** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

** **

----

** **

**FORM10-Q**

 

**Registrantmeets the conditions set forth in General Instruction H (1)(a) and (b) of Form10-Q and is therefore filing this Form with the reduced disclosure format.**

 

**ý**** QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)OFTHE SECURITIES EXCHANGE ACT OF 1934**

******FORTHE QUARTERLY PERIOD ENDED JUNE 30, 2005**

** **

**OR**

 

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

 

##### **Commission file number: 333-100029**

 

###### **ALLSTATE LIFE INSURANCE COMPANYOFNEW YORK**

(Exact name ofregistrant as specified in its charter)

** **
| **New York**                             | ** ** | **36-2608394**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **100 Motor Parkway, Suite 132**         |       | ** **                           |
| **Hauppauge, New York**                  |       | **11788**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |

 

Registrant’s telephone number, including area code:**631-357-8920**

 

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

** **

**Yes  ****ý     No  ****o**

** **

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

** **

**Yes   ****o     No  ****ý**

** **

**As of July 29, 2005 the Registrant had 100,000 common shares,$25 par value, outstanding, all of which are held by Allstate Life InsuranceCompany.**

 

 

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##### **ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

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

##### **June 30, 2005**

 
| **PART 1.**  | **FINANCIAL INFORMATION**                                                                                                 | **Page** |
|--------------|---------------------------------------------------------------------------------------------------------------------------|----------|
|         |                                                                                                                      |     |
| Item  1.     | Financial  Statements                                                                                                     |     |
|         |                                                                                                                      |     |
|         | Condensed  Statements of Operations for the Three-Month and Six-Month Periods Ended June  30, 2005   and 2004 (unaudited) | 3        |
|         |                                                                                                                      |     |
|         | Condensed  Statements of Financial Position as of June 30, 2005 (unaudited) and December  31, 2004                        | 4        |
|         |                                                                                                                      |     |
|         | Condensed  Statements of Cash Flows for the Six-Month Periods Ended June 30, 2005 and  2004 (unaudited)                   | 5        |
|         |                                                                                                                      |     |
|         | Notes  to Condensed Financial Statements (unaudited)                                                                      | 6        |
|         |                                                                                                                      |     |
|         | Report  of Independent Registered Public Accounting Firm                                                                  | 10       |
|         |                                                                                                                      |     |
| Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               | 11       |
|         |                                                                                                                      |     |
| Item  4.     | Controls  and Procedures                                                                                                  | 24       |
|         |                                                                                                                      |     |
| **PART II.** | **OTHER INFORMATION**                                                                                                     |     |
|         |                                                                                                                      |     |
| Item  1.     | Legal  Proceedings                                                                                                        | 24       |
|         |                                                                                                                      |     |
| Item  6.     | Exhibits                                                                                                                  | 24       |

 

2

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#### **PART 1. FINANCIAL INFORMATION**

 

#### **ITEM 1.   FINANCIALSTATEMENTS**

####  

#### **ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

 

**CONDENSED STATEMENTS OF OPERATIONS**

 
| ** **                                                                                                                 | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                                                                                         | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                 | ** ** | **(unaudited)**                   | ** ** | **(unaudited)**                 | ** ** |
| **Revenues**                                                                                                               |       |                              |       |                            |       |   |   |   |   |
| Premiums                                                                                                                   |       | $                                 | 16,174     |                            | $          | 19,969 |   | $ | 36,167 |   | $ | 36,620 |   |
| Contract charges                                                                                                           |       | 15,976                            |       | 14,576                          |       | 31,235 |   | 28,688 |   |
| Net investment income                                                                                                      |       | 88,503                            |       | 72,676                          |       | 174,995 |   | 143,071 |   |
| Realized capital gains and losses                                                                                          |       | (2,632                            | )          | (2,886                          | )          | (8,509 | ) | (3,539 | ) |
|                                                                                                                       |       | 118,021                           |       | 104,335                         |       | 233,888 |   | 204,840 |   |
|                                                                                                                       |       |                              |       |                            |       |   |   |   |   |
| **Costs and expenses**                                                                                                     |       |                              |       |                            |       |   |   |   |   |
| Contract benefits                                                                                                          |       | 42,901                            |       | 44,916                          |       | 89,984 |   | 87,840 |   |
| Interest credited to contractholder funds                                                                                  |       | 39,438                            |       | 30,535                          |       | 75,664 |   | 58,186 |   |
| Amortization of deferred policy acquisition  costs                                                                         |       | 11,157                            |       | 8,817                           |       | 12,088 |   | 8,708 |   |
| Operating costs and expenses                                                                                               |       | 13,078                            |       | 10,300                          |       | 22,270 |   | 20,258 |   |
|                                                                                                                       |       | 106,574                           |       | 94,568                          |       | 200,006 |   | 174,992 |   |
|                                                                                                                       |       |                              |       |                            |       |   |   |   |   |
| Gain on disposition of operations                                                                                          |       | 1                                 |       | —                          |       | 1 |   | 1,058 |   |
|                                                                                                                       |       |                              |       |                            |       |   |   |   |   |
| **Income from operations before income tax  expense and cumulative effect of change in accounting principle,   after-tax** |       | 11,448                            |       | 9,767                           |       | 33,883 |   | 30,906 |   |
|                                                                                                                       |       |                              |       |                            |       |   |   |   |   |
| Income tax expense                                                                                                         |       | 4,508                             |       | 3,592                           |       | 13,058 |   | 11,094 |   |
|                                                                                                                       |       |                              |       |                            |       |   |   |   |   |
| **Income before cumulative effect of change  in accounting principle, after-tax**                                          |       | 6,940                             |       | 6,175                           |       | 20,825 |   | 19,812 |   |
|                                                                                                                       |       |                              |       |                            |       |   |   |   |   |
| Cumulative effect of change in accounting  principle, after-tax                                                            |       | —                            |       | —                          |       | — |   | (7,586 | ) |
|                                                                                                                       |       |                              |       |                            |       |   |   |   |   |
| **Net income**                                                                                                             |       | $                                 | 6,940      |                            | $          | 6,175 |   | $ | 20,825 |   | $ | 12,226 |   |

 

See notes to condensedfinancial statements.

 

3

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**ALLSTATE LIFE INSURANCE COMPANY OF NEWYORK**

 

**CONDENSED STATEMENTS OF FINANCIALPOSITION**

 
| ** **                                                                         | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| **(in thousands, except par value  data)**                                         | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                         | ** ** | **(unaudited)** | ** ** | ** **       | ** ** |
| **Assets**                                                                         |       |            |       |             |       |
| Investments                                                                        |       |            |       |             |       |
| Fixed income securities, at fair value  (amortized cost $5,451,437 and $5,012,977) |       | $               | 6,111,363  |             | $          | 5,545,647 |   |
| Mortgage loans                                                                     |       | 536,908         |       | 480,280          |       |
| Short-term                                                                         |       | 66,059          |       | 111,509          |       |
| Policy loans                                                                       |       | 35,806          |       | 34,948           |       |
| Other                                                                              |       | 2,399           |       | 4,638            |       |
| Total investments                                                                  |       | 6,752,535       |       | 6,177,022        |       |
|                                                                               |       |            |       |             |       |
| Cash                                                                               |       | 2,841           |       | 8,624            |       |
| Deferred policy acquisition costs                                                  |       | 254,462         |       | 238,173          |       |
| Accrued investment income                                                          |       | 59,460          |       | 55,821           |       |
| Reinsurance recoverables                                                           |       | 10,930          |       | 8,422            |       |
| Current income taxes receivable                                                    |       | 2,684           |       | 367              |       |
| Other assets                                                                       |       | 22,647          |       | 17,665           |       |
| Separate Accounts                                                                  |       | 851,253         |       | 792,550          |       |
| **Total assets**                                                                   |       | $               | 7,956,812  |             | $          | 7,298,644 |   |
|                                                                               |       |            |       |             |       |
| **Liabilities**                                                                    |       |            |       |             |       |
| Reserve for life-contingent contract  benefits                                     |       | $               | 1,911,139  |             | $          | 1,782,451 |   |
| Contractholder funds                                                               |       | 4,135,238       |       | 3,802,846        |       |
| Deferred income taxes                                                              |       | 94,191          |       | 90,760           |       |
| Other liabilities and accrued expenses                                             |       | 277,354         |       | 180,904          |       |
| Payable to affiliates, net                                                         |       | 10,741          |       | 8,831            |       |
| Reinsurance payable to parent                                                      |       | 963             |       | 1,067            |       |
| Separate Accounts                                                                  |       | 851,253         |       | 792,550          |       |
| **Total liabilities**                                                              |       | 7,280,879       |       | 6,659,409        |       |
| **Commitments and Contingent Liabilities  (Note 3)**                               |       |            |       |             |       |
|                                                                               |       |            |       |             |       |
| **Shareholder’s equity**                                                      |       |            |       |             |       |
| Common stock, $25 par value, 100 thousand  shares authorized and outstanding       |       | 2,500           |       | 2,500            |       |
| Additional capital paid-in                                                         |       | 120,000         |       | 120,000          |       |
| Retained income                                                                    |       | 382,269         |       | 361,480          |       |
| Accumulated other comprehensive income:                                            |       |            |       |             |       |
| Unrealized net capital gains and losses                                            |       | 171,164         |       | 155,255          |       |
| **Total accumulated other comprehensive  income**                                  |       | 171,164         |       | 155,255          |       |
| **Total shareholder’s equity**                                                |       | 675,933         |       | 639,235          |       |
| **Total liabilities and shareholder’s equity**                                |       | $               | 7,956,812  |             | $          | 7,298,644 |   |

 

See notes tocondensed financial statements.

 

4

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#### **ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **(in thousands)**                                                                 | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**               | ** ** |
| **Cash flows from operating activities**                                           |       |                          |       |   |   |
| Net income                                                                         |       | $                             | 20,825     |   | $ | 12,226 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                          |       |   |   |
| Amortization and other non-cash items                                              |       | (28,457                       | )          | (24,511 | ) |
| Realized capital gains and losses                                                  |       | 8,509                         |       | 3,539 |   |
| Gain on disposition of operations                                                  |       | (1                            | )          | (1,058 | ) |
| Cumulative effect of change in accounting  principle                               |       | —                        |       | 7,586 |   |
| Interest credited to contractholder funds                                          |       | 75,664                        |       | 58,186 |   |
| Changes in:                                                                        |       |                          |       |   |   |
| Life-contingent contract benefits and  contractholder funds                        |       | 17,867                        |       | 15,929 |   |
| Deferred policy acquisition costs                                                  |       | (25,822                       | )          | (28,212 | ) |
| Income taxes payable                                                               |       | (7,434                        | )          | 3,938 |   |
| Other operating assets and liabilities                                             |       | (4,438                        | )          | 11,026 |   |
| Net cash provided by operating activities                                          |       | 56,713                        |       | 58,649 |   |
|                                                                               |       |                          |       |   |   |
| **Cash flows from investing activities**                                           |       |                          |       |   |   |
| Proceeds from sales of fixed income  securities                                    |       | 303,080                       |       | 233,910 |   |
| Investment collections                                                             |       |                          |       |   |   |
| Fixed income securities                                                            |       | 84,532                        |       | 102,448 |   |
| Mortgage loans                                                                     |       | 38,902                        |       | 6,403 |   |
| Investment purchases                                                               |       |                          |       |   |   |
| Fixed income securities                                                            |       | (687,867                      | )          | (763,912 | ) |
| Mortgage loans                                                                     |       | (93,054                       | )          | (24,474 | ) |
| Change in short-term investments, net                                              |       | 37,382                        |       | 4,884 |   |
| Change in other investments, net                                                   |       | (969                          | )          | 379 |   |
| Net cash used in investing activities                                              |       | (317,994                      | )          | (440,362 | ) |
|                                                                               |       |                          |       |   |   |
| **Cash flows from financing activities**                                           |       |                          |       |   |   |
| Contractholder fund deposits                                                       |       | 500,093                       |       | 510,088 |   |
| Contractholder fund withdrawals                                                    |       | (244,595                      | )          | (124,958 | ) |
| Net cash provided by financing activities                                          |       | 255,498                       |       | 385,130 |   |
|                                                                               |       |                          |       |   |   |
| **Net (decrease) increase in cash**                                                |       | (5,783                        | )          | 3,417 |   |
| **Cash at beginning of period**                                                    |       | 8,624                         |       | 10,731 |   |
| **Cash at end of period**                                                          |       | $                             | 2,841      |   | $ | 14,148 |   |

 

See notes to condensed financial statements.

 

5

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**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

### **1.   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 Allstate Corporation(the “Corporation”).

 

Thecondensed financial statements and notes as of June 30, 2005 and for thethree-month and six-month periods ended June 30, 2005 and 2004 areunaudited.  The condensed financialstatements reflect all adjustments (consisting only of normal recurringaccruals) which are, in the opinion of management, necessary for the fairpresentation of the financial position, results of operations and cash flowsfor the interim periods.  These condensedfinancial statements and notes should be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2004. The results of operations for the interim periods should not beconsidered indicative of results to be expected for the full year.

 

Toconform to the 2005 presentation, certain amounts in the prior year’s condensedfinancial statements and notes have been reclassified.

 

### **2.   Reinsurance**

 

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

 
| ** **                                         | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Premiums and contract charges**                  |       |                              |       |                            |       |   |   |   |   |
| Direct                                             |       | $                                 | 36,185     |                            | $          | 38,677 |   | $ | 75,855 |   | $ | 73,167 |   |
| Assumed – non-affiliate                       |       | 290                               |       | 117                             |       | 502 |   | 302 |   |
| Ceded                                              |       |                              |       |                            |       |   |   |   |   |
| Affiliate                                          |       | (1,172                            | )          | (1,086                          | )          | (2,352 | ) | (2,183 | ) |
| Non-affiliate                                      |       | (3,153                            | )          | (3,163                          | )          | (6,603 | ) | (5,978 | ) |
| Premiums and contract charges, net of  reinsurance |       | $                                 | 32,150     |                            | $          | 34,545 |   | $ | 67,402 |   | $ | 65,308 |   |

 

The effects of reinsurance on contract benefits are as follows:

 
| ** **                            | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                    | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Contract benefits**                 |       |                              |       |                            |       |   |   |   |   |
| Direct                                |       | $                                 | 45,829     |                            | $          | 46,370 |   | $ | 94,870 |   | $ | 90,728 |   |
| Assumed – non-affiliate          |       | 96                                |       | 45                              |       | 156 |   | 78 |   |
| Ceded                                 |       |                              |       |                            |       |   |   |   |   |
| Affiliate                             |       | (726                              | )          | (1,034                          | )          | (1,188 | ) | 17 |   |
| Non-affiliate                         |       | (2,298                            | )          | (465                            | )          | (3,854 | ) | (2,983 | ) |
| Contract benefits, net of reinsurance |       | $                                 | 42,901     |                            | $          | 44,916 |   | $ | 89,984 |   | $ | 87,840 |   |

 

In addition to amounts included in the table above are reinsurancepremiums ceded to ALIC of $722 thousand and $682 thousand for second quarter of2005 and 2004, respectively and $1.42 million and $1.35 million for the firstsix months of 2005 and 2004, respectively, under the terms of the structuredsettlement annuity reinsurance agreement. These amounts are reflected as a component of realized capital gains andlosses on the Condensed Statements of Operations as the treaty is recorded as aderivative instrument pursuant to the requirements of Statement of FinancialAccounting Standard No. 133, “Accounting for Derivative Instruments and HedgingActivities.”

 

6

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

 

The aggregate liabilitybalance related to all guarantees was not material as of June 30, 2005.

 

**Regulation**

 

The Company is subject tochanging social, economic and regulatory conditions.  Recent state and federal regulatoryinitiatives and proceedings have included efforts to impose additionalregulations regarding agent and broker compensation and otherwise expandoverall regulation of insurance products and the insurance industry. Theultimate changes and eventual effects of these initiatives on the Company’sbusiness, if any, are uncertain.

 

**Legal and Regulatory Proceedings and Inquiries**

 

**Background**

 

The Company and certain ofits affiliates are named as defendants in a number of lawsuits and other legalproceedings arising out of various aspects of its business.  In addition, from time to time regulatoryexaminations or inquiries are pending involving the Company.  As background to the “Proceedings”sub-section below, please note the following:

 

•                  Thesematters raise difficult and complicated factual and legal issues and aresubject to many uncertainties and complexities, including but not limited to,the underlying facts of each matter, novel legal issues, variations betweenjurisdictions in which matters are being litigated, differences in applicablelaws and judicial interpretations, the length of time before many of thesematters might be resolved by settlement or through litigation and, in somecases, the timing of their resolutions relative to other similar cases broughtagainst other companies, the fact that some of these matters are putative classactions in which a class has not been certified and in which the purportedclass may not be clearly defined, the fact that some of these matters involvemulti-state class actions in which the applicable law(s) for the claims atissue is in dispute and therefore unclear, and the current challenging legalenvironment faced by large corporations and insurance companies.

 

•                  Inthese matters, plaintiffs seek a variety of remedies including equitable reliefin the form of injunctive and other remedies and monetary relief in the form ofcontractual and extra-contractual damages. In some cases, the monetary damages sought include punitive damages orare not specified.  Often more specificinformation beyond the type of relief sought is not available becauseplaintiffs have not requested more specific relief in their courtpleadings.  In our experience, monetarydemands in plaintiffs’ court pleadings bear little relation to the ultimateloss, if any, to the Company.

 

•                  Forthe reasons specified above, it is not possible to make meaningful estimates ofthe amount or range of loss that could result from these matters at thistime.  The Company reviews these matterson an on-going basis and follows the provisions of Statement of Financial AccountingStandard No. 5, “Accounting for Contingencies” when making accrual anddisclosure decisions.  When assessing 

 

7

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reasonably possible and probable outcomes, the Company bases itsdecisions on its assessment of the ultimate outcome following all appeals.

 

•                  Inthe opinion of the Company’s management, while the ultimate liability in someof these matters in excess of amounts currently reserved may be material to theCompany’s operating results for any particular period if an unfavorable outcomeresults, none will have a material adverse effect on the financial condition ofthe Company.

 

**Proceedings**

 

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

 

AICis defending certain matters relating to its agency program reorganizationannounced in 1999. These matters include a lawsuit filed in December 2001by the U.S. Equal Employment Opportunity Commission (“EEOC”) allegingretaliation under federal civil rights laws, a class action filed in August2001 by former employee agents alleging retaliation and age discriminationunder the Age Discrimination in Employment Act, breach of contract and ERISAviolations, and a lawsuit filed in October 2004 by the EEOC alleging agediscrimination with respect to a policy limiting the rehire of agents affectedby the agency program reorganization. AIC is also defending another action, in which a class was certified,filed by former employee agents who terminated their employment prior to theagency program reorganization.  Theseplaintiffs have asserted breach of contract and ERISA claims and are seekingactual damages including benefits under Allstate employee benefit plans andpayments provided in connection with the reorganization, as well as punitivedamages.  In late March 2004, in thefirst EEOC lawsuit and class action lawsuit, the trial court issued amemorandum and order that, among other things, certified classes of agents,including a mandatory class of agents who had signed a release, for purposes ofeffecting the court’s declaratory judgment that the release is voidable at theoption of the release signer.  The courtalso ordered that an agent who voids the release must return to AIC “any andall benefits received by the [agent] in exchange for signing the release.”  The court also “concluded that, on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order.  The case otherwise remains pending.  A putative nationwide class action has alsobeen filed by former employee agents alleging various violations of ERISA,including a worker classification issue. These plaintiffs are challenging certain amendments to the AgentsPension Plan and are seeking to have exclusive agent independent contractorstreated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was thesubject of further proceedings on appeal, and has been reversed and remanded tothe trial court in April 2005.  In thesematters, plaintiffs seek compensatory and punitive damages, and equitablerelief.  AIC has been vigorouslydefending these lawsuits and other matters related to its agency programreorganization.  The outcome of these disputesis currently uncertain.

 

TheCompany is currently undergoing a periodic market conduct examination by stateinsurance regulators.  Regulators arefocusing, as they have with other insurers, on the Company’s compliance withthe state’s replacement sales and record-keeping processes with regard to lifeinsurance and annuities among other issues. The ultimate outcome of this examination is currently uncertain.

 

**Other Matters**

 

TheCorporation and some of its subsidiaries, including the Company, have receivedinterrogatories and demands for information from regulatory and enforcementauthorities relating to various insurance products and practices.  The areas of inquiry include variable annuitymarket timing and late trading.  TheCorporation and some of its subsidiaries, including the Company, have alsoreceived interrogatories and demands for information from authorities seekinginformation relevant to on-going investigations into the possible violation ofantitrust or insurance laws by unnamed parties and, in particular, seekinginformation as to whether any person engaged in activities for the purpose ofprice fixing, market allocation, or bid rigging. The Company believes thatthese inquiries are similar to those made to many financial services companiesas part of industry-wide investigations by various authorities into thepractices, policies and procedures relating to 

 

8

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insurance and financial servicesproducts.  The Corporation and itssubsidiaries have responded and will continue to respond to these inquiries

 

Variousother legal and regulatory actions are currently pending that involve theCompany and specific aspects of its conduct of business.  Like other members of the insurance industry,the Company is the target of a number of lawsuits and proceedings, some ofwhich involve claims for substantial or indeterminate amounts.  These actions are based on a variety ofissues and target a range of the Company’s practices.  The outcome of these disputes is currentlyunpredictable.

 

However,at this time, based on their present status, it is the opinion of managementthat the ultimate liability, if any, in one or more of the actions described inthis “Other Matters” subsection in excess of amounts currently reserved is notexpected to have a material effect on the results of operations, liquidity orfinancial condition of the Company.

 

**4.   Other Comprehensive Income**

 

The components of other comprehensive income on a pretax and after-taxbasis are as follows:

 
| ** **                                                                           | ** ** | **Three months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                                                   | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **Pretax**                      | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains (losses) arising  during the period, net of related offsets |       | $                               | 71,377     |   | $ | (24,982 | ) | $ | 46,395 |   | $ | (87,752 | ) | $ | 30,712 |   | $ | (57,040 | ) |
| Less: reclassification adjustments                                                   |       | 1,898                           |       | (665 | ) | 1,233 |   | (2,631 | ) | 919 |   | (1,712 | ) |
|                                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)                                                    |       | $                               | 69,479     |   | $ | (24,317 | ) | 45,162 |   | $ | (85,121 | ) | $ | 29,793 |   | (55,328 | ) |
|                                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                           |       |                            |       |   |   | 6,940 |   |   |   |   |   | 6,175 |   |
| Comprehensive income (loss)                                                          |       |                            |       |   |   | $ | 52,102 |   |   |   |   |   | $ | (49,153 | ) |

 
| ** **                                                                           | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **(in thousands)**                                                                   | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **Pretax**                    | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                 |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains (losses) arising  during the period, net of related offsets |       | $                             | 17,361     |   | $ | (6,076 | ) | $ | 11,285 |   | $ | (51,087 | ) | $ | 17,881 |   | $ | (33,206 | ) |
| Less: reclassification adjustments                                                   |       | (7,114                        | )          | 2,490 |   | (4,624 | ) | (2,400 | ) | 840 |   | (1,560 | ) |
|                                                                                 |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)                                                    |       | $                             | 24,475     |   | $ | (8,566 | ) | 15,909 |   | $ | (48,687 | ) | $ | 17,041 |   | (31,646 | ) |
|                                                                                 |       |                          |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                           |       |                          |       |   |   | 20,825 |   |   |   |   |   | 12,226 |   |
| Comprehensive income (loss)                                                          |       |                          |       |   |   | $ | 36,734 |   |   |   |   |   | $ | (19,420 | ) |

 

9

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholder of

AllstateLife Insurance Company of New York:

 

Wehave reviewed the accompanying condensed statement of financial position ofAllstate Life Insurance Company of New York (the “Company”, an affiliate of TheAllstate Corporation) as of June 30, 2005, and the related condensed statementsof operations for the three-month and six-month periods ended June 30, 2005 and2004, and the condensed statements of cash flows for the six-month periodsended June 30, 2005 and 2004.  Theseinterim financial statements are the responsibility of the Company’smanagement.

 

We conducted our reviews in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  A review of interim financial informationconsists principally of applying analytical procedures and making inquiries ofpersons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the objective of which is theexpression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to such condensed interim financial statements for them tobe in conformity with accounting principles generally accepted in the UnitedStates 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 ofDecember 31, 2004, and the related statements of operations andcomprehensive income, shareholder’s equity, and cash flows for the year thenended, not presented herein.  In ourreport dated February 24, 2005, which report includes an explanatory paragraphrelating to a change in the Company’s method of accounting for certainnontraditional long-duration contracts and for separate accounts in 2004, weexpressed an unqualified opinion on those financial statements.  In our opinion, the information set forth inthe accompanying condensed statement of financial position as of December 31,2004 is fairly stated, in all material respects, in relation to the statementof financial position from which it has been derived.

 

 
| /s/  Deloitte & Touche LLP |   |
|--------------------------------|--------|
|                           |   |
| Chicago,  Illinois             |   |
| August  8, 2005                |   |

 

10

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**Item 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THETHREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2005 AND 2004**

** **

### **OVERVIEW**

 

Thefollowing discussion highlights significant factors influencing the financialposition and results of operations of Allstate Life Insurance Company of NewYork (referred to in this document as “we”, “our”, “us” or the “Company”).  It should be read in conjunction with thecondensed financial statements and notes thereto found under Part I. Item 1.contained herein, and with the discussion, analysis, financial statements andnotes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of theAllstate Life Insurance Company of New York Annual Report on Form 10-K for2004.  We operate as a single segmententity, based on the manner in which financial information is used internallyto evaluate performance and determine the allocation of resources.

###  

### **OPERATIONS**

 

Wewill pursue the following to improve return on equity: maintain and developfocused top-tier products, deepen distribution partner relationships, improveour cost structure, advance our enterprise risk management program and leveragethe strength of the Allstate brand name across products and distributionchannels.  The execution of our businessstrategies has and may continue to involve simplifying our business model bychanging the number and selection of products being marketed, for example, thesale of substantially all of our direct response distribution business in 2004;terminating underperforming distribution relationships; reducing policyadministration software systems; and other actions that we may determine areappropriate to successfully execute our business strategies.

 

**Premiums**represent revenues generated from traditional life, immediate annuitieswith life contingencies and other insurance products that have significantmortality or morbidity risk.

 

**Contract charges** are revenues generated from interest-sensitive life products andvariable and fixed annuities for which deposits are classified ascontractholder funds or separate accounts liabilities.  Contract charges are assessed against thecontractholder account values for maintenance, administration, cost ofinsurance and surrender prior to the contractually specified dates.  As a result, changes in contractholder fundsand separate accounts liabilities are considered in the evaluation of growthand as indicators of future levels of revenues.

 

Thefollowing table summarizes premiums and contract charges by product.

 
| ** **                                  | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                          | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums**                                | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional life                            |       | $                                 | 6,245      |                            | $          | 5,746 |   | $ | 12,105 |   | $ | 11,201 |   |
| Immediate annuities with life contingencies |       | 8,823                             |       | 13,597                          |       | 22,042 |   | 24,041 |   |
| Accident and health and other               |       | 1,106                             |       | 626                             |       | 2,020 |   | 1,378 |   |
| **Total premiums**                          |       | 16,174                            |       | 19,969                          |       | 36,167 |   | 36,620 |   |
|                                        |       |                              |       |                            |       |   |   |   |   |
| **Contract charges**                        |       |                              |       |                            |       |   |   |   |   |
| Interest-sensitive life                     |       | 10,524                            |       | 9,982                           |       | 20,469 |   | 19,410 |   |
| Fixed annuities                             |       | 1,634                             |       | 1,495                           |       | 3,427 |   | 3,032 |   |
| Variable annuities                          |       | 3,818                             |       | 3,099                           |       | 7,339 |   | 6,246 |   |
| **Total contract charges**                  |       | 15,976                            |       | 14,576                          |       | 31,235 |   | 28,688 |   |
| **Premiums and contract charges**           |       | $                                 | 32,150     |                            | $          | 34,545 |   | $ | 67,402 |   | $ | 65,308 |   |

 

11

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Thefollowing table summarizes premiums and contract charges by distributionchannel.

 
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                | ** ** | **2005**                             | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Premiums**                      | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate agencies                 |       | $                                    | 6,171      |                            | $          | 5,654 |   | $ | 11,909 |   | $ | 11,011 |   |
| Broker dealers                    |       | —                               |       | —                          |       | 36 |   | 107 |   |
| Specialized brokers               |       | 8,823                                |       | 13,597                          |       | 22,005 |   | 23,934 |   |
| Independent agents                |       | 1,180                                |       | 786                             |       | 2,217 |   | 1,485 |   |
| Direct marketing                  |       | —                               |       | (68                             | )          | — |   | 83 |   |
| **Total premiums**                |       | 16,174                               |       | 19,969                          |       | 36,167 |   | 36,620 |   |
|                              |       |                                 |       |                            |       |   |   |   |   |
| **Contract charges**              |       |                                 |       |                            |       |   |   |   |   |
| Allstate agencies                 |       | 10,218                               |       | 10,073                          |       | 19,924 |   | 19,556 |   |
| Broker dealers                    |       | 2,845                                |       | 2,611                           |       | 5,588 |   | 5,329 |   |
| Banks                             |       | 2,308                                |       | 902                             |       | 4,108 |   | 1,617 |   |
| Specialized brokers               |       | 487                                  |       | 934                             |       | 1,398 |   | 2,062 |   |
| Independent agents                |       | 118                                  |       | 56                              |       | 217 |   | 124 |   |
| **Total contract charges**        |       | 15,976                               |       | 14,576                          |       | 31,235 |   | 28,688 |   |
|                              |       |                                 |       |                            |       |   |   |   |   |
| **Premiums and contract charges** |       | $                                    | 32,150     |                            | $          | 34,545 |   | $ | 67,402 |   | $ | 65,308 |   |

 

Totalpremiums declined 19.0% and 1.2% in the second quarter and first six months of2005, respectively, compared to the same periods of 2004.  In both periods, increased traditional lifeand accident and health premiums were more than offset by lower premiums onimmediate annuities with life contingencies sold through specialized brokers.

 

Contract charges increased 9.6% and 8.9% in the second quarter andfirst six months of 2005, respectively, compared to the same periods of2004.  The increases were primarily dueto higher contract charges on variable annuities and interest-sensitive lifeproducts and, to a lesser extent, fixed annuities.  Higher variable annuity contract charges werethe result of increased average account values during the current periods of2005 compared to the same periods of 2004, reflecting positive investmentresults and net deposits on variable annuity and life contracts.  The increase in the interest-sensitive lifecontract charges were attributable to in-force business growth resulting fromdeposits and credited interest more than offsetting surrenders andbenefits.  Fixed annuity contract chargesfor the second quarter and first six months of 2005 reflect higher surrendercharges compared with the same periods in the prior year.

 

12

----

 

*Contractholder funds* represent interest-bearing liabilitiesarising from the sale of fixed annuities, interest-sensitive life and variable annuity and life deposits allocatedto fixed accounts.  The balance ofcontractholder funds is equal to the cumulative deposits received and interestcredited to the contractholder less cumulative contract maturities, benefits,surrenders, withdrawals and contract charges for mortality or administrativeexpenses.

 

Thefollowing table shows the changes in contractholder funds.

 
| ** **                                                      | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Contractholder  funds, beginning balance**                    |       | $                                 | 4,033,796  |                            | $          | 2,814,594 |   | $ | 3,802,846 |   | $ | 2,658,325 |   |
|                                                            |       |                              |       |                            |       |   |   |   |   |
| Impact of adoption of SOP 03-1(1)                               |       | —                            |       | —                          |       | — |   | 2,031 |   |
|                                                            |       |                              |       |                            |       |   |   |   |   |
| **Deposits:**                                                   |       |                              |       |                            |       |   |   |   |   |
| Fixed annuities (immediate and deferred)                        |       | 187,430                           |       | 257,012                         |       | 431,374 |   | 402,399 |   |
| Interest-sensitive life                                         |       | 26,639                            |       | 26,210                          |       | 48,826 |   | 51,032 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | 14,870                            |       | 31,098                          |       | 33,981 |   | 56,657 |   |
| Total deposits                                                  |       | 228,939                           |       | 314,320                         |       | 514,181 |   | 510,088 |   |
|                                                            |       |                              |       |                            |       |   |   |   |   |
| **Interest credited**                                           |       | 42,956                            |       | 30,235                          |       | 82,620 |   | 57,951 |   |
|                                                            |       |                              |       |                            |       |   |   |   |   |
| **Benefits, withdrawals and other adjustments**                 |       |                              |       |                            |       |   |   |   |   |
| Benefits                                                        |       | (17,900                           | )          | (11,149                         | )          | (34,497 | ) | (19,894 | ) |
| Surrenders and partial withdrawals                              |       | (132,973                          | )          | (45,056                         | )          | (191,289 | ) | (84,299 | ) |
| Contract charges                                                |       | (10,335                           | )          | (10,446                         | )          | (20,447 | ) | (20,328 | ) |
| Net transfers to separate accounts                              |       | (9,524                            | )          | (9,927                          | )          | (18,739 | ) | (21,394 | ) |
| Other adjustments                                               |       | 279                               |       | 1,515                           |       | 563 |   | 1,606 |   |
| Total benefits, withdrawals and other  adjustments              |       | (170,453                          | )          | (75,063                         | )          | (264,409 | ) | (144,309 | ) |
|                                                            |       |                              |       |                            |       |   |   |   |   |
| **Contractholder funds, ending balance**                        |       | $                                 | 4,135,238  |                            | $          | 3,084,086 |   | $ | 4,135,238 |   | $ | 3,084,086 |   |

 

----

(1)          The increase in contractholder funds due tothe adoption of SOP 03-1 reflects the establishment of reserves for certainliabilities that are primarily related to income benefit guarantees providedunder variable annuities and the reclassification of deferred sales inducements(“DSI”) from contractholder funds to other assets.

 

Contractholderfunds deposits decreased 27.2% in the second quarter and increased slightly inthe first six months of 2005 compared to the same periods in 2004.  The decline in the second quarter was dueprimarily to lower deposits on fixed annuities as a result of increasedcompetition from certificates of deposit. The slight increase in the first six months was due primarily to higherdeposits on deferred fixed annuities resulting from strong competitiveposition, almost entirely offset by lower variable annuity and life depositsallocated to fixed accounts and, to a lesser extent, decreased deposits on interest-sensitivelife products.  Average contractholderfunds, excluding the impact of adopting SOP 03-1, increased 38.5% in the secondquarter and 38.2% in the first six months of 2005 compared to the same periodsin 2004.  Fixed annuity deposits declined27.1% in the second quarter and increased 7.2% in the first six months of 2005compared to the same periods in the prior year. Increases in short-term interest rates without corresponding increasesin longer term rates has generally reduced the competitiveness of fixed annuityproducts relative to shorter term deposit products such as money market fundsand certificates of deposit.  Acontinuation of this environment could reduce the level of expected fixedannuity deposits.

 

Surrendersand partial withdrawals increased 195.1% in the second quarter and 126.9% inthe first six months of 2005 compared to the same periods of 2004 reflecting anannualized withdrawal rate of 13.2% in the second quarter and 10.1% in thefirst six months of 2005 based on the beginning of period contractholder fundsbalance.  This compares to an annualizedwithdrawal rate of 6.4% in second quarter and 6.3% in the first six months of2004.  The increases in the annualizedwithdrawal rates were primarily attributable to higher surrenders on the fixedaccount option on certain variable annuity contracts.  The

 

13

----

 

funds subject to these surrenders wereinvested in prior years when the crediting rate on our fixed investment optionwas attractive relative to short-term market interest rates.  Contractholders withdrew their funds at anincreased rate due to the rise in short-term market interest rates, which werenot accompanied by a structural rise in crediting rates.  Fixed annuity surrenders and withdrawals arealso contributing to the increase due to the growth and aging of our in-forcebusiness.  Surrenders and withdrawals mayvary with changes in interest rates and equity market conditions and the agingof our in-force contracts.

 

*Separate accounts liabilities* represent contractholders’ claims to therelated separate accounts assets. Separate accounts liabilities primarily arise from the sale of variableannuity contracts and variable life insurance policies.

 

Thefollowing table shows the changes in separate accounts liabilities.

 
| ** **                                                      | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Separate accounts liabilities, beginning  balance**           |       | $                                 | 809,274    |                            | $          | 686,639 |   | $ | 792,550 |   | $ | 665,875 |   |
|                                                            |       |                              |       |                            |       |   |   |   |   |
| Variable annuity and life deposits                              |       | 49,397                            |       | 59,943                          |       | 106,228 |   | 111,232 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | (14,870                           | )          | (31,098                         | )          | (33,981 | ) | (56,657 | ) |
| Net deposits                                                    |       | 34,527                            |       | 28,845                          |       | 72,247 |   | 54,575 |   |
|                                                            |       |                              |       |                            |       |   |   |   |   |
| Investment results                                              |       | 18,081                            |       | 2,223                           |       | 6,279 |   | 17,603 |   |
| Contract charges                                                |       | (3,234                            | )          | (2,466                          | )          | (6,220 | ) | (4,852 | ) |
| Net transfers from fixed accounts                               |       | 9,524                             |       | 9,927                           |       | 18,739 |   | 21,394 |   |
| Surrenders and benefits                                         |       | (16,919                           | )          | (14,805                         | )          | (32,342 | ) | (44,232 | ) |
|                                                            |       |                              |       |                            |       |   |   |   |   |
| **Separate accounts liabilities, ending  balance**              |       | $                                 | 851,253    |                            | $          | 710,363 |   | $ | 851,253 |   | $ | 710,363 |   |

 

Separateaccounts liabilities increased $58.7 million as of June 30, 2005 compared toDecember 31, 2004. Variable annuity and life deposits in the second quarter andfirst six months of 2005 decreased 17.6% and 4.5%, respectively, compared tothe same periods in the prior year. However, net deposits increased 19.7% and32.4% in the second quarter and first six months of 2005, respectively, as thedecline in the variable and life deposits was more than offset by a lowerpercentage of deposits being allocated to fixed accounts.  Variable annuity contractholders oftenallocate a significant portion of their initial variable annuity contractdeposit into a fixed rate investment option. The level of this activity is reflected above in the deposits allocatedto the fixed accounts, while all other transfer activity between the fixed andseparate accounts investments options is reflected in net transfers from fixedaccounts.  The liability for the fixedportion of variable annuity contracts is reflected in contractholder funds.

 

**Net investment income** increased 21.8% in the three months endedJune 30, 2005 and 22.3% in the first six months of 2005 compared to the sameperiods in 2004. The increases in both periods were primarily due to the effectof higher portfolio balances, partially offset by lower portfolio yields.  Higher portfolio balances resulted from theinvestment of cash flows from operating and financing activities relatedprimarily to deposits from fixed annuities and interest-sensitive lifepolicies.  Investments as of June 30,2005 increased 9.3% from December 31, 2004. The lower portfolio yields were primarily due to purchases, includingreinvestments, of fixed income securities with yields lower than the currentportfolio average.

 

14

----

 

**Net income** analysis is presented in the following table.

 
| ** **                                                                                            | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                                                                    | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                  |       |                              |       |                            |       |   |   |   |   |
| Premiums                                                                                              |       | $                                 | 16,174     |                            | $          | 19,969 |   | $ | 36,167 |   | $ | 36,620 |   |
| Contract charges(1)                                                                                   |       | 15,976                            |       | 14,573                          |       | 31,235 |   | 28,678 |   |
| Net investment income                                                                                 |       | 88,503                            |       | 72,676                          |       | 174,995 |   | 143,071 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments (2)                            |       | 270                               |       | 69                              |       | 484 |   | 76 |   |
| Contract benefits                                                                                     |       | (42,901                           | )          | (44,916                         | )          | (89,984 | ) | (87,840 | ) |
| Interest credited to contractholder  funds(3)                                                         |       | (38,733                           | )          | (30,155                         | )          | (74,727 | ) | (57,802 | ) |
| Gross margin                                                                                          |       | 39,289                            |       | 32,216                          |       | 78,170 |   | 62,803 |   |
|                                                                                                  |       |                              |       |                            |       |   |   |   |   |
| Amortization of DAC and DSI                                                                           |       | (10,390                           | )          | (8,401                          | )          | (13,893 | ) | (6,852 | ) |
| Operating costs and expenses                                                                          |       | (13,078                           | )          | (10,300                         | )          | (22,270 | ) | (20,258 | ) |
| Income tax expense                                                                                    |       | (6,218                            | )          | (5,046                          | )          | (16,137 | ) | (12,885 | ) |
| Realized capital gains and losses, after-tax                                                          |       | (1,550                            | )          | (1,797                          | )          | (5,285 | ) | (2,231 | ) |
| DAC and DSI amortization expense on  realized capital gains and losses, after-tax                     |       | (950                              | )          | (454                            | )          | 539 |   | (1,406 | ) |
| Reclassification of periodic settlements  and accruals on non-hedge derivative instruments, after-tax |       | (164                              | )          | (43                             | )          | (300 | ) | (47 | ) |
| Gain on disposition of operations,  after-tax                                                         |       | 1                                 |       | —                          |       | 1 |   | 688 |   |
| Cumulative effect of change in accounting  principle, after-tax                                       |       | —                            |       | —                          |       | — |   | (7,586 | ) |
| **Net income**                                                                                        |       | $                                 | 6,940      |                            | $          | 6,175 |   | $ | 20,825 |   | $ | 12,226 |   |

 

----

(1)          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 of deferred loads related torealized capital gains and losses totaled $3 thousand in the second quarter of2004 and $10 thousand in the first six months of 2004.  There was no amortization of deferred loadsrelated to realized capital gains and losses in the second quarter and thefirst six months of 2005.

 

(2)          Periodic settlementsand accruals onnon-hedge derivative instruments are reflected as a component of realizedcapital gains and losses on the Condensed Statements of Operations.

 

(3)          Amortization of DSI is excluded from interest creditedto contractholder funds for purposes of calculating gross margin.  Amortization of DSI totaled $705 thousand and$380 thousand in the three months ended June 30,  2005 and 2004, respectively, and $937 thousandand $384 thousand in the first six months of 2005 and 2004, respectively.

 

*Gross margin*, a non-GAAP measure, represents premiums, contract charges, netinvestment income and periodic settlements and accruals on non-hedge derivativeinstruments, less contract benefits and interest credited to contractholderfunds excluding amortization of DSI.  Wereclassify periodic settlements and accruals on non-hedge derivativeinstruments into gross margin to report them in a manner consistent with theeconomically hedged investments, replicated assets or product attributes (e.g.net investment income or interest credited to contractholder funds) and bydoing so, appropriately reflect trends in product performance.  We use gross margin as a component of ourevaluation of the profitability of our life insurance and financial productportfolio.  Additionally, for many of ourproducts, including fixed annuities, variable life and annuities, andinterest-sensitive life insurance, the amortization of DAC and DSI isdetermined based on actual and expected gross margin.  Gross margin is comprised of three componentsthat are utilized to further analyze the business: investment margin, benefitmargin, and contract charges and fees. We believe gross margin and its components are useful to investorsbecause they allow for the evaluation of income components separately and inthe aggregate when reviewing performance. Gross margin, investment margin and benefit margin should not beconsidered as a substitute for net income and do not reflect the overallprofitability of the business.  Netincome is the GAAP measure that is most directly comparable to thesemargins.  Gross margin is reconciled toGAAP net income in the table above.

 

15

----

 

Thecomponents of gross margin are reconciled to the corresponding financialstatement line items in the following table. 

 
| ** **                                                                         | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **Investment Margin**      | ** ** | **Benefit Margin** | ** ** | **Contract Charges and  Fees** | ** ** | **Gross   Margin** | ** ** |
| **(in thousands)**                                                                 | ** ** | **2005**                        | ** ** | **2004 (4)** | ** ** | **2005** | ** ** | **2004  (4)** | ** ** | **2005** | ** ** | **2004 (4)** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Premiums                                                                           |       | $                               | —     |   | $ | — |   | $ | 16,174 |   | $ | 19,969 |   | $ | — |   | $ | — |   | $ | 16,174 |   | $ | 19,969 |   |
| Contract charges  (1)                                                         |       | —                          |       | — |   | 8,185 |   | 7,701 |   | 7,791 |   | 6,872 |   | 15,976 |   | 14,573 |   |
| Net investment income                                                              |       | 88,503                          |       | 72,676 |   | — |   | — |   | — |   | — |   | 88,503 |   | 72,676 |   |
| Periodic settlements and accruals on  non-hedge derivative   instruments  (2) |       | 270                             |       | 69 |   | — |   | — |   | — |   | — |   | 270 |   | 69 |   |
| Contract benefits                                                                  |       | (24,754                         | )          | (23,905 | ) | (18,147 | ) | (21,011 | ) | — |   | — |   | (42,901 | ) | (44,916 | ) |
| Interest credited to                                                               |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| contractholder funds(3)                                                            |       | (38,733                         | )          | (30,155 | ) | — |   | — |   | — |   | — |   | (38,733 | ) | (30,155 | ) |
|                                                                               |       | $                               | 25,286     |   | $ | 18,685 |   | $ | 6,212 |   | $ | 6,659 |   | $ | 7,791 |   | $ | 6,872 |   | $ | 39,289 |   | $ | 32,216 |   |

 

** **
| ** **                                                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Investment Margin**    | ** ** | **Benefit Margin** | ** ** | **Contract Charges and   Fees** | ** ** | **Gross Margin** | ** ** |
| **(in thousands)**                                                                     | ** ** | **2005**                      | ** ** | **2004  (4)** | ** ** | **2005** | ** ** | **2004  (4)** | ** ** | **2005** | ** ** | **2004  (4)** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Premiums                                                                               |       | $                             | —     |   | $ | — |   | $ | 36,167 |   | $ | 36,620 |   | $ | — |   | $ | — |   | $ | 36,167 |   | $ | 36,620 |   |
| Contract charges  (1)                                                             |       | —                        |       | — |   | 16,030 |   | 15,180 |   | 15,205 |   | 13,498 |   | 31,235 |   | 28,678 |   |
| Net investment income                                                                  |       | 174,995                       |       | 143,071 |   | — |   | — |   | — |   | — |   | 174,995 |   | 143,071 |   |
| Periodic settlements and accruals on  non-hedge  derivative instruments  (2) |       | 484                           |       | 76 |   | — |   | — |   | — |   | — |   | 484 |   | 76 |   |
| Contract benefits                                                                      |       | (50,161                       | )          | (48,581 | ) | (39,823 | ) | (39,259 | ) | — |   | — |   | (89,984 | ) | (87,840 | ) |
| Interest credited to                                                                   |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| contractholder funds(3)                                                                |       | (74,727                       | )          | (57,802 | ) | — |   | — |   | — |   | — |   | (74,727 | ) | (57,802 | ) |
|                                                                                   |       | $                             | 50,591     |   | $ | 36,764 |   | $ | 12,374 |   | $ | 12,541 |   | $ | 15,205 |   | $ | 13,498 |   | $ | 78,170 |   | $ | 62,803 |   |

 

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(1)     Amortization of deferred loads on interest-sensitive life productsrelated to realized capital gains and losses is excluded from contract chargesfor purposes of calculating gross margin. Amortization of deferred loads related to realized capital gains andlosses totaled $3 thousand in the second quarter of 2004 and $10 thousand inthe first six month of 2004.  There wasno amortization of deferred loads related to realized capital gains and lossesin the second quarter and the first six months of 2005.

 

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

 

(3)     Amortization of DSI is excluded from interest credited tocontractholder funds for purposes of calculating gross margin.  Amortization of DSI totaled $705 thousand and$380 thousand in the three months ended June 30,  2005 and 2004, respectively, and $937thousand and $384 thousand in the first six months of 2005 and 2004,respectively.

 

(4)     The prior period has been restated to conform to the current periodpresentation.  In connection therewith,contract charges related to guaranteed minimum death, income, accumulation andwithdrawal benefits on variable annuities have been reclassified to benefitmargin from maintenance charges. Additionally, amounts previously presented as maintenance charges andsurrender charges are now presented in the aggregate as contract charges andfees.  These reclassifications did notresult in a change in gross margin.

 

16

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Grossmargin increased 22.0% in the second quarter of 2005 and 24.5% in the first sixmonths of 2005 compared to the same period of 2004.  The increases in both periods were mostly dueto higher investment margin.

 

*Investment margin*****is a component of gross margin, both of whichare non-GAAP measures. Investment margin represents the excess of netinvestment income and periodic settlements and accruals on non-hedge derivativeinstruments over interest credited to contractholder funds and the impliedinterest on life-contingent immediate annuities included in the reserve forlife-contingent contract benefits. Amortization of DSI is excluded from interest credited to contractholderfunds for purposes of calculating gross margin. We use investment margin to evaluate our profitability related to thedifference between investment returns on assets supporting certain products andamounts credited to customers (“spread”) during the fiscal period.

 

Investmentmargin by product group is shown in the following table.

 
| ** **              | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**      | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Annuities               |       | $                                 | 22,998     |                            | $          | 15,903 |   | $ | 46,009 |   | $ | 31,082 |   |
| Life insurance          |       | 2,288                             |       | 2,782                           |       | 4,582 |   | 5,682 |   |
| Total investment margin |       | $                                 | 25,286     |                            | $          | 18,685 |   | $ | 50,591 |   | $ | 36,764 |   |

 

Investment margin increased35.3% in the second quarter of 2005 and 37.6% in the first six months of 2005compared to the same periods of 2004 due to increased average contractholder funds,slightly higher investment spreads on investments supporting deferred fixedannuities and increased yields on investments supporting capital, traditionallife and other products.

 

Thefollowing table summarizes the weighted average investment yield, interestcrediting rates and investment spreads for the three months ended June 30.  

 
| ** **                                                                      | ** ** | **Weighted Average   Investment Yield** | ** ** | **Weighted Average   Interest Crediting Rate** | ** ** | **Weighted Average   Investment Spread** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                | ** ** | **2004**                                       | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest-sensitive life                                                         |       | 5.8                                     | %          | 6.1                                            | %          | 4.6                                      | %          | 4.8 | % | 1.2 | % | 1.3 | % |
| Fixed annuities – deferred annuities                                       |       | 5.5                                     |       | 5.6                                            |       | 3.2                                      |       | 3.4 |   | 2.3 |   | 2.2 |   |
| Fixed annuities – immediate annuities with  and without life contingencies |       | 7.6                                     |       | 7.6                                            |       | 6.8                                      |       | 6.8 |   | 0.8 |   | 0.8 |   |
| Investments supporting capital, traditional  life and other products            |       | 6.2                                     |       | 5.9                                            |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

Thefollowing table summarizes the weighted average investment yield, interestcrediting rates and investment spreads for the six months ended June 30.  

 
| ** **                                                                      | ** ** | **Weighted Average   Investment Yield** | ** ** | **Weighted Average   Interest Crediting Rate** | ** ** | **Weighted Average   Investment Spread** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                | ** ** | **2004**                                       | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest-sensitive life                                                         |       | 5.7                                     | %          | 6.2                                            | %          | 4.5                                      | %          | 4.8 | % | 1.2 | % | 1.4 | % |
| Fixed annuities – deferred annuities                                       |       | 5.5                                     |       | 5.6                                            |       | 3.2                                      |       | 3.4 |   | 2.3 |   | 2.2 |   |
| Fixed annuities – immediate annuities with  and without life contingencies |       | 7.5                                     |       | 7.6                                            |       | 6.7                                      |       | 6.8 |   | 0.8 |   | 0.8 |   |
| Investments supporting capital, traditional  life and other products            |       | 6.2                                     |       | 6.0                                            |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

17

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The following table summarizesthe liabilities for these contracts and policies.

 
| ** **                                                             | ** ** | **Six Months Ended   June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                                     | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Fixed annuities – immediate annuities with  life contingencies    |       | $                               | 1,806,477  |   | $ | 1,564,347 |   |
| Other life contingent contracts and other                              |       | 104,662                         |       | 95,106 |   |
| Reserve for life-contingent contract  benefits                         |       | $                               | 1,911,139  |   | $ | 1,659,453 |   |
|                                                                   |       |                            |       |   |   |
| Interest-sensitive life                                                |       | $                               | 397,691    |   | $ | 342,817 |   |
| Fixed annuities – deferred annuities                              |       | 3,218,620                       |       | 2,227,589 |   |
| Fixed annuities – immediate annuities  without life contingencies |       | 518,584                         |       | 513,609 |   |
| Other                                                                  |       | 343                             |       | 71 |   |
| Contractholder funds                                                   |       | $                               | 4,135,238  |   | $ | 3,084,086 |   |

 

*Benefit margin*is a component of gross margin, both of whichare non-GAAP measures.  Benefit marginrepresents life and life-contingent immediate annuity premiums, cost ofinsurance contract charges and variable annuity contract charges for contractguarantees less contract benefits. Benefit margin excludes the implied interest on life-contingentimmediate annuities, which is included in the calculation of investmentmargin.  We use the benefit margin toevaluate our underwriting performance, as it reflects the profitability of ourproducts with respect to mortality or morbidity risk during a fiscal period.

 

Benefitmargin by product group is shown in the following table.

 
| ** **           | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**   | ** ** | **2005**                          | ** ** | **2004(1)**                     | ** ** | **2005** | ** ** | **2004(1)** | ** ** |
| Life insurance       |       | $                                 | 8,333      |                            | $          | 7,851 |   | $ | 15,524 |   | $ | 15,069 |   |
| Annuities            |       | (2,121                            | )          | (1,192                          | )          | (3,150 | ) | (2,528 | ) |
| Total benefit margin |       | $                                 | 6,212      |                            | $          | 6,659 |   | $ | 12,374 |   | $ | 12,541 |   |

 

----

(1)  The prior period has been restated to conformto the current period presentation.

 

Benefit margin declined 6.7%in the second quarter of 2005 and 1.3% in the first six months of 2005 comparedto the same periods of 2004.  The declinein both periods was mostly due to unfavorable mortality experience on immediateannuities with life contingencies, partially offset by growth of our in-forcelife business.

 

Upon the adoption of Statementof Position No. 03-1, “Accounting and Reporting by Insurance Enterprises forCertain Nontraditional Long-Duration Contracts and for Separate Accounts”, onJanuary 1, 2004, reserves were established for death and income benefitsprovided under variable annuities and other secondary guarantees.  Annuity benefit margin will continue to beadversely impacted by certain closed blocks of life-contingent immediate annuitieswhose benefit payments are anticipated to extend beyond their original pricingexpectations.  The annuity benefit marginin future periods will fluctuate based on the timing of annuitant deaths onthese life-contingent immediate annuities and the annual evaluation ofassumptions used in our valuation models for variable annuity guarantees.

 

18

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*Amortization of DAC and DSI*, excluding amortization related to realizedcapital gains and losses, increased 23.7% or $1.99 million in the three months endedJune 30, 2005 and 102.8% or $7.04 million in the first six months of 2005compared to the same periods of 2004. The increases in both periods were primarily the result of higher grossmargins on deferred fixed annuities.  Forthe six-month period, this impact was partially offset by adjustments recordedin connection with our annual comprehensive evaluation of the assumptions usedin our valuation models for all investment products, including variable andfixed annuities and interest-sensitive and variable life products.

 

In the first quarter of 2005,as a result of our annual evaluation of assumptions, we recorded DAC and DSIdeceleration (commonly referred to as “DAC and DSI unlocking”) of $7.3 million,which included deceleration of $2.8 million on interest-sensitive and variablelife products and deceleration of $4.5 million for variable annuities.  The amortization deceleration on variableannuities was mostly attributable to better than anticipated equity marketperformance and persistency.

 

Inthe prior year, the comparable DAC and DSI unlocking was a net deceleration ofamortization of $10.2 million.  Thisdeceleration of amortization was the result of favorable projected mortality onour interest-sensitive life products and resulted in the total DAC and DSIamortization being favorable relative to net income.

 

*Operating costs and expenses* increased 27.0% in the three months endedJune 30, 2005 and 9.9% in the first six months of 2005 compared to the sameperiods of 2004.  The increases were primarilyattributable to higher technology, distribution and administrative expenses,which were incurred to support growth in the Company’s in-force business.  For the six-month period, these increaseswere partially offset by lower guaranty fund assessments and expenses relatedto taxes, licenses and fees in the first quarter of 2005 compared to the firstquarter of 2004.

 

19

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### **INVESTMENTS**

 

Animportant component of our financial results is the return on our investmentportfolio.  The composition of theinvestment portfolio at June 30, 2005 is presented in the table below.

 
| ** **                  | ** ** | **Carrying** | ** ** | **Percent**  | ** ** |
|-----------------------------|------------|--------------|------------|--------------|------------|
| **(in thousands)**          | ** ** | **value**    | ** ** | **of total** | ** ** |
|                        |       |         |       |         |       |
| Fixed income securities (1) |       | $            | 6,111,363  |         | 90.5       | % |
| Mortgage loans              |       | 536,908      |       | 8.0          |       |
| Short-term                  |       | 66,059       |       | 1.0          |       |
| Policy loans                |       | 35,806       |       | 0.5          |       |
| Other                       |       | 2,399        |       | —       |       |
| Total                       |       | $            | 6,752,535  |         | 100.0      | % |

 

----

(1)  Fixed income securities are carried at fairvalue.  Amortized cost basis for thesesecurities was $5.5 billion.

 

Totalinvestments increased to $6.75 billion at June 30, 2005 from $6.18 billion atDecember 31, 2004 due to positive cash flows from operating and financingactivities, higher unrealized capital gains on fixed income securities andincreased funds associated with securities lending transactions.

 

Totalinvestments at amortized cost related to collateral, due to securities lendingtransactions, increased to $246 million at June 30, 2005 from $133 million atDecember 31, 2004.

 

AtJune 30, 2005, 96.3% of the fixed income securities portfolio was ratedinvestment grade, which is defined as a security having a rating from theNational Association of Insurance Commissioners (“NAIC”) of 1 or 2, a rating ofAaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBB from S&P,Fitch or Dominion; or a comparable internal rating if an externally providedrating is not available.

 

Theunrealized net capital gains on fixed income securities at June 30, 2005 were$659.9 million, an increase of $127.3 million or 23.9% since December 31,2004.  The net unrealized gain wascomprised of $668.1 million of unrealized gains and $8.2 million of unrealizedlosses at June 30, 2005.  This iscompared to a net unrealized gain totaling $532.7 million at December 31, 2004,comprised of $545.5 million of unrealized gains and $12.8 million of unrealizedlosses.

 

Of the gross unrealized lossesin the fixed income portfolio at June 30, 2005, $6.0 million or 73.5% wererelated to investment grade securities and are believed to be primarily aresult of a rising interest rate environment. Of the remaining $2.2 million of losses in the fixed income portfolio,$2.0 million or 94.5% were in the corporate fixed income portfolio.  The $2.0 million of corporate fixed incomegross unrealized losses were primarily comprised of securities in thecommunications, utilities, financial services and transportation sectors.  The gross unrealized losses in these sectorswere primarily company specific and interest rate related.  Approximately $919 thousand of the totalgross unrealized losses in the corporate fixed income portfolio were associatedwith the automobile industry, which includes direct debt issuances ofautomobile manufacturers, captive automotive financing companies and automobileparts and equipment sellers.  Values inthe automobile industry were primarily depressed due to company specificconditions. We expect eventual recovery of these securities.  Every security was included in our portfoliomonitoring process.

 

Our portfolio monitoringprocess identifies and evaluates fixed income securities whose carrying valuemay be other than temporarily impaired. The process includes a quarterly review of all securities using ascreening process to identify those securities whose fair value compared toamortized cost is below established thresholds for certain time periods, orwhich are identified through other monitoring criteria such as ratingsdowngrades or payment defaults.  We alsorecognize impairment on securities in an unrealized loss position for which wedo not have the intent and ability to hold until recovery.

 

We also monitor the quality ofour fixed income portfolio by categorizing certain investments as “problem”, “restructured”or “potential problem.”  Problem fixedincome securities are securities in default with respect to principal orinterest and/or securities issued by companies that have gone into bankruptcysubsequent to our acquisition of the security. Restructured fixed income securities have rates and terms that are notconsistent with market rates or terms prevailing at the time of therestructuring.  Potential problem fixed 

 

20

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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.

** **

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

 
| **(in thousands)**                | ** ** | **June 30, 2005**    | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **Amortized   cost** | ** ** | **Fair   value**      | ** ** | **Percent   of total Fixed   Income portfolio** | ** ** | **Amortized   cost** | ** ** | **Fair   value** | ** ** | **Percent   of total  Fixed   Income  portfolio** | ** ** |
| Problem                           |       | $                    | 10,609     |                  | 11,538     |   | 0.2 | % | $ | 10,637 |   | $ | 10,813 |   | 0.2 | % |
| Restructured                      |       | —               |       | —                |       | — |   | 5,396 |   | 6,151 |   | 0.1 |   |
| Potential problem                 |       | 15,192               |       | 15,428                |       | 0.2 |   | 11,231 |   | 10,539 |   | 0.2 |   |
| Total net carrying value          |       | $                    | 25,801     |                  | 26,966     |   | 0.4 | % | $ | 27,264 |   | $ | 27,503 |   | 0.5 | % |
| Cumulative write-downs recognized |       | $                    | 5,682      |                  |       |   |   |   | $ | 4,606 |   |   |   |   |   |

 

Weevaluated each of these securities through our portfolio monitoring process atJune 30, 2005 and recorded write-downs when appropriate.  We further concluded that any remaining unrealizedlosses on these securities were temporary in nature and that we have the intentand ability to hold until recovery. While these balances may increase in the future, particularly ifeconomic conditions are unfavorable, management expects that the total amountof securities in these categories will remain low relative to the total fixedincome securities portfolio.

 

**Net Realized Capital Gains and Losses** The following table presents the componentsof realized capital gains and losses and the related tax effect.

 
| ** **                                        | ** ** | **Three Months Ended   June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| **(in thousands)**                                | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Investment write-downs                            |       | $                                 | (1,076     | )                               | $          | (245 | ) | $ | (1,469 | ) | $ | (884 | ) |
| Dispositions                                      |       | 4,979                             |       | (5,866                          | )          | (3,044 | ) | (4,039 | ) |
| Valuation of derivative instruments               |       | (3,719                            | )          | 2,563                           |       | (3,478 | ) | 708 |   |
| Settlement of derivative instruments              |       | (2,816                            | )          | 662                             |       | (518 | ) | 676 |   |
| Realized capital gains and losses, pretax         |       | (2,632                            | )          | (2,886                          | )          | (8,509 | ) | (3,539 | ) |
| Income tax benefit                                |       | 1,082                             |       | 1,089                           |       | 3,224 |   | 1,308 |   |
| **Realized capital gains and losses,  after-tax** |       | $                                 | (1,550     | )                               | $          | (1,797 | ) | $ | (5,285 | ) | $ | (2,231 | ) |

 

Dispositions in the abovetable include sales, losses recognized in anticipation of sales and othertransactions such as calls and prepayments. We may sell securities during the period in which fair value hasdeclined below amortized cost.  Incertain situations new factors such as negative developments, subsequent creditdeterioration, relative value opportunities, market liquidity concerns andportfolio reallocations can subsequently change our previous intent to continueholding a security.

 

A changing interest rate environment will also drive changes in ourportfolio duration targets at a tactical level. A duration target and range is established with an economic view ofliabilities relative to a long-term portfolio view.  Tactical duration adjustments withinmanagement’s approved ranges are accomplished through both cash markettransactions and derivative activities that generate realized gains and lossesand through new purchases.  As acomponent of our approach to managing portfolio duration, realized gains andlosses on derivative instruments are most appropriately considered inconjunction with the unrealized gains and losses on the fixed incomeportfolio.  This approach mitigates theimpacts of general interest rate changes to the overall financial condition ofthe Company.

 

21

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Inthe first quarter of 2005, because of an anticipated rise in interest rates aswell as changes in existing market conditions and long-term asset returnassumptions, certain changes were planned within various portfolios.  They included continued asset-liabilitymanagement strategies; on-going comprehensive reviews of our portfolios; andchanges being made to our strategic asset allocation, including a decision topursue yield enhancement strategies.  Atthat time we identified, in total, approximately $216 million of securities,all of which were in an unrealized loss position, which we would considerselling to achieve these objectives.  Asa result, we recognized $5.6 million of write-downs due to a change in intentto hold these securities until recovery. Securities related to $1.2 million of the write-downs were sold duringthe second quarter, and we continue to consider selling securities with acarrying value of approximately $0.3 million having write-downs of $0.1million.  The remaining securities with$4.3 million of write-downs recognized in the first quarter have beenre-designated as being held to recovery within the available-for-sale category,primarily as a consequence of the lower than expected interest rateenvironment.  Of this amount, $3.7million of write-downs relates to $158 million of affected securities that wereidentified in connection with yield enhancement strategies.  The difference between the current carryingvalue and par value of the re-designated securities will be recognized in netinvestment income over the remaining life of the securities, pursuant to theguidance in Statement of Position 03-3, “Accounting for Certain Loans or DebtSecurities Acquired in a Transfer”.

 

### **CAPITALRESOURCES AND LIQUIDITY**

 

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

 
| **(in thousands)**                                                         | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
|                                                                       |       |              |       |                  |       |
| Common stock, retained earnings and other  shareholder’s equity items |       | $                 | 504,769    |                  | $          | 483,980 |   |
| Accumulated other comprehensive income                                     |       | 171,164           |       | 155,255               |       |
| Total shareholder’s equity                                            |       | $                 | 675,933    |                  | $          | 639,235 |   |
|                                                                            |            |                   |            |                       |            |  |  |  |

 

*Shareholder’s equity* increased in the first six months of 2005when compared to December 31, 2004 as a result of net income and higherunrealized net capital gains.

 

**Financial Ratings and Strength** Our ratings are influenced by many factorsincluding our operating and financial performance, asset quality, liquidity,asset/liability management, overall portfolio mix, financial leverage (i.e.,debt), exposure to risks and the current level of operating leverage. Therehave been no changes to our insurance financial strength ratings since December31, 2004.

 

**Liquidity Sources and Uses *** *As reflected in our Condensed Statements ofCash Flows, lower operating cash flows in the first six months of 2005 whencompared to the first six months of 2004 primarily relate to higher policybenefits and acquisition costs paid and lower premiums, partially offset byincreased investment income.  Cash flowsused in investing activities decreased in the first six months of 2005 due tothe investment of lower financing and operating cash flows.

 

Lowercash flow from financing activities during the first six months of 2005 whencompared to the first six months of 2004 reflect lower variable annuity andlife deposits allocated to fixed accounts and higher fixed annuity withdrawals,partially offset by higher deposits on fixed annuities.  For quantification of the changes incontractholder funds, see the Operations section of the MD&A.

 

Wehave entered into an inter-company loan agreement with the Corporation.  The amount of inter-company loans availableto us is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to allits eligible subsidiaries at any given point in time is limited to $1.00billion.  We had no amounts outstandingunder the inter-company loan agreement at June 30, 2005 or December 31,2004.  The Corporation uses commercialpaper borrowings and bank lines of credit to fund intercompany borrowings.

 

22

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**FORWARD-LOOKING STATEMENTS AND RISK FACTORS**

 

This document contains “forward-looking statements” that anticipateresults based on our estimates, assumptions and plans that are subject to uncertainty.  These statements are made subject to thesafe-harbor provisions of the Private Securities Litigation Reform Act of1995.  We assume no obligation to updateany forward-looking statements as a result of new information or future eventsor developments.

 

These forward-looking statements do not relate strictly to historicalor current facts 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, among otherthings, our strategy for growth, product development, regulatory approvals,market position, expenses, financial results, litigation and reserves.  We believe that these statements are based onreasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying theforward-looking statements prove inaccurate or if other risks or uncertaintiesarise, actual results could differ materially from those communicated in theseforward-looking statements.  Factorswhich could cause actual results to differ materially from those suggested bysuch forward-looking statements include but are not limited to those discussedor identified in this document (including the risks described below) and areincorporated in this Part I, Item 2 by reference to the information set forthin our Annual Report on Form 10-K, Part II, Item 7, under the caption “Forward-LookingStatements and Risk Factors”.

 

**Actions taken to simplify our business model and improveprofitability may not be successful and may result in losses and costs**

 

Weare pursuing strategies intended to improve our return on equity.  Actions that we have taken and may continueto take include changing the number and selection of products being marketed,terminating underperforming distribution relationships, reducing policyadministration software systems, and other actions that we may determine areappropriate to successfully execute our business strategies.  The actions that we have taken and may takein the future may not achieve their intended outcome and could result in lowerpremiums and contract charges, restructuring costs, losses on disposition orlosses related to the discontinuance of individual products or distributionrelationships.

 

## **Changes inmarket interest rates may lead to a significant decrease in the sales andprofitability of spread-based products**

 

Ourability to manage the investment margin for spread-based products is dependentupon maintaining profitable spreads between investment yields and interestcrediting rates.  As interest ratesdecrease or remain at low levels, proceeds from investments that have matured,prepaid or sold may be reinvested at lower yields, reducing investmentmargin.  Lowering interest-creditingrates can offset decreases in investment margin on some products.  However, these changes could be limited bymarket conditions, regulatory or contractual minimum rate guarantees on manycontracts and may not match the timing or magnitude of changes in assetyields.  Decreases in the rates offeredon products could make those products less attractive, leading to lower salesand/or changes in the level of surrenders and withdrawals for theseproducts.  Non-parallel shifts ininterest rates, such as increases in short-term rates without accompanyingincreases in medium- and long-term rates, can influence customer demand forfixed annuities, which could impact the level and profitability of new customerdeposits.  Increases in market interestrates can also have negative effects, for example by increasing theattractiveness of other investments, which can lead to higher surrenders at atime when the investment asset values are lower as a result of the increase ininterest rates.  For certain products,principally fixed annuity and interest-sensitive life products, the earned rateon assets could lag behind market yields. We may react to market conditions by increasing crediting rates, whichcould narrow spreads.  Unanticipatedsurrenders could result in DAC unlocking or affect the recoverability of DACand thereby increase expenses and reduce profitability.

 

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### **Item4.    Controlsand Procedures**

 

*Evaluation of Disclosure Controlsand Procedures. *We maintain disclosure controls andprocedures as defined in Rule 13a-15(e) under the Securities Exchange Act of1934.  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 and the principal financial officer concludedthat our disclosure controls and procedures are effective in providingreasonable assurance that material information required to be disclosed in ourreports filed with or submitted to the Securities and Exchange Commission underthe Securities Exchange Act is made known to management, including theprincipal executive officer and the principal financial officer, as appropriateto allow timely decisions regarding required disclosure.

 

*Changes in Internal Control overFinancial Reporting. *During the fiscal quarter ended June 30,2005, there were no changes in our internal control over financial reportingthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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

 

### **Item 1.  LegalProceedings**

 

Informationrequired for this Part II, Item 1, is incorporated by reference to thediscussion under the heading “Regulation” and under the heading “Legal andRegulatory Proceedings and Inquiries” in Note 3 of the Company’s CondensedFinancial Statements in Part I, Item 1, of this Form 10-Q.

 

### **Item 6.   Exhibits**

 

(a)          Exhibits

 

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

 

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### **SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|           | Allstate Life Insurance Company of New York |
|----------------|---------------------------------------------|
|           | (Registrant)                                |
|           |                                        |
| August 8, 2005 | By                                          | /s/ Samuel H. Pilch |   |
|           | Samuel H. Pilch                             |
|           | Controller                                  |
|           | (chief accounting officer and duly          |
|           | authorized officer of the registrant)       |

 

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| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
| 10.1             |       |            | Amended and Restated Service and Expense Agreement  between Allstate Insurance Company, The Allstate Corporation and certain  affiliates, effective January 1, 2004, and effective March 5, 2005 with  respect to Allstate Life Insurance Company of New York. Incorporated herein  by reference to Exhibit 10.1 to Allstate Life Insurance Company’s Quarterly  Report on Form 10-Q for quarter ended June 30, 2005. |
|             |       |            |   |
| 10.2             |       |            | New York Insurer Supplement to Amended and  Restated Service and Expense Agreement between Allstate Insurance Company,  The Allstate Corporation, Allstate Life Insurance Company of New York and  Intramerica Life Insurance Company, effective March 5, 2005. Incorporated  herein by reference to Exhibit 10.2 to Allstate Life Insurance Company’s  Quarterly Report on Form 10-Q for quarter ended June 30, 2005. |
|             |       |            |   |
| 15               |       |            | Acknowledgement of awareness from Deloitte &  Touche LLP dated August 8, 2005, 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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