** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

----

 

**FORM 10-Q**

 

**Registrant meets the conditions set forth in General Instruction H (1)(a) and(b) of Form 10-Q and is therefore filing this Form with the reduceddisclosure format.**

 

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

 

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

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d)OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

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

##### ** **

###### **ALLSTATE LIFEINSURANCE COMPANYOFNEW YORK**

(Exactname of registrant as specified in its charter)

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

 

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

 

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

 

**Yes  ****ý     No  ****o**

 

**Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).**

 

**Yes  ****o     No  ****ý**

 

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

 

**Yes  ****o     No  ****ý**

 

**As of October 31,2005 the Registrant had 100,000 common shares, $25 par value, outstanding, allof which are held by Allstate Life Insurance Company.**

 

#####  

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

**INDEXTO QUARTERLY REPORT ON FORM 10-Q**

##### **September 30,2005**

 
| ** **        | ** **                                                                                                                         | **Page**   |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART 1.**  | **FINANCIAL INFORMATION**                                                                                                          | ** ** |
|              |                                                                                                                               |       |
| Item 1.           | Financial Statements                                                                                                               |       |
|              |                                                                                                                               |       |
|              | Condensed Statements of Operations for the  Three-Month and Nine-Month Periods Ended September 30, 2005 and 2004  (unaudited) | 3          |
|              |                                                                                                                               |       |
|              | Condensed Statements of Financial Position  as of September 30, 2005 (unaudited) and December 31, 2004                   | 4          |
|              |                                                                                                                               |       |
|              | Condensed Statements of Cash Flows for the  Nine-Month Periods Ended September 30, 2005 and 2004 (unaudited)                  | 5          |
|              |                                                                                                                               |       |
|              | Notes to Condensed Financial Statements  (unaudited)                                                                               | 6          |
|              |                                                                                                                               |       |
|              | Report of Independent Registered Public  Accounting Firm                                                                           | 11         |
|              |                                                                                                                               |       |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                        | 12         |
|              |                                                                                                                               |       |
| Item 4.           | Controls and Procedures                                                                                                            | 26         |
|              |                                                                                                                               |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                              | ** ** |
|              |                                                                                                                               |       |
| Item 1.           | Legal Proceedings                                                                                                                  | 27         |
|              |                                                                                                                               |       |
| Item 6.           | Exhibits                                                                                                                           | 27         |
|              |                                                                                                                               |       |

 

2

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

####  

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

####  

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

####  

**CONDENSEDSTATEMENTS OF OPERATIONS**

 
| ** **                                                                                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                                                                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                | ** ** | **(unaudited)**                            | ** ** | **(unaudited)**                           | ** ** |
| **Revenues**                                                                                                              |       |                                       |       |                                      |       |   |   |   |   |
| Premiums                                                                                                                  |       | $                                          | 16,580     |                                      | $          | 24,800 |   | $ | 52,747 |   | $ | 61,420 |   |
| Contract charges                                                                                                          |       | 16,781                                     |       | 15,446                                    |       | 48,016 |   | 44,134 |   |
| Net investment income                                                                                                     |       | 89,853                                     |       | 77,126                                    |       | 264,848 |   | 220,197 |   |
| Realized capital gains and losses                                                                                         |       | 4,531                                      |       | (4,805                                    | )          | (3,978 | ) | (8,344 | ) |
|                                                                                                                      |       | 127,745                                    |       | 112,567                                   |       | 361,633 |   | 317,407 |   |
|                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| **Costs and expenses**                                                                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Contract benefits                                                                                                         |       | 41,904                                     |       | 50,474                                    |       | 131,888 |   | 138,314 |   |
| Interest credited to contractholder funds                                                                                 |       | 39,523                                     |       | 34,253                                    |       | 115,187 |   | 92,439 |   |
| Amortization of deferred policy acquisition  costs                                                                        |       | 15,878                                     |       | 6,590                                     |       | 27,966 |   | 15,298 |   |
| Operating costs and expenses                                                                                              |       | 10,014                                     |       | 10,004                                    |       | 32,284 |   | 30,262 |   |
|                                                                                                                      |       | 107,319                                    |       | 101,321                                   |       | 307,325 |   | 276,313 |   |
|                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Gain on disposition of operations                                                                                         |       | —                                     |       | —                                    |       | 1 |   | 1,058 |   |
|                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| **Income from operations before income tax  expense and cumulative effect of change in accounting principle,  after-tax** |       | 20,426                                     |       | 11,246                                    |       | 54,309 |   | 42,152 |   |
|                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Income tax expense                                                                                                        |       | 6,863                                      |       | 3,644                                     |       | 19,921 |   | 14,738 |   |
|                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| **Income before cumulative effect of change  in accounting principle, after-tax**                                         |       | 13,563                                     |       | 7,602                                     |       | 34,388 |   | 27,414 |   |
|                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Cumulative effect of change in accounting  principle, after-tax                                                           |       | —                                     |       | —                                    |       | — |   | (7,586 | ) |
|                                                                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| **Net income**                                                                                                            |       | $                                          | 13,563     |                                      | $          | 7,602 |   | $ | 34,388 |   | $ | 19,828 |   |

 

See notes to condensedfinancial statements.

 

3

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**ALLSTATE LIFE INSURANCE COMPANY OFNEW YORK**

 

**CONDENSEDSTATEMENTS OF FINANCIAL POSITION**

 
| **(in thousands, except par value  data)**                                         | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                         |       |                         |       |                        |       |
| Investments                                                                        |       |                         |       |                        |       |
| Fixed income securities, at fair value  (amortized cost $5,515,539 and $5,012,977) |       | $                            | 6,004,454  |                        | $          | 5,545,647 |   |
| Mortgage loans                                                                     |       | 600,038                      |       | 480,280                     |       |
| Short-term                                                                         |       | 118,742                      |       | 111,509                     |       |
| Policy loans                                                                       |       | 36,330                       |       | 34,948                      |       |
| Other                                                                              |       | 3,348                        |       | 4,638                       |       |
| Total investments                                                                  |       | 6,762,912                    |       | 6,177,022                   |       |
|                                                                               |       |                         |       |                        |       |
| Cash                                                                               |       | 7,305                        |       | 8,624                       |       |
| Deferred policy acquisition costs                                                  |       | 300,643                      |       | 238,173                     |       |
| Accrued investment income                                                          |       | 61,560                       |       | 55,821                      |       |
| Reinsurance recoverables                                                           |       | 10,987                       |       | 8,422                       |       |
| Current income taxes receivable                                                    |       | —                       |       | 367                         |       |
| Other assets                                                                       |       | 31,801                       |       | 17,665                      |       |
| Separate Accounts                                                                  |       | 898,600                      |       | 792,550                     |       |
| **Total assets**                                                                   |       | $                            | 8,073,808  |                        | $          | 7,298,644 |   |
|                                                                               |       |                         |       |                        |       |
| **Liabilities**                                                                    |       |                         |       |                        |       |
| Reserve for life-contingent contract  benefits                                     |       | $                            | 1,859,240  |                        | $          | 1,782,451 |   |
| Contractholder funds                                                               |       | 4,228,371                    |       | 3,802,846                   |       |
| Deferred income taxes                                                              |       | 80,361                       |       | 90,760                      |       |
| Other liabilities and accrued expenses                                             |       | 344,263                      |       | 180,904                     |       |
| Payable to affiliates, net                                                         |       | 7,417                        |       | 8,831                       |       |
| Reinsurance payable to parent                                                      |       | —                       |       | 1,067                       |       |
| Current income taxes payable                                                       |       | 1,195                        |       | —                      |       |
| Separate Accounts                                                                  |       | 898,600                      |       | 792,550                     |       |
| **Total liabilities**                                                              |       | 7,419,447                    |       | 6,659,409                   |       |
|                                                                               |       |                         |       |                        |       |
| **Commitments and Contingent Liabilities  (Note 3)**                               |       |                         |       |                        |       |
|                                                                               |       |                         |       |                        |       |
| **Shareholder’s equity**                                                      |       |                         |       |                        |       |
| Common stock, $25 par value, 100 thousand  shares authorized and outstanding       |       | 2,500                        |       | 2,500                       |       |
| Additional capital paid-in                                                         |       | 120,000                      |       | 120,000                     |       |
| Retained income                                                                    |       | 395,832                      |       | 361,480                     |       |
| Accumulated other comprehensive income:                                            |       |                         |       |                        |       |
| Unrealized net capital gains and losses                                            |       | 136,029                      |       | 155,255                     |       |
| **Total accumulated other comprehensive  income**                                  |       | 136,029                      |       | 155,255                     |       |
| **Total shareholder’s equity**                                                |       | 654,361                      |       | 639,235                     |       |
| **Total liabilities and shareholder’s equity**                                |       | $                            | 8,073,808  |                        | $          | 7,298,644 |   |

 

See notes to condensedfinancial statements.

 

4

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

####  

**CONDENSEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                                 | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                           | ** ** |
| **Cash flows from operating activities**                                           |       |                                      |       |   |   |
| Net income                                                                         |       | $                                         | 34,388     |   | $ | 19,828 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                      |       |   |   |
| Amortization and other non-cash items                                              |       | (43,805                                   | )          | (37,624 | ) |
| Realized capital gains and losses                                                  |       | 3,978                                     |       | 8,344 |   |
| Gain on disposition of operations                                                  |       | (1                                        | )          | (1,058 | ) |
| Cumulative effect of change in accounting  principle                               |       | —                                    |       | 7,586 |   |
| Interest credited to contractholder funds                                          |       | 115,187                                   |       | 92,439 |   |
| Changes in:                                                                        |       |                                      |       |   |   |
| Reserve for life-contingent contract  benefits and contractholder funds            |       | 23,505                                    |       | 28,950 |   |
| Deferred policy acquisition costs                                                  |       | (25,464                                   | )          | (47,149 | ) |
| Income taxes payable                                                               |       | 1,535                                     |       | 10,519 |   |
| Other operating assets and liabilities                                             |       | (14,564                                   | )          | (426 | ) |
| Net cash provided by operating activities                                          |       | 94,759                                    |       | 81,409 |   |
|                                                                               |       |                                      |       |   |   |
| **Cash flows from investing activities**                                           |       |                                      |       |   |   |
| Proceeds from sales of fixed income  securities                                    |       | 394,169                                   |       | 342,905 |   |
| Investment collections                                                             |       |                                      |       |   |   |
| Fixed income securities                                                            |       | 125,606                                   |       | 145,165 |   |
| Mortgage loans                                                                     |       | 44,886                                    |       | 21,129 |   |
| Investment purchases                                                               |       |                                      |       |   |   |
| Fixed income securities                                                            |       | (837,268                                  | )          | (1,204,327 | ) |
| Mortgage loans                                                                     |       | (162,189                                  | )          | (74,900 | ) |
| Change in short-term investments, net                                              |       | 14,201                                    |       | 7,581 |   |
| Change in other investments, net                                                   |       | 365                                       |       | 1,203 |   |
| Net cash used in investing activities                                              |       | (420,230                                  | )          | (761,244 | ) |
|                                                                               |       |                                      |       |   |   |
| **Cash flows from financing activities**                                           |       |                                      |       |   |   |
| Contractholder fund deposits                                                       |       | 681,725                                   |       | 895,148 |   |
| Contractholder fund withdrawals                                                    |       | (357,573                                  | )          | (201,040 | ) |
| Net cash provided by financing activities                                          |       | 324,152                                   |       | 694,108 |   |
|                                                                               |       |                                      |       |   |   |
| **Net (decrease) increase in cash**                                                |       | (1,319                                    | )          | 14,273 |   |
| **Cash at beginning of period**                                                    |       | 8,624                                     |       | 10,731 |   |
| **Cash at end of period**                                                          |       | $                                         | 7,305      |   | $ | 25,004 |   |

 

See notes to condensed financialstatements.

 

5

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

 

### **1.  General**

###  

### **Basis of Presentation**

###  

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

 

The condensedfinancial statements and notes as of September 30, 2005 and for thethree-month and nine-month periods ended September 30, 2005 and 2004 areunaudited.  The condensed financialstatements reflect all adjustments (consisting only of normal recurringaccruals) which are, in the opinion of management, necessary for the fairpresentation of the financial position, results of operations and cash flowsfor the interim periods.  These condensedfinancial statements and notes should be read in conjunction with the financialstatements and notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004. The results of operations for the interim periods should not beconsidered indicative of results to be expected for the full year.

 

To conform tothe 2005 presentation, certain amounts in the prior year’s condensed financialstatements and notes have been reclassified.

 

**Pending accounting standards**

 

*Financial Accounting Standards Board Staff PositionNo. FAS 115-1, "The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments" ("FSPFAS 115-1")*

 

In November2005, the Financial Accounting Standards Board ("FASB") issued FSPFAS 115-1, which nullifies the guidance in paragraphs 10-18 of EITF Issue03-1, "The Meaning of Other-Than-Temporary Impairment and Its Applicationto Certain Investments" and references existing other than temporaryimpairment guidance. FSP FAS 115-1 clarifies that an investor should recognizean impairment loss no later than when the impairment is deemedother-than-temporary, even if a decision to sell the security has not beenmade, and also provides guidance on the subsequent accounting for an impaireddebt security. FSP FAS 115-1 is effective for reporting periods beginningafter December 15, 2005. The adoption of FSP FAS 115-1 is notexpected to have a material impact on the Company's Condensed Statements ofOperations or Financial Position.

 

### ***Statement of Position 05-1, Accounting by Insurance Enterprises forDeferred Acquisition Costs in Connection with Modifications or Exchanges ofInsurance Contracts (“SOP 05-1”)***

 

In October 2005,the American Institute of Certified Public Accountants issued SOP 05-1.   SOP 05-1 provides accounting guidance fordeferred policy acquisition costs on internal replacements of insurance andinvestment contracts other than those specifically described in Statement ofFinancial Accounting Standards (“SFAS”) No. 97, Accounting and Reportingby Insurance Enterprises for Certain Long-Duration Contracts and for RealizedGains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in productbenefits, features, rights or coverages that occurs by the exchange of a contractfor a new contract, or by amendment, endorsement or rider to a contract, or bythe election of a feature or coverage within a contract.  Internal replacement contracts are those thatare substantially changed from the replaced contract and are accounted for asan extinguishment of the replaced contract. Nonintegrated contract features are accounted for as separately issuedcontracts.  Modifications resulting fromthe election of a feature or coverage within a contract or from an integratedcontract feature generally do not result in an internal replacement contractsubject to SOP 05-1 provided certain conditions are met. The provisions of SOP05-1 are effective for internal replacements occurring in fiscal yearsbeginning after December 15, 2006. The Company’s accounting policy for internal replacements is generallyconsistent with the accounting guidance prescribed in SOP 05–1; therefore, theSOP is not expected to have a material impact on the Company’s CondensedStatements of Operations or Financial Position.

 

### ***Statementof Financial Accounting Standards No. 154, Accounting Changes and ErrorCorrections (“SFAS No.  154”)***

 

In May 2005,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,which replaces Accounting Principles Board (“APB”) Opinion No. 20,Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changesin Interim Financial Statements.  SFAS No. 154requires retrospective application to prior periods’ financial statements forchanges in accounting principle, unless determination of either the periodspecific effects or the cumulative effect of the change is impracticable.  SFAS No. 154 is effective for fiscalyears beginning after December 15, 2005. SFAS No. 154 is not expected to have a material impact on theCompany’s Condensed Statements of Operations or Financial Position.

 

6

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### **2.  Reinsurance**

###  

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

 
| ** **                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Premiums and contract charges**                  |       |                                       |       |                                      |       |   |   |   |   |
| Direct                                             |       | $                                          | 37,036     |                                      | $          | 43,167 |   | $ | 112,891 |   | $ | 116,334 |   |
| Assumed – non-affiliate                       |       | 200                                        |       | 84                                        |       | 702 |   | 386 |   |
| Ceded                                              |       |                                       |       |                                      |       |   |   |   |   |
| Affiliate                                          |       | (1,186                                     | )          | 8                                         |       | (3,538 | ) | (2,175 | ) |
| Non-affiliate                                      |       | (2,689                                     | )          | (3,013                                    | )          | (9,292 | ) | (8,991 | ) |
| Premiums and contract charges, net of  reinsurance |       | $                                          | 33,361     |                                      | $          | 40,246 |   | $ | 100,763 |   | $ | 105,554 |   |

 

The effects of reinsurance oncontract benefits are as follows:

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Contract benefits**                 |       |                                       |       |                                      |       |   |   |   |   |
| Direct                                |       | $                                          | 43,068     |                                      | $          | 52,576 |   | $ | 137,938 |   | $ | 143,304 |   |
| Assumed – non-affiliate          |       | 93                                         |       | 57                                        |       | 249 |   | 135 |   |
| Ceded                                 |       |                                       |       |                                      |       |   |   |   |   |
| Affiliate                             |       | (28                                        | )          | (283                                      | )          | (1,216 | ) | (266 | ) |
| Non-affiliate                         |       | (1,229                                     | )          | (1,876                                    | )          | (5,083 | ) | (4,859 | ) |
| Contract benefits, net of reinsurance |       | $                                          | 41,904     |                                      | $          | 50,474 |   | $ | 131,888 |   | $ | 138,314 |   |

 

In addition to amounts included in the table above are reinsurance premiums ceded to ALIC of $738 thousand and $685 thousand for the third quarters of 2005 and 2004, respectively, and $2.16 million and $2.04 million for the first nine months of 2005 and 2004, respectively, under the terms of the structured settlement annuity reinsurance agreement.  These amounts are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations as the treaty is recorded as a derivative instrument pursuant to the requirements of Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

 

### **3.  Guarantees and Contingent Liabilities**

###  

**Guarantees**

 

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

 

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

 

7

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**Regulation**

 

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

 

**Legal and Regulatory Proceedingsand Inquiries**

 

**Background**

 

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

 

•      Thesematters raise difficult and complicated factual and legal issues and aresubject to many uncertainties and complexities, including but not limited to,the underlying facts of each matter; novel legal issues; variations betweenjurisdictions in which matters are being litigated, heard or investigated;differences in applicable laws and judicial interpretations; the length of timebefore many of these matters might be resolved by settlement, throughlitigation or otherwise and, in some cases, the timing of their resolutionsrelative to other similar matters involving other companies; the fact that someof the lawsuits are putative class actions in which a class has not beencertified and in which the purported class may not be clearly defined; the factthat some of the lawsuits involve multi-state class actions in which theapplicable law(s) for the claims at issue is in dispute and therefore unclear;and the current challenging legal environment faced by large corporations andinsurance companies.

 

•      Inthe lawsuits, plaintiffs seek a variety of remedies including equitable reliefin the form of injunctive and other remedies and monetary relief in the form ofcontractual and extra-contractual damages. In some cases, the monetary damages sought include punitivedamages.  Often specific informationabout the type of relief sought, such as the amount of damages, is notavailable because plaintiffs have not requested specific relief in theirpleadings.  In our experience, monetarydemands in pleadings bear little relation to the ultimate loss, if any, to theCompany.

 

•      Inconnection with regulatory examinations and proceedings, government authoritiesmay seek various forms of relief, including penalties, restitution, and changesin business practices.  The Company maynot be advised of the nature and extent of relief sought until the final stagesof the examination or proceeding.

 

•       Forthe reasons specified above, it is not possible at this time to make meaningfulestimates of the amount or range of loss that could result from the mattersdescribed below in the “Proceedings” subsection.  The Company reviews these matters on anon-going basis and follows the provisions of Statement of Financial AccountingStandards No. 5, “Accounting for Contingencies” when making accrual anddisclosure decisions.  When assessing reasonablypossible and probable outcomes, the Company bases its decisions on itsassessment of the ultimate outcome following all appeals.

 

•      In the opinionof the Company’s management, while the ultimate liability in some of thematters described below in the “Proceedings” subsection in excess ofamounts currently reserved may be material to the Company’s operating resultsfor any particular period if an unfavorable outcome results, none will have amaterial adverse effect on the financial condition of the Company.

 

8

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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 in the following paragraph.

 

AIC isdefending certain matters relating to its agency program reorganizationannounced in 1999. These matters include a lawsuit filed in December 2001by the U.S. Equal Employment Opportunity Commission (“EEOC”) allegingretaliation under federal civil rights laws, a class action filed in August 2001by former employee agents alleging retaliation and age discrimination under theAge Discrimination in Employment Act, breach of contract and ERISA violations, and a lawsuit filed in October 2004by the EEOC alleging age discrimination with respect to a policy limiting therehire of agents affected by the agency program reorganization.  AIC is also defending a certified classaction, filed by former employee agents who terminated their employment priorto the agency program reorganization. These plaintiffs have asserted breach of contract and ERISA claims andare seeking actual damages including benefits under Allstate employee benefitplans and payments provided in connection with the reorganization, as well aspunitive damages.  In late March 2004,in the first EEOC lawsuit and class action lawsuit, the trial court issued amemorandum and order that, among other things, certified classes of agents,including a mandatory class of agents who had signed a release, for purposes ofeffecting the court’s declaratory judgment that the release is voidable at theoption of the release signer.  The courtalso ordered that an agent who voids the release must return to AIC “any andall benefits received by the [agent] in exchange for signing the release.”  The court also “concluded that, on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order.  The case otherwise remains pending.  A putative nationwide class action hasalso been filed by former employee agents alleging various violations of ERISA, including a worker classificationissue.  These plaintiffs are challengingcertain amendments to the Agents Pension Plan and are seeking to have exclusiveagent independent contractors treated as employees for benefit purposes.  This matter was dismissed with prejudice bythe trial court, was the subject of further proceedings on appeal, and wasreversed and remanded to the trial court in April 2005.  Inthese matters, plaintiffs seek compensatory and punitive damages, and equitablerelief.  AIC has been vigorouslydefending these lawsuits and other matters related to its agency programreorganization.  The outcome of thesedisputes is currently uncertain.

 

The Company is currentlyundergoing a periodic market conduct examination by state insuranceregulators.  Regulators are focusing, asthey have with other insurers, on the Company’s compliance with the state’sreplacement sales and record-keeping processes with regard to life insuranceand annuities among other issues.  Theultimate outcome of this examination is currently uncertain.

 

**Other Matters**

 

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

 

Various otherlegal and regulatory actions are currently pending that involve the Company andspecific aspects of its conduct of business. Like other members of the insurance industry, the Company is the targetof a number of lawsuits and proceedings, some of which involve claims forsubstantial or indeterminate amounts. These actions are based on a variety of issues and target a range of theCompany’s practices.  The outcome of these disputes is currentlyunpredictable.

 

However, at thistime, based on their present status, it is the opinion of management that theultimate

 

9

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liability, if any, in one ormore of the actions described in this “Other Matters” subsection inexcess of amounts currently reserved is not expected to have a material effecton the results of operations, liquidity or financial condition of the Company.

 

**4.****             OtherComprehensive Income**

 

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

 
| ** **                                                                           | ** ** | **Three months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **Pretax**                                | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding (losses) gains arising  during the period, net of related offsets |       | $                                         | (52,711    | ) | $ | 18,448 |   | $ | (34,263 | ) | $ | 64,736 |   | $ | (22,658 | ) | $ | 42,078 |   |
| Less: reclassification adjustments                                                   |       | 1,342                                     |       | (470 | ) | 872 |   | (4,849 | ) | 1,697 |   | (3,152 | ) |
|                                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive (loss) income                                                    |       | $                                         | (54,053    | ) | $ | 18,918 |   | (35,135 | ) | $ | 69,585 |   | $ | (24,355 | ) | 45,230 |   |
|                                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                           |       |                                      |       |   |   | 13,563 |   |   |   |   |   | 7,602 |   |
| Comprehensive (loss) income                                                          |       |                                      |       |   |   | $ | (21,572 | ) |   |   |   |   | $ | 52,832 |   |

 
| ** **                                                                           | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands)**                                                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **Pretax**                               | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding (losses) gains arising  during the period, net of related offsets |       | $                                        | (35,327    | ) | $ | 12,364 |   | $ | (22,963 | ) | $ | 14,564 |   | $ | (5,098 | ) | $ | 9,466 |   |
| Less: reclassification adjustments                                                   |       | (5,749                                   | )          | 2,012 |   | (3,737 | ) | (6,334 | ) | 2,217 |   | (4,117 | ) |
|                                                                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive (loss) income                                                    |       | $                                        | (29,578    | ) | $ | 10,352 |   | (19,226 | ) | $ | 20,898 |   | $ | (7,315 | ) | 13,583 |   |
|                                                                                 |       |                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                           |       |                                     |       |   |   | 34,388 |   |   |   |   |   | 19,828 |   |
| Comprehensive income                                                                 |       |                                     |       |   |   | $ | 15,162 |   |   |   |   |   | $ | 33,411 |   |

 

10

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and Shareholder of

Allstate Life Insurance Company of New York:

 

We have reviewedthe accompanying condensed statement of financial position of Allstate LifeInsurance Company of New York (the “Company”, an affiliate of The AllstateCorporation) as of September 30, 2005, and the related condensedstatements of operations for the three-month and nine-month periods ended September 30,2005 and 2004, and the condensed statements of cash flows for the nine-monthperiods ended September 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’smanagement.

 

We conducted ourreviews in accordance with the standards of the Public Company AccountingOversight Board (United States).  Areview of interim financial information consists principally of applyinganalytical procedures and making inquiries of persons responsible for financialand accounting matters.  It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on ourreviews, we are not aware of any material modifications that should be made tosuch condensed interim financial statements for them to be in conformity withaccounting principles generally accepted in the United States of America.

 

We have previouslyaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the statement of financial position ofAllstate Life Insurance Company of New York as of December 31, 2004, andthe related statements of operations and comprehensive income, shareholder’sequity, and cash flows for the year then ended, not presented herein.  In our report dated February 24, 2005,which report includes an explanatory paragraph relating to a change in theCompany’s method of accounting for certain nontraditional long-durationcontracts and for separate accounts in 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, 2004 is fairly stated,in all material respects, in relation to the statement of financial positionfrom which it has been derived.

 

 
| /s/  Deloitte & Touche LLP |   |
|--------------------------------|--------|
|                           |   |
| Chicago,  Illinois             |   |
| November 7, 2005          |   |

 

11

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**Item 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODSENDED SEPTEMBER 30, 2005 AND 2004**

 

### **OVERVIEW**

 

The followingdiscussion highlights significant factors influencing the financial positionand results of operations of Allstate Life Insurance Company of New York(referred to in this document as “we”, “our”, “us” or the “Company”).  It should be read in conjunction with thecondensed financial statements and notes thereto found under Part I. Item1. contained herein, and with the discussion, analysis, financial statementsand notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8.of the Allstate Life Insurance Company of New York Annual Report on Form 10-Kfor 2004.  We operate as a single segmententity, based on the manner in which financial information is used internallyto evaluate performance and determine the allocation of resources.

 

### **OPERATIONS**

###  

We arepursuing the following actions and strategies to improve return on equity:maintaining and developing focused top-tier products, deepening distributionpartner relationships, improving our cost structure, advancing our enterpriserisk management program and leveraging the strength of the Allstate brand nameacross products and distribution channels. The execution of our business strategies has and may continue to involvesimplifying our business model by changing the number and selection of productsbeing marketed, for example, the sale of our direct response distributionbusiness in 2004; terminating underperforming distribution relationships;reducing policy administration software systems; and other actions that we maydetermine are appropriate to successfully execute our business strategies.

 

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

 

The following table summarizespremiums and contract charges by product.

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                        |       |                                       |       |                                      |       |   |   |   |   |
| **Premiums**                                | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional life                            |       | $                                          | 6,387      |                                      | $          | 6,838 |   | $ | 18,492 |   | $ | 18,039 |   |
| Immediate annuities with life contingencies |       | 9,115                                      |       | 17,263                                    |       | 31,157 |   | 41,304 |   |
| Accident and health and other               |       | 1,078                                      |       | 699                                       |       | 3,098 |   | 2,077 |   |
| **Total premiums**                          |       | 16,580                                     |       | 24,800                                    |       | 52,747 |   | 61,420 |   |
|                                        |       |                                       |       |                                      |       |   |   |   |   |
| **Contract charges**                        |       |                                       |       |                                      |       |   |   |   |   |
| Interest-sensitive life                     |       | 10,735                                     |       | 10,611                                    |       | 31,204 |   | 30,021 |   |
| Fixed annuities                             |       | 1,712                                      |       | 1,462                                     |       | 5,139 |   | 4,494 |   |
| Variable annuities                          |       | 4,334                                      |       | 3,373                                     |       | 11,673 |   | 9,619 |   |
| **Total contract charges**                  |       | 16,781                                     |       | 15,446                                    |       | 48,016 |   | 44,134 |   |
| **Premiums and contract charges**           |       | $                                          | 33,361     |                                      | $          | 40,246 |   | $ | 100,763 |   | $ | 105,554 |   |

 

12

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The followingtable summarizes premiums and contract charges by distribution channel.

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                              |       |                                       |       |                                      |       |   |   |   |   |
| **Premiums**                      | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate agencies                 |       | $                                          | 6,248      |                                      | $          | 6,731 |   | $ | 18,157 |   | $ | 17,742 |   |
| Broker dealers                    |       | —                                     |       | —                                    |       | 36 |   | 107 |   |
| Specialized brokers               |       | 9,116                                      |       | 17,262                                    |       | 31,121 |   | 41,196 |   |
| Independent agents                |       | 1,216                                      |       | 865                                       |       | 3,433 |   | 2,350 |   |
| Direct marketing                  |       | —                                     |       | (58                                       | )          | — |   | 25 |   |
| **Total premiums**                |       | 16,580                                     |       | 24,800                                    |       | 52,747 |   | 61,420 |   |
|                              |       |                                       |       |                                      |       |   |   |   |   |
| **Contract charges**              |       |                                       |       |                                      |       |   |   |   |   |
| Allstate agencies                 |       | 10,324                                     |       | 10,201                                    |       | 30,248 |   | 29,757 |   |
| Broker dealers                    |       | 3,197                                      |       | 2,717                                     |       | 8,785 |   | 8,046 |   |
| Banks                             |       | 2,597                                      |       | 1,680                                     |       | 6,705 |   | 3,297 |   |
| Specialized brokers               |       | 534                                        |       | 782                                       |       | 1,932 |   | 2,844 |   |
| Independent agents                |       | 129                                        |       | 66                                        |       | 346 |   | 190 |   |
| **Total contract charges**        |       | 16,781                                     |       | 15,446                                    |       | 48,016 |   | 44,134 |   |
| **Premiums and contract charges** |       | $                                          | 33,361     |                                      | $          | 40,246 |   | $ | 100,763 |   | $ | 105,554 |   |

 

Total premiums declined 33.1% and 14.1% in the third quarter and firstnine months of 2005, respectively, compared to the same periods of 2004. Inboth periods the decrease was primarily the result of lower premiums onimmediate annuities with life contingencies.

 

Contractcharges increased 8.6% and 8.8% in the third quarter and first nine months of2005, respectively, compared to the same periods of 2004.  The increases were due to higher contractcharges on variable annuities, interest-sensitive life products and fixedannuities.  Higher variableannuity contract charges were the result of increased average account valuesduring the current periods of 2005 compared to the same periods of 2004,reflecting positive investment results and net deposits on variable annuity andlife contracts.  The increase in theinterest-sensitive life contract charges were attributable to in-force businessgrowth resulting from deposits and credited interest more than offsettingsurrenders and benefits.  Fixed annuitycontract charges for the third quarter and first nine months of 2005 reflecthigher surrender charges compared with the same periods in the prior year.

 

13

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*Contractholder funds* representinterest-bearing liabilities arising from the sale of fixed annuities,  interest-sensitive life and variable annuityand life deposits allocated to fixed accounts. The balance of contractholder funds is equal to the cumulative depositsreceived and interest credited to the contractholder less cumulative contractbenefits, surrenders, withdrawals and contract charges for mortality oradministrative expenses.

 

The followingtable shows the changes in contractholder funds.

 
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Contractholder funds, beginning balance**                     |       | $                                          | 4,135,238  |                                      | $          | 3,084,086 |   | $ | 3,802,846 |   | $ | 2,658,325 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Impact of adoption of SOP 03-1(1)                               |       | —                                     |       | —                                    |       | — |   | 2,031 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| **Deposits:**                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Fixed annuities (immediate and deferred)                        |       | 136,486                                    |       | 340,560                                   |       | 567,860 |   | 742,959 |   |
| Interest-sensitive life                                         |       | 25,216                                     |       | 24,937                                    |       | 74,042 |   | 75,969 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | 12,341                                     |       | 19,562                                    |       | 46,322 |   | 76,219 |   |
| Total deposits                                                  |       | 174,043                                    |       | 385,059                                   |       | 688,224 |   | 895,147 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| **Interest credited**                                           |       | 42,241                                     |       | 34,124                                    |       | 124,861 |   | 92,075 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| **Benefits, withdrawals and other adjustments**                 |       |                                       |       |                                      |       |   |   |   |   |
| Benefits                                                        |       | (21,260                                    | )          | (12,315                                   | )          | (55,757 | ) | (32,209 | ) |
| Surrenders and partial withdrawals                              |       | (81,088                                    | )          | (54,485                                   | )          | (272,377 | ) | (138,784 | ) |
| Contract charges                                                |       | (10,429                                    | )          | (10,756                                   | )          | (30,876 | ) | (31,084 | ) |
| Net transfers to separate accounts                              |       | (10,656                                    | )          | (9,388                                    | )          | (29,395 | ) | (30,782 | ) |
| Other adjustments                                               |       | 282                                        |       | 594                                       |       | 845 |   | 2,200 |   |
| Total benefits, withdrawals and other  adjustments              |       | (123,151                                   | )          | (86,350                                   | )          | (387,560 | ) | (230,659 | ) |
| **Contractholder funds, ending balance**                        |       | $                                          | 4,228,371  |                                      | $          | 3,416,919 |   | $ | 4,228,371 |   | $ | 3,416,919 |   |

 

----

(1)   The increase incontractholder funds due to the adoption of SOP 03-1 reflects the establishmentof reserves for certain liabilities that are primarily related to incomebenefit guarantees provided under variable annuities and the reclassificationof deferred sales inducements (“DSI”) from contractholder funds to otherassets.

 

Contractholder funds deposits decreased 54.8% and 23.1% in the thirdquarter and first nine months of 2005, respectively, compared to the sameperiods in 2004.  The decline in bothperiods was primarily the result of lower deposits on fixed annuities.  Fixed annuity deposits declined 59.9% and23.6% in the third quarter and first nine months of 2005, respectively, due tolower consumer demand and our continued focus on achieving higher returns.  In addition, the comparison to the prior yearwas impacted by our promotional pricing of a new product offering in the thirdquarter of 2004. Increases in short-term interest rates without correspondingincreases in longer term rates have generally reduced the competitiveness offixed annuity products relative to shorter-term deposit products such as moneymarket funds and certificates of deposit. A continuation of this environment will impact the level of expectedfixed annuity deposits.  Averagecontractholder funds increased 28.7% in the third quarter and 32.2% in thefirst nine months of 2005 compared to the same periods in 2004.

 

Surrenders and partial withdrawals increased48.8% in the third quarter and 96.3% in the first nine months of 2005 comparedto the same periods of 2004 reflecting an annualized withdrawal rate of 7.8% inthe third quarter and 9.5% in the first nine months of 2005 based on thebeginning of period contractholder funds balance.  This compares to an annualized withdrawalrate of 7.1% in third quarter and 7.0% in the first nine months of 2004.  These increases were primarily attributableto higher surrenders on the fixed account option on certain variable annuitycontracts.  The funds subject to thesesurrenders were invested in prior years when the crediting rate on our fixedinvestment option was attractive relative to short-term market interestrates.  Contractholders withdrew theirfunds at an increased rate due to the rise in short-term

 

14

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market interest rates, whichwere not accompanied by a structural rise in crediting rates.  Fixed annuity surrenders and withdrawals arealso contributing to the increase due to the growth and aging of our in-forcebusiness.  Surrenders and withdrawals mayvary with changes in interest rates and equity market conditions and the agingof our in-force contracts.

 

*Separate accounts liabilities* representcontractholders’ claims to the related separate accounts assets.   Separate accounts liabilities primarilyarise from the sale of variable annuity contracts and variable life insurancepolicies.

 

The followingtable shows the changes in separate accounts liabilities.

 
| ** **                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Separate accounts liabilities, beginning  balance**           |       | $                                          | 851,253    |                                      | $          | 710,363 |   | $ | 792,550 |   | $ | 665,875 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Variable annuity and life deposits                              |       | 38,562                                     |       | 40,179                                    |       | 144,790 |   | 151,411 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | (12,341                                    | )          | (19,562                                   | )          | (46,322 | ) | (76,219 | ) |
| Net deposits                                                    |       | 26,221                                     |       | 20,617                                    |       | 98,468 |   | 75,192 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Investment results                                              |       | 32,821                                     |       | (5,992                                    | )          | 39,100 |   | 11,611 |   |
| Contract charges                                                |       | (3,469                                     | )          | (2,614                                    | )          | (9,689 | ) | (7,466 | ) |
| Net transfers from fixed accounts                               |       | 10,656                                     |       | 9,388                                     |       | 29,395 |   | 30,782 |   |
| Surrenders and benefits                                         |       | (18,882                                    | )          | (21,337                                   | )          | (51,224 | ) | (65,569 | ) |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| **Separate accounts liabilities, ending  balance**              |       | $                                          | 898,600    |                                      | $          | 710,425 |   | $ | 898,600 |   | $ | 710,425 |   |

 

Separateaccounts liabilities increased $106.1 million as of September 30, 2005compared to December 31, 2004. Variable annuity and life deposits in thethird quarter and first nine months of 2005 decreased 4.0% and 4.4%, respectively,compared to the same periods in the prior year. However, net deposits increased27.2% and 31.0% in the third quarter and first nine months of 2005,respectively, as the decline in the variable annuity and life deposits was morethan offset by a lower amount of deposits being allocated to fixedaccounts.  Variable annuitycontractholders often allocate a significant portion of their initial variableannuity contract deposit into a fixed rate investment option.  The level of this activity is reflected abovein the deposits allocated to the fixed accounts, while all other transferactivity between the fixed and separate accounts investments options isreflected in net transfers from fixed accounts. The liability for the fixed portion of variable annuity contracts isreflected in contractholder funds.

 

**Netinvestment income** increased 16.5% in the three months ended September 30,2005 and 20.3% in the first nine months of 2005 compared to the same periods in2004. The increases in both periods were primarily due to the effect of higherportfolio balances, partially offset by declining portfolio yields.  Portfolio balances as of September 30,2005 increased 9.5% from December 31, 2004.

 

15

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**Netincome** analysis is presented in the following table.

 
| ** **                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Premiums                                                                                              |       | $                                          | 16,580     |                                      | $          | 24,800 |   | $ | 52,747 |   | $ | 61,420 |   |
| Contract charges(1)                                                                                   |       | 16,776                                     |       | 15,443                                    |       | 48,011 |   | 44,121 |   |
| Net investment income                                                                                 |       | 89,853                                     |       | 77,126                                    |       | 264,848 |   | 220,197 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments (2)                            |       | 289                                        |       | 141                                       |       | 773 |   | 217 |   |
| Contract benefits                                                                                     |       | (41,904                                    | )          | (50,474                                   | )          | (131,888 | ) | (138,314 | ) |
| Interest credited to contractholder funds(3)                                                          |       | (38,780                                    | )          | (34,110                                   | )          | (113,507 | ) | (91,912 | ) |
| Gross margin                                                                                          |       | 42,814                                     |       | 32,926                                    |       | 120,984 |   | 95,729 |   |
|                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Amortization of DAC and DSI                                                                           |       | (13,025                                    | )          | (7,787                                    | )          | (26,918 | ) | (14,639 | ) |
| Operating costs and expenses                                                                          |       | (10,014                                    | )          | (10,004                                   | )          | (32,284 | ) | (30,262 | ) |
| Income tax expense                                                                                    |       | (6,580                                     | )          | (5,037                                    | )          | (22,717 | ) | (17,922 | ) |
| Realized capital gains and losses,  after-tax                                                         |       | 2,795                                      |       | (3,067                                    | )          | (2,490 | ) | (5,298 | ) |
| DAC and DSI amortization expense on  realized capital gains and losses, after-tax                     |       | (2,243                                     | )          | 661                                       |       | (1,704 | ) | (745 | ) |
| Reclassification of periodic settlements  and accruals on non-hedge derivative instruments, after-tax |       | (184                                       | )          | (90                                       | )          | (484 | ) | (137 | ) |
| Gain on disposition of operations,  after-tax                                                         |       | —                                     |       | —                                    |       | 1 |   | 688 |   |
| Cumulative effect of change in accounting  principle, after-tax                                       |       | —                                     |       | —                                    |       | — |   | (7,586 | ) |
| **Net income**                                                                                        |       | $                                          | 13,563     |                                      | $          | 7,602 |   | $ | 34,388 |   | $ | 19,828 |   |

 

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(1)   Amortization of deferredloads on interest-sensitive life products related to realized capital gains andlosses is excluded from contract charges for purposes of calculating grossmargin.  Amortization of deferred loadsrelated to realized capital gains and losses totaled $5 thousand and $3thousand in the third quarter of 2005 and 2004, respectively and $5 thousandand $13 thousand in the first nine months of 2005 and 2004, respectively.

 

(2)   Periodic settlements and accruals on non-hedgederivative instruments are reflected as a component of realized capital gainsand losses on the Condensed Statements of Operations.

 

(3)   Amortizationof DSI is excluded from interest credited to contractholder funds for purposesof calculating gross margin. Amortization of DSI totaled $743 thousand and $143 thousand in the threemonths ended September 30, 2005 and 2004, respectively, and $1.68 million and$527 thousand in the first nine months of 2005 and 2004, respectively.

 

*Gross margin*, a non-GAAP measure, representspremiums, contract charges, net investment income and periodic settlements andaccruals on non-hedge derivative instruments, less contract benefits andinterest credited to contractholder funds excluding amortization of DSI.  We reclassify periodic settlements andaccruals on non-hedge derivative instruments into gross margin to report themin a manner consistent with the economically hedged investments, replicatedassets or product attributes (e.g. net investment income or interest creditedto contractholder funds) and by doing so, appropriately reflect trends inproduct performance.  We use gross marginas a component of our evaluation of the profitability of our life insurance andfinancial product portfolio. Additionally, for many of our products, including fixed annuities,variable life and annuities, and interest-sensitive life insurance, the amortizationof DAC and DSI is determined based on actual and expected gross margin.  Gross margin is comprised of three componentsthat are utilized to further analyze the business: investment margin, benefitmargin, and contract charges and fees. We believe gross margin and its components are useful to investorsbecause they allow for the evaluation of income components separately and inthe aggregate when reviewing performance. Gross margin, investment margin and benefit margin should not beconsidered as a substitute for net income and do not reflect the overallprofitability of the business.  Netincome is the GAAP measure that is most directly comparable to thesemargins.  Gross margin is reconciled toGAAP net income in the table above.

 

16

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

 
| ** **                                                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                       | ** ** | **Investment  Margin**                    | ** ** | **Benefit  Margin** | ** ** | **Contract Charges and  Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in thousands)**                                                               | ** ** | **2005**                                  | ** ** | **2004****(4)** | ** ** | **2005** | ** ** | **2004****(4)** | ** ** | **2005** | ** ** | **2004****(4)** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Premiums                                                                         |       | $                                         | —     |   | $ | — |   | $ | 16,580 |   | $ | 24,800 |   | $ | — |   | $ | — |   | $ | 16,580 |   | $ | 24,800 |   |
| Contract charges  (1)                                                       |       | —                                    |       | — |   | 8,417 |   | 7,661 |   | 8,359 |   | 7,782 |   | 16,776 |   | 15,443 |   |
| Net investment income                                                            |       | 89,853                                    |       | 77,126 |   | — |   | — |   | — |   | — |   | 89,853 |   | 77,126 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments  (2) |       | 289                                       |       | 141 |   | — |   | — |   | — |   | — |   | 289 |   | 141 |   |
| Contract benefits                                                                |       | (25,466                                   | )          | (24,519 | ) | (16,438 | ) | (25,955 | ) | — |   | — |   | (41,904 | ) | (50,474 | ) |
| Interest credited to contractholder funds(3)                                     |       | (38,780                                   | )          | (34,110 | ) | — |   | — |   | — |   | — |   | (38,780 | ) | (34,110 | ) |
|                                                                             |       | $                                         | 25,896     |   | $ | 18,638 |   | $ | 8,559 |   | $ | 6,506 |   | $ | 8,359 |   | $ | 7,782 |   | $ | 42,814 |   | $ | 32,926 |   |

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                       | ** ** | **Investment  Margin**                   | ** ** | **Benefit  Margin** | ** ** | **Contract Charges and  Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in thousands)**                                                               | ** ** | **2005**                                 | ** ** | **2004****(4)** | ** ** | **2005** | ** ** | **2004****(4)** | ** ** | **2005** | ** ** | **2004****(4)** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                             |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Premiums                                                                         |       | $                                        | —     |   | $ | — |   | $ | 52,747 |   | $ | 61,420 |   | $ | — |   | $ | — |   | $ | 52,747 |   | $ | 61,420 |   |
| Contract charges (1)                                                             |       | —                                   |       | — |   | 24,447 |   | 22,841 |   | 23,564 |   | 21,280 |   | 48,011 |   | 44,121 |   |
| Net investment income                                                            |       | 264,848                                  |       | 220,197 |   | — |   | — |   | — |   | — |   | 264,848 |   | 220,197 |   |
| Periodic settlements and accruals on  non-hedge derivative instruments  (2) |       | 773                                      |       | 217 |   | — |   | — |   | — |   | — |   | 773 |   | 217 |   |
| Contract benefits                                                                |       | (75,627                                  | )          | (73,100 | ) | (56,261 | ) | (65,214 | ) | — |   | — |   | (131,888 | ) | (138,314 | ) |
| Interest credited to contractholder funds(3)                                     |       | (113,507                                 | )          | (91,912 | ) | — |   | — |   | — |   | — |   | (113,507 | ) | (91,912 | ) |
|                                                                             |       | $                                        | 76,487     |   | $ | 55,402 |   | $ | 20,933 |   | $ | 19,047 |   | $ | 23,564 |   | $ | 21,280 |   | $ | 120,984 |   | $ | 95,729 |   |

 

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(1)  Amortization of deferred loads on interest-sensitive life productsrelated to realized capital gains and losses is excluded from contract chargesfor purposes of calculating gross margin. Amortization of deferred loads related to realized capital gains andlosses totaled $5 thousand and $3 thousand in the thirdquarter of 2005 and 2004, respectively, and $5 thousand and $13 thousand in thefirst nine months of 2005 and 2004, respectively.

 

(2)  Periodic settlements andaccruals on non-hedge derivative instruments are reflected as a component ofrealized capital gains and losses on the Condensed Statements of Operations.

 

(3)  Amortization of DSI is excludedfrom interest credited to contractholder funds for purposes of calculatinggross margin.  Amortization of DSItotaled $743 thousand and $143 thousand in the three months ended September 30,2005 and 2004, respectively, and $1.68 million and $527 thousand in the firstnine months of 2005 and 2004, respectively.

 

(4)  The prior period has beenrestated to conform to the current period presentation.  In connection therewith, contract chargesrelated to guaranteed minimum death, income, accumulation and withdrawalbenefits on variable annuities have been reclassified to benefit margin frommaintenance charges.  Additionally,amounts previously presented as maintenance charges and surrender charges arenow presented in the aggregate as contract charges and fees.  These reclassifications did not result in achange in gross margin.

 

Gross marginincreased 30.0% in the third quarter of 2005 and 26.4% in the first nine monthsof 2005 compared to the same periods of 2004. The increases in both periods were mostly due to higher investmentmargin.

 

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

 

Investmentmargin by product group is shown in the following table.

 
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**       | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Annuities                |       | $                                          | 23,562     |                                      | $          | 16,281 |   | $ | 69,571 |   | $ | 47,363 |   |
| Life insurance           |       | 2,334                                      |       | 2,357                                     |       | 6,916 |   | 8,039 |   |
| Total  investment margin |       | $                                          | 25,896     |                                      | $          | 18,638 |   | $ | 76,487 |   | $ | 55,402 |   |

 

Investment margin increased 38.9% in the third quarter of 2005 and38.1% in the first nine months of 2005 compared to the same periods of 2004 dueprimarily to higher average contractholder funds, an improved weighted averageinvestment spread on deferred annuities and increased yields on investmentssupporting capital, traditional life and other products.

 

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

 
| ** **                                                                      | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                               | ** ** | **2004**                                      | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest-sensitive  life                                                        |       | 5.6                                    | %          | 6.0                                           | %          | 4.5                                     | %          | 4.9 | % | 1.1 | % | 1.1 | % |
| Fixed  annuities – deferred annuities                                      |       | 5.4                                    |       | 5.6                                           |       | 3.2                                     |       | 3.6 |   | 2.2 |   | 2.0 |   |
| Fixed annuities – immediate annuities with  and without life contingencies |       | 7.4                                    |       | 7.6                                           |       | 6.7                                     |       | 6.8 |   | 0.7 |   | 0.8 |   |
| Investments supporting capital, traditional  life and other products            |       | 6.4                                    |       | 6.2                                           |       | N/A                                     |       | N/A |   | N/A |   | N/A |   |

 

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

 
| ** **                                                                      | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                               | ** ** | **2004**                                      | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest-sensitive  life                                                        |       | 5.7                                    | %          | 6.1                                           | %          | 4.5                                     | %          | 5.0 | % | 1.2 | % | 1.1 | % |
| Fixed annuities  – deferred annuities                                      |       | 5.4                                    |       | 5.6                                           |       | 3.1                                     |       | 3.5 |   | 2.3 |   | 2.1 |   |
| Fixed annuities – immediate annuities with  and without life contingencies |       | 7.5                                    |       | 7.6                                           |       | 6.7                                     |       | 6.8 |   | 0.8 |   | 0.8 |   |
| Investments supporting capital, traditional  life and other products            |       | 6.3                                    |       | 6.1                                           |       | N/A                                     |       | N/A |   | N/A |   | N/A |   |

 

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The following table summarizes the liabilities for these contracts andpolicies.

 
| ** **                                                             | ** ** | **Nine Months Ended  September  30,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(in thousands)**                                                     | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Fixed  annuities – immediate annuities with life contingencies    |       | $                                          | 1,752,353  |   | $ | 1,662,072 |   |
| Other life  contingent contracts and other                             |       | 106,887                                    |       | 98,262 |   |
| Reserve for life-contingent contract  benefits                         |       | $                                          | 1,859,240  |   | $ | 1,760,334 |   |
|                                                                   |       |                                       |       |   |   |
| Interest-sensitive  life                                               |       | $                                          | 412,136    |   | $ | 356,309 |   |
| Fixed  annuities – deferred annuities                             |       | 3,289,970                                  |       | 2,531,923 |   |
| Fixed  annuities – immediate annuities without life contingencies |       | 526,603                                    |       | 528,609 |   |
| Other                                                                  |       | (338                                       | )          | 78 |   |
| Contractholder funds                                                   |       | $                                          | 4,228,371  |   | $ | 3,416,919 |   |

 

*Benefit margin*is a component of gross margin,both of which are non-GAAP measures. Benefit margin represents life and life-contingent immediate annuitypremiums, cost of insurance contract charges and variable annuity contractcharges for contract guarantees less contract benefits.  Benefit margin excludes the implied intereston life-contingent immediate annuities, which is included in the calculation ofinvestment margin.  We use the benefitmargin to evaluate our underwriting performance, as it reflects theprofitability of our products with respect to mortality or morbidity riskduring a fiscal period.

 

Benefit marginby product group is shown in the following table.

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**    | ** ** | **2005**                                   | ** ** | **2004****(1)**                           | ** ** | **2005** | ** ** | **2004****(1)** | ** ** |
| Life  insurance       |       | $                                          | 9,958      |                                      | $          | 8,351 |   | $ | 25,482 |   | $ | 23,420 |   |
| Annuities             |       | (1,399                                     | )          | (1,845                                    | )          | (4,549 | ) | (4,373 | ) |
| Total  benefit margin |       | $                                          | 8,559      |                                      | $          | 6,506 |   | $ | 20,933 |   | $ | 19,047 |   |

 

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(1)       Theprior period has been restated to conform to the current period presentation.

 

Benefit margin increased 31.6% in the third quarter of 2005 and 9.9% inthe first nine months of 2005 compared to the same periods of 2004.  The increase in the third quarter of 2005compared to the same period in the prior year was mostly due to improvedmortality experience and growth on life insurance products. In addition,mortality experience on immediate annuities with life contingencies was morefavorable in the third quarter of 2005 compared to the same period in the prioryear, but was increasingly unfavorable in the first nine months of 2005compared to the same period in the prior year.

 

Upon the adoption of Statement of Position No. 03-1, “Accountingand Reporting by Insurance Enterprises for Certain Nontraditional Long-DurationContracts and for Separate Accounts”, on January 1, 2004, reserves wereestablished for death and income benefits provided under variable annuities andother secondary guarantees.  Annuitybenefit margin will continue to be adversely impacted by life-contingent immediateannuities whose benefit payments are anticipated to extend beyond theiroriginal pricing expectations.  Theannuity benefit margin in future periods will fluctuate based on the timing ofannuitant deaths on these life-contingent immediate annuities and the annual evaluation of assumptions used in ourvaluation models for variable annuity guarantees.

 

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*Amortization of DACand DSI*, excluding amortization related to realizedcapital gains and losses, increased 67.3% in the three months ended September 30,2005 and 83.9% in the first nine months of 2005 compared to the same periods of2004 as a result of higher gross margin primarily from the growth in ourannuity investment margin.  For thenine-month period, the variance was favorably impacted by adjustments recordedin connection with our annual comprehensive evaluation of the assumptions usedin our valuation models for all investment products, including variable andfixed annuities and interest-sensitive and variable life products.

 

In the first quarter of 2005, as a result of our annual evaluation ofassumptions, we recorded DAC and DSI deceleration (commonly referred to as “DACand DSI unlocking”) of $7.3 million, which included deceleration of $2.8million on interest-sensitive and variable life products and deceleration of$4.5 million for variable annuities.  Theamortization deceleration on variable annuities was mostly attributable tobetter than anticipated equity market performance and persistency.

 

In the prior year, the comparable DAC and DSI unlocking was a netdeceleration of amortization of $10.2 million. This deceleration of amortization was the result of favorable projectedmortality on our interest-sensitive life products.

 

*Operating costs and expenses* remainedconsistent in the three months ended September 30, 2005 compared to thesame period in 2004 as lower marketing and compensation costs offset the growthin technology and administrative expenses used to support in-force business growth.The 6.7% increase in the first nine months of 2005 compared to the same periodsof 2004 is primarily attributable to higher technology, distribution, marketingand administrative expenses incurred to support growth in in-force business.  For the nine-month period, these increaseswere partially offset by lower guaranty fund assessments and expenses relatedto taxes, licenses and fees in the first quarter of 2005 compared to the firstquarter of 2004.

 

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### **INVESTMENTS**

 

An importantcomponent of our financial results is the return on our investmentportfolio.  The composition of theinvestment portfolio at September 30, 2005 is presented in the tablebelow.

 
| ** **                   | ** ** | **Carrying** | ** ** | **Percent**  | ** ** |
|------------------------------|------------|--------------|------------|--------------|------------|
| **(in thousands)**           | ** ** | **value**    | ** ** | **of total** | ** ** |
|                         |       |         |       |         |       |
| Fixed income  securities (1) |       | $            | 6,004,454  |         | 88.8       | % |
| Mortgage  loans              |       | 600,038      |       | 8.9          |       |
| Short-term                   |       | 118,742      |       | 1.8          |       |
| Policy loans                 |       | 36,330       |       | 0.5          |       |
| Other                        |       | 3,348        |       | —       |       |
| Total                        |       | $            | 6,762,912  |         | 100.0      | % |

 

----

(1) Fixed incomesecurities are carried at fair value. Amortized cost basis for these securities was $5.52 billion.

 

Totalinvestments increased to $6.76 billion at September 30, 2005 from $6.18billion at December 31, 2004 due to positive cash flows from operating andfinancing activities and increased funds associated with securities lendingtransactions, partially offset by lower unrealized capital gains on fixedincome securities.

 

Totalinvestments at amortized cost related to collateral, due to securities lendingtransactions, increased to $302 million at September 30, 2005 from $133million at December 31, 2004.

 

At September 30, 2005,96.4% of the fixed income securities portfolio was rated investment grade,which is defined as a security having a rating from the National Association ofInsurance Commissioners (“NAIC”) of 1 or 2, a rating of Aaa, Aa, A or Baa fromMoody’s or a rating of AAA, AA, A or BBB from S&P, Fitch or Dominion; or acomparable internal rating if an externally provided rating is not available.

 

The unrealized net capital gains on fixed income securities at September 30,2005 were $488.9 million, a decrease of $43.8 million or 8.2% since December 31,2004.   The net unrealized gain was comprised of$517.8 million of unrealized gains and $28.9 million of unrealized losses at September 30,2005.  This is compared to a netunrealized gain totaling $532.7 million at December 31, 2004, comprised of$545.5 million of unrealized gains and $12.8 million of unrealized losses.

 

Of the gross unrealized losses in the fixed income portfolio at September 30,2005, $26.6 million or 92.1% were related to investment grade securities andare believed to be primarily a result of a rising interest rateenvironment.  Of the remaining $2.3million of losses in the fixed income portfolio, $2.2 million or 98.4% were inthe corporate fixed income portfolio. The $2.2 million of corporate fixed income gross unrealized losses wereprimarily comprised of securities in the financial services, communications,and capital and consumer goods sectors. The gross unrealized losses in these sectors were primarily companyspecific and interest rate related. Approximately $1.3 million of the total gross unrealized losses in thecorporate fixed income portfolio were associated with the automobile industry,which includes direct debt issuances of automobile manufacturers, captiveautomotive financing companies and automobile parts and equipment suppliers,which are reported in the consumer goods and financial services sectors.  Values in the automobile industry wereprimarily depressed due to company specific conditions. We expect eventualrecovery of these securities.  Everysecurity was included in our portfolio monitoring process.

 

Our portfolio monitoring process identifies and evaluates fixed incomesecurities whose carrying value may be other than temporarily impaired.  The process includes a quarterly review ofall securities using a screening process to identify those securities whosefair value compared to amortized cost is below established thresholds for certaintime periods, or which are identified through other monitoring criteria such asratings downgrades or payment defaults. We also recognize impairment on securities in an unrealized lossposition for which we do not have the intent and ability to hold untilrecovery.

 

We also monitor the quality of our fixed income portfolio bycategorizing certain investments as “problem”, “restructured” or “potentialproblem.”  Problem fixed incomesecurities are securities in default with respect to principal or interestand/or securities issued by companies that have gone into bankruptcy subsequentto our acquisition of the security. Restructured fixed income securities have rates and terms that are

 

21

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not consistent with market rates or termsprevailing at the time of the restructuring. Potential problem fixed income securities are current with respect tocontractual principal and/or interest, but because of other facts and circumstances,we have concerns regarding the borrower’s ability to pay future principal andinterest, which causes us to believe these securities may be classified asproblem or restructured in the future.

 

The followingtable summarizes problem, restructured and potential problem fixed income securities.

 
| **(in thousands)**                 | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Amortized  cost**         | ** ** | **Fair  value**            | ** ** | **Percent  of total  Fixed  Income  portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Percent  of total  Fixed  Income  portfolio** | ** ** |
| Problem                            |       | $                           | 14,535     |                       | $          | 16,313 |   | 0.3 | % | $ | 10,637 |   | $ | 10,813 |   | 0.2 | % |
| Restructured                       |       | —                      |       | —                     |       | — |   | 5,396 |   | 6,151 |   | 0.1 |   |
| Potential  problem                 |       | 5,793                       |       | 5,773                      |       | 0.1 |   | 11,231 |   | 10,539 |   | 0.2 |   |
| Total net  carrying value          |       | $                           | 20,328     |                       | $          | 22,086 |   | 0.4 | % | $ | 27,264 |   | $ | 27,503 |   | 0.5 | % |
| Cumulative  write-downs recognized |       | $                           | 5,381      |                       |       |   |   |   | $ | 4,606 |   |   |   |   |   |

 

We have experienced a decrease in securitiescategorized as potential problem as of September 30, 2005 compared to December 31,2004.  The decrease was primarily related to the removal of a security dueto improving conditions.

 

We evaluatedeach of these securities through our portfolio monitoring process at September 30,2005 and recorded write-downs when appropriate. We further concluded that any remaining unrealized losses on thesesecurities were temporary in nature and that we have the intent and ability tohold until recovery.  While thesebalances may increase in the future, particularly if economic conditions areunfavorable, management expects that the total amount of securities in thesecategories will remain low relative to the total fixed income securitiesportfolio.

 

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

 
| ** **                                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Investment  write-downs                           |       | $                                          | 1          |                                      | $          | (2,518 | ) | $ | (1,468 | ) | $ | (3,402 | ) |
| Dispositions                                      |       | 1,341                                      |       | 739                                       |       | (1,703 | ) | (3,300 | ) |
| Valuation of  derivative instruments              |       | 457                                        |       | (3,934                                    | )          | (3,021 | ) | (3,226 | ) |
| Settlement  of derivative instruments             |       | 2,732                                      |       | 908                                       |       | 2,214 |   | 1,584 |   |
| Realized  capital gains and losses, pretax        |       | 4,531                                      |       | (4,805                                    | )          | (3,978 | ) | (8,344 | ) |
| Income tax  (expense) benefit                     |       | (1,736                                     | )          | 1,738                                     |       | 1,488 |   | 3,046 |   |
| **Realized  capital gains and losses, after-tax** |       | $                                          | 2,795      |                                      | $          | (3,067 | ) | $ | (2,490 | ) | $ | (5,298 | ) |

 

Dispositions in the above table include sales, losses recognized inanticipation of sales and other transactions such as calls andprepayments.  We may sell securitiesduring the period in which fair value has declined below amortized cost.  In certain situations new factors such asnegative developments, subsequent credit deterioration, relative valueopportunities, market liquidity concerns and portfolio reallocations cansubsequently change our previous intent to continue holding a security.

 

A changing interest rate environment willalso drive changes in our portfolio duration targets at a tactical level.  A duration target and range is establishedwith an economic view of liabilities relative to a long-term portfolio view.  Tactical duration adjustments withinmanagement’s approved ranges are accomplished through both cash markettransactions and derivative activities that generate realized gains and lossesand through new purchases.  As acomponent of our approach to managing portfolio duration,

 

22

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realized gains and losses onderivative instruments are most appropriately considered in conjunction withthe unrealized gains and losses on the fixed income portfolio.  This approach mitigates the impacts ofgeneral interest rate changes to the overall financial condition of theCompany.

 

Because of changes in existing market conditions andasset return assumptions, certain changes are planned within the investmentportfolio impacting approximately $20 million of securities at the end of thethird quarter of 2005. These changes result from continued asset-liabilitymanagement strategies, on-going comprehensive reviews of our portfolios, andchanges being made to our strategic asset allocations. Approximately $14million of these securities were in an unrealized loss position and, therefore,with the change in our intent to hold these investments, we recognized $0.5million of anticipated disposition write-downs during the quarter.

 

In the first quarter of 2005, because of ananticipated rise in interest rates, as well as changes in existing marketconditions and long-term asset return assumptions, certain changes were plannedwithin various portfolios. They included continued asset-liability managementstrategies; on-going comprehensive reviews of our portfolios; and changes beingmade to our strategic asset allocations, including a decision to pursue yieldenhancement strategies.  At that time, weidentified, in total, approximately $216 million of securities, all ofwhich were in an unrealized loss position, which we would consider selling toachieve these objectives.  As a result,we recognized $6 million of write-downs due to a change in intent to holdthese securities until recovery. Securities totaling $36 million with write-downs of $1 millionwere sold and we continue to consider selling securities with a carrying valueof approximately $0.3 million with write-downs of $0.1 million.  The remaining $180 million of securitieswith write-downs of $4 million have been re-designated as being held torecovery within the available-for-sale category, primarily as a consequence ofthe lower than expected interest rate environment.  The difference between the current carryingvalue and par value of the re-designated securities will be recognized in netinvestment income over the remaining life of the securities, pursuant to theguidance in Statement of Position 03-3, “Accounting for Certain Loans or DebtSecurities Acquired in a Transfer”.

 

### **CAPITAL RESOURCES AND LIQUIDITY**

###  

**Capital Resources**consist of shareholder’sequity, representing funds deployed or available to be deployed to supportbusiness operations.  The following tablesummarizes our capital resources.

 
| **(in thousands)**                                                         | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                       |       |                         |       |                        |       |
| Common  stock, retained earnings and other shareholder’s equity items |       | $                            | 518,332    |                        | $          | 483,980 |   |
| Accumulated  other comprehensive income                                    |       | 136,029                      |       | 155,255                     |       |
| Total shareholder’s equity                                            |       | $                            | 654,361    |                        | $          | 639,235 |   |

 

*Shareholder’s equity* increased in the first nine months of 2005when compared to December 31, 2004 primarily as a result of net income,partially offset by lower unrealized net capital gains.

 

**FinancialRatings and Strength** Our ratings are influenced by many factorsincluding our operating and financial performance, asset quality, liquidity,asset/liability management, overall portfolio mix, financial leverage (i.e.,debt), risk exposures, operating leverage, Allstate Insurance Company’s (“AIC”)ratings, Allstate Life Insurance Company’s (“ALIC”) ratings and other factors.There have been no changes to our insurance financial strength ratings since December 31,2004.

 

In connection with developments at AIC, in October 2005,Standard & Poor’s affirmed the AA insurance financial strength ratingsof the Company and ALIC, with a revised rating outlook of ‘Negative’ (from ‘Stable’).  Also in October 2005, Moody’s affirmedthe Aa2 insurance financial strength ratings of the Company and ALIC.Furthermore, in November 2005, A.M. Best affirmed the A+ insurancefinancial strength ratings of the Company and ALIC.

 

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**Liquidity Sources and Uses *** *Asreflected in our Condensed Statements of Cash Flows, higher operating cashflows in the first nine months of 2005 when compared to the first nine monthsof 2004 primarily relate to higher net investment income, partially offset byhigher income taxes paid.  Cash flowsused in investing activities decreased in the first nine months of 2005 , asthe increase in operating cash flows was more than offset by lower financingcash flows.

 

Lower cashflow from financing activities during the first nine months of 2005 whencompared to the first nine months of 2004 reflect lower deposits on fixedannuities and higher fixed annuity withdrawals. For quantification of the changes in contractholder funds, see theOperations section of the MD&A.

 

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

 

**FORWARD-LOOKING STATEMENTS AND RISK FACTORS**

** **

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

 

Theseforward-looking statements do not relate strictly to historical or currentfacts and may be identified by their use of words like “plans,” “seeks,” “expects,”“will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets”and other words with similar meanings. These statements may address, among other things, our strategy forgrowth, product development, regulatory approvals, market position, expenses,financial results, litigation and reserves. We believe that these statements are based on reasonable estimates,assumptions and plans.  However, if theestimates, assumptions or plans underlying the forward-looking statements proveinaccurate or if other risks or uncertainties arise, actual results coulddiffer materially from those communicated in these forward-lookingstatements.  Factors which could causeactual results to differ materially from those suggested by suchforward-looking statements include but are not limited to those discussed oridentified in this document (including the risks described below) and areincorporated in this Part I, Item 2 by reference to the information setforth in our Annual Report on Form 10-K, Part II, Item 7, under thecaption “Forward-Looking Statements and Risk Factors”.

 

**A decrease in our financial strength ratings may have an adverse effecton our competitive position.**

 

Financial strength ratings are important factorsin establishing the competitive position of insurance companies and generallyhave an effect on an insurance company’s business.  On an ongoing basis, rating agencies reviewthe financial performance and condition of insurers and could downgrade or changethe outlook on an insurer’s ratings due to, for example, a change in an insurer’sstatutory capital; a change in a rating agency’s determination of the amount ofrisk-adjusted capital required to maintain a particular rating; an increase inthe perceived risk of an insurer’s investment portfolio; a reduced confidencein management or a host of other considerations that may or may not be underthe insurer’s control. The insurance financial strength ratings of both AIC andALIC are A+, AA and Aa2 from A.M. Best, Standard and Poor’s and Moody’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.

 

**Actionstaken to simplify our business model and improve profitability may not besuccessful and may result in losses and costs.**

 

We are pursuing strategiesintended to improve our return on equity. Actions that we have taken and may continue to take include changing thenumber and selection of products being marketed, terminating underperformingdistribution relationships, reducing policy administration software systems,and other actions that we may determine are appropriate to successfully executeour business strategies.  The actions

 

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that we havetaken and may take in the future may not achieve their intended outcome andcould result in lower premiums and contract charges, restructuring costs,losses on disposition or losses related to the discontinuance of individualproducts or distribution relationships.

 

## **Changesin market interest rates may lead to a significant decrease in the sales andprofitability of spread-based products.**

 

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

 

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

 

*Evaluationof Disclosure Controls and Procedures. *Wemaintain disclosure controls and procedures as defined in Rule 15d-15(e) underthe Securities Exchange Act of 1934. Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness 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 our disclosurecontrols and procedures are effective in providing reasonable assurance thatmaterial information required to be disclosed in our reports filed with orsubmitted to the Securities and Exchange Commission under the SecuritiesExchange Act is made known to management, including the principal executiveofficer and the principal financial officer, as appropriate to allow timelydecisions regarding required disclosure.

 

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

 

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

 

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

 

Information required forthis Part II, Item 1, is incorporated by reference to the discussion underthe heading “Regulation” and under the heading “Legal and RegulatoryProceedings and Inquiries” in Note 3 of the Company’s Condensed FinancialStatements in Part I, Item 1, of this Form 10-Q.

 

### **Item 6.**    Exhibits

###  

(a)   Exhibits

 

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

 

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### **SIGNATURE**

 

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

 
|                   | Allstate  Life Insurance Company of New York |
|------------------------|----------------------------------------------|
|                   | (Registrant)                                 |
|                   |                                         |
| November 7,  2005 | By                                           | /s/ Samuel  H. Pilch |   |
|                   | Samuel H.  Pilch                             |
|                   | Controller                                   |
|                   | (chief  accounting officer and duly          |
|                   | authorized  officer of the registrant)       |

 

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| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
|             |       |            |
| 15               |       |            | Acknowledgement  of awareness from Deloitte & Touche LLP dated November 7, 2005,  concerning unaudited interim financial information. |
|             |       |            |   |
| 31.1             |       |            | Rule 15d-14(a) Certification  of Principal Executive Officer |
|             |       |            |   |
| 31.2             |       |            | Rule 15d-14(a) Certification  of Principal Financial Officer |
|             |       |            |   |
| 32               |       |            | Section 1350  Certifications |

 

E-1

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