** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM10-Q**

 

Registrant meets theconditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q andis therefore filing this Form with the reduced disclosure format.

 

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

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,2004**

 

**OR**

 

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

 

**Commission file number: 333-100029**

 

**ALLSTATE LIFE INSURANCE COMPANYOF****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 area code:**631-357-8920**

 

**Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.**

**Yes ****ý  No ****o**

 

**Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).**

**Yes ****o  No ****ý**

 

**As of October 31, 2004 the Registrant had100,000 common shares, $25 par value, outstanding, all of which are held byAllstate Life Insurance Company.**

 

 

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**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORKINDEX TO QUARTERLY REPORT ON FORM 10-QSeptember 30, 2004**

** **
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                     | ** ** |
|-------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
|        |                                                                                                                          |       |
| Item 1.     | Financial Statements                                                                                                          | 3          |
|        |                                                                                                                          |       |
|        | Condensed Statements of Operations for the  Three-Month and Nine-Month Periods Ended September 30, 2004 and 2003  (unaudited) | 3          |
|        |                                                                                                                          |       |
|        | Condensed Statements of Financial Position  as of September 30, 2004 (unaudited) and December 31, 2003                        | 4          |
|        |                                                                                                                          |       |
|        | Condensed Statements of Cash Flows for the  Nine-Month Periods Ended September 30, 2004 and 2003 (unaudited)                  | 5          |
|        |                                                                                                                          |       |
|        | Notes to Condensed Financial Statements (unaudited)                                                                           | 6          |
|        |                                                                                                                          |       |
|        | Report of Independent Registered Public  Accounting Firm                                                                      | 14         |
|        |                                                                                                                          |       |
| Item 2.     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                   | 15         |
|        |                                                                                                                          |       |
| Item 4.     | Controls and Procedures                                                                                                       | 27         |
|        |                                                                                                                          |       |
| **PART II** | **OTHER INFORMATION**                                                                                                         | ** ** |
|        |                                                                                                                          |       |
| Item 1.     | Legal Proceedings                                                                                                             | 27         |
|        |                                                                                                                          |       |
| Item  6.    | Exhibits                                                                                                                      | 27         |

 

2

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**PART I. FINANCIAL INFORMATION**

** **

**ITEM 1.   FINANCIAL STATEMENTS**

** **

**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

** **

**CONDENSED STATEMENTS OF OPERATIONS**

** **
| ** **                                                                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                                                                       | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                               | ** ** | **(Unaudited)**                       | ** ** | **(Unaudited)**                      | ** ** |
| **Revenues**                                                                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Premiums                                                                                                                 |       | $                                     | 24,800     |                                 | $          | 14,189 |   | $ | 61,420 |   | $ | 44,451 |   |
| Contract charges                                                                                                         |       | 15,446                                |       | 12,721                               |       | 44,134 |   | 39,394 |   |
| Net investment income                                                                                                    |       | 77,126                                |       | 67,259                               |       | 220,197 |   | 195,913 |   |
| Realized capital gains and losses                                                                                        |       | (4,805                                | )          | (1,923                               | )          | (8,344 | ) | (6,406 | ) |
|                                                                                                                     |       | 112,567                               |       | 92,246                               |       | 317,407 |   | 273,352 |   |
|                                                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| **Costs and expenses**                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Contract benefits                                                                                                        |       | 50,474                                |       | 38,278                               |       | 138,314 |   | 119,712 |   |
| Interest credited to contractholder funds                                                                                |       | 34,253                                |       | 26,557                               |       | 92,439 |   | 78,349 |   |
| Amortization of deferred policy acquisition  costs                                                                       |       | 6,590                                 |       | 7,527                                |       | 15,298 |   | 23,649 |   |
| Operating costs and expenses                                                                                             |       | 10,004                                |       | 11,452                               |       | 30,262 |   | 26,788 |   |
|                                                                                                                     |       | 101,321                               |       | 83,814                               |       | 276,313 |   | 248,498 |   |
|                                                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| (Loss) gain on disposition of operations                                                                                 |       | —                                |       | (4,312                               | )          | 1,058 |   | (4,312 | ) |
|                                                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| **Income from operations before income tax  expense and cumulative effect of change in accounting principle, after-tax** |       | 11,246                                |       | 4,120                                |       | 42,152 |   | 20,542 |   |
|                                                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| Income tax expense                                                                                                       |       | 3,644                                 |       | 1,267                                |       | 14,738 |   | 6,934 |   |
|                                                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| **Income before cumulative effect of change  in accounting principle, after-tax**                                        |       | 7,602                                 |       | 2,853                                |       | 27,414 |   | 13,608 |   |
|                                                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| Cumulative effect of change in accounting  principle, after-tax                                                          |       | —                                |       | —                               |       | (7,586 | ) | — |   |
|                                                                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| **Net income**                                                                                                           |       | $                                     | 7,602      |                                 | $          | 2,853 |   | $ | 19,828 |   | $ | 13,608 |   |

 

Seenotes to condensed financial statements.

 

3

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**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

 

**CONDENSED STATEMENTS OF FINANCIAL POSITION**

 
| **(in thousands, except par value  data)**                                                            | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                                                                                  | ** ** | (**Unaudited**)         | ** ** | ** **             | ** ** |
| **Assets**                                                                                            |       |                    |       |                   |       |
| Investments                                                                                           |       |                    |       |                   |       |
| Fixed income securities, at fair value  (amortized cost $4,648,546 and $3,935,447)                    |       | $                       | 5,170,629  |                   | $          | 4,415,327 |   |
| Mortgage loans                                                                                        |       | 440,511                 |       | 385,643                |       |
| Short-term                                                                                            |       | 114,874                 |       | 22,756                 |       |
| Policy loans                                                                                          |       | 34,572                  |       | 34,107                 |       |
| Other                                                                                                 |       | 5,001                   |       | —                 |       |
|                                                                                                  |       |                    |       |                   |       |
| Total investments                                                                                     |       | 5,765,587               |       | 4,857,833              |       |
|                                                                                                  |       |                    |       |                   |       |
| Cash                                                                                                  |       | 25,004                  |       | 10,731                 |       |
| Deferred policy acquisition costs                                                                     |       | 216,326                 |       | 187,437                |       |
| Accrued investment income                                                                             |       | 54,455                  |       | 47,818                 |       |
| Reinsurance recoverables                                                                              |       | 6,755                   |       | 4,584                  |       |
| Current income taxes receivable                                                                       |       | 1,602                   |       | 8,170                  |       |
| Other assets                                                                                          |       | 25,442                  |       | 15,004                 |       |
| Separate Accounts                                                                                     |       | 710,425                 |       | 665,875                |       |
| **Total assets**                                                                                      |       | $                       | 6,805,596  |                   | $          | 5,797,452 |   |
|                                                                                                  |       |                    |       |                   |       |
| **Liabilities**                                                                                       |       |                    |       |                   |       |
| Reserve for life-contingent contract  benefits                                                        |       | $                       | 1,760,334  |                   | $          | 1,683,771 |   |
| Contractholder funds                                                                                  |       | 3,416,919               |       | 2,658,325              |       |
| Deferred income taxes                                                                                 |       | 88,837                  |       | 81,657                 |       |
| Other liabilities and accrued expenses                                                                |       | 258,431                 |       | 168,081                |       |
| Payable to affiliates, net                                                                            |       | 2,594                   |       | 5,061                  |       |
| Reinsurance payable to parent                                                                         |       | 1,071                   |       | 1,108                  |       |
| Separate Accounts                                                                                     |       | 710,425                 |       | 665,875                |       |
| **Total liabilities**                                                                                 |       | 6,238,611               |       | 5,263,878              |       |
|                                                                                                  |       |                    |       |                   |       |
| **Commitments and Contingent Liabilities  (Note 4)**                                                  |       |                    |       |                   |       |
|                                                                                                  |       |                    |       |                   |       |
| **Shareholder’s equity**                                                                         |       |                    |       |                   |       |
| Common stock, $25 par value, 100 thousand  shares authorized and outstanding                          |       | 2,500                   |       | 2,500                  |       |
| Additional capital paid-in                                                                            |       | 55,787                  |       | 55,787                 |       |
| Retained income                                                                                       |       | 356,391                 |       | 336,563                |       |
| Accumulated other comprehensive income:                                                               |       |                    |       |                   |       |
| Unrealized net capital gains and losses and  net gains and losses on derivative financial instruments |       | 152,307                 |       | 138,724                |       |
| **Total accumulated other comprehensive  income**                                                     |       | 152,307                 |       | 138,724                |       |
| **Total shareholder’s equity**                                                                   |       | 566,985                 |       | 533,574                |       |
| **Total liabilities and shareholder’s equity**                                                   |       | $                       | 6,805,596  |                   | $          | 5,797,452 |   |

 

See notes to condensedfinancial statements.

 

4

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**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

** **

**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| **(in thousands)**                                                                 | ** ** | **(Unaudited)**                      | ** ** |
| **Cash flows from operating activities**                                           |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 19,828     |   | $ | 13,608 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                 |       |   |   |
| Amortization and other non-cash items                                              |       | (37,624                              | )          | (36,760 | ) |
| Realized capital gains and losses                                                  |       | 8,344                                |       | 6,406 |   |
| (Gain) loss on disposition of operations                                           |       | (1,058                               | )          | 4,312 |   |
| Cumulative effect of change in accounting  principle                               |       | 7,586                                |       | — |   |
| Interest credited to contractholder funds                                          |       | 92,439                               |       | 78,349 |   |
| Changes in:                                                                        |       |                                 |       |   |   |
| Life-contingent contract benefits and  contractholder funds                        |       | 28,950                               |       | 13,382 |   |
| Deferred policy acquisition costs                                                  |       | (47,149                              | )          | (22,172 | ) |
| Income taxes payable                                                               |       | 10,519                               |       | (7,083 | ) |
| Other operating assets and liabilities                                             |       | (426                                 | )          | (6,009 | ) |
| Net cash provided by operating activities                                          |       | 81,409                               |       | 44,033 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash flows from investing activities**                                           |       |                                 |       |   |   |
| Proceeds from sales of fixed income  securities                                    |       | 342,905                              |       | 200,613 |   |
| Investment collections                                                             |       |                                 |       |   |   |
| Fixed income securities                                                            |       | 145,165                              |       | 179,900 |   |
| Mortgage loans                                                                     |       | 21,129                               |       | 21,967 |   |
| Investment purchases                                                               |       |                                 |       |   |   |
| Fixed income securities                                                            |       | (1,204,327                           | )          | (805,583 | ) |
| Mortgage loans                                                                     |       | (74,900                              | )          | (69,214 | ) |
| Change in short-term investments, net                                              |       | 7,581                                |       | (32,976 | ) |
| Change in other investments, net                                                   |       | 1,203                                |       | 1,098 |   |
| Net cash used in investing activities                                              |       | (761,244                             | )          | (504,195 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash flows from financing activities**                                           |       |                                 |       |   |   |
| Contractholder fund deposits                                                       |       | 895,148                              |       | 579,411 |   |
| Contractholder fund withdrawals                                                    |       | (201,040                             | )          | (134,124 | ) |
| Net cash provided by financing activities                                          |       | 694,108                              |       | 445,287 |   |
|                                                                               |       |                                 |       |   |   |
| **Net increase (decrease) in cash**                                                |       | 14,273                               |       | (14,875 | ) |
| **Cash at beginning of period**                                                    |       | 10,731                               |       | 21,686 |   |
| **Cash at end of period**                                                          |       | $                                    | 25,004     |   | $ | 6,811 |   |

 

Seenotes to condensed financial statements.

 

5

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**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORKNOTES TO CONDENSED FINANCIALSTATEMENTS(Unaudited)**

 

**1.   Basis of Presentation**

 

The accompanying condensed financialstatements include the accounts of Allstate Life Insurance Company of New York(the “Company”), a wholly owned subsidiary of Allstate Life Insurance Company (“ALIC”),which is wholly-owned by Allstate Insurance Company (“AIC”), a wholly-ownedsubsidiary of The Allstate Corporation (the “Corporation”).

 

The condensed financial statements and notesas of September 30, 2004, and for the three-month and nine-month periods endedSeptember 30, 2004 and 2003 are unaudited. The condensed financial statements reflect all adjustments (consistingonly of normal recurring accruals) which are, in the opinion of management,necessary for the fair presentation of the financial position, results ofoperations 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 year endedDecember 31, 2003.  The results ofoperations for the interim periods should not be considered indicative ofresults to be expected for the full year.

 

To conform to the 2004 presentation, certainamounts in the prior year’s condensed financial statements have beenreclassified.

 

**Adoptedaccounting standards**

* *

*Statement of Position 03-1, “Accounting andReporting by Insurance Enterprises for Certain Nontraditional Long-DurationContracts and for Separate Accounts” (“SOP 03-1”)*

 

On January 1, 2004, the Company adopted SOP03-1.  The major provisions of the SOPaffecting the Company require:

 

•                  Establishment of reserves primarilyrelated to death benefit and income benefit guarantees provided under variableannuity contracts;

 

•                  Deferral of sales inducements thatmeet certain criteria, and amortization using the same method used for deferredpolicy acquisition costs (“DAC”).

 

**Effectsof adoption**

 

The cumulative effect of the change inaccounting principle from implementing SOP 03-1 was a loss of $7.6 million,after-tax ($11.7 million, pre-tax).  Itwas comprised of an increase in contractholder funds and benefits reserves(primarily for variable annuity contracts) of $942 thousand, pre-tax, and areduction in DAC and deferred sales inducements (“DSI”) of $10.7 million,pre-tax.

 

The SOP requires consideration of a range ofpotential results to estimate the cost of variable annuity death benefits andincome benefits, which generally necessitates the use of stochastic modelingtechniques.  To maintain consistency withthe assumptions used in the establishment of reserves for variable annuityguarantees, the Company utilized the results of this stochastic modeling toestimate expected gross profits, which form the basis for determining theamortization of DAC and DSI.  This newmodeling approach resulted in a lower estimate of expected gross profits, andtherefore resulted in a write-down of DAC and DSI.

 

In 2004, DSI and related amortization isclassified within the Condensed Statements of Financial Position and Operationsas other assets and interest credited to contractholder funds,respectively.  The amounts are providedbelow.

** **

**Liabilities for contract guarantees**

 

The Company offers various guarantees tovariable contractholders including a return of no less than (a) total depositsmade on the contract less any customer withdrawals, (b) total deposits made onthe contract less any customer withdrawals plus a minimum return or (c) thehighest contract value on a specified anniversary date minus any customerwithdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death(death benefits), upon annuitization (income benefits), or at specified datesduring the accumulation period (accumulation benefits). To manage the riskassociated with its accumulation benefits, the Company cedes 100% of theseobligations to ALIC.

 

6

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The table below presents informationregarding the Company’s variable contracts with guarantees.  The Company’s variable annuity contracts mayoffer more than one type of guarantee in each contract; therefore, the sum ofamounts listed exceeds the total account balances of variable annuity contracts’separate accounts with guarantees.

 
| **($ in millions)**                                               | ** ** | **September 30,  2004** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|
| *In the event of death*                                                |       |                    |       |
| Account value                                                          |       | $                       | 709        |   |
| Net amount at risk(1)                                                  |       | $                       | 111        |   |
| Average attained age of contractholders                                |       | 63 years                |       |
| *At annuitization*                                                     |       |                    |       |
| Account value                                                          |       | $                       | 37         |   |
| Net amount at risk(2)                                                  |       | $                       | —     |   |
| Weighted average waiting period until  annuitization options available |       | 9 years                 |       |
| *Accumulation at specified dates*                                      |       |                    |       |
| Account value                                                          |       | $                       | 53         |   |
| Net amount at risk(3)                                                  |       | $                       | —     |   |
| Weighted average waiting period until  guarantee date                  |       | 11 years                |       |

 

(1)          Defined as the currentguaranteed minimum death benefit in excess of the current account balance atthe balance sheet date.

(2)          Definedas the present value of the minimum guaranteed annuity payments determined inaccordance with the terms of the contract in excess of the current accountbalance.

(3)          Defined as the presentvalue of the guaranteed minimum accumulation balance in excess of the currentaccount balance.

 

----

Account balances of variable contracts’separate accounts with guarantees were invested as follows: 

 
| **(in millions)**                                                       | ** ** | **September 30, 2004** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|
| Equity securities (including mutual funds)                              |       | $                      | 678        |   |
| Cash and cash equivalents                                               |       | 31                     |       |
| Total variable contracts’ separate account  assets with guarantees |       | $                      | 709        |   |

 

The following summarizes the liabilities forguarantees:

 
| **(in thousands)**             | ** ** | **Liability for  guarantees related to  death benefits** | ** ** | **Liability for  guarantees  related to  income benefits** | ** ** | **Total** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------|------------|
| Balance, January 1, 2004       |       | $                                                             | 868        |                                                       | $          | 74        |       | $ | 942 |   |
| Incurred guaranteed benefits   |       | 1,340                                                         |       | 4                                                          |       | 1,344     |       |
| Paid guarantee benefits        |       | (1,699                                                        | )          | —                                                     |       | (1,699    | )          |
| Balance, September 30, 2004(1) |       | $                                                             | 509        |                                                       | $          | 78        |       | $ | 587 |   |

 

(1)          Includedin the total reserve balance are reserves for variable annuity death benefitsof $509 thousand, variable annuity income benefits of $15 thousand and otherguarantees of $63 thousand.

 

----

The liability for death and income benefitguarantees is established equal to a benefit ratio multiplied by the cumulativecontract charges earned, plus accrued interest less contract benefitpayments.  The benefit ratio iscalculated as the estimated present value of all expected contract benefitsdivided by the present value of all expected contract charges.  For guarantees related to death benefits,benefits represent the current guaranteed minimum death benefit payments inexcess of the current account balance. For

 

7

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guarantees related to incomebenefits, benefits represent the present value of the minimum guaranteedannuity benefits in excess of the current account balance.

 

Projected benefits and contract charges usedin determining the liability for guarantees are developed using models andstochastic scenarios that are also used in the development of estimated expectedgross profits.  Underlying assumptionsfor the liability related to income benefits include assumed futureannuitization elections based on factors such as the extent of benefit to thepotential annuitant, eligibility conditions and the annuitant’s attained age.The liability for guarantees will be re-evaluated periodically, and adjustmentswill be made to the liability balance through a charge or credit to contractbenefits.

 

Guarantees related to accumulation benefitsare considered to be derivative financial instruments; therefore, the liabilityfor accumulation benefits is established based on its fair value.

 

**Deferred sales inducements**

 

Costs related to sales inducements offered onsales to new customers, principally on investment contracts and primarily inthe form of additional credits to the customer’s account value or enhancementsto interest credited for a specified period, which are beyond amounts currentlybeing credited to existing contracts, are deferred and recorded as otherassets.  All other sales inducements areexpensed as incurred and included in interest credited to contractholder fundson the Condensed Statements of Operations. DSI is amortized to income using the same methodology and assumptions asDAC, and included in interest credited to contractholder funds.  DSI is periodically reviewed forrecoverability and written down when necessary.

 

DSI activity for the nine months endedSeptember 30, 2004 was as follows:

 
| **(in thousands)**                     | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| Balance, January 1, 2004               |       | $          | 2,165      |   |
| Sales inducements deferred             |       | 1,149      |       |
| Amortization charged to income         |       | (527       | )          |
| Effects of unrealized gains and losses |       | (65        | )          |
| Balance, September 30, 2004            |       | $          | 2,722      |   |

 

*Emerging Issues Task Force Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments” (“EITF 03-1”) and Financial Accounting Standards Board (“FASB”)Staff Position No. EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITFIssue No. 03-1, The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments” (“FSP EITF 03-1-1”)*

 

In March 2004, the Emerging Issues Task Force(“EITF”) reached a final consensus on EITF 03-1, which was to be effective forfiscal periods beginning after June 15, 2004. EITF 03-1 requires that when the fair value of an investment security isless than its carrying value an impairment exists for which a determinationmust be made as to whether the impairment is temporary orother-than-temporary.  An impairment lossshould be recognized equal to the difference between the investment’s carryingvalue and its fair value when an impairment is other-than-temporary. Subsequentto an other-than temporary impairment loss, a debt security should be accountedfor in accordance with Statement of Position No. 03-3, “Accounting for Loansand Certain Debt Securities Acquired in a Transfer”, which allows the accretionof the discount between the carrying value and expected value of a security ifthe amount and timing of the receipt of the expected cash flows is reasonablyestimable.  EITF 03-1 also indicates thatalthough not presumptive, a pattern of selling investments prior to theforecasted recovery may call into question an investor’s intent to hold thesecurity until it recovers in value or otherwise matures.

 

The EITF 03-1 impairment model applies to allinvestment securities accounted for under Statement of Financial AccountingStandard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt andEquity Securities” and to investment securities accounted for under the costmethod.  The final consensus on EITF 03-1included additional disclosure requirements incremental to those adopted by theCompany effective December 31, 2003 that will be effective December 31, 2004.

 

8

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In September 2004, the FASB issued FSP EITFIssue 03-1-1, which deferred the effective date of the impairment measurementand recognition provisions contained in paragraphs 10-20 of EITF 03-1 untilproposed FSP EITF 03-1-a is issued. (See Pending accounting standard.)

 

**Pending and recentlyissued accounting standards**

 

*AmericanInstitute of Certified Public Accountants (“AICPA”) Technical Practice Aid(“TPA”) re. SOP 03-1*

 

In September2004, the staff of the AICPA, aided by industry experts, issued a set oftechnical questions and answers on financial accounting and reporting issuesrelated to SOP 03-1 that will be included in the AICPA’s TPAs.  The TPA addresses a number of issues relatedto SOP 03-1 including when it is necessary to establish a liability in additionto the account balance for certain contracts that meet the definition of aninsurance contract and have amounts assessed against the contractholder in amanner that is expected to result in profits in earlier years and losses insubsequent years from the insurance benefit function.  The Company is in the process of evaluatingthe impact of the TPA.  The impact of theTPA is not expected to be material to the Company’s Condensed Statements ofOperations or Financial Position.

 

*FSP EITF Issue 03-1-a,“Implementation Guidance for the Application of Paragraph 16 of EITF Issue No03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments” (“FSP EITF Issue 03-1-a”)*

** **

In September 2004, the FASB issued proposedFSP EITF 03-1-a, that addresses the application of paragraph 16 of EITF Issue03-1 to debt securities that are impaired because of increases in interest rates,and/or credit sector spread.  Thereafter,in connection with its decision to defer the effective date of paragraphs 10—20of EITF 03-1 through the issuance of FSP EITF Issue 03-1-1, the FASB requestedfrom its constituents information about both the issues set forth in FSP EITF03-1-a as well as the issues that arose during the FSP EITF 03-1-b, “EffectiveDate of Paragraph 16 of EITF Issue No. 03-1, *“TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments”*, comment letter process.

** **

Due to the uncertainty as to how all of therelevant outstanding issues will be resolved, the Company is unable todetermine the impact of adopting paragraphs 10-20 of EITF 03-1 until finalimplementation guidance is issued. Adoption of paragraphs 10-20 of EITF 03-1 may have a material impact onthe Company’s Condensed Statements of Operation but is not expected to have amaterial impact on the Company’s Condensed Statements of Financial Positionsince fluctuations in fair value are already recorded in accumulated othercomprehensive income.

** **

**2.  Other Investments**

 

In 2004, the Company entered into interestrate cap agreements, financial futures contracts and foreign currency swapagreements that are used to reduce exposure to rising or falling interest ratesrelative to certain annuity contracts or to change the interest ratecharacteristics of existing assets or liabilities. All are used forasset-liability management.

 

In exchange for a premium, interest rate capagreements provide the holder with the right to receive at a future date, theamount, if any, by which a specified market interest rate exceeds the fixed caprate applied to a notional amount.  Hedgeaccounting is not applied to these derivative contracts. The fair values of theinstruments are reported as other investments and the related gains and lossesfrom the changes in fair value and the accrued periodic settlements arerecognized in realized capital gains and losses.

 

Financial futures contracts are commitmentsto purchase or sell designated financial instruments at a future date for aspecified price or yield.  Hedgeaccounting is not applied to these derivative contracts.  The fair values of the instruments arereported as other investments or other liabilities and accrued expenses and therelated gains and losses from the changes in fair value, some of which arerecognized through daily cash settlements, are classified consistent with therisks being economically hedged and are reported as realized capital gains andlosses or contract benefits.

 

Under cash flow hedge accounting, the Companydesignates its foreign currency swap agreements as cash flow hedges when thehedging instrument is highly effective in offsetting the exposure of variationsin cash flows for the hedged risk that could affect net income.  The Company’s cash flow exposure isassociated with an existing asset.  Thefair value of the instruments is reported as other investments or otherliabilities and accrued expenses and the changes in fair value of theinstruments are reported in accumulated other comprehensive income on theCondensed Statements of Financial Position. Amounts are reclassified to net investment income or realized capitalgains and losses as the hedge transaction affects net income.  Accrued periodic settlements on instrumentsused in cash flow hedges are reported in net investment income.

 

9

----

 
| ** **                       | ** ** | **September 30, 2004** | ** ** | **Nine Months  Ended  September 30,  2004** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**               | ** ** | **Notional  amount**   | ** ** | **Fair value**                              | ** ** | **Realized capital  gain (loss)** | ** ** |
| Interest rate cap agreements     |       | $                      | 145,800    |                                        | $          | 4,384 |   | $ | (1,058 | ) |
| Financial futures contracts      |       | 26,500                 |       | (45                                         | )          | 1,366 |   |
| Foreign currency swap agreements |       | 7,500                  |       | —                                      |       | — |   |
|                                  |            |                        |            |                                             |            |  |  |  |  |  |

 

**3.   Reinsurance**

 

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

 
| **(in thousands)**                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Premiums and contract charges**                  |       |                                  |       |                                 |       |   |   |   |   |
| Direct                                             |       | $                                     | 43,167     |                                 | $          | 28,874 |   | $ | 116,334 |   | $ | 89,414 |   |
| Assumed – non-affiliate                       |       | 84                                    |       | 103                                  |       | 386 |   | 210 |   |
| Ceded                                              |       |                                  |       |                                 |       |   |   |   |   |
| Affiliate                                          |       | 8                                     |       | (1,128                               | )          | (2,175 | ) | (3,418 | ) |
| Non-affiliate                                      |       | (3,013                                | )          | (939                                 | )          | (8,991 | ) | (2,361 | ) |
| Premiums and contract charges, net of  reinsurance |       | $                                     | 40,246     |                                 | $          | 26,910 |   | $ | 105,554 |   | $ | 83,845 |   |

 

The effects of reinsurance on contract benefits are as follows:

 
| **(in thousands)**                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Contract benefits**                 |       |                                  |       |                                 |       |   |   |   |   |
| Direct                                |       | $                                     | 52,576     |                                 | $          | 40,791 |   | $ | 143,304 |   | $ | 124,024 |   |
| Assumed – non-affiliate          |       | 57                                    |       | 1                                    |       | 135 |   | 36 |   |
| Ceded                                 |       |                                  |       |                                 |       |   |   |   |   |
| Affiliate                             |       | (283                                  | )          | (1,312                               | )          | (266 | ) | (1,425 | ) |
| Non-affiliate                         |       | (1,876                                | )          | (1,202                               | )          | (4,859 | ) | (2,923 | ) |
| Contract benefits, net of reinsurance |       | $                                     | 50,474     |                                 | $          | 38,278 |   | $ | 138,314 |   | $ | 119,712 |   |

 

**4.   Guarantees and Contingent Liabilities**

 

**Guarantees**

** **

In the normal course of business, the Companyprovides standard indemnifications to counterparties in contracts in connectionwith numerous transactions, including indemnifications for breaches ofrepresentations and warranties, taxes and certain other liabilities, such asthird party lawsuits.  The indemnificationclauses are often standard contractual terms and were entered into in thenormal course of business based on an assessment that the risk of loss would beremote.  The terms of 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.  Because theobligated amounts of the indemnifications are not explicitly stated in manycases, the maximum amount of the obligation under such indemnifications is notdeterminable.  Historically, the Companyhas not made any material payments pursuant to these obligations.

 

10

----

 

The aggregate liability balance related toall guarantees was not material as of September 30, 2004.

 

**Regulation**

 

The Company is subject to changing social,economic and regulatory conditions. Recent state and federal regulatory initiatives and proceedings haveincluded efforts to remove barriers preventing banks from engaging in thesecurities and insurance businesses, change tax laws affecting the taxation ofinsurance companies and the tax treatment of insurance products or competingnon-insurance products that may impact the relative desirability of variouspersonal investment products and otherwise expand overall regulation ofinsurance products and the insurance industry. The ultimate changes andeventual effects of these initiatives on the Company’s business, if any, areuncertain.

 

Regulatory bodies have contacted the parentof the Company and have requested information relating to variable insuranceproducts, including such areas as market timing and late trading and salespractices. The Company believes that these inquiries are similar to those madeto many financial services companies as part of an industry-wide investigationby various regulatory agencies into the practices, policies and proceduresrelating to variable insurance products sales and subaccount trading practices.The Company’s parent has and will continue to respond to these informationrequests and investigations. The Company at the present time is not aware ofany systemic problems with respect to such matters that may have a materialadverse effect on the Company’s financial position.

 

**LegalProceedings**

 

**Background**

** **

The Company and certain of its affiliates arenamed as defendants in a number of lawsuits and other legal proceedings arisingout of various aspects of its business. As background to the “Proceedings” sub-section below, please note thefollowing:

 

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

 

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

 

•                  For the reasonsspecified above, it is not possible to make meaningful estimates of the amountor range of loss that could result from these matters at this time.  The Company reviews these matters on anon-going basis and follows the provisions of SFAS No. 5, “Accounting forContingencies”, when making accrual and disclosure decisions.  When assessing reasonably possible andprobable outcomes, the Company bases its decisions on its assessment of theultimate outcome following all appeals.

 

•                  In the opinionof the Company’s management, while some of these matters may be material to theCompany’s operating results for any particular period if an unfavorable outcomeresults, none will have a material adverse effect on the financial condition ofthe Company.

 

11

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**Proceedings**

 

Legal proceedings involving Allstate agenciesand AIC 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 moresignificant of these proceedings is provided below.

 

AIC is defending various lawsuits involving worker classificationissues. A putative nationwide class action filed by former employee agentsincludes a worker classification issue; these agents are challenging certainamendments to the Agents Pension Plan and are seeking to have exclusive agentindependent contractors treated as employees for benefit purposes. This matterwas dismissed with prejudice in late March 2004 by the trial court but will bethe subject of further proceedings on appeal. AIC has been vigorously defending this and various other workerclassification lawsuits. The outcome of these disputes is currently uncertain.

 

AIC is defending certain matters relating toits agency program reorganization announced in 1999. These matters include alawsuit filed in December 2001 by the U.S. Equal Employment OpportunityCommission (“EEOC”) alleging retaliation under federal civil rightslaws, a class action filed in August 2001 by former employee agents allegingretaliation and age discrimination under the Age Discrimination inEmployment Act, breach ofcontract and ERISA violations, and a lawsuit filed in October 2004 by the EEOCalleging age discrimination with respect to a policy limiting the rehire ofagents affected by the agency program reorganization.  AIC is also defending another action, inwhich a class was certified in June 2004, filed by former employee agents whoterminated their employment prior to the agency program reorganization.  These plaintiffs have asserted claims underERISA and for constructive discharge, and are seeking the benefits provided inconnection with the reorganization.  AIChas asked the court to reconsider its class certification ruling.    In late March 2004, in the first EEOClawsuit and class action lawsuit, 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 “concluded that, on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked thecourt to clarify and/or reconsider its memorandum and order.  The case otherwise remains pending.  A putative nationwide class action has alsobeen filed by former employee agents alleging various violations of ERISA. This matter was dismissed with prejudice inMarch 2004 by the trial court but will be the subject of further proceedings onappeal.  In these matters, plaintiffs seek compensatory and punitive damages, andequitable relief.  AIC has beenvigorously defending these lawsuits and other matters related to its agencyprogram reorganization.  The outcome ofthese disputes is currently uncertain.

 

**OtherMatters**

 

The Corporation and its affiliates havereceived interrogatories and demands to produce information from severalregulatory and enforcement authorities. These authorities are seeking information relevant to on-goinginvestigations into the possible violation of antitrust or insurance laws byunnamed parties and, in particular, are seeking information as to whether anyperson engaged in activities for the purpose of price fixing, marketallocation, or bid rigging.  Published press reports have indicated thatnumerous demands of this nature have been sent to insurance companies as partof industry-wide investigations.  TheCorporation intends to cooperate fully with these and any similar requests forinformation.

 

Various other legal and regulatory actionsare currently pending that involve the Company and specific aspects of itsconduct of business.  Like other membersof the insurance industry, the Company is the target of a number of lawsuits,some of which involve claims for substantial and/or indeterminate amounts.  This litigation is based on a variety ofissues including insurance and claim settlement practices.  The outcome of these disputes is currentlyunpredictable.    However, at this time,based on their present status, it is the opinion of management that theultimate liability, if any, in one or more of these other actions in excess ofamounts currently reserved is not expected to have a material effect on theresults of operations, liquidity or financial position of the Company.

 

12

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**5.     OtherComprehensive Income**

 

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

 
| ** **                                                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| **(in thousands)**                                                                | ** ** | **Pretax**                           | ** ** | **Tax** | ** ** | **After-tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-tax** | ** ** |
| *Unrealized capital gains and losses*                                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains (losses) arising  during the period                      |       | $                                    | 64,736     |   | $ | (22,658 | ) | $ | 42,078 |   | $ | (38,089 | ) | $ | 13,332 |   | $ | (24,757 | ) |
| Less: reclassification adjustments                                                |       | (5,089                               | )          | 1,781 |   | (3,308 | ) | (1,924 | ) | 673 |   | (1,251 | ) |
| Unrealized net capital gains (losses)                                             |       | 69,825                               |       | (24,439 | ) | 45,386 |   | (36,165 | ) | 12,659 |   | (23,506 | ) |
| Net gains (losses) on derivative financial  instruments arising during the period |       | —                               |       | — |   | — |   | — |   | — |   | — |   |
| Less: reclassification adjustments for  derivative instruments                    |       | 240                                  |       | (84 | ) | 156 |   | — |   | — |   | — |   |
| Unrealized net gains (losses) on derivative  financial instruments                |       | (240                                 | )          | 84 |   | (156 | ) | — |   | — |   | — |   |
| Other comprehensive income (loss)                                                 |       | $                                    | 69,585     |   | $ | (24,355 | ) | 45,230 |   | $ | (36,165 | ) | $ | 12,659 |   | (23,506 | ) |
|                                                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                        |       |                                 |       |   |   | 7,602 |   |   |   |   |   | 2,853 |   |
|                                                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income (loss)                                                       |       |                                 |       |   |   | $ | 52,832 |   |   |   |   |   | $ | (20,653 | ) |

 
| ** **                                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| **(in thousands)**                                                                | ** ** | **Pretax**                          | ** ** | **Tax** | ** ** | **After-tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-tax** | ** ** |
| *Unrealized capital gains and losses*                                             |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains (losses) arising  during the period                      |       | $                                   | 14,564     |   | $ | (5,098 | ) | $ | 9,466 |   | $ | 8,806 |   | $ | (3,081 | ) | $ | 5,725 |   |
| Less: reclassification adjustments                                                |       | (6,334                              | )          | 2,217 |   | (4,117 | ) | (5,445 | ) | 1,906 |   | (3,539 | ) |
| Unrealized net capital gains (losses)                                             |       | 20,898                              |       | (7,315 | ) | 13,583 |   | 14,251 |   | (4,987 | ) | 9,264 |   |
| Net gains (losses) on derivative financial  instruments arising during the period |       | —                              |       | — |   | — |   | — |   | — |   | — |   |
| Less: reclassification adjustments for  derivative instruments                    |       | —                              |       | — |   | — |   | — |   | — |   | — |   |
| Unrealized net gains (losses) on derivative  financial instruments                |       | —                              |       | — |   | — |   | — |   | — |   | — |   |
| Other comprehensive income (loss)                                                 |       | $                                   | 20,898     |   | $ | (7,315 | ) | 13,583 |   | $ | 14,251 |   | $ | (4,987 | ) | 9,264 |   |
|                                                                              |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                        |       |                                |       |   |   | 19,828 |   |   |   |   |   | 13,608 |   |
|                                                                              |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income (loss)                                                       |       |                                |       |   |   | $ | 33,411 |   |   |   |   |   | $ | 22,872 |   |

 

13

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Shareholder ofAllstate 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 September 30, 2004, and therelated condensed statements of operations for the three-month and nine-monthperiods ended September 30, 2004 and 2003, and the condensed statements of cashflows for the nine-month periods ended September 30, 2004 and 2003.  These interim financial statements are theresponsibility of the Company’s management.

 

We conducted our reviews in accordance with standardsof the Public Company 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 standards of the Public Company AccountingOversight Board (United States), the objective of which is the expression of anopinion regarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

Based on our reviews, we arenot aware of any material modifications that should be made to such condensedinterim financial statements for them to be in conformity with accountingprinciples generally accepted in the United States of America.

 

We have previously audited, in accordance withauditing 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, 2003, and the related statements ofoperations and comprehensive income, shareholder’s equity, and cash flows for theyear then ended, not presented herein. In our report dated February 4, 2004, we expressed an unqualifiedopinion on those financial statements. In our opinion, the information set forth in the accompanying condensedstatement of financial position as of December 31, 2003 is fairly stated, inall material respects, in relation to the statement of financial position fromwhich it has been derived.

 
| /s/ Deloitte  & Touche LLP |   |
|--------------------------------|--------|
|                           |
| Chicago,  Illinois             |
| November 10,  2004             |

 

14

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**Item2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH ANDNINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003**

 

**OVERVIEW**

** **

The following discussion highlightssignificant factors influencing the financial position and results ofoperations of Allstate Life Insurance Company of New York (referred to in thisdocument as “we”, “our”, “us” or the “Company”).  It should be read in conjunction with thecondensed financial statements and notes thereto found under Part I. Item 1.contained herein, and with the discussion, analysis, financial statements andnotes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of theAllstate Life Insurance Company of New York Annual Report on Form 10-K for 2003.  We operate as a single segment entity,consistent with the way in which we use financial information to evaluatebusiness performance and to determine the allocation of resources.

 

**RESULTS OFOPERATIONS**

 

**Premiums**represent revenues generated from traditional life, immediateannuities with life contingencies and other insurance products that havesignificant mortality or morbidity risk.

 

**Contractcharges** are revenues generated from interest-sensitive lifeproducts, variable annuities, fixed annuities and other investment products forwhich deposits are classified as contractholder funds or separate accountsliabilities on the Condensed Statements of Financial Position.  Contract charges are assessed against thecontractholder account values for maintenance, administration, cost ofinsurance and surrender prior to the contractually specified dates.  As a result, changes in contractholder fundsand separate accounts liabilities are considered in the evaluation of growthand as indicators of future levels of revenues.

 

The following table summarizes premiums andcontract charges by product.

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                          | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| **Premiums**                                | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional life                            |       | $                                     | 6,838      |                                 | $          | 5,393 |   | $ | 18,039 |   | $ | 16,467 |   |
| Immediate annuities with life contingencies |       | 17,263                                |       | 6,759                                |       | 41,304 |   | 21,579 |   |
| Other                                       |       | 699                                   |       | 2,037                                |       | 2,077 |   | 6,405 |   |
| **Total premiums**                          |       | 24,800                                |       | 14,189                               |       | 61,420 |   | 44,451 |   |
|                                        |       |                                  |       |                                 |       |   |   |   |   |
| **Contract charges**                        |       |                                  |       |                                 |       |   |   |   |   |
| Interest-sensitive life                     |       | 10,611                                |       | 8,727                                |       | 30,021 |   | 28,173 |   |
| Fixed annuities                             |       | 1,462                                 |       | 1,389                                |       | 4,494 |   | 3,990 |   |
| Variable annuities                          |       | 3,373                                 |       | 2,605                                |       | 9,619 |   | 7,231 |   |
| **Total contract charges**                  |       | 15,446                                |       | 12,721                               |       | 44,134 |   | 39,394 |   |
| **Premiums and contract charges**           |       | $                                     | 40,246     |                                 | $          | 26,910 |   | $ | 105,554 |   | $ | 83,845 |   |

 

15

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The following table summarizes premiums andcontract charges by distribution channel.

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                        | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                      |       |                                  |       |                                 |       |   |   |   |   |
| **Premiums**                              | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate agencies                         |       | $                                     | 6,731      |                                 | $          | 5,310 |   | $ | 17,742 |   | $ | 16,219 |   |
| Financial institutions and broker/dealers |       | —                                |       | —                               |       | 107 |   | 34 |   |
| Specialized brokers                       |       | 17,262                                |       | 6,724                                |       | 41,196 |   | 21,544 |   |
| Independent agents                        |       | 865                                   |       | 476                                  |       | 2,350 |   | 1,099 |   |
| Direct response                           |       | (58                                   | )          | 1,679                                |       | 25 |   | 5,555 |   |
| **Total premiums**                        |       | 24,800                                |       | 14,189                               |       | 61,420 |   | 44,451 |   |
|                                      |       |                                  |       |                                 |       |   |   |   |   |
| **Contract charges**                      |       |                                  |       |                                 |       |   |   |   |   |
| Allstate agencies                         |       | 10,201                                |       | 8,789                                |       | 29,757 |   | 28,515 |   |
| Financial institutions and broker/dealers |       | 4,397                                 |       | 2,961                                |       | 11,343 |   | 8,083 |   |
| Specialized brokers                       |       | 782                                   |       | 922                                  |       | 2,844 |   | 2,683 |   |
| Independent agents                        |       | 66                                    |       | 49                                   |       | 190 |   | 113 |   |
| **Total contract charges**                |       | 15,446                                |       | 12,721                               |       | 44,134 |   | 39,394 |   |
|                                      |       |                                  |       |                                 |       |   |   |   |   |
| **Premiums and contract charges**         |       | $                                     | 40,246     |                                 | $          | 26,910 |   | $ | 105,554 |   | $ | 83,845 |   |

 

Total premiums increased 75.0% to $24.8million in the third quarter of 2004 and 38.2% to $61.4 million in the firstnine months of 2004 compared to the same periods of 2003.  The increases in both periods were the resultof increased premiums on immediate annuities with life contingencies partiallyoffset by decreased premiums resulting from the disposal of the majority of ourdirect response distribution business.

 

Contract charges increased 21.4% to $15.4million in the third quarter of 2004 and 12.0% to $44.1 million in the firstnine months of 2004 compared to the same periods of 2003.  The increases in both periods were primarilyattributable to higher contract charges on interest-sensitive life products andvariable annuities as a result of average higher account values in the currentperiods from new business and investment returns.

 

*Contractholder funds*represent interest-bearing liabilities arising from the sale of individualproducts, such as interest-sensitive life and fixed annuities.  The balance of contractholder funds is equalto the cumulative deposits received and interest credited to the contractholderless cumulative contract maturities, benefits, surrenders, withdrawals andcontract charges for mortality or administrative expenses.

 

16

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The following table shows the changes incontractholder funds.

 
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Contractholder funds, beginning balance**                     |       | $                                     | 3,084,086  |                                 | $          | 2,407,026 |   | $ | 2,658,325 |   | $ | 2,051,429 |   |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Impact of adoption of SOP 03-1(1)                               |       | —                                |       | —                               |       | 2,031 |   | — |   |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| **Deposits:**                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Fixed annuities (immediate and deferred)                        |       | 340,560                               |       | 114,040                              |       | 742,959 |   | 416,765 |   |
| Interest-sensitive life                                         |       | 24,937                                |       | 16,163                               |       | 75,969 |   | 43,945 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | 19,562                                |       | 43,797                               |       | 76,219 |   | 118,701 |   |
| Total deposits                                                  |       | 385,059                               |       | 174,000                              |       | 895,147 |   | 579,411 |   |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| **Interest credited**                                           |       | 34,124                                |       | 26,557                               |       | 92,075 |   | 78,349 |   |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| **Benefits, withdrawals and other adjustments**                 |       |                                  |       |                                 |       |   |   |   |   |
| Benefits and withdrawals                                        |       | (66,800                               | )          | (49,744                              | )          | (170,993 | ) | (128,292 | ) |
| Contract charges                                                |       | (10,756                               | )          | (10,727                              | )          | (31,084 | ) | (30,320 | ) |
| Net transfers to separate accounts                              |       | (9,388                                | )          | (5,285                               | )          | (30,782 | ) | (9,069 | ) |
| Other adjustments                                               |       | 594                                   |       | 3,572                                |       | 2,200 |   | 3,891 |   |
| Total benefits, withdrawals and other  adjustments              |       | (86,350                               | )          | (62,184                              | )          | (230,659 | ) | (163,790 | ) |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| **Contractholder funds, ending balance**                        |       | $                                     | 3,416,919  |                                 | $          | 2,545,399 |   | $ | 3,416,919 |   | $ | 2,545,399 |   |

 

(1) The increasein contractholder funds due to the adoption of AICPA Statement of Position03-1, “Accounting and Reporting by Insurance Enterprises for CertainNontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”)reflects the establishment of reserves for certain liabilities that areprimarily related to death benefit and income benefit guarantees provided undervariable annuity contracts and the reclassification of deferred salesinducements from contractholder funds to other assets.

 

----

Contractholder funds deposits increased121.3% in the third quarter and 54.5% in the first nine months of 2004 comparedto the same periods in 2003 due to increased fixed annuity andinterest-sensitive life deposits in both periods. These new depositscontributed to increases in average contractholder funds, excluding the impactof adopting SOP 03-1, of 31.3% in the third quarter and 32.2% in the first ninemonths of 2004 compared to the same periods in 2003.  Fixed annuity deposits increased 198.6% and78.3% in the third quarter and first nine months of 2004, respectively,compared to the same periods in 2003. The increases were attributable to strong consumer demand andcompetitive pricing.

 

Benefits and withdrawals increased 34.3% inthe third quarter and 33.3% in the first nine months of 2004 compared to thesame periods in 2003.  Benefits andwithdrawals for the third quarter and first nine months of 2004 represent anannualized withdrawal rate of 8.7% and 8.6%, respectively, based on thebeginning of period contractholder funds balance compared to 8.3% for both thethird quarter and the first nine months of 2003.  Benefits and withdrawals have been comparableto our pricing assumptions.

 

*Separate accounts liabilities*represent contractholders’ claims to the related legally segregated separateaccounts assets.   Separate accountsliabilities primarily arise from the sale of variable annuity contracts andvariable life insurance policies.  Thefollowing table shows the changes in separate accounts liabilities.

 

17

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| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Separate accounts liabilities, beginning  balance**           |       | $                                     | 710,363    |                                 | $          | 575,684 |   | $ | 665,875 |   | $ | 537,204 |   |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Variable annuity and life deposits                              |       | 40,179                                |       | 67,014                               |       | 151,411 |   | 168,986 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | (19,562                               | )          | (43,797                              | )          | (76,219 | ) | (118,701 | ) |
| Net deposits                                                    |       | 20,617                                |       | 23,217                               |       | 75,192 |   | 50,285 |   |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Investment results                                              |       | (5,992                                | )          | 13,436                               |       | 11,611 |   | 60,692 |   |
| Contract charges                                                |       | (2,614                                | )          | (2,040                               | )          | (7,466 | ) | (5,698 | ) |
| Net transfers from fixed accounts                               |       | 9,388                                 |       | 5,285                                |       | 30,782 |   | 9,069 |   |
| Surrenders and benefits                                         |       | (21,337                               | )          | (27,130                              | )          | (65,569 | ) | (63,100 | ) |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| **Separate accounts liabilities, ending  balance**              |       | $                                     | 710,425    |                                 | $          | 588,452 |   | $ | 710,425 |   | $ | 588,452 |   |

 

Separate accounts liabilities increased $62thousand and $44.6 million during the third quarter and first nine months of2004, respectively, compared to $12.8 million and $51.2 million during thethird quarter and first nine months of 2003, respectively.  Net cash inflows were offset by surrendersand benefits and unfavorable investment results in the third quarter of2004.  Deposits, net transfers from fixedaccounts and favorable investment results were partially offset by surrendersand benefits and contract charges during the first nine months of 2004.      Variable annuity contractholders oftenallocate a significant portion of their initial variable annuity deposits intoa fixed rate investment option.  Thelevel of this activity is reflected above in the deposits allocated to thefixed accounts, while all other transfer activity between the fixed andseparate accounts investments options is reflected in net transfers from fixedaccounts.  The liability for the fixed portionof variable annuity contracts is reflected in contractholder funds.

 

**Netinvestment income** increased 14.7% in the third quarter of2004 and 12.4% in the first nine months of 2004 compared to the same periods in2003.  The increases in both periods wereprimarily the result of the effect of higher portfolio balances, partiallyoffset by lower portfolio yields. Higher portfolio balances resulted from theinvestment of cash flows from operating and financing activities. Totalinvestments as of September 30, 2004 increased 19.3% from September 30, 2003 due primarily tocontractholder deposits, partially offset by a decline in unrealized capitalgains on fixed income securities. The lower portfolio yields were primarily dueto purchases, including reinvestments, of fixed income securities with yieldslower than the current portfolio average.

 

18

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

 
| ** **                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                                                    | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Premiums                                                                                              |       | $                                     | 24,800     |                                 | $          | 14,189 |   | $ | 61,420 |   | $ | 44,451 |   |
| Contract charges(1)                                                                                   |       | 15,443                                |       | 12,721                               |       | 44,121 |   | 39,394 |   |
| Net investment income                                                                                 |       | 77,126                                |       | 67,259                               |       | 220,197 |   | 195,913 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments(2)                             |       | 141                                   |       | —                               |       | 217 |   | — |   |
| Contract benefits                                                                                     |       | (50,474                               | )          | (38,278                              | )          | (138,314 | ) | (119,712 | ) |
| Interest credited to contractholder funds(3)                                                          |       | (34,110                               | )          | (26,557                              | )          | (91,912 | ) | (78,349 | ) |
| Gross margin                                                                                          |       | 32,926                                |       | 29,334                               |       | 95,729 |   | 81,697 |   |
|                                                                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Amortization of DAC and DSI                                                                           |       | (7,787                                | )          | (7,925                               | )          | (14,639 | ) | (22,493 | ) |
| Operating costs and expenses                                                                          |       | (10,004                               | )          | (11,452                              | )          | (30,262 | ) | (26,788 | ) |
| Income tax expense                                                                                    |       | (5,037                                | )          | (3,406                               | )          | (17,922 | ) | (11,277 | ) |
| Realized capital gains and losses,  after-tax                                                         |       | (3,067                                | )          | (1,216                               | )          | (5,298 | ) | (4,063 | ) |
| DAC and DSI amortization expense on  realized capital gains and losses, after-tax                     |       | 661                                   |       | 253                                  |       | (745 | ) | (733 | ) |
| Reclassification of periodic settlements  and accruals on non-hedge derivative instruments, after-tax |       | (90                                   | )          | —                               |       | (137 | ) | — |   |
| (Loss) gain on disposition of operations,  after-tax                                                  |       | —                                |       | (2,735                               | )          | 688 |   | (2,735 | ) |
| Cumulative effect of change in accounting  principle, after-tax                                       |       | —                                |       | —                               |       | (7,586 | ) | — |   |
| **Net income**                                                                                        |       | $                                     | 7,602      |                                 | $          | 2,853 |   | $ | 19,828 |   | $ | 13,608 |   |

 

(1)          Beginningin 2004, amortization of deferred loads on interest-sensitive life productsrelated to capital gains is excluded from contract charges for purposes ofcalculating gross margin.  Amortizationof deferred loads related to capital gains totaled $3 thousand and $13 thousandfor the third quarter and the first nine months of 2004.

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

(3)          Beginning in 2004, amortization of DSI isexcluded from interest credited to contractholder funds for purposes ofcalculating gross margin.  Amortizationof DSI totaled $143 thousand in the third quarter of 2004 and $527 thousand forthe first nine months of 2004.  Priorperiods have not been restated.

 

----

*Gross margin*, anon-GAAP measure, represents premiums, contract charges and net investmentincome, less contract benefits and interest credited to contractholderfunds.  We use gross margin as acomponent of our evaluation of the profitability of our life insurance andfinancial product portfolio. Additionally, for many of our products, including fixed annuities,variable contracts, and interest-sensitive life insurance, the amortization ofDAC and DSI is determined based on actual and expected gross margin.  Gross margin is comprised of four componentsthat are utilized to further analyze the business: investment margin, benefitmargin, maintenance charges and surrender charges.  We believe gross margin and its componentsare useful to investors because they allow for the evaluation of incomecomponents separately and in the aggregate when reviewing performance.  Gross margin, investment margin and benefitmargin should not be considered as a substitute for net income and do notreflect the overall profitability of the business.  Net income is the GAAP measure that is mostdirectly comparable to these margins. Gross margin is reconciled to GAAP net income in the table above.

 

The components of gross margin are reconciledto the corresponding financial statement line items in the following table.

 

19

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| ** **                                                                | ** ** | **Three  Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(in  thousands)**                                                       | ** ** | **Investment  Margin**                | ** ** | **Benefit  Margin** | ** ** | **Maintenance  Charges** | ** ** | **Surrender  Charges** | ** ** | **Gross  Margin** | ** ** |
| ** **                                                                | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Premiums                                                                  |       | $                                     | —     |   | $ | — |   | $ | 24,800 |   | $ | 14,189 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 24,800 |   | $ | 14,189 |   |
| Contract charges(1)                                                       |       | —                                |       | — |   | 7,359 |   | 6,271 |   | 6,459 |   | 5,210 |   | 1,625 |   | 1,240 |   | 15,443 |   | 12,721 |   |
| Net investment income                                                     |       | 77,126                                |       | 67,259 |   | — |   | — |   | — |   | — |   | — |   | — |   | 77,126 |   | 67,259 |   |
| Periodic  settlements and accruals on non-hedge derivative instruments(2) |       | 141                                   |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 141 |   | — |   |
| Contract benefits                                                         |       | (24,519                               | )          | (24,040 | ) | (25,955 | ) | (14,238 | ) | — |   | — |   | — |   | — |   | (50,474 | ) | (38,278 | ) |
| Interest credited to contractholder funds(3)                              |       | (34,110                               | )          | (26,557 | ) | — |   | — |   | — |   | — |   | — |   | — |   | (34,110 | ) | (26,557 | ) |
|                                                                      |       | $                                     | 18,638     |   | $ | 16,662 |   | $ | 6,204 |   | $ | 6,222 |   | $ | 6,459 |   | $ | 5,210 |   | $ | 1,625 |   | $ | 1,240 |   | $ | 32,926 |   | $ | 29,334 |   |

 
| ** **                                                                | ** ** | **Nine  Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in  thousands)**                                                       | ** ** | **Investment  Margin**               | ** ** | **Benefit  Margin** | ** ** | **Maintenance  Charges** | ** ** | **Surrender  Charges** | ** ** | **Gross  Margin** | ** ** |
| ** **                                                                | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Premiums                                                                  |       | $                                    | —     |   | $ | — |   | $ | 61,420 |   | $ | 44,451 |   | $ | - |   | $ | — |   | $ | - |   | $ | — |   | $ | 61,420 |   | $ | 44,451 |   |
| Contract charges(1)                                                       |       | —                               |       | — |   | 22,088 |   | 20,352 |   | 18,047 |   | 15,448 |   | 3,986 |   | 3,594 |   | 44,121 |   | 39,394 |   |
| Net investment income                                                     |       | 220,197                              |       | 195,913 |   | — |   | — |   | — |   | — |   | — |   | — |   | 220,197 |   | 195,913 |   |
| Periodic  settlements and accruals on non-hedge derivative instruments(2) |       | 217                                  |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 217 |   | — |   |
| Contract benefits                                                         |       | (73,100                              | )          | (69,717 | ) | (65,214 | ) | (49,995 | ) | — |   | — |   | — |   | — |   | (138,314 | ) | (119,712 | ) |
| Interest credited to contractholder funds(3)                              |       | (91,912                              | )          | (78,349 | ) | — |   | — |   | — |   | — |   | — |   | — |   | (91,912 | ) | (78,349 | ) |
|                                                                      |       | $                                    | 55,402     |   | $ | 47,847 |   | $ | 18,294 |   | $ | 14,808 |   | $ | 18,047 |   | $ | 15,448 |   | $ | 3,986 |   | $ | 3,594 |   | $ | 95,729 |   | $ | 81,697 |   |

 

(1)          Beginningin 2004, amortization of deferred loads on interest-sensitive life productsrelated to capital gains is excluded from contract charges for purposes ofcalculating gross margin.  Amortizationof deferred loads related to capital gains totaled $3 thousand and $13 thousandfor the third quarter and the first nine months of 2004.

 

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

 

(3)          Beginning in 2004, amortization of DSI isexcluded from interest credited to contractholder funds for purposes ofcalculating gross margin.  Amortizationof DSI totaled $143 thousand in the third quarter of 2004 and $527 thousand forthe first nine months of 2004.  Priorperiods have not been restated.

----

 

20

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Gross margin increased 12.2% in the thirdquarter of 2004 and 17.2% in the first nine months of 2004 compared to the sameperiods of 2003 due to increased investment margin and higher maintenance andsurrender charges.

 

*Investment margin*****is a component of gross margin, both of which are non-GAAPmeasures. Investment margin represents the excess of net investment income overinterest credited to contractholder funds and the implied interest onlife-contingent immediate annuities included in reserve for life-contingentcontract benefits.  We use investmentmargin to evaluate profitability related to the difference between investmentreturns on assets supporting certain products and amounts credited to customers(“spread”) during a fiscal period.

 

Investment margin by product group is shownin the following table.

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**      | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Life insurance          |       | $                                     | 2,357      |                                 | $          | 2,565 |   | $ | 8,039 |   | $ | 7,279 |   |
| Annuities               |       | 16,281                                |       | 14,097                               |       | 47,363 |   | 40,568 |   |
| Total investment margin |       | $                                     | 18,638     |                                 | $          | 16,662 |   | $ | 55,402 |   | $ | 47,847 |   |
|                         |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

** **

Investment margin increased 11.9% in thethird quarter and 15.8% in the first nine months of 2004 compared to the sameperiods of 2003.  The increases in bothperiods were primarily due to an increase in contractholder funds partiallyoffset by declines in the fixed annuity and interest-sensitive life investmentspreads as investment yields were not fully offset by crediting rate reductions.In the first nine months of 2004, the yield decline on the investmentssupporting capital, traditional life and other products also offset theincrease due to growth compared to the first nine months of the prior year.

 

The following table summarizes the annualizedweighted average investment yield, interest crediting rates and investmentspreads for the three months ended September 30.

** **
| ** **                                                           | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spreads** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                               | ** ** | **2003**                                      | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest-sensitive life                                              |       | 6.0                                    | %          | 6.6                                           | %          | 4.9                                      | %          | 4.9 | % | 1.1 | % | 1.7 | % |
| Fixed annuities – deferred                                      |       | 5.6                                    |       | 6.0                                           |       | 3.6                                      |       | 3.7 |   | 2.0 |   | 2.3 |   |
| Fixed annuities – immediate                                     |       | 7.6                                    |       | 7.8                                           |       | 6.8                                      |       | 6.9 |   | 0.8 |   | 0.9 |   |
| Investments supporting capital, traditional  life and other products |       | 6.2                                    |       | 6.2                                           |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

The following table summarizes the annualizedweighted average investment yield, interest crediting rates and investmentspreads for the nine months ended September 30.

** **
| ** **                                                           | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spreads** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                               | ** ** | **2003**                                      | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest-sensitive life                                              |       | 6.1                                    | %          | 6.7                                           | %          | 5.0                                      | %          | 5.0 | % | 1.1 | % | 1.7 | % |
| Fixed annuities – deferred                                      |       | 5.6                                    |       | 6.1                                           |       | 3.5                                      |       | 3.9 |   | 2.1 |   | 2.2 |   |
| Fixed annuities – immediate                                     |       | 7.6                                    |       | 7.8                                           |       | 6.8                                      |       | 6.9 |   | 0.8 |   | 0.9 |   |
| Investments supporting capital, traditional  life and other products |       | 6.1                                    |       | 6.3                                           |       | N/A                                      |       | N/A |   | N/A |   | N/A |   |

 

21

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The following table summarizes theliabilities for these contracts and policies.

 
| ** **                                                                    | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                                                            | ** ** | **2004**          | ** ** | **2003** | ** ** |
|                                                                          |       |              |       |   |   |
| Interest-sensitive life                                                       |       | $                 | 355,827    |   | $ | 293,087 |   |
| Fixed annuities – deferred                                               |       | 2,532,664         |       | 1,772,336 |   |
| Fixed annuities – immediate                                              |       | 1,948,364         |       | 1,827,784 |   |
|                                                                          |       | 4,836,855         |       | 3,893,207 |   |
| FAS 115/133 market value adjustment                                           |       | 232,530           |       | 192,510 |   |
| Life-contingent contracts and other                                           |       | 107,858           |       | 102,361 |   |
| Total contractholder funds and reserve for  life-contingent contract benefits |       | $                 | 5,177,243  |   | $ | 4,188,078 |   |

 

*Benefitmargin*is acomponent of gross margin, both of which are non-GAAP measures.  Benefit margin**representspremiums and cost of insurance contract charges less contract benefits.  Benefit margin excludes the implied intereston life-contingent immediate annuities, which is included in the calculation ofinvestment margin, and mortality charges on variable annuities, which areincluded as a component of maintenance charges. We use the benefit margin to evaluate underwriting performance,as it reflects the profitability of our products with respect to mortality ormorbidity risk during a fiscal period.

 

Benefit margin by product group is shown inthe following table.

 
| ** **           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**   | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Life insurance       |       | $                                     | 8,351      |                                 | $          | 7,710 |   | $ | 23,420 |   | $ | 17,864 |   |
| Annuities            |       | (2,147                                | )          | (1,488                               | )          | (5,126 | ) | (3,056 | ) |
| Total benefit margin |       | $                                     | 6,204      |                                 | $          | 6,222 |   | $ | 18,294 |   | $ | 14,808 |   |

 

Benefit margin decreased 0.3% in the thirdquarter of 2004 compared to the same period in 2003 as growth from new businesswas partially offset by the disposal of the majority of our direct responsedistribution business and fewer deaths on our life-contingent immediateannuities.    For the first nine months of 2004, thebenefit margin increased 23.5% compared to the same period of 2003 as thedisposal of the majority of our direct response distribution business and fewerdeaths on our life-contingent immediate annuities had a less adverse impact onthe 2004 benefit margin than the reserve strengthening on certain traditionallife insurance policies had on the 2003 benefit margin.

 

As required by SOP 03-1, as of January 1,2004, a reserve was established for guaranteed minimum death benefits (“GMDBs”)and guaranteed minimum income benefits (“GMIBs”).  In previous periods GMDBs were expensed aspaid and no costs were recognizable for GMIBs. Under the SOP, we anticipate that the benefit margin will be lessvolatile in the future, as contract benefit expense pertaining to GMDBs andGMIBs will be proportionate to the related revenue rather than cash paymentsmade during the period.  Included in thebenefit margin for the third quarter and first nine months of 2004 areadditions to the reserve for guarantees of $0.4 million and $1.3 million,respectively.  Included in the benefitmargin for the third quarter and first nine months of 2003 are GMDB payments of$0.5 million and $2.5 million, respectively. For further explanation of the impacts of the adoption of thisaccounting guidance, see Note 1 to the Condensed Financial Statements.

 

*Amortization of DAC and DSI*decreased 1.7% in the third quarter of 2004 compared to the same period of 2003as the elimination of DAC amortization on the direct response distributionbusiness that was sold in January of 2004 was largely offset by higheramortization reflective of increased gross margins on fixed and variableannuities.    Amortization of DAC and DSIdecreased 34.9% in the first nine months of 2004 compared to the same period inthe prior year due to a deceleration of amortization (commonly called

 

22

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“DAC unlocking”) oninterest-sensitive life and fixed annuities of $10.2 million in the first quarterof 2004 compared to an acceleration of amortization of $325 thousand in thesame period of 2003.

 

The adoption of SOP 03-1 required a newmodeling approach for estimating expected future gross profits that are usedwhen determining the amortization of DAC. Because of this new modeling approach, effective January 1, 2004, thevariable annuity DAC and DSI assets were reduced by $10.7 million.  This reduction was recognized as a cumulativeeffect of a change in accounting principle.

 

*Operating costs and expenses*decreased 12.6% in the third quarter and increased 13.0% for the first ninemonths of 2004 compared to the same periods in the prior year.  The decrease in total operating costs andexpenses in the third quarter of 2004 compared to the same period in the prioryear was primarily the result of the disposal of the majority of our directresponse distribution business partially offset by higher non-deferrable salesexpenses.  For the first nine months of2004 compared to the same period in the prior year, higher non-deferrable salesand employee expenses were partially offset by the disposal of the majority ofour direct response distribution business and reinsurance expense creditsrecognized in the second quarter of 2003.

 

**INVESTMENTS**

 

An important component of our financialresults is the return on our investment portfolio.  The investment portfolio is managed basedupon the business and its corresponding liability structure.  The composition of the investment portfolioat September 30, 2004 is presented in the table below.

 
| **(in thousands)**          | ** ** | **Carrying  value** | ** ** | **Percent  of total** | ** ** |
|-----------------------------|------------|---------------------|------------|-----------------------|------------|
|                        |       |                |       |                  |       |
| Fixed income securities (1) |       | $5,170,629          |       | 89.7                  | %          |
| Mortgage loans              |       | 440,511             |       | 7.6                   |       |
| Short-term                  |       | 114,874             |       | 2.0                   |       |
| Policy loans                |       | 34,572              |       | 0.6                   |       |
| Other                       |       | 5,001               |       | 0.1                   |       |
| Total                       |       | $5,765,587          |       | 100.0                 | %          |

 

(1) Fixed income securities are carried at fair value.  Amortized cost basis for these securities was$4.65 billion.

 

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Total investments increased to $5.77 billionat September 30, 2004 from $4.86 billion at December 31, 2003 due to positivecash flows from operating and financing activities and increased fundsassociated with securities lending and increased unrealized gains on fixedincome securities.

 

Total investments at amortized costs relatedto collateral associated with securities lending increased to $203.9 million atSeptember 30, 2004 from $134.5 million at December 31, 2003.

 

At September 30, 2004, 96.2% 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 Moody’s equivalent rating of Aaa,Aa, A or Baa; an S&P equivalent rating of AAA, AA, A or BBB; or acomparable internal rating when an external rating is notavailable.

 

The unrealized net capitalgains on fixed income securities at September 30, 2004 were $522.1 million, anincrease of $42.2 million or 8.8 % since December 31, 2003.   The net unrealized gain was comprised of$538.0 million of unrealized gains and $15.9 million of unrealized losses atSeptember 30, 2004.  This is compared toa net unrealized gain totaling $479.9 million at December 31, 2003, comprisedof $498.8 million of unrealized gains and $18.9 million of unrealized losses.

 

Of the gross unrealized losses in the fixedincome portfolio at September 30, 2004, $12.4 million or 78.0% were related toinvestment grade securities and are believed to be primarily a result of theinterest rate environment.  Of theremaining $3.5 million of losses in the fixed income portfolio, $1.7 million or48.6% was concentrated in the corporate fixed income portfolio, $1.8 million or51.4% was concentrated in the asset backed securities portfolio.  Approximately $0.8 million of the grossunrealized losses in the

 

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corporate fixed incomeportfolio were associated with the airline industry for which values weredepressed due to company specific issues and economic issues related to fuelcosts.  We expect eventual recovery of thesesecurities. Every security was included in our portfolio monitoring process.

 

Our portfolio monitoring process identifiesand evaluates fixed income securities whose carrying value may be other thantemporarily impaired.  The processincludes a quarterly review of all securities using a screening process toidentify those securities whose fair value compared to amortized cost for fixedincome securities is below established thresholds for certain time periods, orwhich are identified through other monitoring criteria such as ratingsdowngrades or payment defaults.

 

We also monitorthe quality of our fixed income portfolio by categorizing certain investmentsas “problem”, “restructured” or “potential problem.”  Problem fixed income securities aresecurities in default with respect to principal or interest and/or securitiesissued by companies that have gone into bankruptcy subsequent to ouracquisition of the security. Restructured fixed income securities have rates and terms that are notconsistent with market rates or terms prevailing at the time of therestructuring.  Potential problem fixedincome securities are current with respect to contractual principal and/orinterest, but because of other facts and circumstances, we have seriousconcerns regarding the borrower’s ability to pay future principal and interest,which causes us to believe these securities may be classified as problem orrestructured in the future.

 

The following table summarizes problem,restructured and potential problem fixed income securities.

 
| **(in thousands)**                | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **Amortized  cost**    | ** ** | **Fair  value**       | ** ** | **Percent  of total  Fixed  Income  portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Percent  of total  Fixed  Income  portfolio** | ** ** |
| Problem                           |       | $                      | 12,904     |                  | $          | 12,402 |   | 0.2 | % | $ | 13,186 |   | $ | 12,533 |   | 0.3 | % |
| Restructured                      |       | 5,390                  |       | 6,109                 |       | 0.1 |   | 5,701 |   | 6,303 |   | 0.1 |   |
| Potential problem                 |       | 16,907                 |       | 15,095                |       | 0.3 |   | 17,899 |   | 17,843 |   | 0.4 |   |
| Total net carrying value          |       | $                      | 35,201     |                  | $          | 33,606 |   | 0.6 | % | $ | 36,786 |   | $ | 36,679 |   | 0.8 | % |
| Cumulative write-downs recognized |       | $                      | 5,698      |                  |       |   |   |   | $ | 4,817 |   |   |   |   |   |

 

We have experienced a decrease in theamortized cost of fixed income securities categorized as problem, restructuredand potential problem as of September 30, 2004 compared to December 31,2003.  The decrease was primarily relatedto the sale of holdings in these categories due to specific developmentscausing a change in our outlook and intent to hold those securities.

 

We also evaluated each of these securitiesthrough our portfolio monitoring process and recorded write-downs whenappropriate.  We further concluded thatany remaining unrealized losses on these securities were temporary innature.  While these balances mayincrease in the future, particularly if economic conditions are unfavorable, weexpect that the total amount of securities in these categories will remain lowrelative to the total fixed income securities portfolio.

 

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** **

**NetRealized Capital Gains and Losses** The following tablepresents the components of realized capital gains and losses and the relatedtax effect.

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Investment write-downs                        |       | $                                     | (2,518     | )                                    | $          | (295 | ) | $ | (3,402 | ) | $ | (7,547 | ) |
| Dispositions                                  |       | 739                                   |       | (2,726                               | )          | (3,300 | ) | (1,100 | ) |
| Valuation of derivative instruments           |       | (3,934                                | )          | 81                                   |       | (3,226 | ) | (942 | ) |
| Settlement of derivative instruments          |       | 908                                   |       | 1,017                                |       | 1,584 |   | 3,183 |   |
| Realized capital gains and losses, pretax     |       | (4,805                                | )          | (1,923                               | )          | (8,344 | ) | (6,406 | ) |
| Income tax benefit                            |       | 1,738                                 |       | 707                                  |       | 3,046 |   | 2,343 |   |
| Realized capital gains and losses,  after-tax |       | $                                     | (3,067     | )                                    | $          | (1,216 | ) | $ | (5,298 | ) | $ | (4,063 | ) |

 

Dispositions in the above table include salesand other transactions such as calls and prepayments.  We may sell securities during the period inwhich fair value has declined below amortized cost for fixed incomesecurities.  In certain situations newfactors such as negative developments, subsequent credit deterioration,relative value opportunities, market liquidity concerns and portfolioreallocations can subsequently change our previous intent to continue holding asecurity.  Included in losses fromwritten down investments is $2.5 million related to airline industry holdings,all of which was recognized in the third quarter of 2004.

 

**CAPITALRESOURCES AND LIQUIDITY**

** **

**CapitalResources**consist of shareholder’s equity.  The following table summarizes our capitalresources.

 
| **(in thousands)**                                                         | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                                                       |       |                    |       |                   |       |
| Common stock, retained earnings and other shareholder’s  equity items |       | $                       | 414,678    |                   | $          | 394,850 |   |
| Accumulated other comprehensive income                                     |       | 152,307                 |       | 138,724                |       |
| Total shareholder’s equity                                            |       | $                       | 566,985    |                   | $          | 533,574 |   |

 

*Shareholder’sequity*increased in the first nine months of 2004 when compared to December 31, 2003due to net income and increases in unrealized net capital gains on fixed incomesecurities.

 

**FinancialRatings and Strength** Our ratings are influenced by manyfactors including our operating and financial performance, asset quality,liquidity, asset/liability management, overall portfolio mix, financialleverage (i.e., debt), exposure to risks and the current level of operatingleverage. There have been no changes to our insurance financial strengthratings since December 31, 2003. However, in February 2004, A.M. Best revised the outlook to stable frompositive for the insurance financial strength ratings of ALIC and certain ratedALIC subsidiaries and affiliates, including the Company.

 

**LiquiditySources and Uses**

 

Increased operating cash flows in the firstnine months of 2004 when compared to the first nine months of 2003 primarilyrelate to increases in premiums and investment income.  Cash flows used in investing activitiesincreased in the first nine months of 2004 as a result of the investment ofhigher financing cash flow and higher operating cash flows.

 

Higher cash flow from financing activitiesduring the first nine months of 2004 when compared to the same period of 2003reflects an increase in deposits received from contractholders, partiallyoffset by benefits and withdrawals from contractholders’ accounts.  For quantification of the changes incontractholder funds, see the Results of Operations section of the MD&A.

 

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We have entered into an inter-company loanagreement with The Allstate Corporation (the “Corporation”).  The amount of inter-company loans availableto us is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to allits eligible subsidiaries at any given point in time is limited to $1.00billion.  We had no amounts outstandingunder the inter-company loan agreement at September 30, 2004 or December 31,2003.  The Corporation uses commercialpaper borrowings and bank lines of credit to fund intercompany borrowings.

 

**FORWARD-LOOKINGSTATEMENTS AND RISK FACTOR**

** **

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

 

These forward-looking statements do notrelate strictly to historical or current facts and may be identified by theiruse of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,”“estimates,” “intends,” “believes,” “likely,” “targets” and other words withsimilar meanings.  These statements mayaddress, among other things, our strategy for growth, product development,regulatory approvals, market position, expenses, financial results, litigationand reserves.  We believe that thesestatements are based on reasonable estimates, assumptions and plans.  However, if the estimates, assumptions orplans underlying the forward-looking statements prove inaccurate or if otherrisks or uncertainties arise, actual results could differ materially from thosecommunicated in these forward-looking statements.  Factors which could cause actual results todiffer materially from those suggested by such forward-looking statements areincorporated in this Part I, Item 2 by reference to the information set forthin our Annual Report on Form 10-K, Part II, Item 7, under the caption  “Forward-Looking Statements and Risk Factors.”

 

**Anydecrease in our financial strength ratings may have an adverse effect on ourcompetitive position**.

•                  Financialstrength ratings are important factors in establishing the competitive positionof insurance companies and generally have an effect on an insurance company’sbusiness.  On an ongoing basis, ratingagencies review the financial performance and condition of insurers and coulddowngrade or change the outlook on an insurer’s ratings due to, for example, achange in an insurer’s statutory capital; a change in a rating agency’sdetermination of the amount of risk-adjusted capital required to maintain aparticular rating; an increase in the perceived risk of an insurer’s investmentportfolio; a reduced confidence in management or a host of other considerationsthat may or may not be under the insurer’s control. The insurance financialstrength ratings of both Allstate Insurance Company and ALIC, as well as theCompany, are A+, Aa2 and AA (from A.M. Best, Moody’s and Standard and Poor’s,respectively).  Because all of theseratings are subject to continuous review, the retention of these ratings cannotbe assured.  A multiple level downgradein any of these ratings could have a material adverse effect on our sales, ourcompetitiveness, the marketability of our product offerings and our liquidity,operating results and financial condition.

 

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**Item4.    Controlsand Procedures**

 

With the participation of our principalexecutive officer and principal financial officer, we carried out an evaluationof the effectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report.  Based upon this evaluation, the principalexecutive officer and the principal financial officer concluded that ourdisclosure controls and procedures are effective in timely alerting them tomaterial information required to be included in our periodic reports filed withthe Securities and Exchange Commission. However, the design of any system of controls and procedures is based inpart upon assumptions about the likelihood of future events and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.  Our disclosure controls and procedures aredesigned to provide reasonable assurance of achieving their objectives and areeffective at the “reasonable assurance” level.

 

During the fiscal quarter ended September 30,2004, 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.

 

**PART II. OTHER INFORMATION**

** **

**Item 1.    LegalProceedings**

** **

Informationrequired for this Part II, Item 1 is incorporated by reference to thediscussion under the heading “Regulation” and under the heading “Legalproceedings” in Note 4 of the Company’s Condensed Financial Statements in PartI, Item 1, of this Form 10-Q.

 

**Item 6.    Exhibits**

 

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

 

**SIGNATURE**

** **

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

 
|              |   | Allstate Life Insurance  Company of New York |
|-------------------|--------|----------------------------------------------|
|              |   | (Registrant)                                 |
|              |   |                                         |   |
|              |   |                                         |   |
| November 10, 2004 |   | By                                           | /s/ Samuel H. Pilch |   |
|              |   | Samuel H. Pilch                              |
|              |   | Group Vice President and  Controller         |
|              |   | (chief accounting officer and  duly          |
|              |   | authorized officer of the  Registrant)       |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                            | ** ** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 15              |       | Acknowledgement  of awareness from Deloitte & Touche LLP dated November 10, 2004,  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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