**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

###### **FORM 10-Q**

###### ** **

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

 

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

**FORTHE QUARTERLY PERIOD ENDED JUNE 30, 2007**

 

**OR**

 

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

###### ** **

##### **Commissionfile number: 333-100029**

#####  

**ALLSTATE LIFE INSURANCE COMPANY OFNEW YORK**

(Exact name of registrant asspecified 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’stelephone number, including area code:**631-357-8920**

 

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

Yes x           No o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition 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 registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o             No x

 

None of the common equity of the registrantis held by non-affiliates. Therefore, the aggregate market value of commonequity held by non-affiliates of the registrant is zero.

 

As of August 6, 2007, the registrant had100,000 common shares, $25 par value, outstanding, all of which are held byAllstate Life Insurance Company.

 

 

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**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

**INDEX TOQUARTERLY REPORT ON FORM 10-Q**

**June 30,2007**

 
| ** **        | ** **                                                                                                                   | **Page**   |
|-------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART 1.**  | **FINANCIAL INFORMATION**                                                                                                    | ** ** |
|              |                                                                                                                         |       |
| Item 1.           | Financial Statements                                                                                                         |       |
|              |                                                                                                                         |       |
|              | Condensed Statements of Operations for the  Three-Month and Six-Month Periods Ended June 30, 2007 and 2006  (unaudited) | 3          |
|              |                                                                                                                         |       |
|              | Condensed Statements of Financial Position  as of June 30, 2007 (unaudited) and December 31, 2006                  | 4          |
|              |                                                                                                                         |       |
|              | Condensed Statements of Cash Flows for the  Six-Month Periods Ended June 30, 2007 and 2006 (unaudited)                  | 5          |
|              |                                                                                                                         |       |
|              | Notes to Condensed Financial Statements  (unaudited)                                                                         | 6          |
|              |                                                                                                                         |       |
|              | Report of Independent Registered Public  Accounting Firm                                                                     | 15         |
|              |                                                                                                                         |       |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  | 16         |
|              |                                                                                                                         |       |
| Item 4.           | Controls and Procedures                                                                                                      | 30         |
|              |                                                                                                                         |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                        | ** ** |
|              |                                                                                                                         |       |
| Item 1.           | Legal Proceedings                                                                                                            | 31         |
|              |                                                                                                                         |       |
| Item 1A.          | Risk Factors                                                                                                                 | 31         |
|              |                                                                                                                         |       |
| Item 6.           | Exhibits                                                                                                                     | 31         |

 

2

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**PART 1.FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIALSTATEMENTS**

 

**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

 

**CONDENSEDSTATEMENTS OF OPERATIONS**

 
| ** **                                            | ** ** | **Three Months   Ended June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**                                    | ** ** | **2007**                               | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(unaudited)**                        | ** ** | **(unaudited)**                     | ** ** |
| **Revenues**                                          |       |                                   |       |                                |       |   |   |   |   |
| Premiums                                              |       | $                                      | 18,683     |                                | $          | 20,683 |   | $ | 36,415 |   | $ | 34,752 |   |
| Contract  charges                                     |       | 14,741                                 |       | 17,255                              |       | 29,139 |   | 34,842 |   |
| Net  investment income                                |       | 96,939                                 |       | 93,827                              |       | 190,907 |   | 186,720 |   |
| Realized  capital gains and losses                    |       | (839                                   | )          | (4,216                              | )          | (2,744 | ) | (19,352 | ) |
|                                                  |       |                                   |       |                                |       |   |   |   |   |
|                                                  |       | 129,524                                |       | 127,549                             |       | 253,717 |   | 236,962 |   |
|                                                  |       |                                   |       |                                |       |   |   |   |   |
| **Costs  and expenses**                               |       |                                   |       |                                |       |   |   |   |   |
| Contract  benefits                                    |       | 48,705                                 |       | 50,226                              |       | 91,538 |   | 93,556 |   |
| Interest  credited to contractholder funds            |       | 43,248                                 |       | 41,174                              |       | 86,898 |   | 83,048 |   |
| Amortization  of deferred policy acquisition costs    |       | 11,213                                 |       | 11,407                              |       | 28,973 |   | 11,827 |   |
| Operating  costs and expenses                         |       | 8,410                                  |       | 10,475                              |       | 17,554 |   | 24,361 |   |
|                                                  |       | 111,576                                |       | 113,282                             |       | 224,963 |   | 212,792 |   |
|                                                  |       |                                   |       |                                |       |   |   |   |   |
| Gain (loss)  on disposition of operations             |       | 253                                    |       | (7,748                              | )          | (132 | ) | (7,748 | ) |
| ** **                                            | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  from operations before income tax expense** |       | 18,201                                 |       | 6,519                               |       | 28,622 |   | 16,422 |   |
| ** **                                            | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  expense                                   |       | 6,497                                  |       | 1,934                               |       | 10,245 |   | 5,565 |   |
| ** **                                            | ** ** | ** **                             | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                            |       | $                                      | 11,704     |                                | $          | 4,585 |   | $ | 18,377 |   | $ | 10,857 |   |

 

See notes to condensedfinancial statements.

 

3

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**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

 

**CONDENSEDSTATEMENTS OF FINANCIAL POSITION**

 
| **($ in thousands, except par  value data)**                                  | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                         |       |                    |       |                        |       |
| Investments                                                                        |       |                    |       |                        |       |
| Fixed income  securities, at fair value (amortized cost $5,759,590 and $5,542,227) |       | $                       | 5,964,164  |                        | $          | 5,887,139 |   |
| Mortgage  loans                                                                    |       | 689,841                 |       | 708,449                     |       |
| Short-term                                                                         |       | 219,096                 |       | 142,334                     |       |
| Policy loans                                                                       |       | 37,522                  |       | 38,168                      |       |
| Other                                                                              |       | 2,689                   |       | 3,784                       |       |
|                                                                               |       |                    |       |                        |       |
| Total  investments                                                                 |       | 6,913,312               |       | 6,779,874                   |       |
|                                                                               |       |                    |       |                        |       |
| Cash                                                                               |       | 10,403                  |       | 7,090                       |       |
| Deferred  policy acquisition costs                                                 |       | 297,718                 |       | 278,625                     |       |
| Accrued  investment income                                                         |       | 62,050                  |       | 63,843                      |       |
| Reinsurance  recoverables                                                          |       | 406,209                 |       | 437,422                     |       |
| Current  income tax receivable                                                     |       | —                  |       | 862                         |       |
| Other assets                                                                       |       | 62,276                  |       | 42,488                      |       |
| Separate  Accounts                                                                 |       | 1,035,258               |       | 1,009,784                   |       |
| ** **                                                                         |       |                    |       |                        |       |
| **Total  assets**                                                                  |       | $                       | 8,787,226  |                        | $          | 8,619,988 |   |
|                                                                               |       |                    |       |                        |       |
| **Liabilities**                                                                    |       |                    |       |                        |       |
| Contractholder  funds                                                              |       | $                       | 4,711,868  |                        | $          | 4,708,428 |   |
| Reserve for  life-contingent contract benefits                                     |       | 1,910,592               |       | 1,926,492                   |       |
| Deferred  income taxes                                                             |       | 28,478                  |       | 47,940                      |       |
| Other  liabilities and accrued expenses                                            |       | 458,161                 |       | 243,338                     |       |
| Current  income tax payable                                                        |       | 444                     |       | —                      |       |
| Payable to  affiliates, net                                                        |       | 11,021                  |       | 30,031                      |       |
| Reinsurance  payable to parent                                                     |       | —                  |       | 979                         |       |
| Separate  Accounts                                                                 |       | 1,035,258               |       | 1,009,784                   |       |
|                                                                               |       |                    |       |                        |       |
| **Total  liabilities**                                                             |       | 8,155,822               |       | 7,966,992                   |       |
|                                                                               |       |                    |       |                        |       |
| **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                                                                   |       | 449,652                 |       | 432,458                     |       |
| Accumulated  other comprehensive income:                                           |       |                    |       |                        |       |
| Unrealized  net capital gains and losses                                           |       | 39,252                  |       | 78,038                      |       |
|                                                                               |       |                    |       |                        |       |
| **Total  accumulated other comprehensive income**                                  |       | 39,252                  |       | 78,038                      |       |
|                                                                               |       |                    |       |                        |       |
| **Total  shareholder’s equity**                                               |       | 631,404                 |       | 652,996                     |       |
|                                                                               |       |                    |       |                        |       |
| **Total  liabilities and shareholder’s equity**                               |       | $                       | 8,787,226  |                        | $          | 8,619,988 |   |

 

See notes to condensedfinancial statements.

 

4

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**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**                                                                 | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                     | ** ** |
| **Cash  flows from operating activities**                                          | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                   | 18,377     |   | $ | 10,857 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                |       |   |   |
| Amortization  and other non-cash items                                             |       | (38,242                             | )          | (35,257 | ) |
| Realized  capital gains and losses                                                 |       | 2,744                               |       | 19,352 |   |
| Loss on  disposition of operations                                                 |       | 132                                 |       | 7,748 |   |
| Interest  credited to contractholder funds                                         |       | 86,898                              |       | 83,048 |   |
| Changes in:                                                                        |       |                                |       |   |   |
| Life-contingent  contract benefits and contractholder funds                        |       | 4,633                               |       | 16,384 |   |
| Deferred  policy acquisition costs                                                 |       | 8,487                               |       | (23,319 | ) |
| Income taxes  payable                                                              |       | 3,366                               |       | (521 | ) |
| Other  operating assets and liabilities                                            |       | (38,986                             | )          | 4,269 |   |
| Net cash  provided by operating activities                                         |       | 47,409                              |       | 82,561 |   |
| ** **                                                                         | ** ** | ** **                          | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities**                                          |       |                                |       |   |   |
| Proceeds  from sales of fixed income securities                                    |       | 250,282                             |       | 536,815 |   |
| Investment  collections                                                            |       |                                |       |   |   |
| Fixed income  securities                                                           |       | 59,785                              |       | 68,978 |   |
| Mortgage  loans                                                                    |       | 34,291                              |       | 36,963 |   |
| Investment  purchases                                                              |       |                                |       |   |   |
| Fixed income  securities                                                           |       | (363,326                            | )          | (431,533 | ) |
| Mortgage  loans                                                                    |       | (15,969                             | )          | (61,661 | ) |
| Change in  short-term investments, net                                             |       | 14,674                              |       | (29,970 | ) |
| Disposition  of operations                                                         |       | —                              |       | (394,915 | ) |
| Change in  other investments, net                                                  |       | (877                                | )          | 2,401 |   |
| Net cash  used in investing activities                                             |       | (21,140                             | )          | (272,922 | ) |
|                                                                               |       |                                |       |   |   |
| **Cash  flows from financing activities**                                          | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Contractholder  fund deposits                                                      |       | 212,874                             |       | 452,790 |   |
| Contractholder  fund withdrawals                                                   |       | (235,830                            | )          | (256,318 | ) |
| Net cash  (used in) provided by financing activities                               |       | (22,956                             | )          | 196,472 |   |
|                                                                               |       |                                |       |   |   |
| **Net  increase in cash**                                                          |       | 3,313                               |       | 6,111 |   |
| **Cash at  beginning of period**                                                   |       | 7,090                               |       | 3,818 |   |
| **Cash at  end of period**                                                         |       | $                                   | 10,403     |   | $ | 9,929 |   |

 

See notes to condensedfinancial statements.

 

5

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**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.     General**

 

**Basis of Presentation**

 

Theaccompanying condensed financial statements include the accounts of AllstateLife Insurance Company of New York (the “Company”), a wholly owned subsidiaryof Allstate Life Insurance Company (“ALIC”), which is wholly owned by AllstateInsurance Company (“AIC”), a wholly owned subsidiary of The AllstateCorporation (the “Corporation”).

The condensedfinancial statements and notes as of June 30, 2007, and for thethree-month and six-month periods ended June 30, 2007 and 2006 areunaudited. The condensed financial statements reflect all adjustments(consisting only of normal recurring accruals) which are, in the opinion ofmanagement, necessary for the fair presentation of the financial position,results of operations and cash flows for the interim periods. These condensedfinancial statements and notes should be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006. The results of operations for theinterim periods should not be considered indicative of results to be expectedfor the full year.

 

 

### **Adopted accounting standards**

###  

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

 

InOctober 2005, the American Institute of Certified Public Accountants (“AICPA”)issued SOP 05-1. SOP 05-1 provides accounting guidance for deferred policyacquisition costs associated with internal replacements of insurance andinvestment contracts other than those already described in Statement ofFinancial Accounting Standard (“SFAS”) No. 97, “Accounting and Reportingby Insurance Enterprises for Certain Long-Duration Contracts and for RealizedGains and Losses from the Sale of Investments”. SOP 05-1 defines an internalreplacement as a modification in product benefits, features, rights orcoverages that occurs through the exchange of an existing contract for a newcontract, or by amendment, endorsement or rider to an existing contract, or bythe election of a feature or coverage within an existing contract. In February 2007,the AICPA issued Technical Practice Aids (“TPAs”) that provide interpretiveguidance to be used in applying SOP 05-1. The Company adopted the provisions ofSOP 05-1 on January 1, 2007 for internal replacements occurring in fiscalyears beginning after December 15, 2006. The adoption resulted in a $1.2million after-tax adjustment to unamortized DAC and DSI related to the impacton future estimated gross profits from the changes in accounting for certaincosts associated with contract continuations, that no longer qualify fordeferral under SOP 05-1. The adjustment was recorded as a reduction of retainedincome at January 1, 2007, and a reduction of DAC and DSI balances of $1.8million pre-tax. The ongoing effects of SOP 05-1 are not expected to have amaterial impact on the Company’s results of operations or financial position.

 

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

 

In February 2006, the FASB issued SFAS No. 155,which permits the fair value remeasurement at the date of adoption of anyhybrid financial instrument containing an embedded derivative that otherwisewould require bifurcation under paragraph 12 or 13 of SFAS No. 133, “Accounting**for Derivative Instruments and Hedging**Activities”(“SFAS No.133”); clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS No. 133; establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or hybrid financial instruments that contain embeddedderivatives requiring bifurcation; and clarifies that concentrations of creditrisk in the form of subordination are not embedded derivatives. TheCompany adopted the provisions of SFAS No. 155 on January 1, 2007,which were effective for all financial instruments acquired, issued or subjectto a remeasurement event occurring after the beginning of the first fiscal yearthat begins after September 15, 2006. The Company elected not to remeasureexisting hybrid financial instruments at the date of adoption that containedembedded derivatives requiring bifurcation pursuant to paragraph 12 or 13 ofSFAS No. 133. The adoption of SFAS No. 155 did not have a materialeffect on the results of operations or financial position of the Company.

 

6

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

 

In July 2006, the FASB issued FIN 48,which clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS No. 109, “Accountingfor Income Taxes”. FIN 48 requires an entity to recognize the tax benefit ofuncertain tax positions only when it is more likely than not, based on theposition’s technical merits, that the position would be sustained uponexamination by the respective taxing authorities. The tax benefit is measuredas the largest benefit that is more than fifty-percent likely of being realizedupon final settlement with the respective taxing authorities. On January 1,2007, the Company adopted the provisions of FIN 48, which are effective forfiscal years beginning after December 15, 2006. No cumulative effect of achange in accounting principle or adjustment to the liability for unrecognizedtax benefits was recognized as a result of the adoption of FIN 48. Accordingly,the adoption of FIN 48 did not have an effect on the results of operations orfinancial position of the Company.

 

The Company had no liability for unrecognized taxbenefits at January 1, 2007 or June 30, 2007, and believes it isreasonably possible that the liability balance will not significantly increaseor decrease within the next 12 months.

 

TheInternal Revenue Service (“IRS”) has completed its review of the Company’sfederal income tax returns through the 2002 tax year and the statute of limitationshas expired on those years. The IRS is currently examining the Company’sfederal income tax returns for the 2003 and 2004 tax years.

 

*Securities and ExchangeCommission (“SEC”) Staff Accounting Bulletin No. 108, Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements (“SAB 108”)*

 

InSeptember 2006, the SEC issued SAB 108 in order to eliminate the diversityof practice in the process by which misstatements are quantified for purposes ofassessing materiality on the financial statements. SAB 108 is intended toeliminate the potential for the build up of improper amounts on the balancesheet due to the limitations of certain methods of materiality assessmentutilized in current practice. SAB 108 establishes a single quantificationframework wherein the significance measurement is based on the effects of themisstatements on each of the financial statements as well as the relatedfinancial statement disclosures. On December 31, 2006, the Company adoptedthe provisions of SAB 108 which were effective for the first fiscal year endingafter November 15, 2006. The adoption of SAB 108 did not have any effecton the results of operations or financial position of the Company.

 

*FASB Staff Position No. FAS 115-1, TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments (“FSP FAS 115-1”)*

 

FSP FAS 115-1nullifies the guidance in paragraphs 10-18 of Emerging Issues Task Force Issue03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments” and references existing other-than-temporary impairmentguidance. FSP FAS 115-1 clarifies that an investor should recognize animpairment loss no later than when the impairment is deemed other-than-temporary,even if a decision to sell the security has not been made, and also providesguidance on the subsequent accounting for income recognition on an impaireddebt security. The Company adopted FSP FAS 115-1 as of January 1, 2006 ona prospective basis. The effect of adoption did not have a material effect onthe results of operations or financial position of the Company.

 

*SFAS No. 154,Accounting Changes and Error Corrections (“SFAS No. 154”)*

 

SFAS No. 154 replaces AccountingPrinciples Board (“APB”) Opinion No. 20, “Accounting Changes”, and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154requires retrospective application to prior periods’ financial statements forchanges in accounting principle, unless determination of either the periodspecific effects or the cumulative effect of the change is impracticable orotherwise promulgated. The Company adopted SFAS No. 154 on January 1,2006. The adoption of SFAS No. 154 did not have any effect on the resultsof operations or financial position of the Company.

 

7

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### **Pending accounting standards**

 

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

 

In September 2006, the FASB issued SFAS No. 157which redefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (“GAAP”), and expands disclosuresabout fair value measurements. SFAS No. 157 applies where other accountingpronouncements require or permit fair value measurements. Additionaldisclosures and modifications to current fair value disclosures will berequired upon adoption of SFAS No. 157. SFAS No. 157 is effective forfiscal years beginning after November 15, 2007. The Company is currentlyevaluating the effect of adoption of SFAS No. 157 on its results ofoperations and financial position.

 

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

 

In February 2007, the FASB issued SFAS No. 159which provides reporting entities an option to report selected financialassets, including investment securities designated as available for sale, andliabilities, including most insurance contracts, at fair value. SFAS No. 159establishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. The standard also requires additionalinformation to aid financial statement users’ understanding of the impact of areporting entity’s decision to use fair value on its earnings and also requiresentities to display on the face of the balance sheet the fair value of thoseassets and liabilities for which the reporting entity has chosen to measure atfair value. SFAS No. 159 is effective as of the beginning of a reportingentity’s first fiscal year beginning after November 15, 2007. Earlyadoption is permitted as of the beginning of the previous fiscal year providedthe entity makes that choice in the first 120 days of that fiscal year and alsoelects to apply the provisions of SFAS No. 157. Because application of thestandard is optional, any impacts are limited to those financial assets andliabilities to which SFAS No. 159 would be applied, which have yet to bedetermined by the Company.

 

*SOP 07-1, Clarification of the Scope of theAudit and Accounting Guide Investment Companies(**“the Guide”) and Accounting by Parent Companies andEquity Method Investors for Investments in Investment Companies–SOP 07-1 (“SOP07- 1”)*

 

In June 2007, the AICPA issued SOP 07-1. Uponadoption of the SOP, the Company must also adopt the provisions of FASB StaffPosition No. FIN 46(R)-7, “Application of FASB Interpretation No. 46(R)to Investment Companies*”*, whichpermanently exempts investment companies from applying the provisions ofInterpretation 46(R) to investments carried at fair value. SOP 07-1 providesguidance for determining whether an entity falls within the scope of the Guideand whether investment company accounting should be retained by a parentcompany upon consolidation of an investment company subsidiary or by an equitymethod investor in an investment company. In certain circumstances SOP 07-1precludes retention of specialized accounting for investment companies (i.e.fair value accounting), when similar direct investments exist in theconsolidated group and are measured on a basis inconsistent with that appliedto investment companies. Additionally, SOP 07-1 precludes retention ofspecialized accounting for investment companies if the reporting entity doesnot distinguish through documented policies the nature and type of investmentsto be held in the investment companies from those made in the consolidatedgroup where other accounting guidance is being applied. SOP 07-1 is effectivefor fiscal years beginning on or after December 15, 2007. The Company isassessing the current and future implications of this standard to the resultsof operations and financial position.

 

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

 

In April 2007, the FASB issued FSP FIN 39-1,which amends FASB Interpretation No. 39, “Offsetting of Amounts Related toCertain Contracts”. FSP FIN 39-1 replaces the terms “conditional contracts” and“exchange contracts” with the term “derivative instruments” and permits areporting entity to offset fair value amounts recognized for the right toreclaim cash collateral (a receivable) or the obligation to return cashcollateral (a payable) against fair value amounts recognized for derivativeinstruments executed with the same counterparty under the same master nettingarrangement that have been offset in the statement of financial position. FSPFIN 39-1 is effective for fiscal years beginning after November 15, 2007,with early adoption permitted. The effects of applying FSP FIN 39-1 will berecorded as a change in accounting principle through retrospective application.The adoption of FSP FIN 39-1 is not expected to have a material impact on thecompany’s results of operations or financial position based on the currentlevel of derivative activity.

 

8

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### **2.     SupplementalCash Flow Information**

 

Liabilities for collateral received inconjunction with securities lending business activities are reported in otherliabilities and accrued expenses in the Condensed Statements of FinancialPosition. The associated cash flows are included in cash flows from operatingactivities in the Condensed Statements of Cash Flows along with the relatedchanges in investments, which are as follows:

 
| ** **                                                             | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**                                                     | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | ** **                          | ** ** | ** ** | ** ** |
| **Net  change in proceeds managed**                                    | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net change  in fixed income securities                                 |       | $                                   | (108,438   | ) | $ | (52,204 | ) |
| Net change  in short-term investments                                  |       | (84,970                             | )          | (114,354 | ) |
| Operating  cash flow used                                              |       | $                                   | (193,408   | ) | $ | (166,558 | ) |
|                                                                   |       |                                |       |   |   |
| **Net  change in liabilities**                                         | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Liabilities  for collateral and security repurchase, beginning of year |       | $                                   | (199,486   | ) | $ | (149,465 | ) |
| Liabilities  for collateral and security repurchase, end of period     |       | (392,894                            | )          | (316,023 | ) |
| Operating  cash flow provided                                          |       | $                                   | 193,408    |   | $ | 166,558 |   |

 

 

### **3.     Reinsurance**

 

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

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2007**                              | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Premiums  and contract charges**                 | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                             |       | $                                     | 44,373     |                                | $          | 44,576 |   | $ | 86,062 |   | $ | 82,433 |   |
| Assumed – non-affiliate                       |       | 347                                   |       | 349                                 |       | 685 |   | 709 |   |
| Ceded                                              |       |                                  |       |                                |       |   |   |   |   |
| Affiliate                                          |       | (992                                  | )          | (1,270                              | )          | (1,984 | ) | (2,628 | ) |
| Non-affiliate                                      |       | (10,304                               | )          | (5,717                              | )          | (19,209 | ) | (10,920 | ) |
| Premiums and  contract charges, net of reinsurance |       | $                                     | 33,424     |                                | $          | 37,938 |   | $ | 65,554 |   | $ | 69,594 |   |

 

The effects of reinsurance oncontract benefits are as follows:

 
| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**                     | ** ** | **2007**                              | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Contract  benefits**                 | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                 |       | $                                     | 50,301     |                                | $          | 54,603 |   | $ | 98,393 |   | $ | 101,728 |   |
| Assumed –  non-affiliate          |       | 237                                   |       | 400                                 |       | 489 |   | 497 |   |
| Ceded                                  |       |                                  |       |                                |       |   |   |   |   |
| Affiliate                              |       | (97                                   | )          | (291                                | )          | (1,272 | ) | (181 | ) |
| Non-affiliate                          |       | (1,736                                | )          | (4,486                              | )          | (6,072 | ) | (8,488 | ) |
| Contract  benefits, net of reinsurance |       | $                                     | 48,705     |                                | $          | 50,226 |   | $ | 91,538 |   | $ | 93,556 |   |

 

9

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The effects of reinsurance oninterest credited to contractholder funds are as follows:

 
| ** **                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**                                             | ** ** | **2007**                              | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Interest  credited to contractholder funds**                 | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                                         |       | $                                     | 46,741     |                                | $          | 42,691 |   | $ | 93,881 |   | $ | 84,521 |   |
| Assumed –  non-affiliate                                  |       | 9                                     |       | 10                                  |       | 15 |   | 54 |   |
| Ceded–  non-affiliate                                     |       | (3,502                                | )          | (1,527                              | )          | (6,998 | ) | (1,527 | ) |
| Interest  credited to contractholder funds, net of reinsurance |       | $                                     | 43,248     |                                | $          | 41,174 |   | $ | 86,898 |   | $ | 83,048 |   |

 

In addition to amounts included in the table above are reinsurance premiums ceded to ALIC of $797 thousand and $754 thousand for the second quarter of 2007 and 2006, respectively and $1.58 million and $1.49 million for the first six months of 2007 and 2006, respectively, under the terms of the structured settlement annuity reinsurance agreement.

 

*Variable Annuity Business*

 

On June 1, 2006, inaccordance with the terms of the definitive Master Transaction Agreement andrelated agreements (collectively the “Agreement”) the Company, its parent ALIC,and the Corporation, completed the disposal through reinsurance of all of theCompany’s variable annuity business to Prudential Financial, Inc. and itssubsidiary, The Prudential Insurance Company of America (collectively “Prudential”).For the Company, this disposal achieved the economic benefit of transferring toPrudential the future rights and obligations associated with this business.

 

The disposal was effectedthrough reinsurance agreements (the “Reinsurance Agreements”) which includeboth coinsurance and modified coinsurance provisions. Coinsurance and modifiedcoinsurance provisions are commonly used in the reinsurance of variableannuities because variable annuities generally include both separate accountand general account liabilities. When contractholders make a variable annuitydeposit, they must choose how to allocate their account balances between aselection of variable-return mutual funds that must be held in a separateaccount and fixed-return funds held in the Company’s general account. Inaddition, variable annuity contracts include various benefit guarantees thatare general account obligations of the Company. The Reinsurance Agreements donot extinguish the Company’s primary liability under the variable annuitycontracts.

 

Variable annuity balancesinvested in variable-return mutual funds are held in separate accounts, whichare legally segregated assets and available only to settle separate accountcontract obligations. Because the separate account assets must remain with theCompany under insurance regulations, modified coinsurance is typically usedwhen parties wish to transfer future economic benefits of such business. Underthe modified coinsurance provisions, the separate account assets remain on theCompany’s Condensed Statements of Financial Position, but the related resultsof operations are fully reinsured and presented net of reinsurance on theCondensed Statements of Operations.

 

Thecoinsurance provisions of the Reinsurance Agreements were used to transfer thefuture rights and obligations related to fixed–return fund options and benefitguarantees. $440.0 million of assets supporting general account liabilitieswere transferred to Prudential, net of consideration, under the coinsuranceprovisions as of the transaction closing date. General account liabilities of$384.5 million at June 30, 2007 and $415.7 million as of December 31,2006, however, remain on the Condensed Statements of Financial Position with acorresponding reinsurance recoverable.

 

For purposesof presentation in the Statements of Cash Flows, the Company treated thereinsurance of its variable annuity business to Prudential 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 of $388.4 million (computed as$440.0 million of generalaccount insurance liabilities transferred to Prudential on the closingdate less consideration of $51.6 million) and the costs of executing the transactionof $1.2 million, pretax, were classified as a disposition of operations in thecash flows from investing activities section of the Statements of CashFlows.

 

10

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Under the Agreement, theCompany, ALIC and the Corporation have indemnified Prudential for certainpre-closing contingent liabilities (including extra-contractual liabilities ofthe Company and ALIC and liabilities specifically excluded from thetransaction) that the Company and ALIC have agreed to retain. In addition, theCompany, ALIC and the Corporation will each indemnify Prudential for certainpost-closing liabilities that may arise from the acts of the Company andALIC, and their agents, including in connection with the Company’s and ALIC’sprovision of transition services. The Reinsurance Agreements contain no limitsor indemnifications with regard to insurance risk transfer, and transferred allof the future risks and responsibilities for performance on the underlyingvariable annuity contracts to Prudential, including those related to benefitguarantees, in accordance with the provisions of SFAS No. 113 “Accountingand Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”.

 

 The terms of theAgreement give Prudential the right to be the exclusive provider of itsvariable annuity products through the Allstate proprietary agency force forthree years and a non-exclusive preferred provider for the following 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.

 

Pursuantto the Agreement, the consideration was $51.6 million. The disposal resulted ina reinsurance loss of $9.3 million, pretax. This reinsurance loss and othertransactional expenses incurred were included as a component of loss ondisposition of operations on the Statements of Operations and ComprehensiveIncome and amounted to $10.7 million, pretax ($7.0 million, after-tax) during2006. Additional losses totaling $132 thousand were recorded in the first sixmonth of 2007. DAC and DSI were reduced by $79.7 million and $6.2 million,respectively, as of the effective date of the transaction for balances relatedto the variable annuity business subject to the Reinsurance Agreements.

 

The separate account balancerelated to the modified coinsurance reinsurance were $1.03 billion as of June 30,2007 and $1.01 billion as of December 31, 2006. Separate account balancestotaling approximately $3.5 million as of June 30, 2007 and $2.7 millionat December 31, 2006 relate to the variable life business that is beingretained. In the first five months of 2006, prior to this disposition, theCompany’s variable annuity business generated $8.1 million in contract charges.

 

 

**4.     Guarantees and Contingent Liabilities**

 

**Guarantees**

 

In the normal course ofbusiness, the Company provides standard indemnifications to counterparties incontracts in 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 suchindemnifications is not determinable. Historically, the Company has not madeany material payments pursuant to these obligations.

 

The aggregateliability balance related to all guarantees was not material as of June 30,2007.

 

**Regulation**

 

The Company is subject tochanging social, economic and regulatory conditions. From time to time,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.

 

11

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**Legal and regulatory proceedings andinquiries**

 

**Background**

 

The Companyand 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, pleasenote the following:

 

•                  These mattersraise difficult and complicated factual and legal issues and are subject tomany uncertainties and complexities, including the underlying facts of eachmatter; novel legal issues; variations between jurisdictions in which mattersare being litigated, heard or investigated; differences in applicable laws andjudicial interpretations; the length of time before many of these matters mightbe resolved by settlement, through litigation or otherwise and, in some cases,the timing of their resolutions relative to other similar matters involvingother companies; the fact that some of the lawsuits are putative class actionsin which a class has not been certified and in which the purported class may notbe clearly defined; the fact that some of the lawsuits involve multi-state class actionsin which the applicable law(s) for the claims at issue is in dispute andtherefore unclear; and the current challenging legal environment faced by largecorporations and insurance companies.

 

•                  In the lawsuits,plaintiffs seek a variety of remedies including equitable relief in the form ofinjunctive 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.

 

•                  In connectionwith regulatory examinations and proceedings, government authorities may seekvarious forms of relief, including penalties, restitution and changes inbusiness practices. The Company may not be advised of the nature andextent of relief sought until the final stages of the examination orproceeding.

 

•                  For the reasonsspecified above, it is often not possible to make meaningful estimates of theamount or range of loss that could result from the matters described below inthe “Proceedings” subsection. The Company reviews these matters on an on-goingbasis and follows the provisions of SFAS No. 5, “Accounting forContingencies” 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.

 

•                  Due to thecomplexity and scope of the matters disclosed in the “Proceedings” subsection belowand the many uncertainties that exist, the ultimate outcome of these matterscannot be reasonably predicted. In the event of an unfavorable outcome in oneor more of these matters, the ultimate liability may be in excess ofamounts currently reserved and may be material to the Company’s operatingresults or cash flows for a particular quarter or annual period. However, basedon information currently known to it, management believes that the ultimateoutcome of all matters described below as they are resolved over time is notlikely to have a material adverse effect on the financial position of theCompany. 

 

12

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**Proceedings**

 

Legal proceedings involving Allstate agencies andAIC may impact the Company, even when the Company is not directlyinvolved, because the Company sells its products through a variety ofdistribution channels including Allstate agencies. Consequently, informationabout the more significant of these proceedings is provided in the followingparagraph.

 

AIC is defending certainmatters relating to its agency program reorganization announced in 1999. Thesematters include a lawsuit filed in December 2001 by the U.S. EqualEmployment Opportunity Commission (“EEOC”) alleging retaliation under federalcivil rights laws (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 EEOCI and Romero I litigation, the trial court issued a memorandum and order that,among other 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 statedthat, “on the undisputed facts of record, there is no basis for claims of agediscrimination.” The EEOC and plaintiffs have asked the court to clarify and/orreconsider its memorandum and order and on January 16, 2007, the judgedenied their request. On June 20, 2007, the court granted AIC’s motionsfor summary judgment. The EEOC also filed another lawsuit in October 2004alleging age discrimination with respect to a policy limiting the rehire ofagents affected by the agency program reorganization (the “EEOC II” suit). InEEOC II, in October 2006, the court granted partial summary judgment tothe EEOC. 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’s petitionsfor interlocutory review of the trial court’s summary judgment order weregranted. AIC’s interlocutory appeal is now pending in the Court of Appeals forthe Eighth Circuit. AIC is also defending a certified class action filedby former employee agents who terminated their employment prior to the agencyprogram reorganization. These plaintiffs have asserted breach of contract andERISA claims. A putative nationwide class action has also been filed byformer employee agents alleging various violations of ERISA, including a workerclassification issue. These plaintiffs are challenging certain amendments tothe Agents Pension Plan and are seeking to have exclusive agent independentcontractors treated as employees for benefit purposes. This matter wasdismissed with prejudice by the trial court, was the subject of furtherproceedings on appeal, and was reversed and remanded to the trial court in April 2005.On June 20, 2007, the court granted AIC’s motion to dismiss the case. Inall of these various matters, plaintiffs seek compensatory and punitivedamages, and equitable relief. AIC has been vigorously defending these lawsuitsand other matters related to its agency program reorganization. The outcome ofthese disputes is currently uncertain.

 

**Other Matters**

 

Various otherlegal, governmental, and regulatory actions, including state marketconduct exams, and other governmental and regulatory inquiries arecurrently pending that involve the Company and specific aspects of its conductof business. Like other members of the insurance industry, the Company is thetarget of a number of lawsuits and proceedings, some of which involve claimsfor substantial or indeterminate amounts. 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 of thesematters could have an adverse effect on the Company’s operating results or cashflows for a particular quarter or annual period. However, based on informationcurrently known to it, management believes that the ultimate outcome of allmatters described in this “Other Matters” subsection in excess of amountscurrently reserved, as they are resolved over time is not likely to have a materialeffect on the operating results, cash flows or financial position of theCompany.

 

13

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**5.     Other Comprehensive Income**

 

The components of othercomprehensive loss on a pretax and after-tax basis are as follows:

 
| ** **                                                                   | ** ** | **Three months ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **Pretax**                           | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                         | * *   | * *                             | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Unrealized  holding losses arising during the period, net of related offsets |       | $                                    | (59,053    | ) | $ | 20,669 |   | $ | (38,384 | ) | $ | (53,792 | ) | $ | 18,827 |   | $ | (34,965 | ) |
| Less:  reclassification adjustment of realized capital gains and losses      |       | (311                                 | )     | 109 |   | (202 | )  | (6,661 | ) | 2,331 |   | (4,330 | ) |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive loss                                                    |       | $                                    | (58,742    | ) | $ | 20,560 |   | $ | (38,182 | ) | $ | (47,131 | ) | $ | 16,496 |   | $ | (30,635 | ) |
|                                                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                   |       |                                 |       |   |   | 11,704 |   |   |   |   |   | 4,585 |   |
| Comprehensive  loss                                                          |       |                                 |       |   |   | $ | (26,478 | ) |   |   |   |   | $ | (26,050 | ) |

 
| ** **                                                                   | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **2007**                           | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **Pretax**                         | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
| * *                                                                     | * *   | * *                           | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Unrealized  holding losses arising during the period, net of related offsets |       | $                                  | (58,729    | ) | $ | 20,555 |   | $ | (38,174 | ) | $ | (160,348 | ) | $ | 56,122 |   | $ | (104,226 | ) |
| Less:  reclassification adjustment of realized capital gains and losses      |       | 942                                |       | (330 | ) | 612 |   | (24,699 | ) | 8,645 |   | (16,054 | ) |
|                                                                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive loss                                                    |       | $                                  | (59,671    | ) | $ | 20,885 |   | $ | (38,786 | ) | $ | (135,649 | ) | $ | 47,477 |   | $ | (88,172 | ) |
|                                                                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                   |       |                               |       |   |   | 18,377 |   |   |   |   |   | 10,857 |   |
| Comprehensive  loss                                                          |       |                               |       |   |   | $ | (20,409 | ) |   |   |   |   | $ | (77,315 | ) |

 

14

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

 

To the Board of Directors and Shareholder of

Allstate Life Insurance Company of New York:

 

 

We have reviewedthe accompanying condensed statement of financial position of Allstate LifeInsurance Company of New York (the “Company”, an affiliate of The AllstateCorporation) as of June 30, 2007, and the related condensed statements ofoperations for the three-month and six-month periods ended June 30, 2007and 2006, and the condensed statements of cash flows for the six-month periodsended June 30, 2007 and 2006. These interim financial statements are theresponsibility of the Company’s management.

 

We conducted our reviews in accordance withthe standards of the Public Company Accounting Oversight Board (United States).A review of interim financial information consists principally of applyinganalytical procedures and making inquiries of persons responsible for financialand accounting matters. It is substantially less in scope than an auditconducted in accordance with the standards of the Public Company AccountingOversight Board (United States), the objective of which is the expression of anopinion regarding the financial statements taken as a whole. Accordingly, we donot express such an opinion.

 

Based on our reviews, we are not aware of anymaterial modifications that should be made to such condensed interim financialstatements for them to be in conformity with accounting principles generally acceptedin the United States of America.

 

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the statement offinancial position of Allstate Life Insurance Company of New York as of December 31,2006, and the related statements of operations and comprehensive income,shareholder’s equity, and cash flows for the year then ended, not presentedherein. In our report dated March 9, 2007, which report includes anexplanatory paragraph relating to a change in the Company’s method ofaccounting for certain nontraditional long-duration contracts and for separateaccounts in 2004, we expressed an unqualified opinion on those financialstatements. In our opinion, the information set forth in the accompanyingcondensed statement of financial position as of December 31, 2006 isfairly stated, in all material respects, in relation to the statement offinancial position from which it has been derived.

 

 

 

/s/ Deloitte & Touche LLP

 

Chicago, Illinois

August 6, 2007

 

15

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**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND2006**

 

 

### **OVERVIEW**

 

The followingdiscussion highlights significant factors influencing the financial positionand results of operations of Allstate Life Insurance Company of New York(referred to in this document as “we”, “ALNY”, “our”, “us” or the “Company”). Itshould be read in conjunction with the condensed financial statements and notesthereto found under Part I. Item 1. contained herein, and with thediscussion, analysis, financial statements and notes thereto in Part I.Item 1. and Part II. Item 7. and Item 8. of the Allstate Life InsuranceCompany of New York Annual Report on Form 10-K for 2006. We operate as asingle segment entity, based on the manner in which we use financialinformation to evaluate performance and determine the allocation of resources.

 

 

### **OPERATIONS**

###  

EffectiveJune 1, 2006, we disposed of our variable annuity business throughreinsurance with Prudential Financial Inc. (“Prudential”). The following tablepresents the results of operations attributable to the variable annuitybusiness for the period of 2006 prior to the disposition.

 
| **(in thousands)**                                                          | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Six Months Ended  June 30, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| **Favorable/(unfavorable)**                                                 | ** ** | ** **                                 | ** ** | ** **                               | ** ** |
| Contract  charges                                                           |       | $                                          | 3,675      |                                     | $          | 8,103 |   |
| Net  investment income                                                      |       | 3,554                                      |       | 8,789                                    |       |
| Periodic  settlements and accruals on non- hedge derivative instruments (1) |       | 24                                         |       | 33                                       |       |
| Contract  benefits                                                          |       | (256                                       | )          | (2,117                                   | )          |
| Interest  credited to contractholder funds (2)                              |       | (2,742                                     | )          | (6,915                                   | )          |
| Gross margin  (3)                                                           |       | 4,255                                      |       | 7,893                                    |       |
| Realized  capital gains and losses                                          |       | (474                                       | )          | (4,112                                   | )          |
| Amortization  of DAC and DSI(2)                                             |       | (2,477                                     | )          | 7,784                                    |       |
| Operating  costs and expenses                                               |       | (872                                       | )          | (3,394                                   | )          |
| Loss on  disposition of operations                                          |       | (7,748                                     | )          | (7,748                                   | )          |
| Income from  operations before income tax expense                           |       | $                                          | (7,316     | )                                        | $          | 423 |   |
|                                                                        |       |                                       |       |                                     |       |
| Investment  margin                                                          |       | $                                          | 836        |                                     | $          | 1,907 |   |
| Benefit  margin                                                             |       | 485                                        |       | (1,120                                   | )          |
| Contract  charges and fees                                                  |       | 2,934                                      |       | 7,106                                    |       |
| Gross margin  (3)                                                           |       | $                                          | 4,255      |                                     | $          | 7,893 |   |

 

----

(1)          Periodic settlements and accruals on non-hedge derivative instrumentsare reflected as a component of realized capital gains and losses on theCondensed Statements of Operations.

(2)          For purposes 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 for variable annuities totaled $(88)thousand in the second quarter of 2006 and $507 thousand (favorable to income)in the six months ended June 30, 2006.

(3)          Gross margin and its components are measures that are not based ongenerally accepted accounting principals (“non-GAAP”). Gross margin, investmentmargin and benefit margin are defined on pages 20, 21 and 23,respectively.

 

16

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**Premiums**represent revenuesgenerated from traditional life, immediate annuities with life contingencies,accident and health and other insurance products that have significantmortality or morbidity risk.

 

**Contractcharges******are revenuesgenerated from interest-sensitive life, fixed annuities and variable 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 thebusiness subject to the transaction are fully reinsured to Prudential andpresented net of reinsurance on the Condensed Statements of Operations (seeNote 3 to the Condensed Financial Statements).

 

The following table summarizespremiums and contract charges by product.

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**                           | ** ** | **2007**                              | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                                  |       |                                |       |   |   |   |   |
| **Premiums**                                 | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional  life                            |       | $                                     | 5,978      |                                | $          | 6,216 |   | $ | 12,362 |   | $ | 10,825 |   |
| Immediate  annuities with life contingencies |       | 11,188                                |       | 13,228                              |       | 20,987 |   | 21,492 |   |
| Accident and  health and other               |       | 1,517                                 |       | 1,239                               |       | 3,066 |   | 2,435 |   |
| **Total  premiums**                          |       | 18,683                                |       | 20,683                              |       | 36,415 |   | 34,752 |   |
| ** **                                   | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract  charges**                        | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-sensitive  life                     |       | 12,585                                |       | 11,370                              |       | 24,836 |   | 22,600 |   |
| Fixed  annuities                             |       | 2,156                                 |       | 2,210                               |       | 4,303 |   | 4,139 |   |
| Variable  annuities                          |       | —                                |       | 3,675                               |       | — |   | 8,103 |   |
| **Total  contract charges**                  |       | 14,741                                |       | 17,255                              |       | 29,139 |   | 34,842 |   |
| ** **                                   | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums  and contract charges**           |       | $                                     | 33,424     |                                | $          | 37,938 |   | $ | 65,554 |   | $ | 69,594 |   |

 

Total premiums declined 9.7% in the second quarter of 2007 compared tothe second quarter of 2006 and increased 4.8% in the first sixmonths of 2007 compared to the same period of 2006. The decline in the secondquarter of 2007 was primarily due to lower sales of immediate annuities withlife contingencies. The increase in the first six months of 2007 was primarythe result of higher sales of traditional life products.

Contract charges decreased 14.6% and 16.4% inthe second quarter and first six months of 2007, respectively, compared to thesame periods of 2006. Excluding contract charges on variable annuities, all ofwhich are reinsured to Prudential effective June 1, 2006, contract chargesincreased 8.5% and 9.0% in the second quarter and first six months of 2007,respectively, compared to the same periods of 2006. The increase in bothperiods was driven by higher contract charges on interest-sensitive lifeproducts resulting from growth of business in force.

 

17

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*Contractholder funds* representinterest-bearing liabilities arising from the sale of fixed annuities,interest-sensitive life and variable annuity and life deposits allocated tofixed accounts. The balance of contractholder funds is equal to the cumulativedeposits received and interest credited to the contractholder less cumulativecontract maturities, benefits, surrenders, withdrawals and contract charges formortality or administrative expenses.

The followingtable shows the changes in contractholder funds.

 
| ** **                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Contractholder funds, beginning balance**                     |       | $                                | 4,696,297  |                           | $          | 4,426,993 |   | $ | 4,708,428 |   | $ | 4,349,395 |   |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| **Deposits:**                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed annuities                                                 |       | 89,389                           |       | 233,582                        |       | 159,021 |   | 380,409 |   |
| Interest-sensitive life                                         |       | 27,145                           |       | 23,555                         |       | 50,274 |   | 47,839 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | 14                               |       | 6,152                          |       | 29 |   | 15,493 |   |
| Total deposits                                                  |       | 116,548                          |       | 263,289                        |       | 209,324 |   | 443,741 |   |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| **Interest credited**                                           |       | 44,342                           |       | 44,197                         |       | 88,556 |   | 88,528 |   |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| **Benefits, withdrawals and other adjustments**                 | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefits                                                        |       | (37,111                          | )          | (35,952                        | )          | (75,167 | ) | (71,643 | ) |
| Surrenders and partial withdrawals                              |       | (80,360                          | )          | (77,108                        | )          | (160,663 | ) | (166,546 | ) |
| Contract charges                                                |       | (11,902                          | )          | (11,023                        | )          | (23,594 | ) | (21,807 | ) |
| Net transfers to separate accounts                              |       | —                           |       | (7,338                         | )          | — |   | (18,129 | ) |
| Other adjustments                                               |       | (15,946                          | )          | (3,382                         | )          | (35,016 | ) | (3,863 | ) |
| Total benefits, withdrawals and other  adjustments              |       | (145,319                         | )          | (134,803                       | )          | (294,440 | ) | (281,988 | ) |
|                                                            |       |                             |       |                           |       |   |   |   |   |
| **Contractholder funds, ending balance**                        |       | $                                | 4,711,868  |                           | $          | 4,599,676 |   | $ | 4,711,868 |   | $ | 4,599,676 |   |

 

Contractholderfunds increased 0.3% and 3.9% in the second quarters of 2007 and 2006, andincreased 0.1% and 5.8% in the first six months of 2007 and 2006, respectively.Average contractholder funds increased 4.2% and 5.3% in the second quarter andfirst six months of 2007, respectively, compared to the same periods in 2006. Thisis compared to an increase in average contractholder funds of 10.5% and 12.7%in the second quarter and first six months of 2006, respectively, compared tothe same periods in 2005.

Contractholder deposits declined 55.7% and 52.8% in the second quarterand first six months of 2007, respectively, compared to the same periods of2006. These declines were due to lower deposits on fixed annuities and theabsence in 2007 of variable annuity deposits allocated to fixed accounts due tothe reinsurance of the business effective June 1, 2006. Subsequent to theeffective date of the transaction, the net change in contractholder fundsrelating to the reinsured variable annuity business is reflected as a componentof other adjustments in the table above. Fixed annuity deposits were $89.4million and $159.0 million in the second quarter and first six months of 2007,respectively, a decrease of 61.7% and 58.2%, respectively, compared to the sameperiods in the prior year. These declines are indicative of lower industry-widefixed annuity sales and our strategy to raise new business returns on capitalfor these products.

Surrenders and partial withdrawals on deferred fixed annuities andinterest-sensitive life products increased 4.2% in the second quarter of 2007compared to the same period of 2006 and decreased 3.5% in the first six monthsof 2007 compared to the same period of 2006. Partially contributing to thesechanges is the absence in 2007 of surrenders and partial withdrawals related tothe variable annuity business that was reinsured effective June 1, 2006. Excludingvariable annuities, the annualized surrender and partial withdrawal rate, basedon the beginning of period contractholder funds, was 8.6% and 8.2% for thefirst six months of 2007 and 2006, respectively.

 

18

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**Net investment income**increased 3.3% in the second quarter and 2.2% in the first six months of 2007compared to the same periods in 2006. The increase in both periods wasprimarily driven by higher average portfolio balances and increased portfolioyields. Higher average portfolio balances resulted from the investment of cashflows from operating and financing activities related primarily to depositsfrom fixed annuities and interest-sensitive life policies in excess ofwithdrawals. See the Investments section of MD&A for further detail of netinvestment income.

 

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

 
| ** **                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                                                                                    | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Premiums                                                                                              |       | $                                | 18,683     |                           | $          | 20,683 |   | $ | 36,415 |   | $ | 34,752 |   |
| Contract charges(1)                                                                                   |       | 14,746                           |       | 17,259                         |       | 29,144 |   | 34,847 |   |
| Net investment income                                                                                 |       | 96,939                           |       | 93,827                         |       | 190,907 |   | 186,720 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments (2)                            |       | 749                              |       | 560                            |       | 1,509 |   | 984 |   |
| Contract benefits                                                                                     |       | (48,705                          | )          | (50,226                        | )          | (91,538 | ) | (93,556 | ) |
| Interest credited to contractholder funds(3)                                                          |       | (41,929                          | )          | (40,237                        | )          | (83,248 | ) | (80,715 | ) |
| Gross margin                                                                                          |       | 40,483                           |       | 41,866                         |       | 83,189 |   | 83,032 |   |
|                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Amortization of DAC and DSI (3)(4)                                                                    |       | (13,625                          | )          | (14,098                        | )          | (32,995 | ) | (27,508 | ) |
| Operating costs and expenses                                                                          |       | (8,410                           | )          | (10,475                        | )          | (17,554 | ) | (24,361 | ) |
| Income tax expense                                                                                    |       | (6,573                           | )          | (5,766                         | )          | (11,743 | ) | (10,922 | ) |
| Realized capital gains and losses,  after-tax                                                         |       | (538                             | )          | (2,716                         | )          | (1,719 | ) | (12,033 | ) |
| DAC and DSI amortization expense on  realized capital gains and losses, after-tax (1)(4)              |       | 677                              |       | 1,161                          |       | 230 |   | 8,297 |   |
| Reclassification of periodic settlements  and accruals on non-hedge derivative instruments, after-tax |       | (474                             | )          | (351                           | )          | (945 | ) | (612 | ) |
| Gain (loss) on disposition of operations,  after-tax                                                  |       | 164                              |       | (5,036                         | )          | (86 | ) | (5,036 | ) |
| **Net income**                                                                                        |       | $                                | 11,704     |                           | $          | 4,585 |   | $ | 18,377 |   | $ | 10,857 |   |

 

----

(1)          Loads charged tocontractholders at the inception of interest-sensitive life contracts aredeferred and amortized to income in a manner consistent with deferred policyacquisition costs (“DAC”). Amortization of deferred loads on interest-sensitivelife products related to realized capital gains and losses is excluded fromcontract charges for purposes of calculating gross margin. Amortization ofdeferred loads related to realized capital gains and losses totaled $(5)thousand and $(4) thousand in the second quarters of 2007 and 2006,respectively, and totaled $(5) thousand in both the six month periods ended June30, 2007 and 2006.

(2)          Periodic settlements and accruals on non-hedge derivative instruments arereflected as a component of realized capital gains and losses on the CondensedStatements of Operations.

(3)          For purposes 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 $(1.3) million and $(937)thousand in the three months ended June 30, 2007 and 2006, respectively, and$(3.7) million and $(2.3) million in the first six months of 2007 and 2006,respectively.

(4)          Amortization of DAC and DSI relating to realized capital gains and lossesis analyzed separately because realized capital gains and losses may varysignificantly between periods and obscure trends in our business. Amortizationof DAC and DSI relating to realized capital gains and losses, pretax, was $1.1million and $1.8 million in the second quarters of 2007 and 2006, respectively,and was $372 thousand and $13.3 million in the first six months of 2007 and2006, respectively.

 

19

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*Gross margin*, a non-GAAP measure, is comprised of premiums andcontract charges, and net investment income, less contract benefits andinterest credited to contractholder funds excluding amortization of DSI. Grossmargin also includes periodic settlements and accruals on certain non-hedgederivative instruments (see additional discussion under *“investmentmargin”)*. Gross margin is a component of our evaluation of theprofitability of our life insurance and financial product portfolio. Grossmargin is comprised of three components that are utilized to further analyzethe business: investment margin, benefit margin, and contract charges and fees.We use gross margin to evaluate the performance of the business. We believegross margin and its components are also useful to investors because they allowfor the evaluation of income components separately and in the aggregate whenreviewing performance. This actuarial analysis, which is commonly employedthroughout the life insurance industry, measures the difference between productpremiums and accrued policy benefits and between net investment income and bothinterest credited to contractholder funds and insurance reserves. It revealsthe integrity and propriety of the pricing assumptions and financialperformance. Additionally, for many of our products, including fixed annuities,variable life, and interest-sensitive life insurance, the amortization of DACand DSI is determined based on actual and expected gross margin. Variability ofour results may be caused by this amortization which may be the result of grossmargin variability. The analysis of gross margin and its components, separatelyand in the aggregate, provide transparency to our results of operations. Gross margin, investment margin and benefit marginshould not be considered as a substitute for net income and do not reflect theoverall profitability of the business. Net income is the GAAP measure that ismost directly comparable to these margins. Gross margin is best considered inits context as a component of net income and is presented as such and isreconciled to GAAP net income in the table above.

The componentsof gross margin are reconciled to the corresponding financial statement lineitems in the following table. 

 
| ** **                                                                     | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | ** **                      | ** ** |
| ** **                                                                     | ** ** | **Investment  Margin**          | ** ** | **Benefit  Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in thousands)**                                                             | ** ** | **2007**                        | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Premiums                                                                       |       | $                               | —     |   | $ | — |   | $ | 18,683 |   | $ | 20,683 |   | $ | — |   | $ | — |   | $ | 18,683 |   | $ | 20,683 |   |
| Contract charges(1)                                                            |       | —                          |       | — |   | 8,417 |   | 8,469 |   | 6,329 |   | 8,790 |   | 14,746 |   | 17,259 |   |
| Net investment income                                                          |       | 96,939                          |       | 93,827 |   | — |   | — |   | — |   | — |   | 96,939 |   | 93,827 |   |
| Periodic settlements and accruals on non-hedge derivative instruments (2) |       | 749                             |       | 560 |   | — |   | — |   | — |   | — |   | 749 |   | 560 |   |
| Contract benefits                                                              |       | (26,778)                        |       | (25,838) |   | (21,927) |   | (24,388) |   | — |   | — |   | (48,705) |   | (50,226) |   |
| Interest credited to contractholder funds(3)                                   |       | (41,929)                        |       | (40,237) |   | — |   | — |   | — |   | — |   | (41,929) |   | (40,237) |   |
|                                                                           |       | $                               | 28,981     |   | $ | 28,312 |   | $ | 5,173 |   | $ | 4,764 |   | $ | 6,329 |   | $ | 8,790 |   | $ | 40,483 |   | $ | 41,866 |   |

 

20

----

 
| ** **                                                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                      | ** ** | ** **                    | ** ** |
| ** **                                                                      | ** ** | **Investment  Margin**        | ** ** | **Benefit  Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in thousands)**                                                              | ** ** | **2007**                      | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Premiums                                                                        |       | $                             | —     |   | $ | — |   | $ | 36,415 |   | $ | 34,752 |   | $ | — |   | $ | — |   | $ | 36,415 |   | $ | 34,752 |   |
| Contract charges (1)                                                            |       | —                        |       | — |   | 16,720 |   | 16,449 |   | 12,424 |   | 18,398 |   | 29,144 |   | 34,847 |   |
| Net investment income                                                           |       | 190,907                       |       | 186,720 |   | — |   | — |   | — |   | — |   | 190,907 |   | 186,720 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments (2) |       | 1,509                         |       | 984 |   | — |   | — |   | — |   | — |   | 1,509 |   | 984 |   |
| Contract benefits                                                               |       | (53,385                       | )          | (51,358 | ) | (38,153 | ) | (42,198 | ) | — |   | — |   | (91,538 | ) | (93,556 | ) |
| Interest credited to contractholder funds(3)                                    |       | (83,248                       | )          | (80,715 | ) | — |   | — |   | — |   | — |   | (83,248 | ) | (80,715 | ) |
|                                                                            |       | $                             | 55,783     |   | $ | 55,631 |   | $ | 14,982 |   | $ | 9,003 |   | $ | 12,424 |   | $ | 18,398 |   | $ | 83,189 |   | $ | 83,032 |   |

 

----

(1)          Loads charged tocontractholders at the inception of interest-sensitive life contracts aredeferred and amortized to income in a manner consistent with deferred policyacquisition costs (“DAC”). Amortization of deferred loads on interest-sensitivelife products related to realized capital gains and losses is excluded fromcontract charges for purposes of calculating gross margin. Amortization ofdeferred loads related to realized capital gains and losses totaled $(5)thousand and $(4) thousand in the second quarters of 2007 and 2006,respectively, and totaled $(5) thousand in both the six month periods endedJune 30, 2007 and 2006.

(2)          Periodic settlements and accruals on non-hedge derivative instruments arereflected as a component of realized capital gains and losses on the CondensedStatements of Operations.

(3)          For purposes 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 $(1.3) million and $(937)thousand in the three months ended June 30, 2007 and 2006, respectively, and$(3.7) million and $(2.3) million in the first six months of 2007 and 2006,respectively.

 

The decrease in gross margin of 3.3% in the second quarter of 2007 andslight increase of 0.2% in the first six months of 2007, compared to the sameperiods of 2006, were significantly impacted by the absence in 2007 of grossmargin on variable annuities that are reinsured effective June 1, 2006. Excludingthe impact of the reinsured variable annuity business, gross margin increased7.6% and 10.7% in the second quarter and first six months of 2007,respectively, when compared to the same periods in the prior year. Theseincreases were the result of higher benefit and investment margin as well asincreased contract charges and fees.

 

*Investment margin*****isa component 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. We utilize derivative instruments aseconomic hedges of investments or contractholder funds or to replicate fixedincome securities. These instruments do not qualify for hedge accounting or arenot designated as hedges for accounting purposes. Such derivatives areaccounted for at fair value, and reported in realized capital gains and losses.Periodic settlements and accruals on these derivative instruments are includedas a component of gross margin, consistent with their intended use to enhanceor maintain investment income and margin, and together with the economicallyhedged investments or product attributes (e.g., net investment income orinterest credited to contractholders funds) or replicated investments, toappropriately reflect trends in product performance**.**Amortizationof DSI is excluded from interest credited to contractholder funds for purposesof calculating investment margin. We use investment margin to evaluate ourprofitability related to the difference between investment returns on assetssupporting certain products and amounts credited to customers (“spread”) duringthe fiscal period.

 

21

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Investmentmargin by product group is shown in the following table.

 
| ** **              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(in thousands)**      | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Annuities               |       | $                                | 25,553     |                           | $          | 26,089 |   | $ | 49,645 |   | $ | 50,993 |   |
| Life insurance          |       | 3,428                            |       | 2,223                          |       | 6,138 |   | 4,638 |   |
| Total investment margin |       | $                                | 28,981     |                           | $          | 28,312 |   | $ | 55,783 |   | $ | 55,631 |   |

 

 

Investment margin increased 2.4% and 0.3% in the second quarter andfirst six months of 2007, respectively, compared to the same periods in theprior year. These changes were impacted by the absence in 2007 of investmentmargin on the reinsured variable annuity business. Excluding the impact of thereinsured variable annuity business, investment margin increased 5.5% and 3.8%in the second quarter and first six months of 2007, respectively, due primarilyto modest growth in contractholder funds and higher periodic settlements andaccruals on derivative instruments designated as non-hedge for accountingpurposes.

The followingtable summarizes the weighted average investment yield, interest creditingrates and investment spreads for the three months ended June 30. 

 
| ** **                                                           | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                           | ** ** | ** **                             | ** ** | ** **                                    | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **2007**                               | ** ** | **2006**                                      | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest-sensitive life                                              |       | 5.7                                    | %          | 5.6                                           | %          | 4.4                                     | %          | 4.5 | % | 1.3 | % | 1.1 | % |
| Deferred fixed annuities                                             |       | 5.6                                    |       | 5.7                                           |       | 3.4                                     |       | 3.2 |   | 2.2 |   | 2.5 |   |
| Immediate fixed annuities with and without  life contingencies       |       | 7.6                                    |       | 7.5                                           |       | 6.7                                     |       | 6.7 |   | 0.9 |   | 0.8 |   |
| Investments supporting capital, traditional  life and other products |       | 5.9                                    |       | 6.0                                           |       | N/A                                     |       | N/A |   | N/A |   | N/A |   |

 

The followingtable summarizes the weighted average investment yield, interest creditingrates and investment spreads for the six months ended June 30. 

 
| ** **                                                           | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                           | ** ** | ** **                             | ** ** | ** **                                    | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **2007**                               | ** ** | **2006**                                      | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest-sensitive life                                              |       | 5.6                                    | %          | 5.6                                           | %          | 4.6                                     | %          | 4.5 | % | 1.0 | % | 1.1 | % |
| Deferred fixed annuities                                             |       | 5.6                                    |       | 5.5                                           |       | 3.3                                     |       | 3.1 |   | 2.3 |   | 2.4 |   |
| 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 |       | 5.8                                    |       | 6.1                                           |       | N/A                                     |       | N/A |   | N/A |   | N/A |   |

 

22

----

 

The following table summarizes the liabilities for these contracts andpolicies.

 
| ** **                                                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Immediate fixed annuities with life  contingencies              |       | $                              | 1,594,225  |   | $ | 1,531,801 |   |
| Other life contingent contracts and other                       |       | 316,367                        |       | 281,768 |   |
| Reserve for life-contingent contract  benefits                  |       | $                              | 1,910,592  |   | $ | 1,813,569 |   |
|                                                            |       |                           |       |   |   |
| Interest-sensitive life                                         |       | $                              | 499,786    |   | $ | 453,122 |   |
| Deferred fixed annuities                                        |       | 3,643,078                      |       | 3,596,941 |   |
| Immediate fixed annuities without life  contingencies and other |       | 569,004                        |       | 549,613 |   |
| Contractholder funds                                            |       | $                              | 4,711,868  |   | $ | 4,599,676 |   |

 

*Benefit margin*is acomponent of gross margin, both of which are non-GAAP measures. Benefit marginrepresents life and life-contingent immediate annuity premiums, cost ofinsurance contract charges and, prior to the disposal of our variable annuitybusiness through reinsurance, variable annuity contract charges for contractguarantees less contract benefits. Benefit margin excludes the implied intereston life-contingent immediate annuities, which is included in the calculation ofinvestment margin. We use benefit margin to evaluate our underwritingperformance, as it reflects the profitability of our products with respect tomortality or morbidity risk during a fiscal period.

Benefit marginby product group is shown in the following table.

 
| ** **           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(in thousands)**   | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Life insurance       |       | $                                | 5,210      |                           | $          | 5,602 |   | $ | 12,363 |   | $ | 11,153 |   |
| Annuities            |       | (37                              | )          | (838                           | )          | 2,619 |   | (2,150 | ) |
| Total benefit margin |       | $                                | 5,173      |                           | $          | 4,764 |   | $ | 14,982 |   | $ | 9,003 |   |

 

Benefit margin increased 8.6% and 66.4% in the second quarter and firstsix months of 2007, respectively, compared to the same periods in the prioryear. These increases were impacted by the absence in 2007 of benefit margin onthe reinsured variable annuity business. Excluding the reinsured variableannuity business, benefit margin increased 20.9% and 48.0% in the secondquarter and first six months of 2007, respectively. The increase in bothperiods was mostly attributable to improved mortality experience on immediateannuities with life contingencies. Additionally, growth of life insurance inforce had a favorable impact on the benefit margin for the first six months of2007 compared to the same period in the prior year.

 

*Amortization of DAC and DSI*,excluding amortization related to realized capital gains and losses, declined3.4% in the second quarter of 2007 and increased 19.9% in the first six monthsof 2007 compared to the same periods in the prior year. These changes wereimpacted by the absence in 2007 of amortization on the reinsured variableannuity business. Excluding the impact of the reinsured variable annuitybusiness and amortization related to realized capital gains and losses, DAC andDSI amortization increased 19.1% and 45.4% in the second quarter and first sixmonths of 2007, respectively, compared to the same periods in the prior year. Theincrease in both periods was primarily due to higher gross margin on fixedannuities and, in addition, for the six-month period, higher amortizationacceleration relating to our annual review of assumptions (commonly referred toas “unlocking”). DAC and DSI amortization acceleration relating to our annualreview of assumptions totaled $6.7 million and $544 thousand in the first sixmonths of 2007 and 2006, respectively. DAC and DSI amortization acceleration inthe first six months of 2007 was driven primarily by changes in the expectedlevel of future expenses related to fixed annuities. DAC and DSI amortizationrelated to realized capital gains and losses, after-tax, reflected a credit toincome of $677 thousand and $1.2 million in the second quarters of 2007 and2006, respectively, and $230 thousand and $8.3 million in the first six monthsof 2007 and 2006, respectively. The impact of realized capital gains and losseson amortization of DAC and DSI is dependent upon the relationship between theassets that give rise to the gain or loss and the product liability supportedby the assets. Fluctuations result from changes in the impact of realizedcapital gains and losses on actual and expected gross profits.

 

23

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DACand DSI were reduced by $79.7 million and $6.2 million, respectively, in 2006as a result of the disposition of substantially all of our variable annuitybusiness (see Note 3 to the Condensed Consolidated Financial Statements).

 

*Operating costs and expenses* declined 19.7% inthe second quarter of 2007 and 27.9% in the first six months of 2007,respectively, compared to the same periods of 2006. The absence in 2007 ofexpenses related to the reinsured variable annuity business contributed to thedecline in both periods. Excluding the impact of the reinsured variable annuitybusiness, expenses declined 12.4% and 16.3% in the second quarter and first sixmonths of 2007, respectively. These declines were primarily the result of lowerinsurance department assessments in the current year and lower restructuringand related charges.

 

### **INVESTMENTS**

 

An importantcomponent of our financial results is the return on our investment portfolio. Thecomposition of the investment portfolio at June 30, 2007 is presented in thetable below.

 
| **(in thousands)**          | ** ** | **Carrying  value** | ** ** | **Percent  of total** | ** ** |
|-----------------------------|------------|---------------------|------------|-----------------------|------------|
|                        |       |                |       |                  |       |
| Fixed income securities (1) |       | $                   | 5,964,164  |                  | 86.3       | % |
| Mortgage loans              |       | 689,841             |       | 10.0                  |       |
| Short-term                  |       | 219,096             |       | 3.2                   |       |
| Policy loans                |       | 37,522              |       | 0.5                   |       |
| Other                       |       | 2,689               |       | —                |       |
| Total                       |       | $                   | 6,913,312  |                  | 100.0      | % |

 
|   |                                                                                                             |
|--------|------------------------------------------------------------------------------------------------------------------|
| (1)    | Fixed income securities are carried at fair value. Amortized cost  basis for these securities was $5.76 billion. |
|        |                                                                                                                  |  |

 

Totalinvestments increased to $6.91 billion at June 30, 2007, from $6.78 billion atDecember 31, 2006, primarily due to positive cash flows from operatingactivities, including increased funds associated with securities lendingbusiness activities, partially offset by the decreased net unrealized gains onfixed income securities.

Totalinvestments at amortized cost related to collateral received in connection withsecurities lending business activities increased to $392.9 million at June 30,2007, from $199.5 million at December 31, 2006.

Fixed incomesecurities by type are listed in the table below.

 
| **($ in  thousands)**            | ** ** | **June 30,  2007** | ** ** | **% to  Total  Investments** | ** ** | **December  31, 2006** | ** ** | **% to  Total  Investments** | ** ** |
|---------------------------------------|------------|--------------------|------------|------------------------------|------------|------------------------|------------|------------------------------|------------|
|                                  | ** ** | ** **         | ** ** | ** **                   | ** ** | ** **             | ** ** | ** **                   | ** ** |
| U.S. government and agencies          |       | $                  | 718,584    |                         | 10.4       | %                      | $          | 729,111                      |       | 10.8 | % |
| Municipal                             |       | 414,318            |       | 6.0                          |       | 323,003                |       | 4.8                          |       |
| Corporate                             |       | 3,256,029          |       | 47.1                         |       | 3,304,762              |       | 48.7                         |       |
| Asset-backed securities               |       | 126,930            |       | 1.8                          |       | 109,022                |       | 1.6                          |       |
| Commercial mortgage-backed securities |       | 716,641            |       | 10.4                         |       | 673,179                |       | 9.9                          |       |
| Mortgaged-backed securities           |       | 418,756            |       | 6.1                          |       | 433,196                |       | 6.4                          |       |
| Foreign government                    |       | 303,381            |       | 4.4                          |       | 304,947                |       | 4.5                          |       |
| Redeemable preferred stock            |       | 9,525              |       | 0.1                          |       | 9,919                  |       | 0.1                          |       |
| Total fixed income securities         |       | $                  | 5,964,164  |                         | 86.3       | %                      | $          | 5,887,139                    |       | 86.8 | % |

 

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At June 30, 2007, 96.0% of the fixed incomesecurities portfolio was rated investment grade, which is defined as a securityhaving a rating from the National Association 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, Aor BBB from Standard & Poor’s, Fitch or Dominion or a rating of aaa, aa, a,or bbb from A.M. Best; or a comparable internal rating if an externallyprovided rating is not available.

Certain of our asset-backed and mortgage-backed securities arecollateralized by residential mortgage loans that are characterized byborrowers of differing levels of creditworthiness: U.S. agency, prime, Alt-Aand sub-prime. Included in the following table are our asset-backed andmortgage-backed securities categorized by type of collateral. Also included areratings, based on the lower of Moody’s or S&P, and the percent to our totalinvestments.

 
| **($ in thousands)**                                                        | ** ** | **Aaa**    | ** ** | **Aa**     | ** ** | **Baa**    | ** ** | **June 30,  2007** | ** ** | **% to Total  Investments** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|---------------------------------------|------------|
| **Asset-backed securities**                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                            | ** ** |
| Asset-backed securities collateralized by  sub-prime residential mortgage loans: |       |       |       |       |       |       |       |                    |       |                                  |       |
| Sub-prime residential mortgage-backed  securities (“sub- prime RMBS”)       |       | 100.0      | %          | —     | %          | —     | %          | $                       | 93,081     |                                  | 1.3        | % |
| Total asset-backed securities  collateralized by sub-prime residential mortgage loans |       |       |       |       |       |       |       | 93,081                  |       | 1.3                                   |       |
|                                                                                  |       |       |       |       |       |       |       |                    |       |                                  |       |
| Other collateralized debt obligations                                                 |       | 46.4       |       | 38.1       |       | 15.5       |       | 33,849                  |       | 0.5                                   |       |
| Total asset-backed securities                                                         |       |       |       |       |       |       |       | $                       | 126,930    |                                  | 1.8        | % |
|                                                                                  |       |       |       |       |       |       |       |                    |       |                                  |       |
| **Mortgage-backed securities**                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                            | ** ** |
| U.S. Agency                                                                           |       | 100.0      |       | —     |       | —     |       | 201,690                 |       | 2.9                                   |       |
| Prime                                                                                 |       | 46.4       |       | 53.6       |       | —     |       | 89,179                  |       | 1.3                                   |       |
| Alt-A                                                                                 |       | 69.3       |       | 30.7       |       | —     |       | 127,887                 |       | 1.9                                   |       |
| Total mortgage-backed securities                                                      |       |       |       |       |       |       |       | $                       | 418,756    |                                  | 6.1        | % |

 

Ourexposure to residential mortgage loans, excluding U.S. Agency and prime loans,are comprised of sub-prime RMBS, which can be first liens at fixed or variablerates or second liens (ours mostly being insured), and Alt-A mortgage-backedsecurities at fixed or variable rates. Our practice for acquiring andmonitoring sub-prime RMBS and Alt-A mortgage-backed securities takes intoconsideration the quality of the originator, quality of the servicer, security creditrating, underlying characteristics of the mortgages, borrower characteristics,level of credit enhancement in the transaction, and bond insurer strength,where applicable. All of our sub-prime RMBS and Alt-A securities are ratedinvestment grade; $22.1 million are insured; and  the originators and servicers of theunderlying mortgage loans are primarily subsidiaries of large banks andbroker/dealers, or other investment grade entities. Based on our analysis anddue to the seniority of our securities claim on the underlying collateral, wecurrently expect to receive all payments on these securities in accordance withtheir original contractual terms. These securities are structured to experiencelosses according to the seniority level of each tranche, with the least seniortranche taking the first loss. There have not been any downgrades in theratings of these securities since June 30, 2007, and we currently do notanticipate significant downgrades in this portfolio.

 

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Thefollowing table presents additional information about our sub-prime RMBSportfolio including a summary by first and second lien collateral.

 
| **(in thousands)**          | ** ** | **June 30,  2007** | ** ** | **% to Total  Investments** | ** ** |
|----------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| **Sub-prime RMBS**               | ** ** | ** **              | ** ** | ** **                            | ** ** |
| First lien sub-prime RMBS:       |       |                    |       |                                  |       |
| Fixed rate (1)                   |       | $                       | 15,277     |                                  | 0.2        | % |
| Variable rate (1)                |       | 47,438                  |       | 0.7                                   |       |
| Total first lien sub-prime RMBS  |       | 62,715                  |       | 0.9                                   |       |
| Second lien sub-prime RMBS:      |       |                    |       |                                  |       |
| Insured                          |       | 19,097                  |       | 0.3                                   |       |
| Other                            |       | 11,269                  |       | 0.1                                   |       |
| Total second lien sub-prime RMBS |       | 30,366                  |       | 0.4                                   |       |
| Total sub-prime RMBS             |       | $                       | 93,081     |                                  | 1.3        | % |

 
|   |                                                                                                                                  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|
| (1)    | Fixed  rate and variable rate refer to the primary interest rate characteristic of  the underlying mortgages at the time of issuance. |
|        |                                                                                                                                       |  |

 

Thesub-prime RMBS portfolio includes securities that are collateralized bymortgage loans issued in the United States to borrowers that cannot qualify forprime or alternative financing terms due in part to an impaired or limitedcredit history. The sub-prime RMBS portfolio also includes securities that arecollateralized by certain second lien mortgages regardless of the borrower’scredit profile. As of June 30, 2007, the sub-prime RMBS portfolio had netunrealized losses of $613 thousand, which were comprised of $14 thousand ofunrealized gains and $627 thousand of unrealized losses. $22.1 million or 23.7%of the securities are insured.

Thesub-prime RMBS portfolio included $79.5 million or 85.4% of securities thatwere issued during 2006 and 2007. At June 30, 2007, 100% of these securitieswere rated Aaa, and $15.6 million or 19.6% of these securities are insured. Theexpected weighted average life of our 2006 and 2007 sub-prime RMBS portfoliowas estimated to be approximately 2.5 to 3 years at origination.

Ourother collateralized debt obligations consist of securitized investments toportfolios collateralized primarily by corporate credit, including bothinvestment grade and high yield corporate credits.

OurAlt-A mortgage-backed securities include securities that are collateralized byresidential mortgage loans issued to borrowers with stronger credit profilesthan sub-prime borrowers, but who do not qualify for prime financing terms dueto high loan-to-value ratios and/or limited supporting documentation. At June30, 2007, the Alt-A portfolio had net unrealized losses of $982 thousand, whichwere comprised of $1.4 million of unrealized gains and $2.4 million ofunrealized losses. $34.1 million or 26.7% of these securities were issuedduring 2006 and 2007.

Thefollowing table presents information about the collateral in our Alt-Aholdings.

 
| **($ in thousands)** | ** ** | **Aaa**    | ** ** | **Aa**     | ** ** | **June 30,  2007** | ** ** | **% to Total  Investments** | ** ** |
|---------------------------|------------|------------|------------|------------|------------|--------------------|------------|-----------------------------|------------|
| **Alt-A**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** **         | ** ** | ** **                  | ** ** |
| Fixed rate                |       |       |       |       |       | $                  | 53,188     |                        | 0.8        | % |
| Variable rate             |       |       |       |       |       | 74,699             |       | 1.1                         |       |
| Total Alt-A               |       | 69.3       | %          | 30.7       | %          | $                  | 127,887    |                        | 1.9        | % |

 

The unrealized net capital gains on fixed income securities at June 30,2007 were $204.6 million, a decrease of $140.3 million or 40.7% since December31, 2006. The net unrealized gain was comprised of $309.0 millionof unrealized gains and $104.4 million of unrealized losses at June 30, 2007. Thisis compared to net unrealized gains totaling $344.9 million at December 31,2006, comprised of $399.2 million of unrealized gains and $54.3 million ofunrealized losses.

 

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Of the gross unrealized losses at June 30,2007, $100.0 million or 95.8% were related to investment grade securities andare believed to be primarily a result of rising interest rates. All of theremaining $4.4 million of losses were in the corporate fixed income portfolioand were primarily comprised of securities in the consumer goods, capitalgoods, utilities, communication and basic industry sectors. The grossunrealized losses in these sectors were primarily company specific and interestrate related.

Our portfolio monitoring process identifies and evaluates, on acase-by-case basis, fixed income securities whose carrying value may beother-than-temporarily impaired. The process includes a quarterly review of allsecurities using a screening process to identify those securities whose fairvalue compared to amortized cost is below established thresholds for certaintime periods, or which are identified through other monitoring criteria such asratings downgrades or payment defaults. The securities identified, and othersecurities for which we may have a concern, are evaluated based on facts andcircumstances for inclusion on our watch list. We also conduct a portfolioreview to recognize impairment on securities in an unrealized loss position forwhich we do not have the intent and ability to hold until recovery as a resultof approved programs involving the disposition of investments such as changesin duration, revisions to strategic asset allocations and liquidity actions, aswell as certain dispositions anticipated by portfolio managers. Allsecurities in an unrealized loss position at June 30, 2007 were included in ourportfolio monitoring process for determining which declines in value were notother-than- temporary.

We also monitor the quality of our fixed incomeportfolio by categorizing certain investments as “problem”, “restructured” or “potentialproblem.”  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 Companyhad no problem, restructured or potential problem fixed income securities atJune 30, 2007. The following table summarizes problem, restructured andpotential problem fixed income securities at December 31, 2006.

 
| **(in thousands)**                | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **Amortized  cost**   | ** ** | **Fair  value** | ** ** | **Percent  of total  Fixed  Income  portfolio** | ** ** |
| Problem                           |       | $                     | 3,444      |   | $ | 6,883 |   | 0.1 | % |
| Restructured                      |       | —                |       | — |   | — |   |
| Potential problem                 |       | 2                     |       | — |   | — |   |
| Total net carrying value          |       | $                     | 3,446      |   | $ | 6,883 |   | 0.1 | % |
| Cumulative write-downs recognized |       | $                     | 2,491      |   |   |   |   |   |

 

The fixed income securities categorized as problem and potentialproblem as of December 31, 2006 were disposed in 2007. 

 

27

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**Net Investment Income**  Thefollowing table presents net investment income for the three months and sixmonths ended June 30.

 
| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended****June 30,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                | ** ** | **2007**                         | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                              |       |                             |       |                             |       |   |   |   |   |
| Fixed income securities           |       | $                                | 89,424     |                             | $          | 85,398 |   | $ | 176,288 |   | $ | 171,051 |   |
| Mortgage loans                    |       | 9,914                            |       | 9,611                            |       | 20,053 |   | 19,039 |   |
| Short-term and other              |       | 4,527                            |       | 4,329                            |       | 8,278 |   | 6,986 |   |
| Investment income, before expense |       | 103,865                          |       | 99,338                           |       | 204,619 |   | 197,076 |   |
| Investment expense                |       | (6,926                           | )          | (5,511                           | )          | (13,712 | ) | (10,356 | ) |
| **Net investment income**         |       | $                                | 96,939     |                             | $          | 93,827 |   | $ | 190,907 |   | $ | 186,720 |   |

 

Net investment income increased 3.3% and 2.2%in the three months and six months ended June 30, 2007 as compared to the sameperiods in the prior year.

 

**Net Realized Capital Gains and Losses**The following table presents the components of realized capital gains andlosses and the related tax effect.

 
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Investment write-downs                            |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | (258 | ) |
| Dispositions                                      |       | (762                             | )          | (5,950                         | )          | 547 |   | (22,367 | ) |
| Valuation of derivative instruments               |       | 52                               |       | (142                           | )          | (1,973 | ) | 639 |   |
| Settlement of derivative instruments              |       | (129                             | )          | 1,876                          |       | (1,318 | ) | 2,634 |   |
| Realized capital gains and losses, pretax         |       | (839                             | )          | (4,216                         | )          | (2,744 | ) | (19,352 | ) |
| Income tax benefit                                |       | 301                              |       | 1,500                          |       | 1,025 |   | 7,319 |   |
| **Realized capital gains and losses,  after-tax** |       | $                                | (538       | )                              | $          | (2,716 | ) | $ | (1,719 | ) | $ | (12,033 | ) |

 

Dispositions in the above table may include sales, losses recognized inanticipation of sales and other transactions such as calls and prepayments. Wemay sell impaired securities that were in an unrealized loss position at theprevious reporting date in situations where new factors such as negativedevelopments, subsequent credit deterioration, changing liquidity needs,relative value opportunities, and newly identified market opportunities cause achange in our previous intent to hold a security until recovery or maturity.

A changing interest rate environment will also drive changes in ourportfolio duration targets at a tactical level. A duration target and range isestablished with an economic view of liabilities relative to a long-termportfolio view. Tactical duration adjustments within management’s approvedranges are accomplished through both cash market transactions and derivativeactivities that generate realized gains and losses and through new purchases. Asa component of our approach to managing portfolio duration, realized gains andlosses on certain derivative instruments are most appropriately considered inconjunction with the unrealized gains and losses on the fixed income portfolio.This approach mitigates the impacts of general interest rate changes to theoverall financial condition of the Company.

Inthe second quarter of 2007, we recognized $4.3 million of losses related to achange in our intent to hold certain securities with unrealized losses untilthey recover in value. The change in our intent is primarily related tostrategic asset allocation decisions and ongoing comprehensive reviews of ourportfolio. We identified $118.6 million of securities which we did not have theintent to hold until recovery to achieve these objectives.

 

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### **CAPITAL RESOURCES AND LIQUIDITY**

 

**CapitalResources**consists of shareholder’s equity,representing funds deployed or available to be deployed to support businessoperations. The following table summarizes our capital resources.

 
| **(in thousands)**                                                         | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
|                                                                       |       |              |       |                  |       |
| Common stock, retained earnings and other  shareholder’s equity items |       | $                 | 592,152    |                  | $          | 574,958 |   |
| Accumulated other comprehensive income                                     |       | 39,252            |       | 78,038                |       |
| Total shareholder’s equity                                            |       | $                 | 631,404    |                  | $          | 652,996 |   |

 

*Shareholder’s equity* declined in the first six months of 2007,due to lower unrealized net capital gains on fixed income securities and areduction in retained income due to the impact of the Company’s adoption ofStatement of Position 05-1, “Accounting by Insurance Enterprises for DeferredAcquisition Costs in Connection with Modifications or Exchanges of InsuranceContracts” (see Note 1 to the Condensed Financial Statements), partially offsetby net income.

 

**Financial Ratings and Strength**Our ratings are influenced by many factors including our operating andfinancial performance, asset quality, liquidity, asset/liability management,overall portfolio mix, financial leverage (i.e., debt), exposure to risks, thecurrent 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, 2006.

 

**LiquiditySources and Uses *** *Asreflected in our Condensed Statements of Cash Flows, lower operating cash flowsin the first six months of 2007, compared to the first six months of 2006, wereprimarily the result of the settlement of an intercompany obligation in 2007and lower contract charges due to the disposition of the variable annuitybusiness in 2006, partially offset by lower capitalized acquisition expenses,higher investment income and increased premiums received.

Decreased cashflows used in investing activities were due to cash flows used in financingactivities as well as lower net cash provided by operating activities. Also,cash flows used in investing activities in the prior year include thesettlement of the disposal of our variable annuity business.

Cash flowsfrom financing activities reflect a use of cash in the first six months of 2007compared to a source of cash in the first six months of 2006 as contractholderfund withdrawals in the first six months of 2007 exceeded contractholder funddeposits. For quantification of the changes in contractholder funds, see theOperations section of MD&A.

We have aninter-company loan agreement with The Allstate Corporation (the “Corporation”).The amount of inter-company loans available to us is at the discretion of TheAllstate Corporation. The maximum amount of loans The Allstate Corporation willhave outstanding to all its eligible subsidiaries at any given point in time islimited to $1.00 billion. We had no amounts outstanding under the inter-companyloan agreement at June 30, 2007 or December 31, 2006. The Allstate Corporationuses commercial paper borrowings and bank lines of credit to fund intercompanyborrowings.

 

Asdescribed in Note 1 to the Condensed Financial Statements, in accordance withFinancial Accounting Standards Board Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”), the Company had no liability forunrecognized tax benefits at January 1 or June 30, 2007. We believe it isreasonably possible that the liability balance will not significantly increaseor decrease within the next 12 months.

 

29

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### **Item 4.       Controlsand Procedures**

 

*Evaluationof Disclosure Controls and Procedures.*We maintain disclosurecontrols and procedures as defined in Rule 13a-15(e) and 15(d)-15(e) under theSecurities Exchange Act of 1934. Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis 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.

 

*Changesin Internal Control over Financial Reporting.*During thefiscal quarter ended June 30, 2007, there have been no changes in our internalcontrol over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

30

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

###  

### **Item 1.       LegalProceedings**

###  

Information required for this Part II, Item 1, isincorporated by reference to the discussion under the heading “Regulation” andunder the heading “Legal and Regulatory Proceedings and Inquiries” in Note 4 ofthe Company’s Condensed Financial Statements in Part I, Item 1, of this Form10-Q.

 

**Item 1A.    Risk Factors**

 

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

Theseforward-looking statements do not relate strictly to historical or currentfacts and may be identified by their use of words like “plans,” “seeks,” “expects,”“will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets”and other words with similar meanings. These statements may address, amongother things, our strategy for growth, product development, regulatoryapprovals, market position, expenses, financial results, litigation andreserves. We believe that these statements are based on reasonable estimates,assumptions and plans. However, if the estimates, assumptions or plansunderlying the forward-looking statements prove inaccurate or if other risks oruncertainties arise, actual results could differ materially from thosecommunicated in these forward-looking statements. Risk factors which couldcause actual results to differ materially from those suggested by suchforward-looking statements include but are not limited to those discussed oridentified in this document (including the risks described below), in ourpublic filings with the Securities and Exchange Commission, and those incorporatedby reference in Part I, Item 1A of Allstate Life Insurance Company of New YorkAnnual Report on Form 10-K for 2006.

 

**Basedon our analysis and the seniority of our securities’ claim on the underlyingcollateral, we currently expect to receive all payments on our sub-prime RMBSand Alt-A mortgage-backed securities portfolio in accordance with theiroriginal contractual terms. We currently do not anticipate significantdowngrades in this portfolio.**

Onan ongoing basis, rating agencies review ratings of these securities and coulddowngrade or change their outlook due to, for example, a change in theirratings methodology and surveillance procedures, a perceived increase in therisk of default related to housing fundamentals or other developments that havea negative impact on the quality of the underlying mortgages. We believe thatour practices for acquiring and monitoring these securities, which includeconsideration of the security’s rating, provide us with information sufficientto forecast our expected receipt of payments. We continually review informationabout these securities as it becomes known and may revise our payment outlookbased on information such as a particular issuer’s ability to meet theircontractual obligations, housing delinquencies or loss trends.

 

**Thechange in our unrecognized tax benefit during the next 12 months is subject touncertainty.**

Asrequired by Financial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”), which was adopted as of January 1,2007, we have disclosed our estimate of net unrecognized tax benefits and thereasonably possible change in its balance during the next 12 months. We believethat this estimate has been appropriately established based on available factsand information, however, actual results may differ from our estimate forreasons such as changes in our position on specific issues,  developments with respect to the governments’interpretations of income tax laws or changes in judgment resulting from newinformation obtained in audits or the appeals process.

 

### **Item 6.       Exhibits**

###  

(a)   Exhibits

 

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

 

31

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### **SIGNATURE**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|            | Allstate  Life Insurance Company of New York |                 |
|-----------------|----------------------------------------------|----------------------|
|            | (Registrant)                                 |                 |
|            |                                         |                 |
| August 6,  2007 | By                                           | /s/ Samuel  H. Pilch |   |
|            | Samuel H.  Pilch                             |                 |
|            | Controller                                   |                 |
|            | (chief  accounting officer and duly          |                 |
|            | authorized  officer of the registrant)       |                 |
|                 |                                              |                      |  |  |

 

32

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| **Exhibit No.** | ** ** | **Description**                                                                                                                         |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                    |
| 15              |       | Acknowledgment  of awareness from Deloitte & Touche LLP, dated August 6, 2007, 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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