that, “on the undisputed facts of record,there is no basis for claims of age discrimination.” The EEOC and plaintiffshave asked the court to clarify and/or reconsider its memorandum and order. Thecase otherwise remains pending. The EEOC also filed another lawsuit in October2004 alleging age discrimination with respect to a policy limiting the rehireof agents affected by the agency program reorganization (the “EEOC II” suit).In EEOC II, in October 2006, the court granted partial summary judgment to theEEOC. Although the court did not determine that AIC was liable for agediscrimination under the ADEA, it determined that the rehire policy resulted ina disparate impact, reserving for trial the determination on whether AIC hadreasonable factors other than age to support the rehire policy. AIC is alsodefending a certified class action filed by former employee agents whoterminated their employment prior to the agency program reorganization. Theseplaintiffs have asserted breach of contract and ERISA claims. A putativenationwide class action has also been filed by former employee agents allegingvarious violations of ERISA, including a worker classification issue. Theseplaintiffs are challenging certain amendments to the Agents Pension Plan andare seeking to have exclusive agent independent contractors treated as employeesfor benefit purposes. This matter was dismissed with prejudice by the trialcourt, was the subject of further proceedings on appeal, and was reversed andremanded to the trial court in April 2005. In all of these various matters,plaintiffs seek compensatory and punitive damages, and equitable relief. AIChas been vigorously defending these lawsuits and other matters related to itsagency program reorganization. The outcome of these disputes is currentlyuncertain.

The Company iscurrently undergoing a periodic market conduct examination by state insuranceregulators. Regulators are focusing, as they have with other insurers, on theCompany’s compliance with the state’s replacement sales and record-keepingprocesses with regard to life insurance and annuities among other issues. Theyhave alleged that the Company failed to meet the requirements of applicableregulations. In relation to this examination, the Company accrued $17 millionof additional benefits. The final outcome of this examination is still pending;however, the Company has begun certain customer remediation steps related toreplacement sales.

**OtherMatters**

The Corporationand some of its subsidiaries, including the Company, have receivedinterrogatories and demands for information from regulatory and enforcementauthorities relating to various insurance products and practices. The areas ofinquiry include variable annuity market timing and late trading. TheCorporation and some of its subsidiaries, including the Company, have alsoreceived interrogatories and demands for information from authorities seekinginformation relevant to on-going investigations into the possible violation ofantitrust or insurance laws by unnamed parties and, in particular, seekinginformation as to whether any person engaged in activities for the purpose ofprice fixing, market allocation, or bid rigging. The Company believes thatthese 

11

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inquiries are similar tothose made to many financial services companies as part of industry-wideinvestigations by various authorities into the practices, policies andprocedures relating to insurance and financial services products. TheCorporation and its subsidiaries have responded and will continue to respond tothese inquiries.

Variousother legal and regulatory actions 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 lawsuits andproceedings, some of which involve claims for substantial or indeterminateamounts. These actions are based on a variety of issues and target a range ofthe Company’s practices. The outcome of these disputes is currentlyunpredictable.

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

**5.      Other Comprehensive Income**

The components of other comprehensive income (loss) ona pretax and after-tax basis are as follows:
|                                                                                      | ** ** | **Three months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| **(in thousands)**                                                              | ** ** | **Pretax**                                               | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
| * *                                                                             | * *   | * *                                                 | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Unrealized  holding gains (losses) arising during the period, net of related offsets |       | $                                                        | 71,794     |   | $ | (25,127 | ) | $ | 46,667 |   | $ | (52,711 | ) | $ | 18,448 |   | $ | (34,263 | ) |
| Less:  reclassification adjustment of realized capital gains and losses              |       | (2,965                                                   | )          | 1,038 |   | (1,927 | ) | 1,342 |   | (470 | ) | 872 |   |
|                                                                                 |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive income (loss)                                                   |       | $                                                        | 74,759     |   | $ | (26,165 | ) | 48,594 |   | $ | (54,053 | ) | $ | 18,918 |   | (35,135 | ) |
|                                                                                 |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                           |       |                                                     |       |   |   | 10,207 |   |   |   |   |   | 13,563 |   |
| Comprehensive income  (loss)                                                         |       |                                                     |       |   |   | $ | 58,801 |   |   |   |   |   | $ | (21,572 | ) |

 
|                                                                              | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **(in thousands)**                                                      | ** ** | **Pretax**                                              | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
| * *                                                                     | * *   | * *                                                | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Unrealized  holding losses arising during the period, net of related offsets |       | $                                                       | (86,786    | ) | $ | 30,376 |   | $ | (56,410 | ) | $ | (35,327 | ) | $ | 12,364 |   | $ | (22,963 | ) |
| Less:  reclassification adjustment of realized capital gains and losses      |       | (25,896                                                 | )          | 9,064 |   | (16,832 | ) | (5,749 | ) | 2,012 |   | (3,737 | ) |
|                                                                         |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive loss                                                    |       | $                                                       | (60,890    | ) | $ | 21,312 |   | (39,578 | ) | $ | (29,578 | ) | $ | 10,352 |   | (19,226 | ) |
|                                                                         |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                   |       |                                                    |       |   |   | 21,064 |   |   |   |   |   | 34,388 |   |
| Comprehensive (loss)  income                                                 |       |                                                    |       |   |   | $ | (18,514 | ) |   |   |   |   | $ | 15,162 |   |

 

12

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Shareholder ofAllstate Life Insurance Company of New York:

We have reviewed theaccompanying condensed statement of financial position of Allstate LifeInsurance Company of New York (the “Company”, an affiliate of The AllstateCorporation) as of September 30, 2006, and the related condensed statements ofoperations for the three-month and nine-month periods ended September 30, 2006and 2005, and the condensed statements of cash flows for the nine-month periodsended September 30, 2006 and 2005. These interim financial statements are theresponsibility of the Company’s management.

We conducted our reviewsin accordance with the standards of the Public Company Accounting OversightBoard (United States). A review of interim financial information consistsprincipally of applying analytical procedures and making inquiries of personsresponsible for financial and accounting matters. It is substantially less inscope than an audit conducted in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the objective of which isthe expression of an opinion regarding the financial statements taken as awhole. Accordingly, we do not express such an opinion.

Based on our reviews, weare not aware of any material modifications that should be made to suchcondensed interim financial statements for them to be in conformity withaccounting principles generally accepted in the United States of America.

We have previouslyaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the statement of financial position ofAllstate Life Insurance Company of New York as of December 31, 2005, and therelated statements of operations and comprehensive income, shareholder’sequity, and cash flows for the year then ended, not presented herein. In ourreport dated March 10, 2006, which report includes an explanatory paragraphrelating to a change in the Company’s method of accounting for certainnontraditional long-duration contracts and for separate accounts in 2004, weexpressed an unqualified opinion on those financial statements. In our opinion,the information set forth in the accompanying condensed statement of financialposition as of December 31, 2005 is fairly stated, in all material respects, inrelation to the statement of financial position from which it has been derived.

/s/ Deloitte & ToucheLLP

Chicago, IllinoisNovember 6, 2006

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### **Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2006AND 2005**

### **OVERVIEW**

The following discussionhighlights significant factors influencing the financial position and resultsof operations of Allstate Life Insurance Company of New York (referred to inthis document as “we”, “our”, “us” or the “Company”). It should be read inconjunction with the condensed financial statements and notes thereto found underPart I. Item 1. contained herein, and with the discussion, analysis, financialstatements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item8. of the Allstate Life Insurance Company of New York Annual Report on Form10-K for 2005. We operate as a single segment entity, based on the manner inwhich we use financial information to evaluate performance and determine theallocation of resources.

### **OPERATIONS**

On June 1, 2006, wecompleted the disposal of our variable annuity business through reinsurance.When comparing the third quarter and first nine months of 2006 to the sameperiod in the prior year, the following impacts to the Condensed Statements ofOperations and gross margin resulted from the disposal of the variable annuitybusiness.
| (in thousands)                                                        | ** ** | **Three months ended  September 30, 2006  Compared to the  Same Period in the  Prior Year** | ** ** | **Nine months ended  September 30, 2006  Compared to the  Same Period in the  Prior Year** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Favorable/(unfavorable)**                                                | ** ** | ** **                                                                                                                                    | ** ** | ** **                                                                                                                                   | ** ** |
| Contract charges                                                           |       | $                                                                                                                                             | (4,322     | )                                                                                                                                            | $          | (3,559 | ) |
| Net investment income                                                      |       | (5,793                                                                                                                                        | )          | (9,497                                                                                                                                       | )          |
| Periodic settlements  and accruals on non-hedge derivative instruments (1) |       | —                                                                                                                                        |       | 33                                                                                                                                           |       |
| Contract benefits                                                          |       | 183                                                                                                                                           |       | (832                                                                                                                                         | )          |
| Interest credited to  contractholder funds                                 |       | 4,672                                                                                                                                         |       | 6,967                                                                                                                                        |       |
| Amortization of DAC (2)                                                    |       | 2,086                                                                                                                                         |       | (2,430                                                                                                                                       | )          |
| Operating costs and  expenses                                              |       | 1,369                                                                                                                                         |       | 1,623                                                                                                                                        |       |
| Loss on disposition of  operations                                         |       | (215                                                                                                                                          | )          | (7,963                                                                                                                                       | )          |
| Income from  operations before income tax expense                          |       | $                                                                                                                                             | (2,020     | )                                                                                                                                            | $          | (15,658 | ) |
|                                                                       |       |                                                                                                                                          |       |                                                                                                                                         |       |
| Investment margin                                                          |       | $                                                                                                                                             | (1,246     | )                                                                                                                                            | $          | (2,474 | ) |
| Benefit margin                                                             |       | (188                                                                                                                                          | )          | (802                                                                                                                                         | )          |
| Contract charges and  fees                                                 |       | (3,951                                                                                                                                        | )          | (3,589                                                                                                                                       | )          |
|                                                                       |       |                                                                                                                                          |       |                                                                                                                                         |       |
| Gross margin (3)                                                           |       | $                                                                                                                                             | (5,385     | )                                                                                                                                            | $          | (6,865 | ) |

----

(1)             Periodicsettlements and accruals on non-hedge derivative instruments are reflected as acomponent of realized capital gains and losses on the Condensed Statements ofOperations.

(2)             Amortizationdeceleration of $4.3 million was recognized in the first nine months of 2005for variable annuities.

(3)             Grossmargin and its components are measures that are not based on generally acceptedaccounting principals (“non-GAAP”). Gross margin, investment margin and benefitmargin are defined on pages 17, 19 and 20, respectively.

**Premiums**representrevenues generated from traditional life, immediate annuities with lifecontingencies, accident and health and other insurance products that havesignificant mortality or morbidity risk.

**Contractcharges******are revenuesgenerated from interest-sensitive life, variable annuities and fixed annuitiesfor which deposits are classified as contractholder funds or separate accountsliabilities. Contract charges are assessed against the contractholder accountvalues for maintenance, administration, cost of insurance and surrender priorto the contractually specified dates. As a result, changes in contractholderfunds are considered in the evaluation of growth and as indicators of futurelevels of revenues. Subsequent to the close of our reinsurance transaction withPrudential on June 1, 2006, variable annuity contract charges on the businesssubject to the transaction are fully reinsured to Prudential and presented netof reinsurance on the Condensed Statements of Operations (see Note 3 to theCondensed Financial Statements).

14

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The followingtable summarizes premiums and contract charges by product.
|                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                         |       |                                                 |       |                                                |       |   |   |   |   |
| **Premiums**                                 | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional life                             |       | $                                                    | 6,044      |                                                | $          | 6,387 |   | $ | 16,869 |   | $ | 18,492 |   |
| Immediate annuities  with life contingencies |       | 11,862                                               |       | 9,115                                               |       | 33,354 |   | 31,157 |   |
| Accident and health and  other               |       | 1,305                                                |       | 1,078                                               |       | 3,740 |   | 3,098 |   |
| **Total premiums**                           |       | 19,211                                               |       | 16,580                                              |       | 53,963 |   | 52,747 |   |
| ** **                                   | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract charges**                         | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-sensitive life                      |       | 11,692                                               |       | 10,735                                              |       | 34,292 |   | 31,204 |   |
| Fixed annuities                              |       | 2,038                                                |       | 1,712                                               |       | 6,177 |   | 5,139 |   |
| Variable annuities                           |       | 10                                                   |       | 4,334                                               |       | 8,113 |   | 11,673 |   |
| **Total contract charges**                   |       | 13,740                                               |       | 16,781                                              |       | 48,582 |   | 48,016 |   |
| **Premiums and contract charges**            |       | $                                                    | 32,951     |                                                | $          | 33,361 |   | $ | 102,545 |   | $ | 100,763 |   |

 

The following tablesummarizes premiums and contract charges by distribution channel.
|                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**           | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                              |       |                                                 |       |                                                |       |   |   |   |   |
| **Premiums**                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate agencies                 |       | $                                                    | 5,935      |                                                | $          | 6,248 |   | $ | 16,521 |   | $ | 18,157 |   |
| Financial institutions            |       | —                                               |       | —                                              |       | — |   | 36 |   |
| Specialized brokers               |       | 11,861                                               |       | 9,116                                               |       | 33,354 |   | 31,121 |   |
| Independent agents                |       | 1,415                                                |       | 1,216                                               |       | 4,088 |   | 3,433 |   |
| **Total premiums**                |       | 19,211                                               |       | 16,580                                              |       | 53,963 |   | 52,747 |   |
| ** **                        | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract charges**              | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate agencies                 |       | 10,793                                               |       | 10,324                                              |       | 32,391 |   | 30,248 |   |
| Financial institutions            |       | 2,230                                                |       | 5,794                                               |       | 14,299 |   | 15,490 |   |
| Specialized brokers               |       | 409                                                  |       | 534                                                 |       | 1,245 |   | 1,932 |   |
| Independent agents                |       | 308                                                  |       | 129                                                 |       | 647 |   | 346 |   |
| **Total contract charges**        |       | 13,740                                               |       | 16,781                                              |       | 48,582 |   | 48,016 |   |
| **Premiums and contract charges** |       | $                                                    | 32,951     |                                                | $          | 33,361 |   | $ | 102,545 |   | $ | 100,763 |   |

 

Totalpremiums increased 15.9% to $19.2 million in the third quarter of 2006 and 2.3%to $54.0 million in the first nine months of 2006 compared to the same periodsof 2005. The increase in the third quarter and first nine months of 2006 wasattributable primarily to increased premiums on immediate annuities sold withlife contingencies, partially offset by lower premiums on traditional lifeproducts.

Contractcharges declined 18.1% to $13.7 million in the third quarter of 2006 andincreased 1.2% to $48.6 million in first nine months of 2006 compared to thesame periods of 2005. Excluding contract charges on variable annuities, whichare reinsured to Prudential effective June 1, 2006, contract charges increased10.3% and 11.4% in the third quarter and first nine months of 2006,respectively, compared to the same periods of 2005. These increases were due tohigher contract charges on interest-sensitive life products and fixedannuities. Higher contract charges on interest-sensitive life products weremostly attributable to in-force business growth and increased contract chargeson fixed annuities were primarily the result of higher surrender charges.

15

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*Contractholderfunds* represent interest-bearing liabilities arising from thesale of fixed annuities, interest-sensitive life, and variable annuity and lifedeposits allocated to fixed accounts. The balance of contractholder funds isequal to the cumulative deposits received and interest credited to thecontractholder less cumulative contract maturities, benefits, surrenders,withdrawals and contract charges for mortality or administrative expenses.

The following table showsthe changes in contractholder funds.
|                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2006**                                             | ** ** | **2005** (1)                                   | ** ** | **2006** | ** ** | **2005 **(1) | ** ** |
| **Contractholder funds, beginning  balance**                    |       | $                                                    | 4,599,676  |                                                | $          | 4,135,238 |   | $ | 4,349,395 |   | $ | 3,802,846 |   |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| **Deposits:**                                                   | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed annuities                                                 |       | 204,649                                              |       | 136,486                                             |       | 585,058 |   | 567,860 |   |
| Interest-sensitive life                                         |       | 23,050                                               |       | 25,216                                              |       | 70,889 |   | 74,042 |   |
| Variable annuity and  life deposits allocated to fixed accounts |       | 12                                                   |       | 12,341                                              |       | 15,505 |   | 46,322 |   |
| Total deposits                                                  |       | 227,711                                              |       | 174,043                                             |       | 671,452 |   | 688,224 |   |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| **Interest credited**                                           |       | 44,869                                               |       | 42,241                                              |       | 133,397 |   | 124,861 |   |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| **Benefits, withdrawals and other  adjustments**                | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefits                                                        |       | (34,114                                              | )          | (33,214                                             | )          | (105,757 | ) | (139,447 | ) |
| Surrenders and partial  withdrawals                             |       | (67,359                                              | )          | (69,134                                             | )          | (233,905 | ) | (188,687 | ) |
| Contract charges                                                |       | (11,322                                              | )          | (10,429                                             | )          | (33,129 | ) | (30,876 | ) |
| Net transfers to  separate accounts                             |       | 2                                                    |       | (10,656                                             | )          | (18,127 | ) | (29,395 | ) |
| Other adjustments                                               |       | (17,111                                              | )          | 282                                                 |       | (20,974 | ) | 845 |   |
| Total benefits,  withdrawals and other adjustments              |       | (129,904                                             | )          | (123,151                                            | )          | (411,892 | ) | (387,560 | ) |
|                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| **Contractholder funds, ending balance**                        |       | $                                                    | 4,742,352  |                                                | $          | 4,228,371 |   | $ | 4,742,352 |   | $ | 4,228,371 |   |

----

(1)       To conform to the current presentation, certainprior period balances have been reclassified.

Contractholder funds increased 3.1% and 2.3% in thethird quarter of 2006 and 2005, respectively, and increased 9.0% and 11.2% inthe first nine months of 2006 and 2005, respectively. Average contractholderfunds increased 11.7% and 13.2% in the third quarter and first nine months of2006, respectively, compared to the same periods in 2005.

Contractholderdeposits increased 30.8% in the third quarter and decreased 2.4% in the firstnine months of 2006, compared to the same periods of 2005. The increase in thethird quarter of 2006 was the result of higher deposits on fixed annuities,mostly driven by increased deposits on traditional deferred annuities. Themagnitude of this increase reflects relatively low deposits in the thirdquarter of 2005. Additionally, deposits on our innovative Allstate® Treasury-LinkedAnnuity contracts were $23.1 million inthe third quarter of 2006, an increase of $16.9 million over the prior period.The crediting rate on this patented product is indexed to the 5-year treasuryrate, which increases the crediting rate to the customer in a rising interestrate environment. The increase in fixed annuity deposits in the third quarterwas partially offset by the absence of variable annuity deposits allocated tofixed accounts in the third quarter of 2006 due to the disposal of our variableannuity business on June 1, 2006. The decline in contractholder fund depositsin the first nine months of 2006 was attributable to decreased variable annuityand life deposits allocated to fixed accounts, partially offset by higher fixedannuity deposits. Higher fixed annuity deposits in the first nine months of2006 were mostly the result of a $39.7 million increase in deposits on Allstate® Treasury-LinkedAnnuity contracts

Surrenders andpartial withdrawals on deferred fixed annuities and interest-sensitive lifeproducts declined 2.6% in the third quarter of 2006 and increased 24.0% in thefirst nine months of 2006, compared to the same periods of 2005. The annualizedwithdrawal rate on these products was 7.5% for the third quarter of 2006 and8.7% for the first nine months of 2006 based on the beginning of periodcontractholder funds balance. This compares to an 

16

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annualized withdrawalrate of 7.6% for third quarter of 2005 and 7.7% for the first nine months of2005. Surrenders and withdrawals may vary with changes in market interest ratesand the aging of our in-force contracts.

**Netinvestment income** increased 3.0% in the third quarter and5.4% in the first nine months of 2006 compared to the same periods in 2005 dueprimarily to higher average portfolio balances. Higher average portfoliobalances resulted from the investment of cash flows from operating andfinancing activities related primarily to deposits from fixed annuities andinterest-sensitive life policies.

**Netincome** analysis is presented in the following table.
|                                                                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                                                | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Premiums                                                                                               |       | $                                                    | 19,211     |                                                | $          | 16,580 |   | $ | 53,963 |   | $ | 52,747 |   |
| Contract charges(1)                                                                                    |       | 13,740                                               |       | 16,776                                              |       | 48,587 |   | 48,011 |   |
| Net investment income                                                                                  |       | 92,536                                               |       | 89,853                                              |       | 279,256 |   | 264,848 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments (2)                             |       | 687                                                  |       | 289                                                 |       | 1,671 |   | 773 |   |
| Contract benefits                                                                                      |       | (44,348                                              | )          | (41,904                                             | )          | (137,904 | ) | (131,888 | ) |
| Interest credited to  contractholder funds(3)                                                          |       | (40,671                                              | )          | (38,780                                             | )          | (121,386 | ) | (113,507 | ) |
| Gross margin                                                                                           |       | 41,155                                               |       | 42,814                                              |       | 124,187 |   | 120,984 |   |
|                                                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Amortization of DAC and  DSI (4)                                                                       |       | (12,513                                              | )          | (13,025                                             | )          | (40,021 | ) | (26,918 | ) |
| Operating costs and  expenses                                                                          |       | (10,526                                              | )          | (10,014                                             | )          | (34,887 | ) | (32,284 | ) |
| Income tax expense                                                                                     |       | (5,975                                               | )          | (6,580                                              | )          | (16,897 | ) | (22,717 | ) |
| Realized capital gains  and losses, after-tax                                                          |       | (3,002                                               | )          | 2,795                                               |       | (15,035 | ) | (2,490 | ) |
| DAC and DSI  amortization expense on realized capital gains and losses, after-tax (4)                  |       | 1,639                                                |       | (2,243                                              | )          | 9,936 |   | (1,704 | ) |
| Reclassification of  periodic settlements and accruals on non-hedge derivative instruments,  after-tax |       | (431                                                 | )          | (184                                                | )          | (1,043 | ) | (484 | ) |
| (Loss) gain on  disposition of operations, after-tax                                                   |       | (140                                                 | )          | —                                              |       | (5,176 | ) | 1 |   |
| **Net income**                                                                                         |       | $                                                    | 10,207     |                                                | $          | 13,563 |   | $ | 21,064 |   | $ | 34,388 |   |

----

(1)             Loadscharged to contractholders at the inception of interest-sensitive lifecontracts are deferred and amortized to income in a manner consistent withdeferred policy acquisition costs (“DAC”). Amortization of deferred loads oninterest-sensitive life products related to realized capital gains and lossesis excluded from contract charges for purposes of calculating gross margin.Amortization of deferred loads related to realized capital gains and lossestotaled $5 thousand in each of the periods presented in the table above exceptfor the three months ended September 30, 2006 for which there was noamortization of deferred loads related to realized capital gains and losses.

(2)             Periodicsettlements and accruals on non-hedge derivative instruments are reflected as acomponent of realized capital gains and losses on the Condensed Statements ofOperations.

(3)             Forpurposes of calculating gross margin, amortization of deferred salesinducements (“DSI”) is excluded from interest credited to contractholder fundsand aggregated with amortization of DAC due to the similarity in the substanceof the two items. Amortization of DSI totaled $943 thousand and $743 thousandin the three months ended September 30, 2006 and 2005, respectively, and $3,276thousand and $1,680 thousand in the first nine months of 2006 and 2005,respectively.

(4)             Amortizationof DAC and DSI relating to realized capital gains and losses is analyzedseparately because realized capital gains and losses may vary significantlybetween periods and obscure trends in our business. Amortization of DAC and DSIrelating to realized capital gains and losses was $2,578 thousand and $(3,596)thousand in the third quarter of 2006 and 2005, respectively, and was $15,926thousand and $(2,728) thousand in the first nine months of 2006 and 2005,respectively.

*Grossmargin*, a non-GAAP measure, represents premiums, contractcharges, net investment income and periodic settlements and accruals onnon-hedge derivative instruments, less contract benefits and interest creditedto contractholder funds excluding amortization of DSI. We reclassify periodicsettlements and accruals on non-hedge derivative instruments into gross marginto report them in a manner consistent with the economically hedged investments,replicated assets or product attributes (e.g. net investment income or interestcredited to contractholder funds) and by doing so, appropriately reflect trendsin product performance. We use gross margin as a component of our evaluation ofthe profitability of our life insurance and financial product portfolio.Additionally, for many of 

17

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our products, includingfixed annuities, variable life and annuities, and interest-sensitive lifeinsurance, the amortization of DAC and DSI is determined based on actual andexpected gross margin. Gross margin is comprised of three components that areutilized to further analyze the business: investment margin, benefit margin,and contract charges and fees. We believe gross margin and its components areuseful to investors because they allow for the evaluation of income componentsseparately and in the aggregate when reviewing performance. Gross margin,investment margin and benefit margin should not be considered as a substitutefor net income and do not reflect the overall profitability of the business.Net income is the GAAP measure that is most directly comparable to thesemargins. Gross margin is reconciled to GAAP net income in the table above.

The components of grossmargin are reconciled to the corresponding financial statement line items inthe following table.
|                                                                            | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **Investment  Margin**                                   | ** ** | **Benefit  Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in thousands)**                                                    | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Premiums                                                                   |       | $                                                        | —     |   | $ | — |   | $ | 19,211 |   | $ | 16,580 |   | $ | — |   | $ | — |   | $ | 19,211 |   | $ | 16,580 |   |
| Contract charges (1)                                                       |       | —                                                   |       | — |   | 7,914 |   | 8,417 |   | 5,826 |   | 8,359 |   | 13,740 |   | 16,776 |   |
| Net investment income                                                      |       | 92,536                                                   |       | 89,853 |   | — |   | — |   | — |   | — |   | 92,536 |   | 89,853 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments (2) |       | 687                                                      |       | 289 |   | — |   | — |   | — |   | — |   | 687 |   | 289 |   |
| Contract benefits                                                          |       | (26,169                                                  | )          | (25,466 | ) | (18,179 | ) | (16,438 | ) | — |   | — |   | (44,348 | ) | (41,904 | ) |
| Interest credited to  contractholder funds(3)                              |       | (40,671                                                  | )          | (38,780 | ) | — |   | — |   | — |   | — |   | (40,671 | ) | (38,780 | ) |
|                                                                       |       | $                                                        | 26,383     |   | $ | 25,896 |   | $ | 8,946 |   | $ | 8,559 |   | $ | 5,826 |   | $ | 8,359 |   | $ | 41,155 |   | $ | 42,814 |   |

 
|                                                                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **Investment  Margin**                                  | ** ** | **Benefit  Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in thousands)**                                                    | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Premiums                                                                   |       | $                                                       | —     |   | $ | — |   | $ | 53,963 |   | $ | 52,747 |   | $ | — |   | $ | — |   | $ | 53,963 |   | $ | 52,747 |   |
| Contract charges (1)                                                       |       | —                                                  |       | — |   | 24,363 |   | 24,447 |   | 24,224 |   | 23,564 |   | 48,587 |   | 48,011 |   |
| Net investment income                                                      |       | 279,256                                                 |       | 264,848 |   | — |   | — |   | — |   | — |   | 279,256 |   | 264,848 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments (2) |       | 1,671                                                   |       | 773 |   | — |   | — |   | — |   | — |   | 1,671 |   | 773 |   |
| Contract benefits                                                          |       | (77,527                                                 | )          | (75,627 | ) | (60,377 | ) | (56,261 | ) | — |   | — |   | (137,904 | ) | (131,888 | ) |
| Interest credited to  contractholder funds(3)                              |       | (121,386                                                | )          | (113,507 | ) | — |   | — |   | — |   | — |   | (121,386 | ) | (113,507 | ) |
|                                                                       |       | $                                                       | 82,014     |   | $ | 76,487 |   | $ | 17,949 |   | $ | 20,933 |   | $ | 24,224 |   | $ | 23,564 |   | $ | 124,187 |   | $ | 120,984 |   |

----

(1)             Loadscharged to contractholders at the inception of interest-sensitive lifecontracts are deferred and amortized to income in a manner consistent withdeferred policy acquisition costs (“DAC”). Amortization of deferred loads oninterest-sensitive life products related to realized capital gains and lossesis excluded from contract charges for purposes of calculating gross margin.Amortization of deferred loads related to realized capital gains and lossestotaled $5 thousand in each of the periods presented in the table above exceptfor the three months ended September 30, 2006 for which there was no amortizationof deferred loads related to realized capital gains and losses.

(2)             Periodicsettlements and accruals on non-hedge derivative instruments are reflected as acomponent of realized capital gains and losses on the Condensed Statements ofOperations.

(3)             Forpurposes of calculating gross margin, amortization of DSI is excluded frominterest credited to contractholder funds and aggregated with amortization ofDAC due to the similarity in the substance of the two items. Amortization ofDSI totaled $943 thousand and $743 thousand in the three months ended September30, 2006 and 2005, respectively, and $3,276 thousand and $1,680 thousand in thefirst nine months of 2006 and 2005, respectively.

18

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Gross margin declined3.9% in the third quarter of 2006 and increased 2.6% in the first nine monthsof 2006 compared to the same periods of 2005. In the third quarter of 2006,higher investment and benefit margin were more than offset by lower contract chargesand fees resulting from a significant reduction in variable annuity contractcharges in the current period due to the disposal of our variable annuitybusiness. The increase in gross margin in the first nine months of 2006,compared to the same period in the prior year, was due to increased investmentmargin and, to a significantly lesser extent, higher contract charges and fees,partially offset by lower benefit margin.

*Investmentmargin*****is acomponent of gross margin, both of which are non-GAAP measures. Investmentmargin represents the excess of net investment income and periodic settlementsand accruals on non-hedge derivative instruments over interest credited tocontractholder funds and the implied interest on life-contingent immediateannuities included in the reserve for life-contingent contract benefits.Amortization of DSI is excluded from interest credited to contractholder fundsfor purposes of calculating investment margin. We use investment margin toevaluate our profitability related to the difference between investment returnson assets supporting certain products and amounts credited to customers (“spread”)during the fiscal period.

Investment margin byproduct group is shown in the following table.
|                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Annuities               |       | $                                                    | 24,252     |                                                | $          | 23,562 |   | $ | 75,245 |   | $ | 69,571 |   |
| Life insurance          |       | 2,131                                                |       | 2,334                                               |       | 6,769 |   | 6,916 |   |
| Total investment margin |       | $                                                    | 26,383     |                                                | $          | 25,896 |   | $ | 82,014 |   | $ | 76,487 |   |

 

Investment marginincreased 1.9% in the third quarter of 2006 and 7.2% in the first nine monthsof 2006 compared to the same periods of 2005. The increase in both periods wasprimarily due to growth in contractholder funds. Additionally, for the firstnine months of 2006, the increase was further driven by a higher weightedaverage investment yield on assets supporting deferred fixed annuities.

The following tablesummarizes the weighted average investment yield, interest crediting rates andinvestment spreads for the three months ended September 30. 
|                                                                     | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                         | ** ** | **2005**                                                     | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest-sensitive life                                             |       | 5.6                                              | %          | 5.6                                                          | %          | 4.6                                               | %          | 4.5 | % | 1.0 | % | 1.1 | % |
| Deferred fixed  annuities                                           |       | 5.6                                              |       | 5.4                                                          |       | 3.4                                               |       | 3.2 |   | 2.2 |   | 2.2 |   |
| Immediate fixed  annuities with and without life contingencies      |       | 7.4                                              |       | 7.4                                                          |       | 6.6                                               |       | 6.7 |   | 0.8 |   | 0.7 |   |
| Investments supporting capital, traditional life and other products |       | 6.1                                              |       | 6.4                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

The following tablesummarizes the weighted average investment yield, interest crediting rates andinvestment spreads for the nine months ended September 30.
|                                                                     | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                         | ** ** | **2005**                                                     | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest-sensitive life                                             |       | 5.6                                              | %          | 5.7                                                          | %          | 4.5                                               | %          | 4.5 | % | 1.1 | % | 1.2 | % |
| Deferred fixed  annuities                                           |       | 5.6                                              |       | 5.4                                                          |       | 3.2                                               |       | 3.1 |   | 2.4 |   | 2.3 |   |
| Immediate fixed annuities  with and without life contingencies      |       | 7.5                                              |       | 7.5                                                          |       | 6.7                                               |       | 6.7 |   | 0.8 |   | 0.8 |   |
| Investments supporting capital, traditional life and other products |       | 6.2                                              |       | 6.3                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

19

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The following table summarizes the liabilities forthese contracts and policies.
|                                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Immediate fixed  annuities with life contingencies              |       | $                                                   | 1,544,636  |   | $ | 1,488,670 |   |
| Other life contingent  contracts and other                      |       | 360,978                                             |       | 370,570 |   |
| Reserve for  life-contingent contract benefits                  |       | $                                                   | 1,905,614  |   | $ | 1,859,240 |   |
|                                                            |       |                                                |       |   |   |
| Interest-sensitive life                                         |       | $                                                   | 464,148    |   | $ | 412,136 |   |
| Deferred fixed  annuities                                       |       | 3,724,117                                           |       | 3,289,970 |   |
| Immediate fixed  annuities without life contingencies and other |       | 554,087                                             |       | 526,265 |   |
| Contractholder funds                                            |       | $                                                   | 4,742,352  |   | $ | 4,228,371 |   |

 

*Benefitmargin*is a component of gross margin, both of which arenon-GAAP measures. Benefit margin represents life and life-contingent immediateannuity premiums, cost of insurance contract charges and, prior to the disposalof our variable annuity business through reinsurance, variable annuity contractcharges for contract guarantees less contract benefits. Benefit margin excludesthe implied interest on life-contingent immediate annuities, which is includedin the calculation of investment margin. We use benefit margin to evaluate ourunderwriting performance, as it reflects the profitability of our products withrespect to mortality or morbidity risk during a fiscal period.

Benefit margin by productgroup is shown in the following table.
|                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Life insurance          |       | $                                                    | 7,767      |                                                | $          | 9,958 |   | $ | 18,920 |   | $ | 25,482 |   |
| Annuities               |       | 1,179                                                |       | (1,399                                              | )          | (971 | ) | (4,549 | ) |
| Total benefit margin    |       | $                                                    | 8,946      |                                                | $          | 8,559 |   | $ | 17,949 |   | $ | 20,933 |   |

 

Benefit marginincreased 4.5% in the third quarter of 2006 and declined 14.3% in the firstnine months of 2006 compared to the same periods of 2005. Benefit margin forthe third quarter and first nine months of 2005 included $815 thousand and $2.3million, respectively, of amounts that were classified as contract charges andfees beginning in 2006. Excluding this item, benefit margin increased 15.5% inthe third quarter and decreased 3.9% in the first nine months of 2006. Theincrease in the third quarter of 2006 was primarily the result of improvedmortality experience on life-contingent immediate annuities. In the first ninemonths of 2006, the improved annuity mortality experience was more than offset bylower premiums and unfavorable mortality experience on traditional lifeproducts.

*Amortizationof DAC and DSI*, excluding amortization related to realizedcapital gains and losses, declined 3.9% in the third quarter of 2006 andincreased 48.7% in the first nine months of 2006 compared to the same periodsof 2005. The decline in the third quarter of 2006 was primarily the result ofthe absence of amortization on the variable annuity contracts that weredisposed of through a reinsurance arrangement effective June 1, 2006. Theimpact of the disposal of our variable annuity business in the first ninemonths of 2006 was more than offset by the recognition of amortizationacceleration (commonly referred to as DAC and DSI “unlocking”) totaling $544thousand in the current period compared to the prior period recognition ofamortization deceleration of $7.3 million. Additionally, higher gross margin oninvestment contracts in the first nine months of 2006 also contributed to theincrease in amortization for that period. DAC and DSI amortization related torealized capital gains and losses, after-tax, changed by a favorable $3.9million and $11.6 million in the third quarter and first nine months of 2006,respectively, compared to the same periods in 2005.

DAC and DSI werereduced by $79.7 million and $6.2 million, respectively, in the first ninemonths of 2006 as a result of the disposition of our variable annuity business.

20

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*Operatingcosts and expenses* increased 5.1% and 8.1% in the thirdquarter and first nine months of 2006 compared to the same periods of 2005. Forthe third quarter and first nine months of 2006, higher guaranty fundassessments, restructuring charges and employee benefit expenses were partiallyoffset by the absence of variable annuity related expenses due to thedisposition of the business through reinsurance effective June 1, 2006 andlower technology related expenses.

**INVESTMENTS**

An important component ofour financial results is the return on our investment portfolio. Thecomposition of the investment portfolio at September 30, 2006 is presented inthe table below.
| (in thousands)          | ** ** | **Carrying  value** | ** ** | **Percent  of total** | ** ** |
|------------------------------|------------|---------------------|------------|----------------------------|------------|
|                         |       |                |       |                       |       |
| Fixed income securities  (1) |       | $                   | 6,017,069  |                       | 87.5       | % |
| Mortgage loans               |       | 672,960             |       | 9.8                        |       |
| Short-term                   |       | 144,438             |       | 2.1                        |       |
| Policy loans                 |       | 37,747              |       | 0.5                        |       |
| Other                        |       | 3,525               |       | 0.1                        |       |
| Total                        |       | $                   | 6,875,739  |                       | 100.0      | % |

----

(1)             Fixedincome securities are carried at fair value. Amortized cost basis for thesesecurities was $5.65 billion.

Total investmentsincreased to $6.88 billion at September 30, 2006 from $6.73 billion at December31, 2005 primarily due to positive cash flows from financing and operatingactivities, including increased funds associated with securities lending,partially offset by decreased net unrealized capital gains on fixed incomesecurities and payments totaling approximately $394.9 million related to thesale of our variable annuity business.

Total investments atamortized cost related to collateral received in connection with securitieslending activities increased to $341.4 million at September 30, 2006 from$149.5 million at December 31, 2005.

At September 30,2006, 96.6% of the fixed income securities portfolio was rated investmentgrade, which is defined as a security having a rating from the NationalAssociation of Insurance Commissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa,A or Baa from Moody’s or a rating of AAA, AA, A or BBB from S&P, Fitch orDominion; or a comparable internal rating if an externally provided rating isnot available.

Theunrealized net capital gains on fixed income securities at September 30, 2006were $369.8 million, a decrease of $84.1 million or 18.5% since December 31,2005. The net unrealized gain was comprised of $424.9 million ofunrealized gains and $55.1 million of unrealized losses at September 30, 2006.This is compared to net unrealized gains totaling $453.9 million at December31, 2005, comprised of $497.4 million of unrealized gains and $43.5 million ofunrealized losses.

Of the grossunrealized losses at September 30, 2006, $51.1 million or 92.7% were related toinvestment grade securities and are believed to be primarily a result of arising interest rate environment. The remaining $4.0 million of losses were inthe corporate fixed income portfolio and were primarily comprised of securitiesin the consumer goods, energy and capital goods sectors. The gross unrealizedlosses in these sectors were primarily company specific and interest raterelated.

Our portfolio monitoringprocess identifies and evaluates, on a case-by-case basis, fixed incomesecurities whose carrying value may be other-than-temporarily impaired. Theprocess includes a quarterly review of all securities using a screening processto identify those securities whose fair value compared to amortized cost isbelow established thresholds for certain time periods, or which are identifiedthrough other monitoring criteria such as ratings downgrades or paymentdefaults. As a result of approved programs involving the disposition ofinvestments such as changes in duration and revisions to strategic assetallocations, and certain dispositions anticipated by portfolio managers, wealso conduct a portfolio review to recognize impairment on securities in anunrealized loss position for which we do not have the intent and ability tohold until recovery. All securities in an unrealized loss position at September30, 2006 were included in our portfolio monitoring process for determiningwhich declines in value were not other-than- temporary.

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We also monitorthe quality of our fixed income portfolio by categorizing certain investmentsas “problem”, “restructured” or “potential problem.” Problem fixed incomesecurities are securities in default with respect to principal or interestand/or securities issued by companies that have gone into bankruptcy subsequentto our acquisition of the security. Restructured fixed income securities haverates and terms that are not consistent with market rates or terms prevailingat the time of the restructuring. Potential problem fixed income securities arecurrent with respect to contractual principal and/or interest, but because ofother facts and circumstances, we have concerns regarding the borrower’sability to pay future principal and interest, which causes us to believe thesesecurities may be classified as problem or restructured in the future.

The following tablesummarizes problem, restructured and potential problem fixed income securities.
|                                   | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**           | ** ** | **Amortized  cost**              | ** ** | **Fair  value**                 | ** ** | **Percent of  total  Fixed  Income  portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Percent of  total  Fixed  Income  portfolio** | ** ** |
| Problem                           |       | $                                | 3,653      |                            | $          | 6,055 |   | 0.1 | % | $ | 14,373 |   | $ | 17,762 |   | 0.3 | % |
| Restructured                      |       | —                           |       | —                          |       | — |   | 163 |   | 163 |   | — |   |
| Potential problem                 |       | 1,405                            |       | 1,500                           |       | — |   | 5,609 |   | 5,640 |   | 0.1 |   |
| Total net carrying  value         |       | $                                | 5,058      |                            | $          | 7,555 |   | 0.1 | % | $ | 20,145 |   | $ | 23,565 |   | 0.4 | % |
| Cumulative write-downs recognized |       | $                                | 4,024      |                            |       |   |   |   | $ | 5,455 |   |   |   |   |   |

 

We have experienced adecrease in the amortized cost of fixed income securities categorized asproblem and potential problem as of September 30, 2006 compared to December 31,2005. The decreases were primarily due to dispositions and removal of securityupon improving conditions.

We also evaluated each ofthese securities through our portfolio monitoring process at September 30, 2006and recorded write-downs when appropriate. We further concluded that anyremaining unrealized losses on these securities were temporary in nature andthat we have the intent and ability to hold until recovery. While these balancesmay increase in the future, particularly if economic conditions areunfavorable, management expects that the total amount of securities in thesecategories will remain low relative to the total fixed income securitiesportfolio.

**NetRealized Capital Gains and Losses** The following tablepresents the components of realized capital gains and losses and the relatedtax effect.
|                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Investment write-downs                       |       | $                                                    | —     |                                                | $          | 1 |   | $ | (258 | ) | $ | (1,468 | ) |
| Dispositions                                 |       | (1,716                                               | )          | 1,341                                               |       | (24,083 | ) | (1,703 | ) |
| Valuation of derivative  instruments         |       | (3,964                                               | )          | 457                                                 |       | (3,325 | ) | (3,021 | ) |
| Settlement of  derivative instruments        |       | 939                                                  |       | 2,732                                               |       | 3,573 |   | 2,214 |   |
| Realized capital gains  and losses, pretax   |       | (4,741                                               | )          | 4,531                                               |       | (24,093 | ) | (3,978 | ) |
| Income tax benefit  (expense)                |       | 1,739                                                |       | (1,736                                              | )          | 9,058 |   | 1,488 |   |
| Realized capital gains and losses, after-tax |       | $                                                    | (3,002     | )                                                   | $          | 2,795 |   | $ | (15,035 | ) | $ | (2,490 | ) |

 

Dispositions inthe above table include sales, losses recognized in anticipation ofdispositions and other transactions such as calls and prepayments. We may sellsecurities during the period in which fair value has declined below amortizedcost. In certain situations, new factors such as negative developments,subsequent credit deterioration, relative value opportunities, market liquidityconcerns and portfolio reallocations can subsequently change our previousintent to continue holding a security.

Valuation and settlementof derivative instruments primarily include gains and losses related tointerest rate caps used to reduce the interest rate risk resulting frommismatches between existing assets and liabilities 

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and financial futuresused to hedge the interest rate risk of anticipated purchases and sales ofinvestments and product sales to customers.

### **CAPITAL RESOURCES AND LIQUIDITY**

**CapitalResources**consist of shareholder’s equity, representing fundsdeployed or available to be deployed to support business operations. Thefollowing table summarizes our capital resources.
| (in thousands)                                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                          |       |                         |       |                        |       |
| Common stock, additional  capital paid-in and retained income |       | $                            | 561,680    |                        | $          | 538,465 |   |
| Accumulated other  comprehensive income                       |       | 89,390                       |       | 128,968                     |       |
| Total shareholder’s equity                               |       | $                            | 651,070    |                        | $          | 667,433 |   |

 

*Shareholder’s equity* declined in the first nine months of 2006due primarily to lower unrealized net capital gains on fixed income securities,partially offset by net income.

**FinancialRatings and Strength** Our ratings are influenced by manyfactors including our operating and financial performance, asset quality,liquidity, asset/liability management, overall portfolio mix, financial leverage(i.e., debt), exposure to risks, the current level of operating leverage,Allstate Life Insurance Company’s and Allstate Insurance Company’s ratings andother factors. There have been no changes to our insurance financial strengthratings since December 31, 2005.

**LiquiditySources and Uses**As reflected in our Condensed Statements ofCash Flows, lower operating cash flows in the first nine months of 2006,compared to the first nine months of 2005, were primarily related to higherincome tax payments in the current period, partially offset by higherinvestment income.

Cash flows used ininvesting activities decreased in the first nine months of 2006 due todecreased net cash provided by operating and financing activities. Cash flowsused in investing activities also include the settlement of the disposal of ourvariable annuity business.

Cash flows provided byfinancing activities declined in the first nine months of 2006 as a result oflower contractholder fund deposits. For quantification of the changes incontractholder funds, see the Operations section of the MD&A.

We have an inter-companyloan agreement with The Allstate Corporation (the “Corporation”). The amount ofinter-company loans available to us is at the discretion of the Corporation.The maximum amount of loans the Corporation will have outstanding to all itseligible subsidiaries at any given point in time is limited to $1.00 billion.We had no amounts outstanding under the inter-company loan agreement atSeptember 30, 2006 or December 31, 2005. The Corporation uses commercial paperborrowings and bank lines of credit to fund intercompany borrowings.

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### **Item 4.    Controls andProcedures**

*Evaluation of Disclosure Controls and Procedures.*Wemaintain disclosure controls and procedures as defined in Rule 13a-15(e) and15(d)-15(e) under the Securities Exchange Act of 1934. Under the supervisionand with the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of the effectivenessof our disclosure controls and procedures as of the end of the period coveredby this report. Based upon this evaluation, the principal executive officer andthe principal financial officer concluded that our disclosure controls andprocedures are effective in providing reasonable assurance that materialinformation required to be disclosed in our reports filed with or submitted tothe Securities and Exchange Commission under the Securities Exchange Act ismade known to management, including the principal executive officer and theprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

*Changes in Internal Control over Financial Reporting.*During the fiscal quarter ended September 30, 2006, therehave been no changes in our internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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### **PART II. OTHER INFORMATION**

### **Item 1.    LegalProceedings**

Information required forthis Part II, Item 1, is incorporated by reference to the discussion under theheading “Regulation” and under the heading “Legal and Regulatory Proceedingsand Inquiries” in Note 4 of the Company’s Condensed Financial Statements inPart I, Item 1, of this Form 10-Q.

**Item 1A.Risk Factors**

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

These forward-lookingstatements do not relate strictly to historical or current facts and may beidentified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,”“anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” andother words with similar meanings. These statements may address, among otherthings, our strategy for growth, product development, regulatory approvals,market position, expenses, financial results, litigation and reserves. Webelieve that these statements are based on reasonable estimates, assumptionsand plans. However, if the estimates, assumptions or plans underlying theforward-looking statements prove inaccurate or if other risks or uncertaintiesarise, actual results could differ materially from those communicated in theseforward-looking statements. Risk factors which could cause actual results todiffer materially from those suggested by such forward-looking statementsinclude but are not limited to those discussed or identified in this document,in our public filings with the Securities and Exchange Commission, and those inPart I, Item 1A of Allstate Life Insurance Company of New York Annual Report onForm 10-K for 2005, which are hereby incorporated herein by reference. Therehave been no material changes from the risk factors previously disclosed in ourAnnual Report on Form 10-K.

### **Item 6.    Exhibits**

(a)           Exhibits

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

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### **SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                  | Allstate Life Insurance Company of New York |
|------------------|---------------------------------------------|
|             | (Registrant)                                |
|             |                                        |
| November 7, 2006 | By                                          | /s/ Samuel H. Pilch |
|             |                                        | Samuel H. Pilch |
|             |                                        | Controller  (chief accounting officer and duly authorized officer of Registrant) |

 

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| Exhibit No. | ** ** | **Description**                                                                                                                           | ** ** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 15               |       | Acknowledgement  of awareness from Deloitte & Touche LLP dated November 6, 2006,  concerning unaudited interim financial information. |       |
|             |       |                                                                                                                                      |       |
| 31.1             |       | Rule  15d-14(a) Certification of Principal Executive Officer                                                                              |       |
|             |       |                                                                                                                                      |       |
| 31.2             |       | Rule  15d-14(a) Certification of Principal Financial Officer                                                                              |       |
|             |       |                                                                                                                                      |       |
| 32               |       | Section 1350  Certifications                                                                                                              |       |

 

E-1

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