**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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

###### ** **

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

 

**x**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF**

###### **THE SECURITIES EXCHANGE ACT OF1934**

##### ** **

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

##### ** **

**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

(Exact name of registrant asspecified in its charter)

 

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

 

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

 

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

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

** **

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

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

** **

**Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).**

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

** **

**As of May 13, 2008, the registrant had 100,000 commonshares, $25 par value, outstanding, all of which are held by Allstate LifeInsurance Company.**

 

 

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

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

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

 
| **PART 1.**  | ** ** | **FINANCIAL INFORMATION**                                                                                      | ** ** | ** ** |
|-------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------|
|              |       |                                                                                                           |       |       |
| Item 1.           |       | Financial Statements                                                                                           |       |       |
|              |       |                                                                                                           |       |       |
|              |       | Condensed Statements of Operations for the Three-Month Periods Ended  March 31, 2008 and 2007 (unaudited) |       | 3          |
|              |       |                                                                                                           |       |       |
|              |       | Condensed Statements of Financial Position as of March 31, 2008  (unaudited) and December 31, 2007   |       | 4          |
|              |       |                                                                                                           |       |       |
|              |       | Condensed Statements of Cash Flows for the Three-Month Periods Ended  March 31, 2008 and 2007 (unaudited) |       | 5          |
|              |       |                                                                                                           |       |       |
|              |       | Notes to Condensed Financial Statements (unaudited)                                                            |       | 6          |
|              |       |                                                                                                           |       |       |
|              |       | Report of Independent Registered Public Accounting Firm                                                        |       | 19         |
|              |       |                                                                                                           |       |       |
| Item 2.           |       | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                    |       | 20         |
|              |       |                                                                                                           |       |       |
| Item 4.           |       | Controls and Procedures                                                                                        |       | 37         |
|              |       |                                                                                                           |       |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                          | ** ** | ** ** |
|              |       |                                                                                                           |       |       |
| Item 1.           |       | Legal Proceedings                                                                                              |       | 38         |
|              |       |                                                                                                           |       |       |
| Item 1A.          |       | Risk Factors                                                                                                   |       | 38         |
|              |       |                                                                                                           |       |       |
| Item 6.           |       | Exhibits                                                                                                       |       | 38         |

 

----

 

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

#### ** **

#### **ITEM 1.  FINANCIAL STATEMENTS**

#### ** **

#### **ALLSTATE LIFEINSURANCE COMPANY OF NEW YORK**

#### ** **

**CONDENSED STATEMENTS OF OPERATIONS**

** **
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(unaudited)**                                  | ** ** |
| **Revenues**                                          |       |                                             |       |   |   |
| Premiums                                              |       | $                                                | 9,201      |   | $ | 17,732 |   |
| Contract charges                                      |       | 15,481                                           |       | 14,398 |   |
| Net investment income                                 |       | 99,746                                           |       | 93,968 |   |
| Realized capital gains and losses                     |       | 1,721                                            |       | (1,905 | ) |
|                                                  |       |                                             |       |   |   |
|                                                  |       | 126,149                                          |       | 124,193 |   |
|                                                  |       |                                             |       |   |   |
| **Costs and expenses**                                |       |                                             |       |   |   |
| Contract benefits                                     |       | 38,805                                           |       | 42,833 |   |
| Interest credited to contractholder funds             |       | 43,301                                           |       | 43,650 |   |
| Amortization of deferred policy acquisition  costs    |       | 1,451                                            |       | 17,760 |   |
| Operating costs and expenses                          |       | 9,022                                            |       | 9,144 |   |
|                                                  |       | 92,579                                           |       | 113,387 |   |
|                                                  |       |                                             |       |   |   |
| Loss on disposition of operations                     |       | (268                                             | )          | (385 | ) |
|                                                  |       |                                             |       |   |   |
| **Income from operations before income tax  expense** |       | 33,302                                           |       | 10,421 |   |
|                                                  |       |                                             |       |   |   |
| Income tax expense                                    |       | 11,725                                           |       | 3,748 |   |
|                                                  |       |                                             |       |   |   |
| **Net income**                                        |       | $                                                | 21,577     |   | $ | 6,673 |   |

 

See notes to condensedfinancial statements.

 

3

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**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

** **

**CONDENSED STATEMENTS OF FINANCIAL POSITION**

 
| ** **                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in thousands, except par value data)**          | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                         |       |               |       |                  |       |
| Investments                                                                        |       |               |       |                  |       |
| Fixed income securities, at fair value  (amortized cost $5,901,843 and $5,928,899) |       | $                  | 6,177,908  |                  | $          | 6,271,128 |   |
| Mortgage loans                                                                     |       | 711,321            |       | 725,301               |       |
| Short-term                                                                         |       | 316,718            |       | 22,688                |       |
| Policy loans                                                                       |       | 38,464             |       | 38,509                |       |
| Other                                                                              |       | —             |       | 3                     |       |
|                                                                               |       |               |       |                  |       |
| Total investments                                                                  |       | 7,244,411          |       | 7,057,629             |       |
|                                                                               |       |               |       |                  |       |
| Cash                                                                               |       | 7,052              |       | 7,356                 |       |
| Deferred policy acquisition costs                                                  |       | 315,116            |       | 278,664               |       |
| Accrued investment income                                                          |       | 64,746             |       | 64,514                |       |
| Reinsurance recoverables                                                           |       | 375,251            |       | 381,431               |       |
| Current income taxes receivable                                                    |       | —             |       | 146                   |       |
| Other assets                                                                       |       | 70,404             |       | 47,079                |       |
| Separate Accounts                                                                  |       | 837,849            |       | 948,358               |       |
|                                                                               |       |               |       |                  |       |
| **Total assets**                                                                   |       | $                  | 8,914,829  |                  | $          | 8,785,177 |   |
|                                                                               |       |               |       |                  |       |
| **Liabilities**                                                                    |       |               |       |                  |       |
| Contractholder funds                                                               |       | $                  | 4,866,228  |                  | $          | 4,848,461 |   |
| Reserve for life-contingent contract  benefits                                     |       | 2,027,441          |       | 2,016,971             |       |
| Deferred income taxes                                                              |       | 31,682             |       | 39,737                |       |
| Current income taxes payable                                                       |       | 6,198              |       | —                |       |
| Other liabilities and accrued expenses                                             |       | 462,323            |       | 241,756               |       |
| Payable to affiliates, net                                                         |       | 2,850              |       | 8,035                 |       |
| Reinsurance payable to parent                                                      |       | 978                |       | 987                   |       |
| Separate Accounts                                                                  |       | 837,849            |       | 948,358               |       |
|                                                                               |       |               |       |                  |       |
| **Total liabilities**                                                              |       | 8,235,549          |       | 8,104,305             |       |
|                                                                               |       |               |       |                  |       |
| **Commitments and Contingent Liabilities  (Note 5)**                               |       |               |       |                  |       |
|                                                                               |       |               |       |                  |       |
| **Shareholder’s equity**                                                      |       |               |       |                  |       |
| Common stock, $25 par value, 100 thousand  shares authorized and outstanding       |       | 2,500              |       | 2,500                 |       |
| Additional capital paid-in                                                         |       | 140,000            |       | 140,000               |       |
| Retained income                                                                    |       | 494,761            |       | 473,184               |       |
| Accumulated other comprehensive income:                                            |       |               |       |                  |       |
| Unrealized net capital gains and losses                                            |       | 42,019             |       | 65,188                |       |
|                                                                               |       |               |       |                  |       |
| **Total accumulated other comprehensive  income**                                  |       | 42,019             |       | 65,188                |       |
|                                                                               |       |               |       |                  |       |
| **Total shareholder’s equity**                                                |       | 679,280            |       | 680,872               |       |
|                                                                               |       |               |       |                  |       |
| **Total liabilities and shareholder’s equity**                                |       | $                  | 8,914,829  |                  | $          | 8,785,177 |   |

 

See notes tocondensed financial statements.

 

4

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#### ** **

#### **ALLSTATE LIFEINSURANCE COMPANY OF NEW YORK**

#### ** **

**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **($ in thousands)**                                                     | ** ** | **(unaudited)**                                  | ** ** |
| **Cash flows from operating activities**                                           |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 21,577     |   | $ | 6,673 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                             |       |   |   |
| Amortization and other non-cash items                                              |       | (18,706                                          | )          | (18,666 | ) |
| Realized capital gains and losses                                                  |       | (1,721                                           | )          | 1,905 |   |
| Loss on disposition of operations                                                  |       | 268                                              |       | 385 |   |
| Interest credited to contractholder funds                                          |       | 43,301                                           |       | 43,650 |   |
| Changes in:                                                                        |       |                                             |       |   |   |
| Life-contingent contract benefits and  contractholder funds                        |       | (3,413                                           | )          | (199 | ) |
| Deferred policy acquisition costs                                                  |       | (9,648                                           | )          | 8,933 |   |
| Income taxes payable                                                               |       | 10,764                                           |       | 3,123 |   |
| Other operating assets and liabilities                                             |       | 1,624                                            |       | (34,195 | ) |
| Net cash provided by operating activities                                          |       | 44,046                                           |       | 11,609 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash flows from investing activities**                                           |       |                                             |       |   |   |
| Proceeds from sales of fixed income  securities                                    |       | 132,449                                          |       | 71,336 |   |
| Investment collections                                                             |       |                                             |       |   |   |
| Fixed income securities                                                            |       | 41,885                                           |       | 32,988 |   |
| Mortgage loans                                                                     |       | 20,253                                           |       | 20,576 |   |
| Investment purchases                                                               |       |                                             |       |   |   |
| Fixed income securities                                                            |       | (129,725                                         | )          | (137,178 | ) |
| Mortgage loans                                                                     |       | (5,750                                           | )          | (4,977 | ) |
| Change in short-term investments, net                                              |       | (113,731                                         | )          | 34,715 |   |
| Change in other investments, net                                                   |       | 1,345                                            |       | (115 | ) |
| Net cash (used in) provided by investing  activities                               |       | (53,274                                          | )          | 17,345 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash flows from financing activities**                                           |       |                                             |       |   |   |
| Contractholder fund deposits                                                       |       | 133,749                                          |       | 94,928 |   |
| Contractholder fund withdrawals                                                    |       | (124,825                                         | )          | (118,359 | ) |
| Net cash provided by (used in) financing  activities                               |       | 8,924                                            |       | (23,431 | ) |
|                                                                               |       |                                             |       |   |   |
| **Net (decrease) increase in cash**                                                |       | (304                                             | )          | 5,523 |   |
| **Cash at beginning of period**                                                    |       | 7,356                                            |       | 7,090 |   |
| **Cash at end of period**                                                          |       | $                                                | 7,052      |   | $ | 12,613 |   |

 

See notes to condensed financial statements.

 

5

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**ALLSTATE LIFEINSURANCE COMPANY OF NEW YORK**

**NOTES TO CONDENSEDFINANCIAL STATEMENTS**

**(unaudited)**

 

### **1.   General**

###  

### **Basis of presentation**

###  

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

The condensed financialstatements and notes as of March 31, 2008 and for the three-month periodsended March 31, 2008 and 2007 are unaudited.  The condensed financial statements reflectall adjustments (consisting only of normal recurring accruals) which are, inthe opinion of management, necessary for the fair presentation of the financialposition, results of operations and cash flows for the interim periods.  These condensed financial statements andnotes should be read in conjunction with the financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2007.  Theresults of operations for the interim periods should not be consideredindicative of results to be expected for the full year.

 

**Premiums and Contract Charges**

 

The following table summarizes premiums andcontract charges by product.

 
| ** **                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** |
| **($ in thousands)**              | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Premiums**                                |       |                             |       |   |   |
| Traditional life insurance                  |       | $                                | 5,123      |   | $ | 6,384 |   |
| Immediate annuities with life contingencies |       | 2,150                            |       | 9,799 |   |
| Other                                       |       | 1,928                            |       | 1,549 |   |
| Total premiums                              |       | 9,201                            |       | 17,732 |   |
|                                        |       |                             |       |   |   |
| **Contract charges**                        |       |                             |       |   |   |
| Interest-sensitive life insurance           |       | 13,712                           |       | 12,251 |   |
| Fixed annuities                             |       | 1,769                            |       | 2,147 |   |
| Total contract charges                      |       | 15,481                           |       | 14,398 |   |
| Total premiums and contract charges         |       | $                                | 24,682     |   | $ | 32,130 |   |

 

### **Adopted accounting standards**

###  

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

** **

 In October 2005, the American Instituteof Certified Public Accountants (“AICPA”) issued SOP 05-1.  SOP 05-1 provides accounting guidance fordeferred policy acquisition costs (“DAC”) associated with internal replacementsof insurance and investment contracts other than those set forth in Statementof Financial Accounting Standard (“SFAS”) No. 97, “Accounting andReporting by Insurance Enterprises for Certain Long-Duration Contracts and forRealized Gains and Losses from the Sale of Investments”.  SOP 05-1 defines an internal replacement as amodification in product benefits, features, rights or coverages that occursthrough the exchange of an existing contract for a new contract, or byamendment, endorsement or rider to an existing contract, or by the election ofa feature or coverage within an existing contract.   The Company adopted the provisions of SOP05-1 on January 1, 2007 for internal replacements occurring in fiscalyears beginning after December 15, 2006. The adoption resulted in a $1.2 million after-tax reduction to retainedincome to reflect the impact on estimated future gross profits (“EGP”) from thechanges in accounting for certain costs associated with contract continuationsthat no longer qualify for deferral under SOP 05-1 and a reduction of DAC anddeferred sales inducement balances of $1.8 million pre-tax as of January 1,2007.

 

6

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

 

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

 

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

 

The FASB issued the interpretation in July 2006 and the staffposition in May 2007.  FIN 48clarifies the accounting for uncertainty in income taxes recognized in anentity’s financial statements in accordance with SFAS No. 109, “Accountingfor Income Taxes”.  FIN 48 requires anentity to recognize the tax benefit of uncertain tax positions only when it ismore likely than not, based on the position’s technical merits, that the positionwould be sustained upon examination by the respective taxing authorities.  The tax benefit is measured as the largestbenefit that is more than fifty-percent likely of being realized upon finalsettlement with the respective taxing authorities.  On January 1, 2007, the Company adoptedthe provisions of FIN 48, which were effective for fiscal years beginning afterDecember 15, 2006.  No cumulativeeffect of a change in accounting principle or adjustment to the liability forunrecognized tax benefits was recognized as a result of the adoption of FIN48.  Accordingly, the adoption of FIN 48did not have an effect on the results of operations or financial position ofthe Company.

 

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

 

In September 2006, the FASB issued SFAS No. 157, whichredefines fair value as the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between marketparticipants at the measurement date, establishes a framework for measuring fairvalue in generally accepted accounting principles (“GAAP”), and expandsdisclosures about fair value measurements. SFAS No. 157 establishes a three-level hierarchy for fair valuemeasurements based upon the nature of the inputs to the valuation of an assetor liability.  SFAS No. 157 applieswhere other accounting pronouncements require or permit fair valuemeasurements.  In February 2008,the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASBStatement No. 157” (“FSP 157-2”), which permits the deferral of theeffective date of SFAS No. 157 to fiscal years beginning after November 15,2008 for all non-financial assets and liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis.  The Company adopted the provisions of SFAS No. 157for financial assets and liabilities recognized or disclosed at fair value on arecurring and non-recurring basis as of January 1, 2008.  Consistent with the provisions of FSP 157-2,the Company decided to defer the adoption of SFAS No. 157 fornon-financial assets and liabilities measured at fair value on a non-recurringbasis until January 1, 2009.  Theadoption of SFAS No. 157 did not have a material effect on the Company’sresults of operations or financial position (see Note 3).

 

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

 

InFebruary 2007, the FASB issued SFAS No. 159 which provides reportingentities, on an ongoing basis, an option to report selected financial assets,including investment securities, and financial liabilities, including mostinsurance contracts, at fair value through earnings.  SFAS No. 159 establishes presentationand disclosure requirements designed to facilitate comparisons betweencompanies that choose different measurement alternatives for similar types offinancial assets and liabilities.  Thestandard also requires additional information to aid financial statement users’understanding of the impacts of a reporting entity’s decision to use fair valueon its earnings and 

 

7

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requiresentities to display, on the face of the statement of financial position, thefair value of those assets and liabilities for which the reporting entity haschosen to measure at fair value.  SFAS No. 159is effective as of the beginning of a reporting entity’s first fiscal yearbeginning after November 15, 2007.  The Company did not apply the fairvalue option to any existing financial assets or liabilities as of January 1,2008.  Consequently, the initial adoptionof SFAS No. 159 had no impact on the Company’s results of operations orfinancial position.

 

*FASB Staff Position No. FIN 39–1, Amendmentof FASB Interpretation No. 39 (“FSP FIN 39–1”)*

 

InApril 2007, the FASB issued FSP FIN 39–1, which amends FASB InterpretationNo. 39, “Offsetting of Amounts Related to Certain Contracts”.  FSP FIN 39–1 replaces the terms “conditionalcontracts” and “exchange contracts” with the term “derivative instruments” andrequires a reporting entity to offset fair value amounts recognized for theright to reclaim cash collateral or the obligation to return cash collateralagainst fair value amounts recognized for derivative instruments executed withthe same counterparty under the same master netting arrangement that have beenoffset in the statement of financial position. FSP FIN 39–1 is effective forfiscal years beginning after November 15, 2007, with early adoptionpermitted.  The adoption of FSP FIN 39–1did not have a material impact on the Company’s results of operations orfinancial position.

 

### **Pending accounting standards**

###  

*SOP 07-1, Clarification of the Scope of theAudit and Accounting Guide, Investment Companies (“the Guide”) and Accountingby Parent Companies and Equity Method Investors for Investments in InvestmentCompanies (“SOP 07- 1”)*

 

InJune 2007, the AICPA issued SOP 07–1 which provides guidance fordetermining whether an entity falls within the scope of the Guide and whetherinvestment company accounting should be retained by a parent company uponconsolidation of an investment company subsidiary or by an equity methodinvestor in an investment company.  SOP07–1 was to be effective for fiscal years beginning on or after December 15,2007, however in February 2008, the FASB issued FASB Staff Position No. SOP07-1, “Effective Date of AICPA Statement of Position 07-1”, which amends SOP07-1 to (1) delay indefinitely the effective date of the SOP and (2) prohibitadoption of the SOP for an entity that did not early adopt the SOP before December 15,2007.  The Company did not early adoptthis standard.  Consequently, the Companyis not permitted to adopt the statement.

 

*SFAS No. 161, Disclosures about Derivative Instruments and HedgingActivities – an amendment of FASB Statement No. 133 (“SFAS No. 161”)*

 

InMarch 2008, the FASB issued SFAS No. 161, which amends and expandsthe disclosure requirements for derivatives currently accounted for inaccordance with SFAS No. 133.  The new disclosures are designed toenhance the understanding of how and why an entity uses derivative instrumentsand how derivative instruments affect an entity’s financial position, resultsof operations, and cash flows.  The standard requires, on a quarterlybasis, quantitative disclosures about the potential cash outflows associatedwith the triggering of credit-related contingent features, if any; tabulardisclosures about the classification and fair value amounts of derivative instrumentsreported in the statement of financial position; disclosure of the location andamount of gains and losses on derivative instruments reported in the statementof operations; and qualitative information about how and why an entity usesderivative instruments and how derivative instruments and related hedged itemsaffect the entity’s financial statements.  SFAS No. 161 is effectivefor fiscal periods beginning after November 15, 2008, and is to be appliedon a prospective basis only.  SFAS No. 161 affects disclosures andtherefore will not impact the Company’s results of operations or financialposition.

 

8

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### **2.   Supplemental Cash FlowInformation**

###  

Liabilities for collateral received in conjunction with the Company’ssecurities lending business activities are reported in other liabilities andaccrued expenses in the Condensed Statements of Financial Position.  The accompanying cash flows are included incash flows from operating activities in the Condensed Statements of Cash Flowsalong with the activities resulting from management of the proceeds, which areas follows:

 
| ** **                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                                | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                             | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net change in fixed income securities                                  |       | $                                                | (13,009    | ) | $ | (72,717 | ) |
| Net change in short-term investments                                   |       | (178,581                                         | )          | (107,174 | ) |
| Net change in proceeds managed                                         |       | $                                                | (191,590   | ) | $ | (179,891 | ) |
|                                                                   |       |                                             |       |   |   |
| Liabilities for collateral and security  repurchase, beginning of year |       | $                                                | (198,138   | ) | $ | (199,486 | ) |
| Liabilities for collateral and security  repurchase, end of period     |       | (389,728                                         | )          | (379,377 | ) |
| Operating cash flow provided                                           |       | $                                                | 191,590    |   | $ | 179,891 |   |

 

**3.   FairValue of Financial Assets and Financial Liabilities**

 

Themeasurement basis for a significant amount of the Company’s financial assets isfair value. Financial instruments measured at fair value on a recurring basisinclude:

 

*Financial Assets*  Primarily investments including U.S.treasuries, money markets funds, corporates, municipals, U.S. government andagencies, commercial mortgage-backed securities (“CMBS”), preferred stock,mortgage-backed securities (“MBS”), foreign governments, asset-backedsecurities (“ABS”), commercial paper, derivatives (exchange traded andover-the-counter (“OTC”)), and separate account assets.

 

*Financial Liabilities*   Primarily free-standingderivatives (exchange listed and OTC) and derivatives embedded in certaincontractholder liabilities.

 

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

 

·                  Definesfair value as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date, and establishes a framework for measuring fair value;

 

·                  Establishesa three-level hierarchy for fair value measurements based upon the transparencyof inputs to the valuation as of the measurement date;

 

·                  Expandsdisclosures about financial instruments measured at fair value.

 

In determining fair value, the Companyprincipally uses the market approach which generally utilizes market data forthe same or similar instruments.  To alesser extent, the Company uses the income approach which involves determiningfair values from discounted cash flow methodologies.  SFAS No. 157 establishes a hierarchy forinputs used in determining fair value that maximize the use of observableinputs and minimizes the use of unobservable inputs by requiring thatobservable inputs be used when available. Certain financial assets are not carried at fair value on a recurringbasis, including investments such as mortgage loans and policy loans, and thusare only categorized in the fair value hierarchy when held at fair value on anon-recurring basis.

 

9

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

 

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

 

Financialassets and financial liabilities recorded on the Condensed Statements ofFinancial Position at fair value are categorized based on the reliability ofinputs to the valuation techniques as follows:

 

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

 

*Level 2***        **Financial assets and financial liabilitieswhose values are based on the following:

 

a)  Quotedprices for similar assets or liabilities in active markets;

b)  Quotedprices for identical or similar assets or liabilities in non-active markets; or

c)  Valuationmodels whose inputs are observable, directly or indirectly, for substantiallythe full term of the asset or liability

 

*Level 3**        *Financial assets and financial liabilitieswhose values are based on prices or valuation techniques that require inputsthat are both unobservable and significant to the overall fair valuemeasurement.  These inputs may reflectthe Company’s estimates of the assumptions that market participants would usein valuing the financial assets and financial liabilities.

 

Theavailability of observable inputs varies by instrument. In situations wherefair value estimates are based on internally developed pricing models or inputsthat are unobservable in the market, the determination of fair value requiresmore judgment.  The degree of judgmentexercised by the Company in determining fair value is typically greatest forinstruments categorized in Level 3. In many instances, inputs used to measure fairvalue fall into different levels of the fair value hierarchy.  Inthose instances, for disclosure purposes, the level in the fair value hierarchywithin which the fair value measurement is categorized is determined based onthe lowest level input that is significant to the fair value measurement inits entirety.

 

**Summaryof Valuation Techniques for Classes of Financial Assets and FinancialLiabilities**

 

Level1 Measurements

 

U.S.Treasuries:  Valuation is based on unadjusted quotedprices for identical assets in active markets that the Company can access.

 

MoneyMarket Funds; Separate Account Assets:  Comprised of actively tradedmutual funds that have daily quoted net asset values for identical assets thatthe Company can access.  Net asset valuesfor the actively traded mutual funds in which the separate account assets areinvested are obtained daily from the fund managers.

 

Level2 Measurements

 

Corporate,including privately placed:  Valued based on inputsincluding quoted prices for identical or similar assets in markets that are notactive.  Privately placed securities inLevel 2 of $331.7 million are those that are valued based on market-observableexternal ratings from independent third party rating agencies.

 

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

 

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

 

10

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CMBS: Valuation is principally based on inputsincluding quoted prices for identical or similar assets in markets that are notactive and are categorized as Level 2. Other CMBS are reported in Level 3.

 

PreferredStock; MBS; Foreign Government:  Valued based on inputsincluding quoted prices for identical or similar assets in markets that are notactive.

 

Short-term:Commercial Paper and Other:  Valued based on inputsincluding amortized cost, which approximates fair value, and quoted prices foridentical or similar assets in markets that are not active.

 

Level3 Measurements

 

CorporatePrivately Placed Securities:  Valued based on non-bindingbroker quotes and using models that arewidely accepted in the financial services industry and use internally assignedcredit ratings as inputs and instrument specific inputs.  Instrument specific inputs used ininternal fair value determinations include: coupon rate, weighted average life,sector of the issuer and call provisions. Privately placed securities are categorized as Level 3 as a result of the significance ofnon-market observable inputs. The $1.2 billion of privately placed fixed incomesecurities included in Level 3 comprise $1.1 billion valued using an internalmodel and $129.9 million valued using non-binding broker quotes.  The internally modeled securities are valuedbased on internal ratings, which are not observable in the market.  Multiple internal ratings comprise an NAICrating category and when used in the internal model provide a more refined determinationof fair value.  The Company’s internalratings are primarily consistent with the NAIC ratings which are generallyupdated annually.

 

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

 

OtherCDO: Valued based onnon-binding broker quotes received from brokers who are familiar with theinvestments.  Due to the reducedavailability of actual market prices or relevant observable inputs as a resultof the decrease in liquidity that has been experienced in the market for thesesecurities, all CLO and other CDO are categorized as Level 3.

 

CMBS;Commercial Real Estate Collateralized Debt Obligations (“CRE CDO”): CRE CDO, which are reported as CMBS, andother CMBS, are valued based on non-binding broker quotes and are categorizedas Level 3.  Other non-broker quoted CMBSare reported in Level 2.

 

Free-StandingDerivatives:  Certain OTC derivatives, such as caps arevalued using valuation models that are widely accepted in the financialservices industry.  Inputs includenon-market observable inputs such as volatility assumptions that aresignificant to the valuation of the instruments.

 

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

 

DerivativesEmbedded in Annuity Contracts and Other Assets: Valued internally using models widely accepted in the financial servicesindustry that determine a single bestestimate of fair value for a block of contractholder liabilities that containcertain embedded derivatives.  The modelsuse stochastically determined cash flows based on the contractual elements ofembedded derivatives and other applicable market data.  These are categorized as Level 3 as a result of the significance of non-marketobservable inputs.

 

Other Assets:  Includes a structured settlement annuityreinsurance agreement accounted for as a derivative instrument pursuant to therequirements of SFAS No. 133.  Valuedinternally utilizing a model that uses interest rate and volatility assumptionsto generate stochastically determined cash flows.  This item is categorized as Level 3 as aresult of the significance of non-market observable inputs.

 

11

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

 
| **($ in thousands)**               | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets** | ** **    | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Balance as of**  | ** **    |
|----------------------------------------------|------------|---------------------------------------------------------------------------------|---------------|--------------------------------------------|------------|---------------------------------------|------------|------------------------------|---------------|
| ** **                                   | ** ** | **(Level 1)**                                                              | ** **    | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **March 31, 2008** | ** **    |
| **Financial Assets**                         |       |                                                                            |          |                                       |       |                                  |       |                         |          |
| U.S. Treasuries                              |       | $                                                                               | 152,676       |                                       |       |                                  |       |                         | $             | 152,676 |   |
| Short-term: Money Markets Funds              |       | 22,641                                                                          |          |                                       |       |                                  |       | 22,641                       |          |
| **Total Level 1**                            | ** ** | **175,317**                                                                     | ** **    | ** **                                 |       |                                  |       | **175,317**                  |          |
|                                         |       |                                                                            |          |                                       |       |                                  |       |                         |          |
| Corporate                                    |       |                                                                            |          | $                                          | 2,059,701  |                                  |       |                         | 2,059,701     |   |
| Municipal                                    |       |                                                                            |          | 426,204                                    |       |                                  |       | 426,204                      |          |
| U.S. Government and Agencies                 |       |                                                                            |          | 680,294                                    |       |                                  |       | 680,294                      |          |
| CMBS                                         |       |                                                                            |          | 638,512                                    |       |                                  |       | 638,512                      |          |
| Preferred Stock                              |       |                                                                            |          | 8,014                                      |       |                                  |       | 8,014                        |          |
| MBS                                          |       |                                                                            |          | 375,931                                    |       |                                  |       | 375,931                      |          |
| Foreign Government                           |       |                                                                            |          | 350,966                                    |       |                                  |       | 350,966                      |          |
| Short-term: Commercial Paper and Other       |       |                                                                            |          | 292,077                                    |       |                                  |       | 292,077                      |          |
| **Total Level 2**                            | ** ** | ** **                                                                      | ** **    | **4,831,699**                              | ** ** | ** **                            | ** ** | **4,831,699**                | ** **    |
|                                         |       |                                                                            |          |                                       |       |                                  |       |                         |          |
| Corporate Privately Placed Securities        |       |                                                                            |          |                                       |       | $                                     | 1,238,956  |                         | 1,238,956     |   |
| ABS RMBS                                     |       |                                                                            |          |                                       |       | 67,224                                |       | 67,224                       |          |
| ALT-A                                        |       |                                                                            |          |                                       |       | 26,603                                |       | 26,603                       |          |
| Other CDO                                    |       |                                                                            |          |                                       |       | 26,131                                |       | 26,131                       |          |
| CRE CDO                                      |       |                                                                            |          |                                       |       | 29,894                                |       | 29,894                       |          |
| CMBS                                         |       |                                                                            |          |                                       |       | 1,914                                 |       | 1,914                        |          |
| Free-Standing Derivatives                    |       |                                                                            |          |                                       |       | 897                                   |       | 897                          |          |
| Municipal                                    |       |                                                                            |          |                                       |       | 46,350                                |       | 46,350                       |          |
| Other                                        |       |                                                                            |          |                                       |       | 48,538                                |       | 48,538                       |          |
| **Total Level 3**                            | ** ** | ** **                                                                      | ** **    | ** **                                 | ** ** | **1,486,507**                         | ** ** | **1,486,507**                | ** **    |
| Valued at cost or amortized cost             |       |                                                                            |          |                                       |       |                                  |       | 751,785                      |          |
| Counterparty and cash collateral netting (1) |       |                                                                            |          |                                       |       |                                  |       | (897                         | )             |
| **Total Investments**                        | ** ** | **175,317**                                                                     | ** **    | **4,831,699**                              | ** ** | **1,486,507**                         | ** ** | **7,244,411**                | ** **    |
|                                         |       |                                                                            |          |                                       |       |                                  |       |                         |          |
| Separate Account Assets                      |       | 837,849                                                                         |          |                                       |       |                                  |       | 837,849                      |          |
| Other Assets                                 |       | 77                                                                              |          |                                       |       | 506                                   |       | 583                          |          |
|                                         |       |                                                                            |          |                                       |       |                                  |       |                         |          |
| **Total Financial Assets**                   | ** ** | **$**                                                                           | **1,013,243** | ** **                                 | **$**      | **4,831,699**                         | ** ** | **$**                        | **1,487,013** | ** ** | **$** | **8,082,843** | ** ** |
| **% of Total Financial Assets**              |       | 12.5                                                                            | %             | 59.8                                       | %          | 18.4                                  | %          |                         |          |
|                                         |       |                                                                            |          |                                       |       |                                  |       |                         |          |
| **Financial Liabilities**                    |       |                                                                            |          |                                       |       |                                  |       |                         |          |
| Derivatives:                                 |       |                                                                            |          |                                       |       |                                  |       |                         |          |
| Free-standing                                |       |                                                                            |          | $                                          | (469       | )                                     | $          | (4,223                       | )             | $ | (4,692 | ) |
| Embedded in Annuity Contracts                |       |                                                                            |          |                                       |       | (1,253                                | )          | (1,253                       | )             |
| Counterparty and cash collateral netting (1) |       |                                                                            |          |                                       |       |                                  |       | 897                          |          |
| **Total Financial Liabilities**              | ** ** | ** **                                                                      |          | $                                          | (469       | )                                     | $          | (5,476                       | )             | $ | (5,048 | ) |
| **% of Total Financial Liabilities**         | ** ** | ** **                                                                      |          | 9.3                                        | %          | 108.5                                 | %          |                         |          |
|                                              |            |                                                                                 |               |                                            |            |                                       |            |                              |               |  |  |  |  |  |  |  |

 

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(1)   In accordance with FSP FIN 39-1, the Company nets all fair valueamounts recognized for derivative instruments and fair value amounts recognizedfor the right to reclaim cash collateral or the obligation to return cashcollateral executed with the same counterparty under a master nettingagreement.

----

 

12

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

 
| **($ in thousands)**         | ** ** | **Beginning  Balance:  January 1,  2008** | ** ** | **Total Realized  Capital Gains  and (Losses) in  Income****(1)** | ** ** | **Total Unrealized  Capital Gains  and (Losses) in  OCI** | ** ** | **Purchases, Sales,  Issuances and  Settlements, net** | ** ** | **Net Transfers In  and/or (out) of  Level 3****(2)** | ** ** | **Ending  Balance:  March 31,  2008** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Financial  Assets**                  |       |                                           |       |                                                                                  |       |                                                                          |       |                                                                  |       |                                                                           |       |                                       |       |
| Corporate  Privately Placed Securities |       | $                                              | 1,211,628  |                                                                                  | $          | 1,600                                                                         |       | $                                                                     | 1,059      |                                                                           | $          | 14,136                                     |       | $ | 10,533 |   | $ | 1,238,956 |   |
| ABS RMBS                               |       | 76,110                                         |       | (632                                                                                  | )          | (4,382                                                                        | )          | (3,872                                                                | )          | —                                                                         |       | 67,224                                     |       |
| Alt-A                                  |       | 28,836                                         |       | 5                                                                                     |       | (2,238                                                                        | )          | —                                                                |       | —                                                                         |       | 26,603                                     |       |
| Other CDO                              |       | 30,768                                         |       | 269                                                                                   |       | (1,910                                                                        | )          | (2,996                                                                | )          |                                                                           |       | 26,131                                     |       |
| CRE CDO                                |       | 33,067                                         |       | (5                                                                                    | )          | (3,160                                                                        | )          | (8                                                                    | )          | —                                                                         |       | 29,894                                     |       |
| CMBS                                   |       | 3,727                                          |       | 3                                                                                     |       | (1,816                                                                        | )          | —                                                                |       | —                                                                         |       | 1,914                                      |       |
| Free-Standing  Derivatives, net        |       | (980                                           | )          | (2,472                                                                                | )          | —                                                                        |       | 126                                                                   |       | —                                                                         |       | (3,326                                     | )(3)       |
| Municipals                             |       | 33,200                                         |       | —                                                                                |       | —                                                                        |       | (2,450                                                                | )          | 15,600                                                                         |       | 46,350                                     |       |
| Other                                  |       | 52,562                                         |       | 6,758                                                                                 |       | (9,423                                                                        | )          | (1,359                                                                | )          | —                                                                         |       | 48,538                                     |       |
| Total Investments                      |       | 1,468,918                                      |       | 5,526                                                                                 |       | (21,870                                                                       | )          | 3,577                                                                 |       | 26,133                                                                         |       | 1,482,284                                  | (4)        |
| Other Assets                           |       | (1,733                                         | )          | 2,239                                                                                 |       | —                                                                        |       | —                                                                |       | —                                                                         |       | 506                                        |       |
| Total Level 3  Financial Assets        |       | $                                              | 1,467,185  |                                                                                  | $          | 7,765                                                                         |       | $                                                                     | (21,870    | )                                                                              | $          | 3,577                                      |       | $ | 26,133 |   | $ | 1,482,790 |   |
|                                   |       |                                           |       |                                                                                  |       |                                                                          |       |                                                                  |       |                                                                           |       |                                       |       |
| **Financial  Liabilities**             |       |                                           |       |                                                                                  |       |                                                                          |       |                                                                  |       |                                                                           |       |                                       |       |
| Derivatives  Embedded in               |       |                                           |       |                                                                                  |       |                                                                          |       |                                                                  |       |                                                                           |       |                                       |       |
| Annuity Contracts                      |       | $                                              | 174        |                                                                                  | $          | (1,428                                                                        | )          | $                                                                     | —     |                                                                           | $          | 1                                          |       | $ | — |   | $ | (1,253 | ) |
| Total Level 3  Financial Liabilities   |       | $                                              | 174        |                                                                                  | $          | (1,428                                                                        | )          | $                                                                     | —     |                                                                           | $          | 1                                          |       | $ | — |   | $ | (1,253 | ) |

 

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(1)   The amounts above are reportedin the Condensed Statements of Operations as follows: $6.3 million in realized capital gains and losses and $1.4million in net investment income; and $(1.4) million in contract benefits.

(2)   Transfers into Level 3 duringthe three months ended March 31, 2008 are attributable to a change in theavailability of market observable information for individual securities withthe respective categories.

(3)   Comprises $897 thousand ofFinancial Assets and $(4.2) million of Financial Liabilities.

(4)   Comprises $1.49 billion of investmentsand $(4.2) million of free-standing Derivatives included in FinancialLiabilities.

----

 

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

 
| **($ in thousands)**            | ** ** | **Total Realized  Capital Gains  and (Losses) in  Income****(1)** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Financial Assets**                      |       |                                                                                  |       |
| Corporate Privately Placed Securities     |       | $                                                                                     | 1,111      |   |
| ABS RMBS                                  |       | (632                                                                                  | )          |
| Alt-A                                     |       | 4                                                                                     |       |
| Other CDO                                 |       | (56                                                                                   | )          |
| CRE CDO                                   |       | (5                                                                                    | )          |
| CMBS                                      |       | 3                                                                                     |       |
| Free-Standing Derivatives, net            |       | 20                                                                                    |       |
| Municipals                                |       | —                                                                                |       |
| Other                                     |       | 2,202                                                                                 |       |
| **Total Financial Assets**                |       | $                                                                                     | 2,647      |   |
|                                      |       |                                                                                  |       |
| **Financial Liabilities**                 |       |                                                                                  |       |
|                                      |       |                                                                                  |       |
| Derivatives Embedded in Annuity Contracts |       | $                                                                                     | (1,428     | ) |
| **Total Financial Liabilities**           |       | $                                                                                     | (1,428     | ) |

 

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(1)   Theamounts above are reported in the Condensed Statements of Operations asfollows: $1.2 million in realizedcapital gains and losses; $1.4 million in net investment income; and$(1.4) million in contract benefits.

----

 

13

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**4.  ****Reinsurance**

 

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

 
| ** **                                         | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Premiums and contract charges**                  |       |                                             |       |   |   |
| Direct                                             |       | $                                                | 34,053     |   | $ | 41,689 |   |
| Assumed-non-affiliate                              |       | 286                                              |       | 338 |   |
| Ceded                                              |       |                                             |       |   |   |
| Affiliate                                          |       | (992                                             | )          | (992 | ) |
| Non-affiliate                                      |       | (8,665                                           | )          | (8,905 | ) |
|                                               |       |                                             |       |   |   |
| Premiums and contract charges, net of  reinsurance |       | $                                                | 24,682     |   | $ | 32,130 |   |

 

        Theeffects of reinsurance on contract benefits are as follows:

 
| ** **                            | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**        | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Contract benefits**                 |       |                                             |       |   |   |
| Direct                                |       | $                                                | 45,846     |   | $ | 48,092 |   |
| Assumed-non-affiliate                 |       | 276                                              |       | 252 |   |
| Ceded                                 |       |                                             |       |   |   |
| Affiliate                             |       | (1,494                                           | )          | (1,175 | ) |
| Non-affiliate                         |       | (5,823                                           | )          | (4,336 | ) |
|                                  |       |                                             |       |   |   |
| Contract benefits, net of reinsurance |       | $                                                | 38,805     |   | $ | 42,833 |   |

 

The effects of reinsurance on interest credited to contractholder fundsare as follows:

 
| ** **                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Interest credited to contractholder funds**                  |       |                                             |       |   |   |
| Direct                                                         |       | $                                                | 46,295     |   | $ | 47,140 |   |
| Assumed-non-affiliate                                          |       | 9                                                |       | 6 |   |
| Ceded—non-affiliate                                       |       | (3,003                                           | )          | (3,496 | ) |
|                                                           |       |                                             |       |   |   |
| Interest credited to contractholder funds,  net of reinsurance |       | $                                                | 43,301     |   | $ | 43,650 |   |

###  

In addition to amounts includedin the tables above are reinsurance premiums ceded to ALIC of $819 thousand and$778 thousand for the three months ended March 31, 2008 and 2007,respectively, under the terms of the structured settlement annuity reinsuranceagreement.  These amounts are reflectedas a component of realized capital gains and losses on the Condensed Statementsof Operations as the treaty is recorded as a derivative instrument pursuant tothe requirements of SFAS No. 133.

 

14

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### **5.   Guaranteesand Contingent Liabilities**

###  

**Guaranty funds**

 

Under state insurance guaranty fund laws,insurers doing business in a state can be assessed, up to prescribed limits,for certain obligations of insolvent insurance companies to policyholders andclaimants.  Amounts assessed to eachcompany are typically related to its proportion of business written in aparticular state.

The New York Liquidation Bureau (the “Bureau”)has publicly reported that Executive Life Insurance Company of New York (“ExecutiveLife”), currently under its jurisdiction as part of a 1992 court-orderedrehabilitation plan, may only be able to meet future obligations of its annuitycontracts for the next fifteen years. The shortfall is estimated to be in the range of $650 million to $750million.  If Executive Life were to bedeclared insolvent in the future, the Company would likely have exposure toguaranty fund assessments or other costs.

Based on currently available information,the outcome of this situation is uncertain at this time.  The Bureau may eventually take actions toaddress this situation that may lead to guaranty fund assessments or othercosts to the Company.  Under current law,the Company may be allowed to recoup a portion of the amount of any additionalguaranty fund assessment in periods subsequent to the recognition of theassessment by offsetting future premium taxes. The Company’s market share in New York was approximately 5.5% in 2006based on industry annuity premium.

 

**Guarantees**

 

Related to the disposal through reinsurance of our variable annuitybusiness to Prudential Financial, Inc. and its subsidiary in 2006, theCompany and ALIC have agreed to indemnify Prudential for certain pre–closingcontingent liabilities (including extra–contractual liabilities of the Companyand ALIC, and liabilities specifically excluded from the transaction) that theCompany and ALIC have agreed to retain. In addition, the Company and ALIC will indemnify Prudential for certainpost–closing liabilities that may arise from the acts of the Company, ALIC andits agents, including in connection with the Company’s and ALIC’s provision oftransition services. The Reinsurance Agreements contain no limitations orindemnifications with regard to insurance risk transfer, and transferred all ofthe future risks and responsibilities for performance on the underlying variableannuity contracts to Prudential, including those related to benefit guarantees,in accordance with the provisions of SFAS No. 113 “Accounting andReporting for Reinsurance of Short–Duration and Long–Duration Contracts”.Management does not believe this agreement will have a material adverse effecton results of operations, cash flows or financial position of the Company.

In the normal course of business, theCompany provides standard indemnifications to contractual counterparties inconnection 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.  The indemnificationclauses are often standard contractual terms and are entered into in the normalcourse of business based on an assessment that the risk of loss would beremote.  The terms of theindemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and thecontingencies triggering the obligation to indemnify have not occurred and arenot expected to occur.  Consequently, themaximum amount of the obligation under such indemnifications is notdeterminable.  Historically, the Companyhas not made any material payments pursuant to these obligations.

The aggregateliability balance related to all guarantees was not material as of March 31,2008.

 

**Regulation**

 

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

 

15

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**Legal and regulatory proceedings andinquiries**

 

**Background**

 

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

 

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

 

·                  The outcome onthese matters may also be affected by decisions, verdicts, and settlements, andthe timing of such decisions, verdicts, and settlements, in other individualand class action lawsuits that involve the Company, other insurers, or otherentities and by other legal,governmental, and regulatory actions that involve the Company, other insurers,or other entities.

 

·                  In the lawsuits,plaintiffs seek a variety of remedies including equitable relief in the form ofinjunctive and other remedies and monetary relief in the form of contractualand extra-contractual damages.  In somecases, the monetary damages sought include punitive damages.  Often specific information about the reliefsought, such as the amount of damages, is not available because plaintiffs havenot requested specific relief in their pleadings.  In Allstate’s experience, when specificmonetary demands are made in pleadings, they bear little relation to theultimate loss, if any, to the Company.

 

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

 

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

 

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

 

**Proceedings**

 

Legal proceedings involving Allstate agencies andAIC may impact the Company, even when the Company is not directly involved,because the Company sells its products through a variety of distributionchannels including Allstate agencies. Consequently, information about the more significant of theseproceedings is provided in the following paragraph.

 

16

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AIC is defending certain matters relating toits agency program reorganization announced in 1999.  These matters are in various stages ofdevelopment.

 

·                  These mattersinclude a lawsuit filed in 2001 by the U.S. Equal Employment OpportunityCommission (“EEOC”) alleging retaliation under federal civil rights laws (the “EEOC I” suit) and a class action filedin 2001 by former employee agents alleging retaliation and age discriminationunder the Age Discrimination in Employment Act (“ADEA”), breach of contract and ERISA violations (the “RomeroI” suit).   In 2004, in the consolidatedEEOC I and Romero I litigation, the trial court issued a memorandum and orderthat, among other things, certified classes of agents, including a mandatoryclass of agents who had signed a release, for purposes of effecting the court’sdeclaratory judgment that the release is voidable at the option of the releasesigner.  The court also ordered that anagent who voids the release must return to AIC “any and all benefits receivedby the [agent] in exchange for signing the release.”  The court also stated that, “on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order and in January 2007,the judge denied their request.  In June 2007,the court granted AIC’s motions for summary judgment.  Following plaintiffs’ filing of a notice ofappeal, the Third Circuit issued an order in December 31, 2007 statingthat the notice of appeal was not taken from a final order within the meaningof the federal law and thus not appealable at this time.  In March 2008, the Third Circuit decidedthat the appeal should not summarily be dismissed and that the question ofwhether the matter is appealable at this time will be addressed by the Courtalong with the merits of the appeal.

 

·                  The EEOC also filed another lawsuit in 2004alleging age discrimination with respect to a policy limiting the rehire ofagents affected by the agency program reorganization (the “EEOC II” suit).  In EEOC II, in 2006, the court grantedpartial summary judgment to the EEOC. Although the court did not determine that AIC was liable for agediscrimination under the ADEA, it determined that the rehire policy resulted ina disparate impact, reserving for trial the determination on whether AIC hadreasonable factors other than age to support the rehire policy.  AIC’s interlocutory appeal of the trial court’ssummary judgment order is now pending in the United States Court of Appeals forthe Eighth Circuit.

 

·                  AIC is also defending a certified classaction filed by former employee agents who terminated their employment prior tothe agency program reorganization. Plaintiffs allege that they were constructively discharged so thatAllstate could avoid paying ERISA and other benefits offered under thereorganization.  They claim that theconstructive discharge resulted from the implementation of agency standards,including mandatory office hours and a requirement to have licensed staffavailable during business hours.  Thecourt approved the form of class notice which was sent to approximately 1,800potential class members in November 2007. Fifteen individuals opted out. AIC’s motions for judgment on the pleadings were partially granted andAIC’s motion for summary judgment remains pending.

 

·                  A putativenationwide class action has also been filed by former employee agents allegingvarious violations of ERISA, includinga worker classification issue.  Theseplaintiffs are challenging certain amendments to the Agents Pension Plan andare seeking to have exclusive agent independent contractors treated asemployees for benefit purposes.  Thismatter was dismissed with prejudice by the trial court, was the subject offurther proceedings on appeal, and was reversed and remanded to the trial courtin 2005.  In June 2007, the court granted AIC’smotion to dismiss the case.  Followingplaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007stating that the notice of appeal was not taken from a final order within themeaning of the federal law and thus not appealable at this time. In March 2008,the Third Circuit decided that the appeal should not summarily be dismissed andthat the question of whether the matter is appealable at this time will beaddressed by the Court along with the merits of the appeal.

 

Inall of these various matters, plaintiffs seek compensatory and punitivedamages, and equitable relief.  AIChas been vigorously defending these lawsuits and other matters related to itsagency program reorganization.

 

17

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 **OtherMatters**

 

Various other legal,governmental, and regulatory actions, including state market conductexams, and other governmental and regulatory inquiries are currentlypending that involve the Company and specific aspects of its conduct ofbusiness.  Like other members of theinsurance industry, the Company is the target of a number of lawsuits and othertypes of proceedings, some of which involve claims for substantial orindeterminate amounts.  These actions are based on a variety ofissues and target a range of the Company’s practices.  Theoutcome of these disputes is currently unpredictable.

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

 

**6.   OtherComprehensive Income**

 

Thecomponents of other comprehensive (loss) income on a pretax and after-tax basisare as follows:

 
| ** **                                                              | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **(in thousands)**                                                 | ** ** | **Pretax**                                           | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding (losses) gains arising  during the period            |       | $                                                    | (34,671    | ) | 12,134 |   | $ | (22,537 | ) | $ | 211 |   | (74 | ) | $ | 137 |   |
| Less: reclassification adjustment of  realized capital gains and losses |       | 973                                                  |       | (341 | ) | 632 |   | 1,140 |   | (399 | ) | 741 |   |
| Unrealized net capital gains and losses                                 |       | (35,644                                              | )          | 12,475 |   | (23,169 | ) | (929 | ) | 325 |   | (604 | ) |
|                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive loss                                                |       | $                                                    | (35,644    | ) | 12,475 |   | (23,169 | ) | $ | (929 | ) | 325 |   | (604 | ) |
|                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                              |       |                                                 |       |   |   | 21,577 |   |   |   |   |   | 6,673 |   |
|                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive (loss) income                                             |       |                                                 |       |   |   | $ | (1,592 | ) |   |   |   |   | $ | 6,069 |   |

 

18

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and Shareholder of

Allstate Life Insurance Company of New York:

 

We have reviewed the accompanying condensed statementof financial position of Allstate Life Insurance Company of New York (the “Company”,an affiliate of The Allstate Corporation) as of March 31, 2008, and therelated condensed statements of operations for the three-month periods ended March 30,2008 and 2007, and the condensed statements of cash flows for the three-monthperiods ended March 31, 2008 and 2007. These interim 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 accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the statement of financial position of Allstate Life Insurance Companyof New York as of December 31, 2007, and the related statements ofoperations and comprehensive income, shareholder’s equity, and cash flows forthe year then ended (not presented herein); and in our report dated March 13,2008, which report includes an explanatory paragraph relating to a change inthe Company’s method of accounting for uncertainty in income taxes andaccounting for deferred acquisition costs associated with internal replacementsin 2007, we expressed an unqualified opinion on those financialstatements.  In our opinion, the informationset forth in the accompanying condensed statement of financial position as of December 31,2007 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

May 12, 2008

 

19

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**Item 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THETHREE-MONTH PERIODS ENDED MARCH 31, 2008 AND 2007**

###  

### **OVERVIEW**

###  

The following discussionhighlights significant factors influencing the financial position and resultsof operations of Allstate Life Insurance Company of New York (referred to inthis document as “we”, “ALNY”, “our”, “us” or the “Company”).  It should be read in conjunction with thecondensed financial statements and notes thereto found under Part I. Item1. contained herein, and with the discussion, analysis, financial statementsand notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8.of the Allstate Life Insurance Company of New York Annual Report on Form 10-Kfor 2007.  We operate as a single segmententity based on the manner in which we use financial information to evaluatebusiness performance and determine the allocation of resources.

 

**APPLICATIONOF CRITICAL ACCOUNTING ESTIMATES**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”) requires management to adopt accounting policies and makeestimates and assumptions that affect amounts reported in the financialstatements.

In applying policies,management makes subjective and complex judgments that frequently requireestimates about matters that are inherently uncertain. Many of these policies,estimates and related judgments are common in the insurance and financialservices industries; others are specific to our businesses and operations.  It is reasonably likely that changes in theseestimates could occur from period to period and result in a material impact onour financial statements.

Our critical accountingestimate for the fair value of financial assets and financial liabilitiesfollows.  For description of criticalaccounting estimates not discussed below, see the Application of CriticalAccounting Estimates section of the MD&A found under Part II. Item 7.of the Allstate Life Insurance Company of New York Annual Report on Form 10-Kfor 2007.

 

**Fair Value of Financial Assets and FinancialLiabilities  Financial AccountingStandards Board**(“FASB”) Statement No. 157,*Fair Value Measurements* (“SFAS No. 157”)is effective for fiscal years beginning after November 15, 2007. Weadopted the provisions of SFAS No. 157 as of January 1, 2008 forfinancial assets and financial liabilities that are measured at fair value.SFAS No. 157:

 

·                  Definesfair value as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date, and establishes a framework for measuring fair value;

 

·                  Establishesa three-level hierarchy for fair value measurements based upon the transparencyof inputs to the valuation as of the measurement date;

 

·                  Expandsdisclosures about financial instruments measured at fair value.

 

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

Theavailability of market observable information is the principal factor indetermining the level that financial instruments are assigned in thethree-level hierarchy. Observable inputs are those used by market participantsin valuing financial instruments that are developed based on market dataobtained from independent sources. In the absence of observable inputs,unobservable inputs reflect our estimates of the assumptions marketparticipants would use in valuing financial assets and financial liabilitiesand are developed based on the best information available in thecircumstances.  The degree of managementjudgment involved in determining fair values is inversely related to the availabilityof market observable information.

 

20

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

 

*Level 1:***    **Financial assets and financial liabilities whose values are based onunadjusted quoted prices for identical assets or liabilities in an activemarket that we can access.

 

*Level 2:*****Financial assets and financial liabilitieswhose values are based on the following:

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

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

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

 

*Level 3:****    ***Financial assets and financial liabilitieswhose values are based on prices or valuation techniques that require inputsthat are both unobservable and significant to the overall fair valuemeasurement. These inputs may reflect our estimates of the assumptions thatmarket participants would use in valuing the financial assets and financialliabilities.

 

We utilize a combination of third party valuation service providers,brokers, and internal valuation models to determine fair value.  We gain assurance on the overall reasonableness and consistentapplication of input assumptions, valuation methodologies, and compliance withaccounting standards for fair value determination through the execution ofvarious processes and controls designed to ensure that our financial assets andfinancial liabilities are appropriately valued and our ongoing monitoring ofthe fair values received or derived internally. We are responsible for the determination of the value of thefinancial assets and financial liabilities carried at fair value and thesupporting assumptions and methodologies. In certain situations, we employ independent third-party valuationservice providers to gather, analyze, and interpret market information andderive fair values based upon relevant assumptions and methodologies forindividual instruments.  In situationswhere our valuation service providers are unable to obtain sufficient marketobservable information upon which to estimate the fair value for a particularsecurity, fair value is determined either by requesting brokers who areknowledgeable about these securities to provide a quote or by employinginternal valuation models that are widely accepted in the financial servicesindustry.  Changing market conditions inthe first quarter of 2008 were incorporated into valuation assumptions andreflected in the fair values which were validated by calibration and otheranalytical techniques to available market observable data.

Valuation service providerstypically obtain data about market transactions and other key valuation modelinputs from multiple sources and, through the use of proprietary algorithms,produce valuation information in the form of a single fair value for individualsecurities for which a fair value has been requested under the terms of ouragreements.  For certain types ofsecurities, fair values are derived from the valuation service providers’proprietary valuation models.  The inputsused by the valuation service providers include, but are not limited to, marketprices from recently completed transactions and transactions of comparablesecurities, interest rate yield curves, credit spreads, currency rates, andother market-observable information, as applicable. Valuation service providersalso use proprietary discounted cash flow models that are widely accepted inthe financial services industry and similar to those used by other marketparticipants to value the same financial instruments.  The valuation models take into account, amongother things, market observable information as of the measurement date, asdescribed above, as well as the specific attributes of the security beingvalued including its term, interest rate, credit rating, industry sector, andwhere applicable, collateral quality and other issue or issuer specificinformation.  Executing valuation modelseffectively requires seasoned professional judgment and experience.  In cases where market transactions or othermarket observable data is limited, the extent to which judgment is appliedvaries inversely with the availability of market observable information.

For certain of our financial assets carried at fair value, where ourvaluation service providers cannot provide fair value determinations, we obtainnon-binding price quotes from brokers familiar with the security who, similarto our valuation service providers, may consider transactions or activity insimilar securities, as applicable, among other information.  The brokers providing price quotes aregenerally from the brokerage divisions of leading financial institutions withmarket making, underwriting and distribution expertise.

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

 

21

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Our internal pricing methodsare primarily based on models using discounted cash flow methodologies thatdetermine a single best estimate of fair value for individual financialinstruments.  In addition, our models useinternally assigned credit ratings as inputs (which are generally consistentwith any external ratings and those we use to report our holdings by creditrating) and stochastically determined cash flows for certain derivativesembedded in certain contractholder liabilities, both of which are difficult toindependently observe and verify.  Instrumentspecific inputs used in our internal fair value determinations include: couponrate, weighted average life, sector of the issuer, call provisions, and thecontractual elements of derivatives embedded in certain contractholderliabilities.  Market specific inputs usedin these fair values, which we believe are representative of inputs othermarket participants would use to determine fair value of the same instrumentsinclude: interest rate yield curves, quoted market prices of comparable securities,credit spreads, estimated liquidity premiums, and other applicable market dataincluding lapse and anticipated market return estimates for derivativesembedded in certain contractholder liabilities. As a result of the significance of non-market observable inputs,including internally assigned credit ratings and stochastic cash flow estimatesas described above, judgment is required in developing these fair values. Thefair value of these financial assets and financial liabilities may differ fromthe amount received to sell an asset or the amount paid to transfer a liabilityin an orderly transaction between market participants at the measurementdate.  Moreover, the use of differentvaluation assumptions may have a material effect on the financial assets’ andfinancial liabilities’ fair values.

Fairvalue of our investments comprise an aggregation of numerous, single bestestimates for each security in the Condensed Statements of FinancialPosition.  Because of this detailedapproach there is no single set of assumptions that determine our fair valueestimates.  Moreover management does notcompile a range of estimates for items reported at fair value because we do notbelieve that a range would provide meaningful information.  Level 1 and Level 2 measurements representvaluations where all significant inputs are market observable. Level 3measurements have one or more significant inputs that are not market observableand as a result these fair value determinations have greater potentialvariability as it relates to their significant inputs.  The Level 3 principal components are privateplaced securities valued using internal models, asset-backed residentialmortgage-baked securities (“ABS RMBS”), broker quoted securities and Alt-Aresidential mortgage-backed securities (“Alt-A”). In general, the greater thereliance on significant inputs that are not market observable, the greaterpotential variability of the fair value determinations. ABS RMBS and Alt-Areflected the most significant impacts, to their respective fair valuedeterminations, due to the continued illiquidity that existed for these classesof securities. For broker quoted securities’ fair value determinations, webelieve the brokers providing the quotes may consider market observabletransactions or activity in similar securities, as applicable, and otherinformation as calibration points. Privately placed securities’ fair value determinations, which were basedon internal ratings that are not market observable are calibrated to marketobservable information in the form of external National Association ofInsurance Commissioners (“NAIC”) ratings and credit spreads.  We believe our most significant exposure tochanges in fair value is due to market risk. Our exposure to changes in market conditions is discussed fully in theMarket Risk section of the MD&A included in our 2007 Form 10-K.

We employ specific controlprocesses to determine the reasonableness of the fair values of our financialassets and financial liabilities.  Ourprocesses are designed to ensure that the values received or internallyestimated are accurately recorded and that the data inputs and the valuationtechniques utilized are appropriate, consistently applied, and that theassumptions are reasonable and consistent with the objective of determiningfair value.  For example, on a continuingbasis, we assess the reasonableness of individual security values received fromvaluation service providers that exceed certain thresholds as compared toprevious values received from those valuation service providers. In addition,we may validate the reasonableness of fair values by comparing informationobtained from our valuation service providers to other third party valuationsources for selected financial assets. When fair value determinations areexpected to be more variable, we validate them through reviews by members ofmanagement who have relevant expertise and who are independent of those chargedwith executing investing transactions.

 

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

 
| ** **                                                                                         | ** ** | **Investments**     | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------|------------|
| **(in thousands)**                                                                            | ** ** | **Carrying  Value** | ** ** | **Percent  to total** | ** ** |
| Fair value based on internal sources (1)                                                           |       | $                   | 1,470,214  |   | 20.3 | % |
| Fair value based on external sources (2)                                                           |       | 5,022,412           |       | 69.3 |   |
| Total fixed income securities and certain  short-term securities                                   |       | 6,492,626           |       | 89.6 |   |
| Mortgage loans, policy loans, short-term  and other investments, valued at cost and amortized cost |       | 751,785             |       | 10.4 |   |
| Total                                                                                              |       | $                   | 7,244,411  |   | 100.0 | % |

 

(1)          Includes short-term: commercial paper and other of $292.1 millionreported in Level 2.

(2)          Includes 4% that are valued using broker quotes.

----

 

Formore detailed information on our accounting policy for the fair value offinancial assets and financial liabilities and information on the financialassets and financial liabilities included in the Levels promulgated by SFAS No. 157,see Note 3 to the Condensed Financial Statements.

 

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

 
| **(in thousands)**                                   | ** ** | **Fair Value** | ** ** | **Fair Value  as a % of  Amortized Cost** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|---------------------------------------------------------------|------------|
| Corporate – privately placed securities              |       | $                   | 1,238,956  |                                                          | 103.5      | % |
| ABS RMBS                                                  |       | 67,224              |       | 85.4                                                          |       |
| Alt A                                                     |       | 26,603              |       | 89.9                                                          |       |
| Other CDO                                                 |       | 26,131              |       | 89.8                                                          |       |
| CRE CDO                                                   |       | 29,894              |       | 78.2                                                          |       |
| Commercial mortgage-backed securities  (“CMBS”) |       | 1,914               |       | 32.5                                                          |       |
| Free-Standing Derivatives                                 |       | 897                 |       | N/A                                                           |       |
| Municipals                                                |       | 46,350              |       | 100.0                                                         |       |
| Other                                                     |       | 48,538              |       | 96.9                                                          |       |
| **Total Level 3 investments**                             |       | $                   | 1,486,507  |                                                          | 100.8      | % |

 

23

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Thefollowing table summarizes Level 1, 2 and 3 financial assets and financialliabilities by their classification in the Condensed Statement of FinancialPosition at March 31, 2008.

 
| **(in thousands)**                  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Valued at  cost or  amortized  cost** | ** ** | **Balance as of  March 31, 2008** | ** ** |
|------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|---------------------------------------------------|------------|-------------------------------------------------------|------------|
| **Financial Assets**                     |       |             |       |             |       |             |       |                                              |       |                                                  |       |
| Fixed income securities                  |       | $                | 152,676    |             | $          | 4,539,622        |       | $                                                 | 1,485,610  |                                                  |       |   | $ | 6,177,908 |   |
| Mortgage loans                           |       |             |       |             |       |             |       | $                                                 | 711,321    |                                                  | 711,321    |   |
| Short-term                               |       | 22,641           |       | 292,077          |       |             |       | 2,000                                             |       | 316,718                                               |       |
| Policy loans                             |       |             |       |             |       |             |       | 38,464                                            |       | 38,464                                                |       |
| Other investments                        |       |             |       |             |       | 897              |       |                                              |       | 897                                                   |       |
| Counterparty and cash collateral netting |       |             |       |             |       |             |       |                                              |       | (897                                                  | )          |
| **Total Investments**                    |       | 175,317          |       | 4,831,699        |       | 1,486,507        |       | 751,785                                           |       | 7,244,411                                             |       |
| **Separate account assets**              |       | 837,849          |       |             |       |             |       |                                              |       | 837,849                                               |       |
| **Other assets**                         |       | 77               |       |             |       | 506              |       |                                              |       | 583                                                   |       |
| **Total Financial Assets**               |       | $                | 1,013,243  |             | $          | 4,831,699        |       | $                                                 | 1,487,013  |                                                  | $          | 751,785 |   | $ | 8,082,843 |   |
|                                     |       |             |       |             |       |             |       |                                              |       |                                                  |       |
| **Financial Liabilities**                |       |             |       |             |       |             |       |                                              |       |                                                  |       |
| **Contractholder funds**                 |       |             |       |             |       | (1,253           | )          |                                              |       | (1,253                                                | )          |
| **Other liabilities**                    |       |             |       | (469             | )          | (4,223           | )          |                                              |       | (3,795                                                | )          |
| **Total Financial Liabilities**          |       | $                |       | $                | (469       | )                | $          | (5,476                                            | )          | $                                                     | —     |   | $ | (5,048 | ) |

 

Transfers into and out ofLevel 3 during the quarter are attributable to a change in the availability ofmarket observable information for individual securities within the respectivecategories.  For a further discussion of the impact ofunrealized net capital gains and losses on our results of operations and adiscussion of the fluctuations in fair value during the quarter ended March 31,2008, see the Investments section of the MD&A.

 

24

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### **OPERATIONS**

 

        TheCompany’s results of operations for the three months ended March 31 arepresented in the following table.

 
| ** **                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Revenues**                              |       |                                             |       |   |   |
| Premiums                                  |       | $                                                | 9,201      |   | $ | 17,732 |   |
| Contract charges                          |       | 15,481                                           |       | 14,398 |   |
| Net investment income                     |       | 99,746                                           |       | 93,968 |   |
| Realized capital gains and losses         |       | 1,721                                            |       | (1,905 | ) |
| Total revenues                            |       | 126,149                                          |       | 124,193 |   |
|                                      |       |                                             |       |   |   |
| **Costs and expenses**                    |       |                                             |       |   |   |
| Contract benefits                         |       | (38,805                                          | )          | (42,833 | ) |
| Interest credited to contractholder funds |       | (43,301                                          | )          | (43,650 | ) |
| Amortization of DAC                       |       | (1,451                                           | )          | (17,760 | ) |
| Operating costs and expenses              |       | (9,022                                           | )          | (9,144 | ) |
| Total costs and expenses                  |       | (92,579                                          | )          | (113,387 | ) |
|                                      |       |                                             |       |   |   |
| Loss on disposition of operations         |       | (268                                             | )          | (385 | ) |
| Income tax expense                        |       | (11,725                                          | )          | (3,748 | ) |
| Net income                                |       | $                                                | 21,577     |   | $ | 6,673 |   |

 

*Net Income*****inthe first quarter of 2008****totaled $21.6million compared to $6.7 million in the same period of 2007. The change was primarilythe result of lower total costs and expenses and, to a lesser extent, highertotal revenues.

 

**Analysis of Revenues**Total revenues increased 1.6% or $2.0 millionin the first quarter of 2008 compared to the same period of 2007 due to highernet investment income, the recognition of realized capital gains in the firstquarter of 2008 compared to realized capital losses in the first quarter of2007, and higher contract charges, partially offset by lower premiums.

 

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

 

*Contract charges*****are revenues generated from interest-sensitive and variablelife insurance, 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 fundsare considered in the evaluation of growth and as indicators of future levelsof revenues.

 

25

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The following table summarizespremiums and contract charges by product.

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                        |       |                                             |       |   |   |
| **Premiums**                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Traditional life insurance                  |       | $                                                | 5,123      |   | $ | 6,384 |   |
| Immediate annuities with life contingencies |       | 2,150                                            |       | 9,799 |   |
| Accident, health and other                  |       | 1,928                                            |       | 1,549 |   |
| **Total premiums**                          |       | 9,201                                            |       | 17,732 |   |
|                                        |       |                                             |       |   |   |
| **Contract charges**                        |       |                                             |       |   |   |
| Interest-sensitive life insurance           |       | 13,712                                           |       | 12,251 |   |
| Fixed annuities                             |       | 1,769                                            |       | 2,147 |   |
| **Total contract charges****(1)**           |       | 15,481                                           |       | 14,398 |   |
| **Premiums and contract charges**           |       | $                                                | 24,682     |   | $ | 32,130 |   |

 

----

| (1) | Contract  charges for the three months ended March 31, 2008 and 2007 include  contract charges related to the cost of insurance totaling $9.6 million and  $8.3 million, respectively. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

 

Total premiums decreased 48.1% in the first quarter of 2008 compared tothe same period of 2007 due primarily to a decline in sales of life contingentimmediate annuities due to market conditions.

Contract charges increased 7.5% inthe first quarter of 2008 compared to the same period of 2007 due to growth ininterest-sensitive life insurance policies in force, partially offset bydecreased contract charges on fixed annuities resulting primarily from lowersurrender charges.

 

26

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*Contractholder funds* representinterest-bearing liabilities arising from the sale of fixed annuities,interest-sensitive life insurance policies and variable annuity and lifedeposits allocated to fixed accounts. The balance of contractholder funds is equal to the cumulative depositsreceived and interest credited to the contractholder less cumulative contractmaturities, benefits, surrenders, withdrawals and contract charges formortality or administrative expenses.

The following table shows thechanges in contractholder funds.

 
| ** **                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Contractholder funds, beginning balance**                     |       | $                                                | 4,848,461  |   | $ | 4,708,428 |   |
|                                                            |       |                                             |       |   |   |
| **Deposits**                                                    |       |                                             |       |   |   |
| Fixed annuities                                                 |       | 92,125                                           |       | 69,632 |   |
| Interest-sensitive life insurance                               |       | 25,982                                           |       | 23,129 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | 11                                               |       | 15 |   |
| Total deposits                                                  |       | 118,118                                          |       | 92,776 |   |
|                                                            |       |                                             |       |   |   |
| **Interest credited**                                           |       | 45,116                                           |       | 44,214 |   |
|                                                            |       |                                             |       |   |   |
| **Benefits, withdrawals and other adjustments**                 |       |                                             |       |   |   |
| Benefits                                                        |       | (41,213                                          | )          | (38,056 | ) |
| Surrenders and partial withdrawals                              |       | (83,607                                          | )          | (80,303 | ) |
| Contract charges                                                |       | (12,837                                          | )          | (11,692 | ) |
| Net transfers to separate accounts                              |       | (5                                               | )          | — |   |
| Other adjustments (1)                                           |       | (7,805                                           | )          | (19,070 | ) |
| Total benefits, withdrawals and other  adjustments              |       | (145,467                                         | )          | (149,121 | ) |
| **Contractholder funds, ending balance**                        |       | $                                                | 4,866,228  |   | $ | 4,696,297 |   |

 

----

| (1) | The table above illustrates the changes in  contractholder funds, which are presented gross of reinsurance recoverables  on the Condensed Statements of Financial Position. The table above is  intended to supplement our discussion and analysis of revenues, which are  presented net of reinsurance on the Condensed Statements of Operations. As a result,  the net change in contractholder funds associated with products reinsured to  third parties is reflected as a component of the other adjustments line. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

 

Contractholderfunds increased 0.4% in the first quarter of 2008 and decreased 0.3% in thesame period of 2007.  Averagecontractholder funds increased 3.3% in the first quarter of 2008 compared tothe first quarter of 2007.

Contractholder deposits increased 27.3% inthe first quarter of 2008 compared to the same period of 2007 primarily due tohigher deposits on fixed annuities resulting from increased consumer demand.

Surrenders and partial withdrawals increased 4.1% in the first quarterof 2008 compared to the same period of 2007. The increase was due to higher surrenders and partial withdrawals onfixed annuities and, to a lesser extent, interest-sensitive life products. Thesurrender and partial withdrawal rate on deferred fixed annuities andinterest-sensitive life products, based on the beginning of periodcontractholder funds, was 8.5% in the first quarter of 2008 compared to 8.6% inthe first quarter of 2007.

 

*Net investment income*increased 6.1% in the first quarter of 2008 compared to the same period of 2007due to higher average portfolio balances.

 

*Realized capital gains and losses*reflected net gains of $1.7 million in the first quarter of 2008 compared withnet losses of $1.9 million in first quarter of 2007.  For further discussion of realized capitalgains and losses, see the Investments section of MD&A.

 

27

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** **

**Analysis of Costs and Expenses **Total costs and expenses decreased 18.4% in the first quarter of 2008compared to the same period in the prior year due primarily to loweramortization of DAC and, to a lesser extent, decreased contract benefits.

 

*Contract benefits* decreased 9.4%or $4.0 million in the first quarter of 2008 compared to the same period in2007 due to lower contract benefits on annuities and, to a lesser extent,decreased contract benefits on life insurance products.  The decline in contract benefits on annuitieswas mostly attributable to lower sales of immediate annuities with lifecontingencies, partially offset by unfavorable mortality experience.  The decline in contract benefits on lifeinsurance products was due to favorable mortality experience.

We analyze our mortality and morbidity results using the differencebetween premiums, contract charges earned for the cost of insurance andcontract benefits excluding the portion related to the implied interest onimmediate annuities with life contingencies (“benefit spread”).  This implied interest totaled $27.3 millionand $26.6 million in the first quarter of 2008 and 2007, respectively.  Thebenefit spread by product group is disclosed in the following table.

 
| ** **              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Life insurance          |       | $                                                | 8,246      |   | $ | 7,153 |   |
| Annuities               |       | (987                                             | )          | 2,656 |   |
| Total benefit spread    |       | $                                                | 7,259      |   | $ | 9,809 |   |

 

*Interest credited to contractholder funds*in the first quarter of 2008 was comparable with the first quarter of 2007 aslower weighted average interest crediting rates on interest-sensitive lifeinsurance and decreased amortization of deferred sales inducements were mostlyoffset by increased contractholder funds and higher weighted average interest creditingrates on deferred fixed annuities.

Inorder to analyze the impact of net investment income and interest credited topolicyholders on net income, we review the difference between net investmentincome and the sum of interest credited to contractholder funds and the impliedinterest on immediate annuities with life contingencies which is included as acomponent of contract benefits on the Condensed Statements of Operations (“investmentspread”).

Theinvestment spread by product group is shown in the following table.

 
| ** **                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Annuities                                                |       | $                                                | 17,276     |   | $ | 14,471 |   |
| Life insurance                                           |       | 1,038                                            |       | 381 |   |
| Net investment income on investments  supporting capital |       | 10,850                                           |       | 8,859 |   |
| Total investment spread                                  |       | $                                                | 29,164     |   | $ | 23,711 |   |

 

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

 
| ** **                                                           | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | ** **                                       | ** ** | ** **                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **2008**                                         | ** ** | **2007**                                                     | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest-sensitive life insurance                                    |       | 5.8                                              | %          | 5.6                                                          | %          | 4.4                                               | %          | 4.7 | % | 1.4 | % | 0.9 | % |
| Deferred fixed annuities                                             |       | 5.6                                              |       | 5.6                                                          |       | 3.4                                               |       | 3.3 |   | 2.2 |   | 2.3 |   |
| Immediate fixed annuities with and without  life contingencies       |       | 7.3                                              |       | 7.3                                                          |       | 6.6                                               |       | 6.6 |   | 0.7 |   | 0.7 |   |
| Investments supporting capital, traditional  life and other products |       | 6.2                                              |       | 5.6                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

28

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The following table summarizes our product liabilities as of March 31and indicates the account value of those contracts and policies in which aninvestment spread is generated.

 
| ** **                                                      | ** ** | **Three Months Ended  March  31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Immediate fixed annuities with life  contingencies              |       | $                                                      | 1,625,280  |   | $ | 1,579,403 |   |
| Other life contingent contracts and other                       |       | 402,161                                                |       | 360,959 |   |
| Reserve for life-contingent contract benefits                   |       | $                                                      | 2,027,441  |   | $ | 1,940,362 |   |
|                                                            |       |                                                   |       |   |   |
| Interest-sensitive life insurance                               |       | $                                                      | 542,361    |   | $ | 486,415 |   |
| Deferred fixed annuities                                        |       | 3,737,663                                              |       | 3,642,861 |   |
| Immediate fixed annuities without life  contingencies and other |       | 586,204                                                |       | 567,021 |   |
| Contractholder funds                                            |       | $                                                      | 4,866,228  |   | $ | 4,696,297 |   |

 

*Amortization of DAC* decreased 91.8% or $16.3 million in thefirst quarter of 2008 compared to the same period of 2007.  The decrease in amortization of DAC in thefirst quarter of 2008 compared to the same period of 2007 was due to therecognition in the first quarter of 2008 of amortization deceleration (creditto income) totaling $8.8 million compared to amortization acceleration (chargeto income) totaling $5.8 million in the same period in the prior year.  In addition, the impact of realized capitalgains and losses on amortization of DAC resulted in a reduction to amortizationof DAC of $1.4 million in the first quarter of 2008 compared to the same periodof 2007.

In accordance with our annualcomprehensive review of DAC assumptions (commonly referred to as “DAC unlocking”),in the first quarter of 2008, the Company recognized net amortizationdeceleration totaling $8.8 million, including $6.5 million for fixed annuitiesand $2.3 million for interest-sensitive life insurance products.  In the first quarter of 2007, netamortization acceleration totaled $5.8 million and included net amortizationdeceleration of $1.5 million for interest-sensitive life insurance products andnet amortization acceleration of $7.3 million for fixed annuities.  The first quarter 2008 net amortizationdeceleration of $6.5 million on fixed annuities was due primarily to higherthan expected investment spreads partially offset by increased expenses and the2008 net amortization deceleration of $2.3 million on interest-sensitive lifeinsurance products was due to higher than expected benefit spreads partiallyoffset by increased expenses.

Theimpact of realized capital gains and losses on amortization of DAC is dependentupon the relationship between the assets that give rise to the gain or loss andthe product liability supported by the assets. Fluctuations result from changes in the impact of realized capital gainsand losses on actual and expected gross profits.

 

*Operating costs and expenses*declined 1.3% in the first quarter of 2008 compared to the same period of 2007due primarily to lower non-deferrable commissions.

 

*Loss on disposition of operations*for the first quarter of 2008 and 2007 totaled $268 thousand and $385 thousand,respectively, and related to adjustments associated with a previous perioddisposition.

 

*Income tax expense* increased by $8.0 million in the first quarter of 2008 compared to thesame period in the prior year.  Thisincrease was consistent with the increase in pretax income.

 

29

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**INVESTMENTS**

 

An important component of ourfinancial results is the return on our investment portfolio.  The composition of the investment portfolioat March 31, 2008 is presented in the table below.

 
| ** **                  | ** ** | **Carrying** | ** ** | **Percent**       | ** ** |
|-----------------------------|------------|--------------|------------|-------------------|------------|
| **(in thousands)**     | ** ** | **value**    | ** ** | **of total** | ** ** |
|                        |       |         |       |              |       |
| Fixed income securities (1) |       | $            | 6,177,908  |              | 85.3       | % |
| Mortgage loans              |       | 711,321      |       | 9.8               |       |
| Short-term                  |       | 316,718      |       | 4.4               |       |
| Policy loans                |       | 38,464       |       | 0.5               |       |
| Total                       |       | $            | 7,244,411  |              | 100.0      | % |

 

----

(1)  Fixed income securities are carried at fair value.  Amortized cost basis for these securities was$5.90 billion.

----

 

Total investments increased to$7.24 billion at March 31, 2008, from $7.06 billion at December 31,2007, primarily due to positive cash flows from operating and financingactivities, including increased funds associated with securities lending,partially offset by decreased net unrealized capital gains on fixed incomesecurities.

Total investments at amortizedcost related to collateral received in connection with securities lendingbusiness activities increased to $389.7 million at March 31, 2008, from$198.1 million at December 31, 2007.

        Fixed incomesecurities by type are listed in the table below.

 
| **($ in thousands)**        | ** ** | **Fair value at  March 31,  2008** | ** ** | **% to Total  Investments** | ** ** | **Fair value at  December 31,  2007** | ** ** | **% to Total  Investments** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | ** **                                        | ** ** | ** **                            | ** ** | ** **                                           | ** ** | ** **                            | ** ** |
| U.S. government and agencies          |       | $                                                 | 832,970    |                                  | 11.5       | %                                                    | $          | 797,191                               |       | 11.3 | % |
| Municipal                             |       | 472,554                                           |       | 6.5                                   |       | 433,307                                              |       | 6.1                                   |       |
| Corporate                             |       | 3,334,455                                         |       | 46.0                                  |       | 3,378,811                                            |       | 47.9                                  |       |
| Foreign government                    |       | 350,966                                           |       | 4.9                                   |       | 333,540                                              |       | 4.7                                   |       |
| Mortgage-backed securities            |       | 415,274                                           |       | 5.7                                   |       | 419,617                                              |       | 6.0                                   |       |
| Commercial mortgage-backed securities |       | 670,320                                           |       | 9.3                                   |       | 791,941                                              |       | 11.2                                  |       |
| Asset-backed securities               |       | 93,355                                            |       | 1.3                                   |       | 106,877                                              |       | 1.5                                   |       |
| Redeemable preferred stock            |       | 8,014                                             |       | 0.1                                   |       | 9,844                                                |       | 0.2                                   |       |
| Total fixed income securities         |       | $                                                 | 6,177,908  |                                  | 85.3       | %                                                    | $          | 6,271,128                             |       | 88.9 | % |

 

At March 31, 2008, 97.0% ofthe fixed income securities portfolio was rated investment grade, which isdefined as a security having a rating from the National Association ofInsurance Commissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa, A or Baa fromMoody’s or a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”),Fitch or Dominion or a rating of aaa, aa, a, or bbb from A.M. Best; or acomparable internal rating if an externally provided rating is not available.

Duringthe first quarter of 2008, certain financial markets continued to experiencedecreased liquidity.  We experienced thisilliquidity particularly in our ABS RMBS, ABS CDO, Alt-A and CRE CDOportfolios.  These portfolios totaled$123.7 million, or less than 5.0% of our total investments at March 31,2008.  Certain other asset-backed andreal estate investment markets experienced similar illiquidity, but to a muchlesser degree.

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

 

As of March 31, 2008, approximately $237.8 million or 50.3% of ourmunicipal bond portfolio is insured by five bond insurers and 79.3% have aMoody’s equivalent rating of Aaa or Aa. Our practices for acquiring and

 

30

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monitoringmunicipal bonds primarily are based on the quality of the underlyingsecurity.  As of March 31, 2008, webelieve that the current valuations already reflect a decline in the value ofthe insurance, and further such declines if any, are not expected to bematerial.  While the valuation of theseholdings may be temporarily impacted by negative and rapidly changing marketdevelopments, we continue to have the intent and ability to hold the bonds andexpect to receive all of the contractual cash flows.  As of March 31, 2008, 47.5% of ourinsured municipal bond portfolio was insured by MBIA, 21.6% by AMBAC, 10.3% byFSA and 15.1% by FGIC.  In total, we hold$259.8 million of fixed income securities that are insured by bond insurers,including $15.7 million of our ABS RMBS.

Includedin our municipal bond portfolio at March 31, 2008 are $150.2 million ofauction rate securities (“ARS”) that have long-term stated maturities, with theinterest rate reset based on auctions that generally occur every 7, 28 or 35days depending on the specific security. This is compared to a balance of ARS at December 31, 2007 of $133.7million, with the increase representing purchases partially offset byredemptions.  Our holdings primarily have a Moody’sequivalent rating of Aaa and fair value is estimated at the corresponding parvalue based on market observable inputs. We make our investment decisions based on the underlying credit of eachsecurity, which for approximately 90% of our holdings are pools of studentloans for which at least 85% of the collateral is insured by the U.S.Department of Education at the time we purchased the security.  During the first quarter of 2008, all of ourARS holdings experienced failed auctions and we received the failed auctionrate or, for those which contain maximum reset rate formulas, we received thecontractual maximum rate. We anticipate that failed auctions may persist andmost of our holdings will continue to pay the failed auction rate or, for thosethat contain maximum rate reset formulas, the maximum rate, as describedbelow.  Auctions continue to be conductedas scheduled for each of the securities.

Weestimate that approximately one third of our student loan backed  ARS include maximum rate reset formulaswhereby, when the failed interest rate exceeds an annual maximum rate over apreceding stipulated period, the coupon interest rate is temporarily reset tothe maximum rate, which can vary between zero and the failed auction rate.  This maximum rate formula causes the resetinterest rate on these securities to be lower than the failed auction rate inorder to reduce the annual interest rate to not exceed the annual contractualmaximum rate.  Generally, the annualcontractual maximum rate is higher than the historical rates paid on thesesecurities.  During April 2008,$30.3 million of our ARS reset to a period of zero coupon interest rate.

*MBS*totaled $415.3 million and 100.0% were rated investment grade at March 31,2008.  The credit risk associated withour MBS is mitigated due to the fact that 82.7% of the portfolio consists ofsecurities that were issued by, or have underlying collateral that isguaranteed by, U.S. government agencies or U.S. government sponsored entities (“U.S.Agency”).  The MBS portfolio is subjectto interest rate risk since price volatility and the ultimate realized yieldare affected by the rate of prepayment of the underlying mortgages.

The followingtable shows MBS by type and Moody’s equivalent rating.

 
| **(in thousands)** | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** | **Aaa**    | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| **MBS**                 | ** ** | ** **                                            | ** ** | ** **                            | ** ** | ** ** | ** ** |
| U.S. Agency             |       | $                                                     | 343,323    |                                  | 4.7        | %          | 100.0      | % |
| Prime                   |       | 45,348                                                |       | 0.6                                   |       | 100.0      |       |
| Alt-A                   |       | 26,603                                                |       | 0.4                                   |       | 100.0      |       |
| Total MBS               |       | $                                                     | 415,274    |                                  | 5.7        | %          |       |   |

 

Allof our Alt-A mortgage-backed securities are at fixed rates and include certainsecurities that are collateralized by residential mortgage loans issued toborrowers with stronger credit profiles than sub-prime borrowers, but who donot qualify for prime financing terms due to high loan-to-value ratios orlimited supporting documentation.  Fairvalue represents 89.9% of the amortized cost of these securities.  As of March 31, 2008, the Alt-Aportfolio had net unrealized losses of $3.0 million.

*CMBS* totaled $670.3million and 100.0% were rated investment grade at March 31, 2008.  Approximately 92.6% of the CMBS investmentsare pools of commercial mortgages, broadly diversified across property typesand geographical area.  The CMBSportfolio is subject to credit risk, but unlike other structured products, isgenerally not subject to prepayment risk due to protections within theunderlying commercial mortgages whereby borrowers are effectively restrictedfrom prepaying their mortgages due to changes in interest rates.

 

31

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

 
| **(in thousands)** | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** | **Aaa** | ** ** | **Aa** | ** ** | **A**  | ** ** | **Baa** | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|---------|------------|--------|------------|--------|------------|---------|------------|
| **CMBS**                |       | $                                                     | 640,426    |                                  | 8.9        | %       | 77.4       | %      | 16.1       | %      | 6.1        | %       | 0.4        | % |
| CRE CDO                 |       | 29,894                                                |       | 0.4                                   |       | 35.6    |       | 36.7   |       | 22.1   |       | 5.6     |       |
| Total CMBS              |       | $                                                     | 670,320    |                                  | 9.3        | %       |       |   |       |   |       |    |       |   |

 

CRE CDO are investments secured primarily bycommercial mortgage-backed securities and other commercial mortgage debtobligations.  These securities aregenerally less liquid and have a higher risk profile than other commercialmortgage-backed securities.  Fair valuerepresents 78.2% of the amortized cost of these securities.  As of March 31, 2008, CRE CDO hadgross unrealized losses of $8.4 million and no gross unrealized gains.  We also collected $8 thousand of principalrepayments consistent with the expected cash flows.

*ABS* totaled $93.4million and 99.6% were rated investment grade at March 31, 2008.  ABSby type are listed in the table below.

 
| **(in thousands)**               | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** | **Aaa** | ** ** | **_Aa_** | ** ** | **_A_** | ** ** | **Ba or  lower** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|---------|------------|----------|------------|---------|------------|-----------------------|------------|
| **ABS**                               |       |                                                  |       |                                  |       |    |       |     |       |    |       |                  |       |
| ABS RMBS                              |       | $                                                     | 67,224     |                                  | 0.9        | %       | 93.0       | %        | 0.8        | %       | 4.4        | %                     | 1.8        | % |
| Other collateralized debt obligations |       | 26,131                                                |       | 0.4                                   |       | 57.2    |       | 14.8     |       | 28.0    |       | —                |       |
| Total ABS                             |       | $                                                     | 93,355     |                                  | 1.3        | %       |       |     |       |    |       |                  |       |   |

 

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

 
| **(in thousands)** | ** ** | **Fair value at  March 31, 2008** | ** ** | **% to Total  Investments** | ** ** |
|-------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|
| **ABS RMBS**            |       |                                                  |       |                                  |       |
| First lien:             |       |                                                  |       |                                  |       |
| Fixed rate(1)           |       | $                                                     | 12,870     |                                  | 0.2        | % |
| Variable rate(1)        |       | 33,839                                                |       | 0.4                                   |       |
| Total first lien(2)     |       | 46,709                                                |       | 0.6                                   |       |
| Second lien :           |       |                                                  |       |                                  |       |
| Insured                 |       | 13,963                                                |       | 0.2                                   |       |
| Other                   |       | 6,552                                                 |       | 0.1                                   |       |
| Total second lien(3)    |       | 20,515                                                |       | 0.3                                   |       |
| Total ABS RMBS          |       | $                                                     | 67,224     |                                  | 0.9        | % |

 

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(1)   Fixed rateand variable rate refer to the primary interest rate characteristics of theunderlying mortgages at the time of issuance.

(2)   The creditratings of the first lien ABS RMBS were 96.1% Aaa, 1.2% Aa and  2.7% A at March 31, 2008.

(3)   The creditratings of the second lien ABS RMBS were 85.7% Aaa, 8.2% A and 6.1% Ba or lowerat March 31, 2008.

----

 

ABSRMBS portfolio includes securities that are collateralized by mortgage loansissued to borrowers that cannot qualify for prime or Alt-A financing terms duein part to an impaired or limited credit history.  It also includes securities that arecollateralized by certain second lien mortgages regardless of the borrower’scredit history.  Fair value represents85.4% of the amortized cost of these securities.  As of March 31, 2008, the ABS RMBSportfolio had gross unrealized losses of $11.5 million and no gross unrealizedgains.

At March 31, 2008, $62.5 million or 92.9% of the total ABS RMBSsecurities that are rated Aaa, Aa, A and Ba are insured by 6 bondinsurers.  $59.2 million or 88.0% of theportfolio consisted of securities that were issued during 2005, 2006 and2007.  At March 31, 2008, 92.9% ofsecurities issued during 2005, 2006 and 2007 were rated Aaa, 0.9% rated Aa,4.4% rated A and 1.8% rated Ba or lower.

 

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Duringthe first quarter of 2008, we collected $3.9 million of principal repaymentsconsistent with the expected cash flows.

Impairmentwrite-downs during the first quarter of 2008 were recorded on our ABS RMBStotaling $633 thousand.  We did notrecord any write-downs related to our CRE CDO. We continue to believe that the unrealized losses on these securitiesare not necessarily predictive of the ultimate performance of the underlyingcollateral.  In the absence of furtherdeterioration in the collateral relative to our positions in the securities’respective capital structures, which could be other-than-temporary, theunrealized losses should reverse over the remaining lives of the securities.

*Other collateralized debt obligations* totaled $26.1 million and all were ratedinvestment grade at March 31, 2008. Other collateralized debt obligations consist primarily of obligationssecured by high yield and investment grade corporate credits including $5.7million of collateralized loan obligations; $9.2 million of primarily banktrust preferred CDOs and $3.9 million of market value CDOs.  As of March 31, 2008, net unrealizedlosses on the other collateralized debt obligations were $3.0 million.

*Unrealizednet capital gains*totaled $275.6 million as of March 31, 2008, compared to unrealized netcapital gains of $341.5 million at December 31, 2007.  The decline was primarily due to unrealizednet capital losses on investment grade fixed income securities as the yieldssupporting fair values increased, resulting from widening credit spreads thatmore than offset the effects of declining risk free interest rates.  We continue to experience volatility in thebalance of our unrealized net capital gains and losses as we did between theyears 2004/2005 and 2006/2007. Thefollowing table presents total unrealized gains and losses.

 
| ** **                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands)**               | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| U.S. government and agencies          |       | $                  | 248,800    |                  | $          | 220,299 |   |
| Municipal                             |       | 4,282              |       | 11,552                |       |
| Corporate                             |       | 39,305             |       | 63,866                |       |
| Foreign government                    |       | 86,857             |       | 73,689                |       |
| Mortgage-backed securities            |       | 1,716              |       | (113                  | )          |
| Commercial mortgage-backed securities |       | (89,173            | )          | (19,250               | )          |
| Asset-backed securities               |       | (14,414            | )          | (8,326                | )          |
| Redeemable preferred stock            |       | (1,308             | )          | 512                   |       |
| Fixed income securities               |       | 276,065            |       | 342,229               |       |
| Derivatives                           |       | (455               | )          | (766                  | )          |
| **Unrealized gains and losses**       |       | $                  | 275,610    |                  | $          | 341,463 |   |

 

The net unrealized gain for thefixed income portfolio totaled $276.1 million, comprised of $477.0 million ofunrealized gains and $200.9 million of unrealized losses at March 31,2008.  This is compared to a netunrealized gain for the fixed income portfolio totaling $342.2 million at December 31,2007, comprised of $437.6 million of unrealized gains and $95.3 million ofunrealized losses.

Of the gross unrealized lossesin the fixed income portfolio at March 31, 2008, $187.1 million or 93.1%were related to investment grade securities and are believed to be primarilyinterest rate related.  All of theremaining $13.8 million of losses were in the corporate fixed income portfolioand were primarily comprised securities in the consumer goods, banking,financial services, capital goods and other sectors.  The gross unrealized losses in these sectorswere primarily company specific and interest rate related.

We have a comprehensiveportfolio monitoring process to identify and evaluate, on a case-by-case basis,fixed income securities whose carrying value may be other-than-temporarilyimpaired.  The process includes aquarterly review of all securities using a screening process to identifysituations where the fair value compared to amortized cost is below establishedthresholds for certain time periods, or which are identified through othermonitoring criteria such as ratings downgrades or payment defaults.  The securities identified, in addition toother securities for which we may have a concern, are evaluated based on factsand circumstances for inclusion on our watch-list.  We also conduct a portfolio review torecognize impairment on securities in an unrealized loss position for which wedo not have the intent and ability to hold until recovery as a result ofapproved programs involving the disposition of investments for reasons such aschanges in duration, revisions to strategic asset allocations and liquidity actions,as well as certain dispositions anticipated by portfolio managers.  All investments in an unrealized lossposition at March 31, 2008 were included in our

 

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portfolio monitoring process for determining whether declines in valuewere other-than-temporary.

The following table summarizesfixed income and equity securities in a gross unrealized loss positionaccording to significance, aging and investment grade classification.

 
| **(in thousands, except number of   issues)**                                                  | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                              | ** ** | **Investment  Grade**        | ** ** | **Below  Investment  Grade**    | ** ** | **Total** | ** ** | **Investment  Grade** | ** ** | **Below   Investment  Grade** | ** ** | **Total** | ** ** |
| Category (I): Unrealized loss less  than 20% of cost (1)                                                      |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                        |       | 344                          |       | 51                              |       | 395 |   | 381 |   | 60 |   | 441 |   |
| Fair Value                                                                                                              |       | $                            | 1,769,313  |                            | $          | 99,007 |   | $ | 1,868,320 |   | $ | 2,014,259 |   | $ | 103,660 |   | $ | 2,117,919 |   |
| Unrealized                                                                                                              |       | $                            | (101,286   | )                               | $          | (6,334 | ) | $ | (107,620 | ) | $ | (74,751 | ) | $ | (8,180 | ) | $ | (82,931 | ) |
|                                                                                                                    |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Category (II): Unrealized loss greater than  or equal to 20% of cost for a period of less than 6 consecutive months (1) |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                        |       | 55                           |       | 13                              |       | 68 |   | 9 |   | 5 |   | 14 |   |
| Fair Value                                                                                                              |       | $                            | 213,534    |                            | $          | 19,078 |   | $ | 232,612 |   | $ | 22,380 |   | $ | 4,830 |   | $ | 27,210 |   |
| Unrealized                                                                                                              |       | $                            | (85,783    | )                               | $          | (7,484 | ) | $ | (93,267 | ) | $ | (9,208 | ) | $ | (3,208 | ) | $ | (12,416 | ) |
|                                                                                                                    |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Total Number of Issues                                                                                                  |       | 399                          |       | 64                              |       | 463 |   | 390 |   | 65 |   | 455 |   |
| Total Fair Value                                                                                                        |       | $                            | 1,982,847  |                            | $          | 118,085 |   | $ | 2,100,932 |   | $ | 2,036,639 |   | $ | 108,490 |   | $ | 2,145,129 |   |
| Total Unrealized Losses                                                                                                 |       | $                            | (187,069   | )                               | $          | (13,818 | ) | $ | (200,887 | ) | $ | (83,959 | ) | $ | (11,388 | ) | $ | (95,347 | ) |

 

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(1)          Cost represents amortized cost.

----

 

The largest individualunrealized loss was $3.4 million for category (I) and $5.0 million forcategory (II) as of March 31, 2008.

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

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

We also monitor the quality ofour fixed income and bank loan portfolios by categorizing certain investmentsas “problem”, “restructured” or “potential problem.”  Problem fixed income securities and bankloans are in default with respect to principal or interest and/or areinvestments issued by companies that have gone into bankruptcy subsequent toour acquisition or loan.  Restructuredfixed income and bank loan investments have rates and terms that are notconsistent with market rates or terms prevailing at the time of therestructuring.  Potential problem fixedincome or bank loan investments are current with respect to contractualprincipal and/or interest, but because of other facts and circumstances, wehave concerns regarding the borrower’s ability to pay future principal andinterest, which causes us to believe these investments may be classified asproblem or restructured in the future.

 

As of March 31, 2008,fixed income securities categorized as potential problem totaled $4.8million.  The Company recognizedcumulative write-downs on these securities of $633 thousand.  The Company had no fixed income securitiescategorized as problem or restructured as of March 31, 2008.  Further, as of December 31, 2007, theCompany had no fixed income securities categorized as problem, restructured orpotential problem.

 

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We also evaluated each of these investmentsthrough our portfolio monitoring process at March 31, 2008 and recordedwrite-downs when appropriate.  We furtherconcluded that any remaining unrealized losses on these investments weretemporary in nature and that we have the intent and ability to hold the securitiesuntil recovery.  While these balances mayincrease in the future, particularly if economic conditions are unfavorable,management expects that****the totalamount of investments in these categories will remain low relative to the totalfixed income securities and bank loans portfolios.

 

**Net Investment Income**  Thefollowing table presents net investment income for the three months ended March 31.

 
| **(in thousands)**           | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Fixed income securities           |       | $        | 91,556     |     | $          | 86,864 |   |
| Mortgage loans                    |       | 10,519   |       | 10,139   |       |
| Short-term                        |       | 2,040    |       | 3,171    |       |
| Other                             |       | 573      |       | 580      |       |
| Investment income, before expense |       | 104,688  |       | 100,754  |       |
| Investment expense                |       | 4,942    |       | 6,786    |       |
| **Net investment income**         |       | $        | 99,746     |     | $          | 93,968 |   |

 

**Net Realized Capital Gains and Losses **The following tablespresent the components of realized capital gains and losses and the related taxeffect.

 
| ** **                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                           | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                              |       |                                             |       |   |   |
| Investment write-downs                            |       | $                                                | (633       | ) | $ | — |   |
| Dispositions                                      |       | 2,011                                            |       | 1,309 |   |
| Valuation of derivative instruments               |       | (240                                             | )          | (2,025 | ) |
| Settlements of derivative instruments             |       | 583                                              |       | (1,189 | ) |
| Realized capital gains and losses, pretax         |       | 1,721                                            |       | (1,905 | ) |
| Income tax (expense) benefit                      |       | (602                                             | )          | 724 |   |
| **Realized capital gains and losses,  after-tax** |       | $                                                | 1,119      |   | $ | (1,181 | ) |

 

Dispositions in the above table includesales, losses recognized in anticipation of dispositions and other transactionssuch as calls and prepayments.  We maysell impaired fixed income securities that were in an unrealized loss positionat the previous reporting date, or other investments where the fair value hasdeclined below the carrying value, in situations where new factors such asnegative developments, subsequent credit deterioration, liquidity needs, andnewly identified market opportunities cause a change in our previous intent tohold a security to recovery or maturity.

In the first quarter of 2008, we recognized $3.5 million of lossesrelated to a change in our intent to hold certain investments with unrealizedlosses until they recover in value.  Thechange in our intent was primarily related to strategic asset allocationdecisions and ongoing comprehensive reviews of our portfolios.  At March 31, 2008, the fair value ofsecurities for which we did not have the intent to hold until recovery totaled$101.3 million.

A changing interest rate environment willdrive changes in our portfolio duration targets at a tactical level.  A duration target and range is establishedwith an economic view of liabilities relative to a long-term portfolio view.  Tactical duration management is accomplishedthrough both cash market transactions including new purchases and derivativeactivities that generate realized gains and losses.  As a component of our approach to managingportfolio duration, realized gains and losses on certain derivative instrumentsare most appropriately considered in conjunction with the unrealized gains andlosses on the fixed income portfolio. This approach mitigates the impacts of general interest rate changes tothe overall financial condition of the Company.

 

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### **CAPITAL RESOURCES AND LIQUIDITY**

###  

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

 
| **(in thousands)**                                       | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                          |       |                     |       |                        |       |
| Common stock, additional capital paid-in  and retained income |       | $                        | 637,261    |                        | $          | 615,684 |   |
| Accumulated other comprehensive income                        |       | 42,019                   |       | 65,188                      |       |
| Total shareholder’s equity                               |       | $                        | 679,280    |                        | $          | 680,872 |   |

 

*Shareholder’s equity* decreased in the first quarter of 2008,due to decreased unrealized net capital gains on fixed income securities,partially offset by net income.

 

**Financial Ratings and Strength**Our ratings are influenced by many factors including our operating andfinancial performance, asset quality, liquidity, asset/liability management,overall portfolio mix, financial leverage (i.e., debt), exposure to risks, thecurrent level of operating leverage, Allstate Life Insurance Company’s  and Allstate Insurance Company’s ratings andother factors. There have been no changes to our insurance financial strengthratings since December 31, 2007.

 

**LiquiditySources and Uses**As reflected in our CondensedStatements of Cash Flows, higher operating cash flows in the first three monthsof 2008, compared to the first three months of 2007, were primarily the resultof a payment made in the first quarter of 2007 related to the settlement of aninter-company obligation and higher investment income.

Cash flows from investingactivities shifted to a use of cash in the first quarter of 2008 from a sourceof cash in the first quarter of 2007. The change was the result of the investment of higher operating cashflows and cash provided by financing activities.

Cash flows from financingactivities shifted to a source of cash in the first quarter of 2008 compared toa use of cash in the first quarter of 2007. The change was the result of increased contractholder fund depositspartially offset by higher contractholder fund withdrawals.  For quantification of the changes incontractholder funds, see the Operations section of MD&A.

We have an inter-company loanagreement with The Allstate Corporation. The amount of inter-company loans available to us is at the discretionof The Allstate Corporation.  The maximumamount of loans The Allstate Corporation will have outstanding to all itseligible subsidiaries at any given point in time is limited to $1.00 billion.  We had no amounts outstanding under theinter-company loan agreement at March 31, 2008 or December 31,2007.  The Allstate Corporation usescommercial paper borrowings and bank lines of credit to fund intercompanyborrowings.

 

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### **Item 4.    Controls and Procedures**

###  

*Evaluationof Disclosure Controls and Procedures. *Wemaintain disclosure controls and procedures as defined in Rule 13a-15(e) and15(d)-15(e) under the Securities Exchange Act of 1934.  Under the 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 over FinancialReporting. ***During the fiscal quarter ended March 31,2008, there have been no changes in our internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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

###  

### **Item 1.    Legal Proceedings**

###  

Information required for this Part II, Item 1, isincorporated by reference to the discussion under the heading “Regulation” andunder the heading “Legal and regulatory proceedings and inquiries” in Note 5 ofthe Company’s Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.

 

**Item 1A. Risk Factors**

 

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

Theseforward-looking statements do not relate strictly to historical or currentfacts and may be identified by their use of words like “plans,” “seeks,” “expects,”“will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets”and other words with similar meanings. These statements may address, amongother things, our strategy for growth, product development, 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 the forward-looking statements prove inaccurateor if other risks or uncertainties arise, actual results could differmaterially from those communicated in these forward-looking statements.  Risk factors which could cause actual resultsto differ materially from those suggested by such forward-looking statementsinclude but are not limited to those discussed or identified in this document(including the risks described below), in our public filings with theSecurities and Exchange Commission, and those incorporated by reference in Part I,Item 1A of Allstate Life Insurance Company of New York Annual Report on Form 10-Kfor 2007.

 

### **Item 6.    Exhibits**

###  

(a)   Exhibits

 

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

 

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### **SIGNATURE**

###  

        Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

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

 

39

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| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
| 15                   |       |            | Acknowledgement  of awareness from Deloitte & Touche LLP dated May 12, 2008,  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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