** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

** **

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

###### ** **

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

** **

**x****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007**

** **

**OR**

** **

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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

##### ** **

**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

(Exact name of registrant as specified in itscharter)

 

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

 

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

** **

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

Yes x    No o

 

**Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” in Rule 12b-2 of the Exchange.**
| Large accelerated filer | Accelerated filer | Non-accelerated filer |
|-------------------------|-------------------|-----------------------|
| o                       | o                 | x                     |

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

Yes o    No x

 

As of November 5, 2007, the registrant had 100,000common shares, $25 par value, outstanding, all of which are held by AllstateLife Insurance Company.

 

 

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** **

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

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

##### **September 30, 2007**

##### ** **

| **PART 1.**  | **FINANCIAL INFORMATION**                                                                                                    | **Page**   |
|--------------|------------------------------------------------------------------------------------------------------------------------------|------------|
|         |                                                                                                                         |       |
| Item 1.      | Financial Statements                                                                                                         |       |
|         |                                                                                                                         |       |
|         | Condensed Statements of Operations for the Three-Month and Nine-Month  Periods Ended September 30, 2007 and 2006 (unaudited) | 3          |
|         |                                                                                                                         |       |
|         | Condensed Statements of Financial Position as of September 30, 2007  (unaudited) and December 31, 2006                       | 4          |
|         |                                                                                                                         |       |
|         | Condensed Statements of Cash Flows for the Nine-Month Periods Ended  September 30, 2007 and 2006 (unaudited)                 | 5          |
|         |                                                                                                                         |       |
|         | Notes to Condensed Financial Statements (unaudited)                                                                          | 6          |
|         |                                                                                                                         |       |
|         | Report of Independent Registered Public Accounting Firm                                                                      | 15         |
|         |                                                                                                                         |       |
| Item 2.      | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                                  | 16         |
|         |                                                                                                                         |       |
| Item 4.      | Controls and Procedures                                                                                                      | 29         |
|         |                                                                                                                         |       |
| **PART II.** | **OTHER INFORMATION**                                                                                                        | ** ** |
|         |                                                                                                                         |       |
| Item 1.      | Legal Proceedings                                                                                                            | 30         |
|         |                                                                                                                         |       |
| Item 1A.     | Risk Factors                                                                                                                 | 30         |
|         |                                                                                                                         |       |
| Item 6.      | Exhibits                                                                                                                     | 30         |
|         |                                                                                                                         |       |

 

----

 

#### **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)**                        | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)**                                     | ** ** |
| **Revenues**                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Premiums                                              |       | $                                                    | 17,720     |                                                | $          | 19,211 |   | $ | 54,135 |   | $ | 53,963 |   |
| Contract charges                                      |       | 14,677                                               |       | 13,740                                              |       | 43,816 |   | 48,582 |   |
| Net investment income                                 |       | 96,994                                               |       | 92,536                                              |       | 287,901 |   | 279,256 |   |
| Realized capital gains and losses                     |       | 681                                                  |       | (4,741                                              | )          | (2,063 | ) | (24,093 | ) |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
|                                                  |       | 130,072                                              |       | 120,746                                             |       | 383,789 |   | 357,708 |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| **Costs and expenses**                                |       |                                                 |       |                                                |       |   |   |   |   |
| Contract benefits                                     |       | 45,297                                               |       | 44,348                                              |       | 136,835 |   | 137,904 |   |
| Interest credited to contractholder funds             |       | 44,572                                               |       | 41,614                                              |       | 131,470 |   | 124,662 |   |
| Amortization of deferred policy acquisition  costs    |       | 12,049                                               |       | 8,992                                               |       | 41,022 |   | 20,819 |   |
| Operating costs and expenses                          |       | 9,335                                                |       | 10,526                                              |       | 26,889 |   | 34,887 |   |
|                                                  |       | 111,253                                              |       | 105,480                                             |       | 336,216 |   | 318,272 |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Loss on disposition of operations                     |       | —                                               |       | (215                                                | )          | (132 | ) | (7,963 | ) |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| **Income from operations before income tax  expense** |       | 18,819                                               |       | 15,051                                              |       | 47,441 |   | 31,473 |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Income tax expense                                    |       | 6,434                                                |       | 4,844                                               |       | 16,679 |   | 10,409 |   |
|                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| **Net income**                                        |       | $                                                    | 12,385     |                                                | $          | 10,207 |   | $ | 30,762 |   | $ | 21,064 |   |

 

See notes to condensedfinancial statements.

 

3

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**ALLSTATE LIFE INSURANCE COMPANY OFNEW YORK**

 

**CONDENSEDSTATEMENTS OF FINANCIAL POSITION**

** **
| ** **                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in thousands, except par value data)**          | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                         |       |                   |       |                  |       |
| Investments                                                                        |       |                   |       |                  |       |
| Fixed income securities, at fair value  (amortized cost $5,900,261 and $5,542,227) |       | $                      | 6,168,835  |                  | $          | 5,887,139 |   |
| Mortgage loans                                                                     |       | 708,249                |       | 708,449               |       |
| Short-term                                                                         |       | 118,033                |       | 142,334               |       |
| Policy loans                                                                       |       | 38,181                 |       | 38,168                |       |
| Other                                                                              |       | 19                     |       | 3,784                 |       |
|                                                                               |       |                   |       |                  |       |
| Total investments                                                                  |       | 7,033,317              |       | 6,779,874             |       |
|                                                                               |       |                   |       |                  |       |
| Cash                                                                               |       | 4,920                  |       | 7,090                 |       |
| Deferred policy acquisition costs                                                  |       | 288,475                |       | 278,625               |       |
| Accrued investment income                                                          |       | 67,643                 |       | 63,843                |       |
| Reinsurance recoverables                                                           |       | 393,150                |       | 437,422               |       |
| Current income taxes receivable                                                    |       | —                 |       | 862                   |       |
| Other assets                                                                       |       | 44,719                 |       | 42,488                |       |
| Separate Accounts                                                                  |       | 1,016,547              |       | 1,009,784             |       |
|                                                                               |       |                   |       |                  |       |
| **Total assets**                                                                   |       | $                      | 8,848,771  |                  | $          | 8,619,988 |   |
|                                                                               |       |                   |       |                  |       |
| **Liabilities**                                                                    |       |                   |       |                  |       |
| Contractholder funds                                                               |       | $                      | 4,791,262  |                  | $          | 4,708,428 |   |
| Reserve for life-contingent contract  benefits                                     |       | 1,957,763              |       | 1,926,492             |       |
| Deferred income taxes                                                              |       | 29,460                 |       | 47,940                |       |
| Current income taxes payable                                                       |       | 1,334                  |       | —                |       |
| Other liabilities and accrued expenses                                             |       | 386,354                |       | 243,338               |       |
| Payable to affiliates, net                                                         |       | 9,198                  |       | 30,031                |       |
| Reinsurance payable to parent                                                      |       | —                 |       | 979                   |       |
| Separate Accounts                                                                  |       | 1,016,547              |       | 1,009,784             |       |
|                                                                               |       |                   |       |                  |       |
| **Total liabilities**                                                              |       | 8,191,918              |       | 7,966,992             |       |
|                                                                               |       |                   |       |                  |       |
| **Commitments and Contingent Liabilities  (Note 4)**                               |       |                   |       |                  |       |
|                                                                               |       |                   |       |                  |       |
| **Shareholder’s equity**                                                      |       |                   |       |                  |       |
| Common stock, $25 par value, 100 thousand  shares authorized and outstanding       |       | 2,500                  |       | 2,500                 |       |
| Additional capital paid-in                                                         |       | 140,000                |       | 140,000               |       |
| Retained income                                                                    |       | 462,037                |       | 432,458               |       |
| Accumulated other comprehensive income:                                            |       |                   |       |                  |       |
| Unrealized net capital gains and losses                                            |       | 52,316                 |       | 78,038                |       |
|                                                                               |       |                   |       |                  |       |
| **Total accumulated other comprehensive  income**                                  |       | 52,316                 |       | 78,038                |       |
|                                                                               |       |                   |       |                  |       |
| **Total shareholder’s equity**                                                |       | 656,853                |       | 652,996               |       |
|                                                                               |       |                   |       |                  |       |
| **Total liabilities and shareholder’s equity**                                |       | $                      | 8,848,771  |                  | $          | 8,619,988 |   |

 

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,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **($ in thousands)**                                                     | ** ** | **(unaudited)**                                     | ** ** |
| **Cash flows from operating activities**                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                   | 30,762     |   | $ | 21,064 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                |       |   |   |
| Amortization and other non-cash items                                              |       | (57,080                                             | )          | (53,843 | ) |
| Realized capital gains and losses                                                  |       | 2,063                                               |       | 24,093 |   |
| Loss on disposition of operations                                                  |       | 132                                                 |       | 7,963 |   |
| Interest credited to contractholder funds                                          |       | 131,470                                             |       | 124,662 |   |
| Changes in:                                                                        |       |                                                |       |   |   |
| Life-contingent contract benefits and  contractholder funds                        |       | 9,981                                               |       | 19,131 |   |
| Deferred policy acquisition costs                                                  |       | 6,891                                               |       | (30,364 | ) |
| Income taxes payable                                                               |       | (1,797                                              | )          | (36,012 | ) |
| Other operating assets and liabilities                                             |       | (36,249                                             | )          | (3,912 | ) |
| Net cash provided by operating activities                                          |       | 86,173                                              |       | 72,782 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash flows from investing activities**                                           |       |                                                |       |   |   |
| Proceeds from sales of fixed income  securities                                    |       | 339,309                                             |       | 710,186 |   |
| Investment collections                                                             |       |                                                |       |   |   |
| Fixed income securities                                                            |       | 84,197                                              |       | 97,249 |   |
| Mortgage loans                                                                     |       | 54,838                                              |       | 57,960 |   |
| Investment purchases                                                               |       |                                                |       |   |   |
| Fixed income securities                                                            |       | (598,494                                            | )          | (775,808 | ) |
| Mortgage loans                                                                     |       | (54,542                                             | )          | (93,832 | ) |
| Change in short-term investments, net                                              |       | 45,495                                              |       | 18,952 |   |
| Disposition of operations                                                          |       | (44                                                 | )     | (394,915 | ) |
| Change in other investments, net                                                   |       | (503                                                | )          | 1,685 |   |
| Net cash used in investing activities                                              |       | (129,744                                            | )          | (378,523 | ) |
|                                                                               |       |                                                |       |   |   |
| **Cash flows from financing activities**                                           |       |                                                |       |   |   |
| Contractholder fund deposits                                                       |       | 377,809                                             |       | 668,215 |   |
| Contractholder fund withdrawals                                                    |       | (336,408                                            | )          | (357,789 | ) |
| Net cash provided by financing activities                                          |       | 41,401                                              |       | 310,426 |   |
|                                                                               |       |                                                |       |   |   |
| **Net (decrease) increase in cash**                                                |       | (2,170                                              | )          | 4,685 |   |
| **Cash at beginning of period**                                                    |       | 7,090                                               |       | 3,818 |   |
| **Cash at end of period**                                                          |       | $                                                   | 4,920      |   | $ | 8,503 |   |

** **

See notes tocondensed financial statements.

 

5

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** **

**ALLSTATE LIFEINSURANCE COMPANY OF NEW YORK**

**NOTES TO CONDENSEDFINANCIAL 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, 2007 and for the three-monthand nine-month periods ended September 30, 2007 and 2006 are unaudited. Thecondensed financial statements reflect all adjustments (consisting only ofnormal recurring accruals) which are, in the opinion of management, necessaryfor the fair presentation of the financial position, results of operations andcash flows for the interim periods. These condensed financial statements andnotes should be read in conjunction with the financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006. The results of operations for the interim periods should notbe considered indicative of results to be expected for the full year.

 

### **Adopted accounting standards**

###  

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

** **

 In October 2005, the American Institute ofCertified Public Accountants (“AICPA”) issued SOP 05-1. SOP 05-1 providesaccounting guidance for deferred policy acquisition costs associated withinternal replacements of insurance and investment contracts other than thosealready described in Statement of Financial Accounting Standard (“SFAS”) No.97, “Accounting and Reporting by Insurance Enterprises for CertainLong-Duration Contracts and for Realized Gains and Losses from the Sale ofInvestments”. SOP 05-1 defines an internal replacement as a modification inproduct benefits, features, rights or coverages that occurs by the exchange ofan existing contract for a new contract, or by amendment, endorsement or riderto an existing contract, or by the election of a feature or coverage within anexisting contract. In February 2007, the AICPA issued Technical Practice Aids (“TPAs”)that provide interpretive guidance to be used in applying SOP 05-1. The Companyadopted the provisions of SOP 05-1 on January 1, 2007 for internal replacementsoccurring in fiscal years beginning after December 15, 2006. The adoptionresulted in a $1.2 million after-tax reduction to retained income to reflectthe impact on estimated future gross profits from the changes in accounting forcertain costs associated with contract continuations that no longer qualify fordeferral under SOP 05-1 and a reduction of deferred acquisition costs (“DAC”)and deferred sales inducements (“DSI”) balances of $1.8 million pre-tax as ofJanuary 1, 2007. The ongoing effects of SOP 05-1 are not expected to have amaterial impact on the Company’s results of operations or financial position.

 

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

 

InFebruary 2006, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 155, which permits the fair value remeasurement at the date of adoption ofany hybrid financial instrument containing an embedded derivative thatotherwise would require bifurcation under paragraph 12 or 13 of SFAS No. 133, “Accounting**for Derivative Instruments and Hedging**Activities”(“SFAS No.133”); clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of SFAS No. 133; establishes a requirement to evaluate interestsin securitized financial assets to identify interests that are freestandingderivatives or hybrid financial instruments that contain embedded derivativesrequiring bifurcation; and clarifies that concentrations of credit risk in theform of subordination are not embedded derivatives. The Company adopted theprovisions of SFAS No. 155 on January 1, 2007, which were effective for allfinancial instruments acquired, issued or subject to a remeasurement eventoccurring after the beginning of the first fiscal year beginning afterSeptember 15, 2006. The Company elected not to remeasure existing hybridfinancial instruments that contained embedded derivatives requiring bifurcationat the date of adoption pursuant to paragraph 12 or 13 of SFAS No. 133. Theadoption of SFAS No. 155 did not have a material effect on the results ofoperations or financial position of the Company.

 

6

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

 

In July 2006, the FASB issued FIN 48, which clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 requiresan entity to recognize the tax benefit of uncertain tax positions only when itis more likely than not, based on the position’s technical merits, that theposition would be sustained upon examination by the respective taxingauthorities. The tax benefit is measured as the largest benefit that is morethan fifty-percent likely of being realized upon final settlement with therespective taxing authorities. On January 1, 2007, the Company adopted theprovisions of FIN 48, which were effective for fiscal years beginning afterDecember 15, 2006. No cumulative effect of a change in accounting principle oradjustment to the liability for unrecognized tax benefits was recognized as aresult of the adoption of FIN 48. Accordingly, the adoption of FIN 48 did nothave an effect on the results of operations or financial position of theCompany.

 

TheCompany had no liability for unrecognized tax benefits at January 1, 2007 orSeptember 30, 2007, and believes it is reasonably possible that the liabilitybalance will not significantly increase or decrease within the next 12 months.

 

The Internal Revenue Service(“IRS”) has completed its examination of the Company’s federal income taxreturns for 2003-2004. The Company’s tax years prior to 2003 have been examinedby the IRS and the statute of limitations has expired on those years.

 

*Securities and Exchange Commission (“SEC”) Staff Accounting BulletinNo. 108, Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements (“SAB 108”)*

 

In September 2006, the SECissued SAB 108 to eliminate the diversity of practice in the process by whichmisstatements are quantified for purposes of assessing their materiality on thefinancial statements. SAB 108 is intended to eliminate the potential for thebuild up of improper amounts on the balance sheet due to the limitations ofcertain methods of materiality assessment utilized in current practice. SAB 108establishes a single quantification framework wherein the significancedetermination is based on the effects of the misstatements on each of thefinancial statements as well as the related financial statement disclosures. OnDecember 31, 2006, the Company adopted the provisions of SAB 108 which wereeffective for the first fiscal year ending after November 15, 2006. Theadoption of SAB 108 did not have any effect on the results of operations orfinancial position of the Company.

 

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

 

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

 

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

 

SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No.20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes inInterim Financial Statements”. SFAS No. 154 requires retrospective applicationto prior periods’ financial statements for changes in accounting principle,unless determination of either the period specific effects or the cumulativeeffect of the change is impracticable or otherwise not required. The Companyadopted SFAS No. 154 on January 1, 2006. The adoption of SFAS No. 154 did nothave any effect on the results of operations or financial position of theCompany.

 

7

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### **Pending accounting standards**

###  

*SFAS No. 157, Fair Value Measurements (“SFAS No. 157”)*

 

InSeptember 2006, the FASB issued SFAS No. 157 which redefines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (“GAAP”), and expands disclosures about fair valuemeasurements. SFAS No. 157 applies where other accounting pronouncementsrequire or permit fair value measurements. Additional disclosures andmodifications to current fair value disclosures will be required upon adoptionof SFAS No. 157. SFAS No. 157 is effective for fiscal years beginning afterNovember 15, 2007. The Company is currently evaluating the effects of adoptionof SFAS No. 157 on its results of operations and financial position.

 

*SFAS No. 159, The Fair Value Option for Financial Assets and FinancialLiabilities (“SFAS No. 159”)*

 

InFebruary 2007, the FASB issued SFAS No. 159 which provides reporting entitiesan option to report selected financial assets, including investment securitiesdesignated as available for sale, and financial liabilities, including mostinsurance contracts, at fair value. SFAS No. 159 establishes presentation anddisclosure requirements designed to facilitate comparisons between companiesthat choose different measurement alternatives for similar types of financialassets and liabilities. The standard also requires additional information toaid financial statement users’ understanding of the impact of a reportingentity’s decision to use fair value on its earnings and also requires entitiesto display, on the face of the statement of financial position the fair valueof those assets and liabilities for which the reporting entity has chosen tomeasure at fair value. SFAS No. 159 is effective as of the beginning of areporting entity’s first fiscal year beginning after November 15, 2007. Because application of the standard is optional, any impacts are limited tothose financial assets and liabilities to which SFAS No. 159 would be applied,which have yet to be determined by the Company.

 

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

 

InJune 2007, the AICPA issued SOP 07-1. Upon adoption of the SOP, the Companymust also adopt the provisions of FASB Staff Position No. FIN 46(R)-7, “Applicationof FASB Interpretation No. 46(R) to Investment Companies*”*,which permanently exempts investment companies from applying the provisions ofInterpretation 46(R) to investments carried at fair value. SOP 07-1 providesguidance for determining whether an entity falls within the scope of the Guideand whether investment company accounting should be retained by a parentcompany upon consolidation of an investment company subsidiary or by an equitymethod investor in an investment company. In certain circumstances, SOP 07-1precludes retention of specialized accounting for investment companies (i.e.fair value accounting), when similar direct investments exist in theconsolidated group and are measured on a basis inconsistent with that appliedto investment companies. Additionally, SOP 07-1 precludes retention ofspecialized accounting for investment companies if the reporting entity doesnot distinguish, through documented policies, the nature and type ofinvestments to be held in the investment companies from those made in theconsolidated group where other accounting guidance is being applied. SOP 07-1was to be effective for fiscal years beginning on or after December 15, 2007,however the FASB voted in October 2007 to delay the effective date. A revisedeffective date for SOP 07-1 is not yet available. The Company is assessing thecurrent and future implications of this standard on its results of operationsand financial position.

 

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

 

InApril 2007, the FASB issued FSP FIN 39-1, which amends FASB Interpretation No.39, “Offsetting of Amounts Related to Certain Contracts”. FSP FIN 39-1 replacesthe terms “conditional contracts” and “exchange contracts” with the term “derivativeinstruments” and requires a reporting entity to offset fair value amountsrecognized for the right to reclaim cash collateral or the obligation to returncash collateral against fair value amounts recognized for derivativeinstruments executed with the same counterparty under the same master nettingarrangement that have been offset in the statement of financial position. FSP FIN39-1 is effective for fiscal years beginning after November 15, 2007, withearly adoption permitted. The effects of applying FSP FIN 39-1 will be recordedas a change in accounting principle through retrospective application. Theadoption of FSP FIN 39-1 is not expected to have a material impact on thecompany’s results of operations or financial position based on the currentlevel of derivative activity.

 

8

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

###  

Non-cash investment exchanges andmodifications, which primarily reflect refinancing of fixed income securities,totaled $162 thousand and $2.6 million for the nine-month periods endedSeptember 30, 2007 and 2006, respectively.

 

Liabilities for collateral received in conjunction with securitieslending activities are reported in other liabilities and accrued expenses inthe Condensed Statements of Financial Position. The associated cash flows areincluded in cash flows from operating activities in the Condensed Statements ofCash Flows along with the related changes in investments, which are as follows:

 
| ** **                                                             | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net change in fixed income securities                                  |       | $                                                   | (131,643   | ) | $ | (100,624 | ) |
| Net change in short-term investments                                   |       | (12,218                                             | )          | (91,285 | ) |
| Net change in proceeds managed                                         |       | $                                                   | (143,861   | ) | $ | (191,909 | ) |
|                                                                   |       |                                                |       |   |   |
| Liabilities for collateral and security  repurchase, beginning of year |       | $                                                   | (199,486   | ) | $ | (149,465 | ) |
| Liabilities for collateral and security  repurchase, end of period     |       | (343,347                                            | )          | (341,374 | ) |
| Operating cash flow provided                                           |       | $                                                   | 143,861    |   | $ | 191,909 |   |

 

### **3.  Reinsurance**

###  

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

 
| ** **                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                            | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Premiums and contract charges**                  |       |                                                 |       |                                                |       |   |   |   |   |
| Direct                                             |       | $                                                    | 42,381     |                                                | $          | 42,382 |   | $ | 128,443 |   | $ | 124,815 |   |
| Assumed – non-affiliate                       |       | 220                                                  |       | 318                                                 |       | 905 |   | 1,027 |   |
| Ceded                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Affiliate                                          |       | (997                                                 | )          | (992                                                | )          | (2,981 | ) | (3,620 | ) |
| Non-affiliate                                      |       | (9,207                                               | )          | (8,757                                              | )          | (28,416 | ) | (19,677 | ) |
| Premiums and contract charges, net of  reinsurance |       | $                                                    | 32,397     |                                                | $          | 32,951 |   | $ | 97,951 |   | $ | 102,545 |   |

 

The effects of reinsurance on contractbenefits are as follows:

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**               | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Contract benefits**                 |       |                                                 |       |                                                |       |   |   |   |   |
| Direct                                |       | $                                                    | 49,025     |                                                | $          | 46,460 |   | $ | 147,418 |   | $ | 148,188 |   |
| Assumed – non-affiliate          |       | 119                                                  |       | 108                                                 |       | 608 |   | 605 |   |
| Ceded                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Affiliate                             |       | (346                                                 | )          | (44                                                 | )          | (1,618 | ) | (225 | ) |
| Non-affiliate                         |       | (3,501                                               | )          | (2,176                                              | )          | (9,573 | ) | (10,664 | ) |
| Contract benefits, net of reinsurance |       | $                                                    | 45,297     |                                                | $          | 44,348 |   | $ | 136,835 |   | $ | 137,904 |   |

 

9

----

 

The effects of reinsurance on interestcredited to contractholder funds are as follows:

 
| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Interest credited to contractholder funds**                  |       |                                                 |       |                                                |       |   |   |   |   |
| Direct                                                         |       | $                                                    | 47,974     |                                                | $          | 45,845 |   | $ | 141,855 |   | $ | 130,366 |   |
| Assumed – non-affiliate                                   |       | 8                                                    |       | 9                                                   |       | 23 |   | 63 |   |
| Ceded– non-affiliate                                      |       | (3,410                                               | )          | (4,240                                              | )          | (10,408 | ) | (5,767 | ) |
| Interest credited to contractholder funds,  net of reinsurance |       | $                                                    | 44,572     |                                                | $          | 41,614 |   | $ | 131,470 |   | $ | 124,662 |   |

 

In addition to amounts included in the table above are reinsurance premiums ceded to ALIC of $814 thousand and $771 thousand for the third quarter of 2007 and 2006, respectively, and $2.39 million and $2.26 million for the first nine months of 2007 and 2006, respectively, under the terms of the structured settlement annuity reinsurance agreement. These reinsurance premiums are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations as the treaty under which these amounts are ceded is accounted for as a derivative instrument pursuant to the requirements of SFAS No. 133.

 

**Variable Annuity Business**

 

On June 1, 2006, in accordance with the terms of thedefinitive Master Transaction Agreement and related agreements (collectivelythe “Agreement”) the Company, its parent ALIC, and the Corporation, completedthe disposal through reinsurance of all of the Company’s variable annuitybusiness to Prudential Financial, Inc. and its subsidiary, The PrudentialInsurance Company of America (collectively “Prudential”). For the Company, thisdisposal achieved the economic benefit of transferring to Prudential the futurerights and obligations associated with this business.

 

The disposal was effected through reinsuranceagreements (the “Reinsurance Agreements”) which include both coinsurance andmodified coinsurance provisions. Coinsurance and modified coinsuranceprovisions are commonly used in the reinsurance of variable annuities becausevariable annuities generally include both separate account and general accountliabilities. When contractholders make a variable annuity deposit, they mustchoose how to allocate their account balances between a selection ofvariable-return mutual funds that must be held in a separate account andfixed-return funds held in the Company’s general account. In addition, variableannuity contracts include various benefit guarantees that are general accountobligations of the Company. The Reinsurance Agreements do not extinguish theCompany’s primary liability under the variable annuity contracts.

 

Variable annuity balances invested invariable-return mutual funds are held in separate accounts, which are legallysegregated assets and available only to settle separate account contractobligations. Because the separate account assets must remain with the Companyunder insurance regulations, modified coinsurance is typically used whenparties wish to transfer future economic benefits of such business. Under themodified coinsurance provisions, the separate account assets remain on theCompany’s Condensed Statements of Financial Position, but the related resultsof operations are fully reinsured and presented net of reinsurance on theCondensed Statements of Operations.

 

The coinsurance provisionsof the Reinsurance Agreements were used to transfer the future rights andobligations related to fixed–return fund options and benefit guarantees. $440.0million of assets supporting general account liabilities were transferred toPrudential, net of consideration, under the coinsurance provisions as of the transactionclosing date.  General account liabilities of $369.6 million at September30, 2007 and $415.7 million as of December 31, 2006, however, remain on theCondensed Statements of Financial Position with a corresponding reinsurancerecoverable.

 

10

----

 

For purposes of presentation in the CondensedStatements of Cash Flows, the Company treated the reinsurance of its variableannuity business to Prudential as a disposition of operations, consistent withthe substance of the transaction which was the disposition of a block ofbusiness accomplished through reinsurance. Accordingly, the net considerationtransferred to Prudential of $388.4 million (computed as $440.0 million of general account insurance liabilitiestransferred to Prudential on the closing date less consideration of $51.6million) and the costs of executing the transaction of $1.2 million, pretax,were classified as a disposition of operations in the cash flows from investingactivities section of the Condensed Statements of Cash Flows.

 

Under the Agreement, the Company, ALIC and theCorporation have indemnified Prudential for certain pre-closing contingentliabilities (including extra-contractual liabilities of the Company and ALICand liabilities specifically excluded from the transaction) that the Companyand ALIC have agreed to retain. In addition, the Company, ALIC and theCorporation will each indemnify Prudential for certain post-closing liabilitiesthat may arise from the acts of the Company and ALIC, and their agents,including in connection with the Company’s and ALIC’s provision of transitionservices. The Reinsurance Agreements contain no limits or indemnifications withregard to insurance risk transfer, and transferred all of the future risks andresponsibilities for performance on the underlying variable annuity contractsto Prudential, including those related to benefit guarantees, in accordancewith the provisions of SFAS No. 113 “Accounting and Reporting for Reinsuranceof Short-Duration and Long-Duration Contracts”.

 

 The terms of the Agreement give Prudential theright to be the exclusive provider of its variable annuity products through theAllstate proprietary agency force for three years and a non-exclusive preferredprovider for the following two years.  During a transition period, theCompany and ALIC will continue to issue new variable annuity contracts, acceptadditional deposits on existing business from existing contractholders onbehalf of Prudential and, for a period of twenty-four months or less, servicethe reinsured business while Prudential prepares for the migration of thebusiness onto its servicing platform.

 

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

 

The separate account balances related to themodified coinsurance reinsurance were $1.01 billion as of September 30, 2007and $1.01 billion as of December 31, 2006.  Separate account balancestotaling approximately $3.8 million as of September 30, 2007 and $2.7 millionat December 31, 2006 relate to the variable life business that is beingretained. In the first five months of 2006, prior to this disposition, theCompany’s variable annuity business generated $8.1 million in contract charges.

 

### **4.  Guaranteesand Contingent Liabilities**

###  

**Guaranty funds**

 

Under state insuranceguaranty fund laws, insurers doing business in a state can be assessed, up toprescribed limits, for certain obligations of insolvent insurance companiesowed to policyholders and claimants. Amounts assessed to each company aretypically related to its proportion of business written in a particular state.

 

The New York LiquidationBureau (the “Bureau”) has publicly reported that Executive Life InsuranceCompany of New York (“Executive Life”), currently under its jurisdiction aspart of a 1992 court-ordered rehabilitation plan, may only be able to meetfuture obligations of its annuity contracts for the next fifteen years due toan estimated $600 million shortfall in assets to fund those obligations. IfExecutive Life were to be declared insolvent in the future, the Company wouldlikely have exposure to guaranty fund assessments or other costs.

 

Based on currentlyavailable information, the outcome of this situation is uncertain at this time.The Bureau may eventually take actions to address this situation that may leadto guaranty fund assessments or other costs to the Company. Under current law,the Company may be allowed to recoup a portion of the amount of any additionalguaranty fund assessment in periods subsequent to the recognition of theassessment by offsetting future premium taxes. The Company’s market share inNew York was approximately 5.5% in 2005 based on industry annuity premium.

 

11

----

 

**Guarantees**

 

In the normalcourse of business, the Company provides standard indemnifications tocounterparties in contracts in connection with numerous transactions, includingacquisitions and divestures. The types of indemnifications typically providedinclude indemnifications for breaches of representations and warranties, taxesand certain other liabilities, such as third 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 the indemnifications vary in duration andnature. 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, the maximum amount of the obligation undersuch indemnifications is not determinable. Historically, the Company has not madeany material payments pursuant to these obligations.

 

The aggregateliability balance related to all guarantees was not material as of September30, 2007.

 

**Regulation**

 

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

 

**Legal and regulatory proceedings and inquiries**

 

**Background**

 

The Company and certain affiliates areinvolved in a number of lawsuits, regulatory inquiries, and other legal proceedingsarising out of various aspects of its business. As background to the “Proceedings”subsection below, please note the following:

 

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

 

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

 

•                  In the lawsuits,plaintiffs seek a variety of remedies including equitable relief in the form ofinjunctive and other remedies and monetary relief in the form of contractualand extra-contractual damages. In some cases, the monetary damages soughtinclude punitive damages. Often specific information about the relief sought,such as the amount of damages, is not available because plaintiffs have notrequested specific relief in their pleadings. In our experience, when specificmonetary demands are made in pleadings, they bear little relation to theultimate loss, if any, to the Company.

 

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

 

12

----

 

•                  For the reasonsspecified above, it is often not possible to make meaningful estimates of theamount or range of loss that could result from the matters described below inthe “Proceedings” subsection. The Company reviews these matters on an ongoingbasis and follows the provisions of SFAS No. 5, “Accounting for Contingencies” whenmaking accrual and disclosure decisions. When assessing reasonably possible andprobable outcomes, the Company bases its decisions on its assessment of theultimate outcome following all appeals.

 

•                  Dueto the complexity and scope of the matters disclosed in the “Proceedings”subsection below and the many uncertainties that exist, the ultimate outcome ofthese matters cannot be reasonably predicted. In the event of an unfavorableoutcome in one or more of these matters, the ultimate liability may be inexcess of amounts currently reserved and may be material to the Company’soperating results or cash flows for a particular quarterly or annual period. However,based on information currently known to it, management believes that theultimate outcome of all matters described below as they are resolved over timeis not likely to have a material adverse effect on the financial position ofthe Company. 

 

**Proceedings**

 

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

 

AIC is defending certain matters relating to its agency programreorganization announced in 1999. These matters are in various stages ofdevelopment.

 

•                  These mattersinclude a lawsuit filed in 2001 by the U.S. Equal Employment OpportunityCommission (“EEOC”) alleging retaliation under federal civil rights laws (the “EEOC I” suit) and a class action filedin 2001 by former employee agents alleging retaliation and age discriminationunder the Age Discrimination in Employment Act (“ADEA”), breach of contract and ERISA violations (the “RomeroI” suit). In 2004, in the consolidated EEOC I and Romero I litigation, thetrial court issued a memorandum and order that, among other things, certifiedclasses of agents, including a mandatory class of agents who had signed arelease, for purposes of effecting the court’s declaratory judgment that therelease is voidable at the option of the release signer. The court also orderedthat an agent who voids the release must return to AIC “any and all benefitsreceived by the [agent] in exchange for signing the release.”  The court also stated that, “on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order and in January 2007, thejudge denied their request. In June 2007, the court granted AIC’s motions forsummary judgment.

 

•                  The EEOC also filed another lawsuit in 2004alleging age discrimination with respect to a policy limiting the rehire of agentsaffected by the agency program reorganization (the “EEOC II” suit). In EEOC II,in 2006, the court granted partial summary judgment to the EEOC. Although thecourt did not determine that AIC was liable for age discrimination under theADEA, it determined that the rehire policy resulted in a disparate impact,reserving for trial the determination on whether AIC had reasonable factorsother than age to support the rehire policy. AIC’s interlocutory appeal of thetrial court’s summary judgment order is now pending in the United States Courtof Appeals for the Eighth Circuit.

 

•                  AIC is also defending a certified classaction filed by former employee agents who terminated their employment prior tothe agency program reorganization. These plaintiffs have asserted breach ofcontract and ERISA claims. The court approved the form of class notice inOctober 2007 and set a December 2007 deadline for filing dispositive motions.

 

•                  A putativenationwide class action has also been filed by former employee agents allegingvarious violations of ERISA, includinga worker classification issue. These plaintiffs are challenging certainamendments to the Agents Pension Plan and are seeking to have exclusive agentindependent contractors treated as employees for benefit purposes. This matterwas dismissed with prejudice by the trial court, was the subject of furtherproceedings on appeal, and was reversed and remanded to the trial court in 2005.In June 2007, the court grantedAIC’s motion to dismiss the case.

 

13

----

 

In all ofthese various matters, plaintiffs seek compensatory and punitive damages, andequitable relief. AIC has beenvigorously defending these lawsuits and other matters related to its agencyprogram reorganization.

 

**Other Matters**

 

Various other legal, governmental, andregulatory actions, including state market conduct exams, and othergovernmental and regulatory inquiries are currently pending that involvethe Company and specific aspects of its conduct of business. Like other membersof the insurance industry, the Company is the target of a number of lawsuitsand proceedings, some of which involve claims for substantial or indeterminateamounts. These actions are basedon a variety of issues and target a range of the Company’s practices. Theoutcome of these disputes is currently unpredictable. One or more of thesematters could have an adverse effect on the Company’s operating results or cashflows for a particular quarterly or annual period. However, based on informationcurrently known to it, management believes that the ultimate outcome of allmatters described in this “Other Matters” subsection in excess of amountscurrently reserved, as they are resolved over time is not likely to have amaterial effect on the operating results, cash flows or financial position ofthe Company.

 

**5.      OtherComprehensive Income**

 

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

 
| ** **                                                                  | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
| **(in thousands)**                                                     | ** ** | **Pretax**                                               | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                        |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains arising during the  period, net of related offsets |       | $                                                        | 23,124     |   | $ | (8,094 | ) | $ | 15,030 |   | $ | 71,794 |   | $ | (25,127 | ) | $ | 46,667 |   |
| Less: reclassification adjustment of  realized capital gains and losses     |       | 3,025                                                    |       | (1,059 | ) | 1,966 |   | (2,965 | ) | 1,038 |   | (1,927 | ) |
|                                                                        |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income                                                  |       | $                                                        | 20,099     |   | $ | (7,035 | ) | 13,064 |   | $ | 74,759 |   | $ | (26,165 | ) | 48,594 |   |
|                                                                        |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                  |       |                                                     |       |   |   | 12,385 |   |   |   |   |   | 10,207 |   |
| Comprehensive income                                                        |       |                                                     |       |   |   | $ | 25,449 |   |   |   |   |   | $ | 58,801 |   |

 
| ** **                                                                   | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| **(in thousands)**                                                      | ** ** | **Pretax**                                              | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                         |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding losses arising during  the period, net of related offsets |       | $                                                       | (35,430    | ) | $ | 12,400 |   | $ | (23,030 | ) | $ | (86,786 | ) | $ | 30,376 |   | $ | (56,410 | ) |
| Less: reclassification adjustment of  realized capital gains and losses      |       | 4,142                                                   |       | (1,450 | ) | 2,692 |   | (25,896 | ) | 9,064 |   | (16,832 | ) |
|                                                                         |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive loss                                                     |       | $                                                       | (39,572    | ) | $ | 13,850 |   | (25,722 | ) | $ | (60,890 | ) | $ | 21,312 |   | (39,578 | ) |
|                                                                         |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                   |       |                                                    |       |   |   | 30,762 |   |   |   |   |   | 21,064 |   |
| Comprehensive income (loss)                                                  |       |                                                    |       |   |   | $ | 5,040 |   |   |   |   |   | $ | (18,514 | ) |

 

14

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

To the Board of Directors and Shareholder of

Allstate Life Insurance Company of New York:

 

 

We have reviewed the accompanying condensed statementof financial position of Allstate Life Insurance Company of New York (the “Company”,an affiliate of The Allstate Corporation) as of September 30, 2007, and therelated condensed statements of operations for the three-month and nine-monthperiods ended September 30, 2007 and 2006, and the condensed statements of cashflows for the nine-month periods ended September 30, 2007 and 2006. Theseinterim financial statements are the responsibility of the Company’smanagement.

 

We conducted our reviews in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than an audit conducted inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the objective of which is the expression of an opinionregarding the financial statements taken as a whole. Accordingly, we do notexpress such an opinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to such condensed interim financial statements for them tobe in conformity with accounting principles generally accepted in the UnitedStates of America.

 

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the statement offinancial position of Allstate Life Insurance Company of New York as ofDecember 31, 2006, and the related statements of operations andcomprehensive income, shareholder’s equity, and cash flows for the year thenended, not presented herein. In our report dated March 9, 2007, which reportincludes an explanatory paragraph relating to a change in the Company’s methodof accounting for certain nontraditional long-duration contracts and forseparate accounts in 2004, we expressed an unqualified opinion on thosefinancial statements. In our opinion, the information set forth in theaccompanying condensed statement of financial position as of December 31, 2006is fairly stated, in all material respects, in relation to the statement offinancial position from which it has been derived.

 

 

/s/ Deloitte & Touche LLP

 

Chicago, Illinois

November 2, 2007

 

15

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**Item2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH ANDNINE-MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006**

 

 

### **OVERVIEW**

###  

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

 

### **OPERATIONS**

###  

EffectiveJune 1, 2006, we disposed of our variable annuity business through reinsurancewith Prudential Financial Inc. (“Prudential”). The following table presents theresults of operations attributable to the variable annuity business for theperiod of 2006 prior to the disposition.

 
| **(in thousands)**                               | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                                                  |       |                                                          |       |   |
| Contract charges                                      |       | $                                                             | 8,103      |   |
| Net investment income                                 |       | 8,789                                                         |       |
| Realized capital gains and losses                     |       | (4,079                                                        | )          |
| Total revenues                                        |       | 12,813                                                        |       |
|                                                  |       |                                                          |       |
| Contract benefits                                     |       | (2,117                                                        | )          |
| Interest credited to contractholder funds             |       | (6,408                                                        | )          |
| Amortization of deferred policy acquisition  costs    |       | 7,277                                                         |       |
| Operating costs and expenses                          |       | (3,394                                                        | )          |
| Total costs and expenses                              |       | (4,642                                                        | )          |
|                                                  |       |                                                          |       |
| Loss on disposition of operations                     |       | (7,748                                                        | )          |
|                                                  |       |                                                          |       |
| Income from operations before income tax  expense (1) |       | $                                                             | 423        |   |

 

----

| (1) |   | For  the nine months ended September 30, 2006, income from operations before  income tax expense on the variable annuity business reinsured to Prudential  included an investment spread and benefit spread of $2.4 million and $(1.1)  million, respectively. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

16

----

 

The Company’s results of operations for the threemonths and nine months ended September 30 are presented in the following table.

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                              |       |                                                 |       |                                                |       |   |   |   |   |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Premiums                                  |       | $                                                    | 17,720     |                                                | $          | 19,211 |   | $ | 54,135 |   | $ | 53,963 |   |
| Contract charges                          |       | 14,677                                               |       | 13,740                                              |       | 43,816 |   | 48,582 |   |
| Net investment income                     |       | 96,994                                               |       | 92,536                                              |       | 287,901 |   | 279,256 |   |
| Realized capital gains and losses         |       | 681                                                  |       | (4,741                                              | )          | (2,063 | ) | (24,093 | ) |
| Total revenues                            |       | 130,072                                              |       | 120,746                                             |       | 383,789 |   | 357,708 |   |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| **Costs and expenses**                    |       |                                                 |       |                                                |       |   |   |   |   |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Contract benefits                         |       | (45,297                                              | )          | (44,348                                             | )          | (136,835 | ) | (137,904 | ) |
| Interest credited to contractholder funds |       | (44,572                                              | )          | (41,614                                             | )          | (131,470 | ) | (124,662 | ) |
| Amortization of DAC                       |       | (12,049                                              | )          | (8,992                                              | )          | (41,022 | ) | (20,819 | ) |
| Operating costs and expenses              |       | (9,335                                               | )          | (10,526                                             | )          | (26,889 | ) | (34,887 | ) |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Total costs and expenses                  |       | (111,253                                             | )          | (105,480                                            | )          | (336,216 | ) | (318,272 | ) |
|                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Loss on disposition of operations         |       | —                                               |       | (215                                                | )          | (132 | ) | (7,963 | ) |
| Income tax expense                        |       | (6,434                                               | )          | (4,844                                              | )          | (16,679 | ) | (10,409 | ) |
| Net income                                |       | $                                                    | 12,385     |                                                | $          | 10,207 |   | $ | 30,762 |   | $ | 21,064 |   |

 

*Net Income*****increased$2.2 million to $12.4 million in the third quarter of 2007 and increased $9.7million to $30.8 million in the first nine months of 2007 compared to the sameperiods in 2006. The increase in the third quarter was mostly the result ofhigher revenues, partially offset by higher amortization of deferred policyacquisition costs (“DAC”) and interest credited to contractholder funds. Highernet income in the first nine months of 2007 was primarily attributable toincreased revenues, lower operating costs and expenses, and the recognition inthe prior year of losses relating to the disposition of our variable annuitybusiness, partially offset by higher amortization of DAC and interest creditedto contractholder funds.

 

**Analysis of Revenues**Total revenues increased 7.7% and 7.3% in thethird quarter and first nine months of 2007, respectively, compared to the sameperiods in the prior year. The increases in both periods were mostly driven byimproved realized capital gains and losses and higher net investment income. Inthe third quarter, these changes were partially offset by lower premiums. Inthe nine-month period, these changes were partially offset by lower contractcharges.

 

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

 

*Contract charges*****are revenues generated from interest-sensitive and variablelife, fixed annuities and variable annuities for which deposits are classifiedas contractholder funds or separate accounts liabilities. Contract charges areassessed against the contractholder account values for maintenance,administration, cost of insurance and surrender prior to the contractuallyspecified dates. As a result, changes in contractholder funds are considered inthe evaluation of growth and as indicators of future levels of revenues. Subsequentto the close of our reinsurance transaction with Prudential on June 1, 2006,variable annuity contract charges on the business subject to the transactionare fully reinsured to Prudential and presented net of reinsurance on theCondensed Statements of Operations (see Note 3 to the Condensed FinancialStatements).

 

17

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The following table summarizes premiums andcontract charges by product.

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                     | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **Premiums**                                | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional life                            |       | $                                                    | 6,575      |                                                | $          | 6,044 |   | $ | 18,937 |   | $ | 16,869 |   |
| Immediate annuities with life contingencies |       | 9,395                                                |       | 11,862                                              |       | 30,382 |   | 33,354 |   |
| Accident and health and other               |       | 1,750                                                |       | 1,305                                               |       | 4,816 |   | 3,740 |   |
| **Total premiums**                          |       | 17,720                                               |       | 19,211                                              |       | 54,135 |   | 53,963 |   |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| **Contract charges**                        |       |                                                 |       |                                                |       |   |   |   |   |
| Interest-sensitive life                     |       | 12,985                                               |       | 11,692                                              |       | 37,821 |   | 34,292 |   |
| Fixed annuities                             |       | 1,692                                                |       | 2,038                                               |       | 5,995 |   | 6,177 |   |
| Variable annuities                          |       | —                                               |       | 10                                                  |       | — |   | 8,113 |   |
| **Total contract charges****(1)**           |       | 14,677                                               |       | 13,740                                              |       | 43,816 |   | 48,582 |   |
| **Premiums and contract charges**           |       | $                                                    | 32,397     |                                                | $          | 32,951 |   | $ | 97,951 |   | $ | 102,545 |   |

 

----

| (1) | Contract charges for the  three months ended September 30, 2007 and 2006 include contract charges  related to the cost of insurance totaling $9.2 million and $7.9 million,  respectively. Contract charges for the nine months ended September 30, 2007  and 2006 include contract charges related to the cost of insurance totaling  $25.9 million and $24.4 million, respectively. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Total premiums declined 7.8% in the third quarter of 2007 compared tothe third quarter of 2006 and increased 0.3% in the first nine months of 2007compared to the same period of 2006. The decline in the third quarter of 2007was due primarily to lower sales of immediate annuities with life contingencies.In the nine month period, lower sales of immediate annuities with lifecontingencies were more than offset by higher sales of traditional lifeinsurance products and accident and health insurance products.

Contract charges increased 6.8% in the thirdquarter of 2007 and declined 9.8% in first nine months of 2007 compared to thesame periods of 2006. In the third quarter, the increase was the result ofhigher contract charges on interest-sensitive life insurance policies due togrowth in business in force, partially offset by lower contract charges onfixed annuities. The decline in contract charges in the ninemonth period was due to the disposal of our variable annuity business throughreinsurance effective June 1, 2006. Excluding contract charges on variableannuities, contract charges increased 8.3% in the first nine months of 2007compared to the same period of 2006. This increase also reflects highercontract charges on interest-sensitive life insurance policies due to growth inbusiness in force, partially offset by lower contract charges on fixedannuities.

 

18

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*Contractholder funds* representinterest-bearing liabilities arising from the sale of fixed annuities,interest-sensitive life insurance policies and variable annuity and lifedeposits allocated to fixed accounts. The balance of contractholder funds isequal to the cumulative deposits received and interest credited to thecontractholder less cumulative contract maturities, benefits, surrenders,withdrawals and contract charges for mortality or administrative expenses.

The followingtable shows the changes in contractholder funds.

 
| ** **                                                      | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2007**                                                   | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Contractholder funds, beginning balance**                     |       | $                                                          | 4,711,868  |                                                      | $          | 4,599,676 |   | $ | 4,708,428 |   | $ | 4,349,395 |   |
|                                                            |       |                                                       |       |                                                      |       |   |   |   |   |
| **Deposits:**                                                   |       |                                                       |       |                                                      |       |   |   |   |   |
| Fixed annuities                                                 |       | 134,811                                                    |       | 204,649                                                   |       | 293,832 |   | 585,058 |   |
| Interest-sensitive life                                         |       | 25,922                                                     |       | 23,050                                                    |       | 76,196 |   | 70,889 |   |
| Variable annuity and life deposits  allocated to fixed accounts |       | 13                                                         |       | 12                                                        |       | 42 |   | 15,505 |   |
| Total deposits                                                  |       | 160,746                                                    |       | 227,711                                                   |       | 370,070 |   | 671,452 |   |
|                                                            |       |                                                       |       |                                                      |       |   |   |   |   |
| **Interest credited**                                           |       | 45,042                                                     |       | 44,869                                                    |       | 133,598 |   | 133,397 |   |
|                                                            |       |                                                       |       |                                                      |       |   |   |   |   |
| **Benefits, withdrawals and other adjustments**                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Benefits                                                        |       | (35,329                                                    | )          | (34,114                                                   | )          | (110,496 | ) | (105,757 | ) |
| Surrenders and partial withdrawals                              |       | (65,248                                                    | )          | (67,359                                                   | )          | (225,911 | ) | (233,905 | ) |
| Contract charges                                                |       | (12,317                                                    | )          | (11,322                                                   | )          | (35,911 | ) | (33,129 | ) |
| Net transfers from (to) separate accounts                       |       | —                                                     |       | 2                                                         |       | — |   | (18,127 | ) |
| Other adjustments                                               |       | (13,500                                                    | )          | (17,111                                                   | )          | (48,516 | ) | (20,974 | ) |
| Total benefits, withdrawals and other  adjustments              |       | (126,394                                                   | )          | (129,904                                                  | )          | (420,834 | ) | (411,892 | ) |
|                                                            |       |                                                       |       |                                                      |       |   |   |   |   |
| **Contractholder funds, ending balance**                        |       | $                                                          | 4,791,262  |                                                      | $          | 4,742,352 |   | $ | 4,791,262 |   | $ | 4,742,352 |   |

 

Contractholderfunds increased 1.7% and 3.1% in the third quarter of 2007 and 2006,respectively, and increased 1.8% and 9.0% in the first nine months of 2007 and2006, respectively. Average contractholder funds increased 1.7% and 4.5% in thethird quarter and first nine months of 2007, respectively, compared to the sameperiods in 2006. This is compared to an increase in average contractholderfunds of 11.7% and 13.2% in the third quarter and first nine months of 2006,respectively, compared to the same periods in 2005.

Contractholder deposits declined 29.4% and 44.9% in the third quarterand first nine months of 2007, respectively, compared to the same periods of2006. These declines were primarily due to lower deposits on fixed annuities. Thedeclines of 34.1% and 49.8% in fixed annuity deposits in the third quarter andfirst nine months of 2007, respectively, compared to the same periods in theprior year, are indicative of lower industry-wide fixed annuity sales and ourstrategy to raise new business returns on capital for these products.

Surrenders and partial withdrawals declined 3.1% and 3.4% in the thirdquarter of 2007 and first nine months of 2007, respectively, compared to thesame periods of 2006. The decrease in surrenders and partial withdrawals in thefirst nine months of 2007 was due to the absence in 2007 of surrenders andpartial withdrawals related to the variable annuity business that was reinsuredeffective June 1, 2006. Subsequent to the effective date of that transaction,the net change in contractholder funds attributable to the reinsured variableannuity business is included as a component of the other adjustments line inthe table above. Surrenders and partial withdrawals for the first nine monthsof 2006 include $30.5 million related to the reinsured variable annuitybusiness. The annualized surrender and partial withdrawal rate on deferredfixed annuities and interest-sensitive life products, based on the beginning ofperiod contractholder funds, was 8.1% and 8.2% for the first nine months of2007 and 2006, respectively.

 

19

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*Net investment income*increased 4.8% in the third quarter and 3.1% in the first nine months of 2007compared to the same periods in 2006. The increase in both periods wasprimarily due to higher average portfolio balances. Higher average portfoliobalances resulted primarily from the investment of operating cash flows. Seethe Investments section of MD&A for further detail of net investmentincome.

 

*Realized capital gains and losses*reflected net gains of $681 thousand in the third quarter of 2007 and netlosses of $2.1 million in first nine months of 2007. This compares to netlosses of $4.7 million and $24.1 million in the third quarter and first ninemonths of 2006, respectively. For further discussion of realized capital gainsand losses, see the Investments section of MD&A.

 

**Analysis of Costs and Expenses  **Total costs and expenses increased 5.5% or $5.8 million and 5.6% or $17.9million in the third quarter and first nine months of 2007, respectively,compared to the same periods in the prior year. The increases in both periodswere mostly driven by higher amortization of DAC and interest credited tocontractholder funds, partially offset by lower operating costs and expenses.

 

*Contract benefits* increased 2.1%or $949 thousand in the third quarter of 2007 and decreased 0.8% or $1.1million in the first nine months of 2007 compared to the same periods in theprior year. The increase in the third quarter of 2007 was driven primarily byhigher contract benefits for the implied interest on life-contingent immediateannuities. The decrease in the first nine months of 2007 was due to the absencein 2007 of contract benefits on the reinsured variable annuity business, whichtotaled $2.1 million in the nine months ended September 31, 2006. Excluding theimpact of the reinsured variable annuity business, contract benefits increased0.8% compared to the prior year as a result of higher contract benefits for theimplied interest on life-contingent immediate annuities, partially offset byimproved mortality experience on immediate annuities with life contingencies.

Contract benefits includethe implied interest on life-contingent immediate annuities. This impliedinterest totaled $27.1 million and $26.2 million in the third quarter of 2007and 2006, respectively, and totaled $80.5 million and $77.5 million in thefirst nine months of 2007 and 2006, respectively.

We analyze our mortalityand morbidity results using the difference between premiums, contract chargesearned for the cost of insurance and contract benefits excluding the portionrelated to the implied interest on life-contingent immediate annuities (“benefitspread”). The benefit spread by product group is disclosed in the followingtable.

 
| ** **              | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(in thousands)** | ** ** | **2007**                                                   | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Life insurance          |       | $                                                          | 8,863      |                                                      | $          | 7,767 |   | $ | 21,226 |   | $ | 18,920 |   |
| Annuities               |       | (207                                                       | )          | 1,179                                                     |       | 2,412 |   | (971 | ) |
| Total benefit spread    |       | $                                                          | 8,656      |                                                      | $          | 8,946 |   | $ | 23,638 |   | $ | 17,949 |   |

 

*Interest credited to contractholder funds*increased 7.1% or $3.0 million in the third quarter and 5.5% or $6.8 million inthe first nine months of 2007 compared to the same periods in the prior year. Theincrease in both periods was the result of growth in contractholder funds andhigher weighted average interest crediting rates on deferred fixed annuities. Inthe first nine months of 2007, the impact of these items was partially offsetby the absence in 2007 of interest credited related to the reinsured variableannuity business. Interest credited to contractholder funds related to thereinsured variable annuity business totaled $6.4 million in the first ninemonths of 2006.

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

 

20

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

 
| ** **                                               | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **2007**                                                   | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Annuities                                                |       | $                                                          | 14,577     |                                                      | $          | 15,244 |   | $ | 45,554 |   | $ | 49,021 |   |
| Life insurance                                           |       | 809                                                        |       | 480                                                       |       | 2,267 |   | 1,969 |   |
| Net investment income on investments  supporting capital |       | 9,953                                                      |       | 9,029                                                     |       | 28,142 |   | 26,077 |   |
| Total investment spread                                  |       | $                                                          | 25,339     |                                                      | $          | 24,753 |   | $ | 75,963 |   | $ | 77,067 |   |

 

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** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                         | ** ** | **2006**                                                     | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest-sensitive life                                              |       | 5.7                                              | %          | 5.6                                                          | %          | 4.6                                               | %          | 4.6 | % | 1.1 | % | 1.0 | % |
| Deferred fixed annuities                                             |       | 5.7                                              |       | 5.6                                                          |       | 3.5                                               |       | 3.4 |   | 2.2 |   | 2.2 |   |
| Immediate fixed annuities with and without  life contingencies       |       | 7.3                                              |       | 7.4                                                          |       | 6.6                                               |       | 6.6 |   | 0.7 |   | 0.8 |   |
| Investments supporting capital, traditional  life and other products |       | 6.1                                              |       | 6.1                                                          |       | 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** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                         | ** ** | **2006**                                                     | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest-sensitive life                                              |       | 5.7                                              | %          | 5.6                                                          | %          | 4.6                                               | %          | 4.5 | % | 1.1 | % | 1.1 | % |
| Deferred fixed annuities                                             |       | 5.6                                              |       | 5.6                                                          |       | 3.4                                               |       | 3.2 |   | 2.2 |   | 2.4 |   |
| Immediate fixed annuities with and without  life contingencies       |       | 7.4                                              |       | 7.5                                                          |       | 6.6                                               |       | 6.7 |   | 0.8 |   | 0.8 |   |
| Investments supporting capital, traditional  life and other products |       | 5.9                                              |       | 6.2                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

The following table summarizes the liabilities for these contracts andpolicies.

 
| ** **                                                      | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
| Immediate fixed annuities with life  contingencies              |       | $                                                         | 1,607,719  |   | $ | 1,544,636 |   |
| Other life contingent contracts and other                       |       | 350,044                                                   |       | 360,978 |   |
| Reserve for life-contingent contract  benefits                  |       | $                                                         | 1,957,763  |   | $ | 1,905,614 |   |
|                                                            |       |                                                      |       |   |   |
| Interest-sensitive life                                         |       | $                                                         | 515,037    |   | $ | 464,148 |   |
| Deferred fixed annuities                                        |       | 3,705,304                                                 |       | 3,724,117 |   |
| Immediate fixed annuities without life  contingencies and other |       | 570,921                                                   |       | 554,087 |   |
| Contractholder funds                                            |       | $                                                         | 4,791,262  |   | $ | 4,742,352 |   |

 

21

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*Amortization of DAC*****increased 34.0% or $3.1 million in the third quarter of 2007 and 97.0%or $20.2 million in the first nine months of 2007 compared to the same periodsof 2006. The components of amortization of DAC are shown in the followingtable.

 
| **(in thousands)**                                                                                               | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2007**                                                   | ** ** | **2006**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Amortization of DAC before amortization  relating to realized capital gains and losses and changes in assumptions (1) |       | $                                                          | (11,958    | )                                                         | $          | (11,244 | ) | $ | (35,413 | ) | $ | (35,784 | ) |
| Amortization relating to realized capital  gains and losses (2)                                                       |       | (91                                                        | )          | 2,252                                                     |       | 209 |   | 14,819 |   |
| Changes in assumptions (“unlocking”)                                                                        |       | —                                                     |       | —                                                    |       | (5,818 | ) | 146 |   |
| Total amortization of DAC                                                                                             |       | $                                                          | (12,049    | )                                                         | $          | (8,992 | ) | $ | (41,022 | ) | $ | (20,819 | ) |

 

----

(1)          Amortization of DACbefore amortization relating to realized capital gains and losses and changesin assumptions for the nine months ended September 30, 2006 includes $(4.6)million relating to the reinsured variable annuity business.

(2)          Amortizationrelating to realized capital gains and losses for the nine months endedSeptember 30, 2006 includes $11.9 million of amortization relating to thereinsured variable annuity business.

 

The increase in amortization of DAC in thethird quarter of 2007 compared to the third quarter of the prior year wasprimarily the result of an unfavorable change in amortization relating torealized capital gains and losses. The increase in amortization in the firstnine months of 2007 compared to the same period in the prior year was primarilydue to the absence in 2007 of amortization on the variable annuity businessthat was reinsured effective June 1, 2006. Amortization on the reinsuredvariable annuity business in the first nine months of 2006 reflected a creditto income of $7.3 million. Excluding amortization relating to the reinsuredvariable annuity business, amortization of DAC increased 46.0% in the firstnine months of 2007 compared to the same period in the prior year. Thisincrease was due primarily to an unfavorable impact totaling $6.0 millionrelating to our annual comprehensive review of DAC assumptions (commonlyreferred to as “unlocking”) and higher gross profits.

The impact of realized capital gains andlosses on amortization of DAC is dependent upon the relationship between theassets that give rise to the gain or loss and the product liability supportedby the assets. Fluctuations result from changes in the impact of realizedcapital gains and losses on actual and expected gross profits.

 

*Operating costs and expenses* declined 11.3%and 22.9% in the third quarter and first nine months of 2007 compared to thesame periods of 2006. The decline in both periods was primarily due to lowerrestructuring and employee benefit related expenses, decreased insurancedepartment assessments and lower non-deferrable commissions, partially offsetby an increased investment in technology. Additionally, the decline in thenine-month period was also impacted by the absence in 2007 of expenses relatedto the reinsured variable annuity business. Excluding the impact of thereinsured variable annuity business, expenses declined 14.6% in the first ninemonths of 2007.

 

*Gain (loss) on disposition of operations* changed by a favorable $215 thousand and $7.8million in the third quarter and first nine months of 2007, respectively,compared to the same periods in the prior year. This improvement was due to therecognition in the prior year of losses relating to the disposition of ourvariable annuity business.

 

*Income taxexpense* increased by $1.6 million and $6.3 million in the third quarter and firstnine months of 2007, respectively, compared to the same periods in the prioryear. These increases primarily reflect the proportional impact of higherincome before taxes.

 

22

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**INVESTMENTS**

 

An importantcomponent of our financial results is the return on our investment portfolio. Thecomposition of the investment portfolio at September 30, 2007 is presented inthe table below.

 
| ** **                  | ** ** | **Carrying** | ** ** | **Percent**       | ** ** |
|-----------------------------|------------|--------------|------------|-------------------|------------|
| **(in thousands)**     | ** ** | **value**    | ** ** | **of total** | ** ** |
|                        |       |         |       |              |       |
| Fixed income securities (1) |       | $            | 6,168,835  |              | 87.7       | % |
| Mortgage loans              |       | 708,249      |       | 10.1              |       |
| Short-term                  |       | 118,033      |       | 1.7               |       |
| Policy loans                |       | 38,181       |       | 0.5               |       |
| Other                       |       | 19           |       | —            |       |
| Total                       |       | $            | 7,033,317  |              | 100.0      | % |

 

----

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

 

Totalinvestments increased to $7.03 billion at September 30, 2007, from $6.78billion at December 31, 2006, primarily due to positive cash flows fromoperating and financing activities, including increased funds associated withsecurities lending, partially offset by the decreased net unrealized gains onfixed income securities.

Totalinvestments at amortized cost related to collateral received in connection withsecurities lending business activities increased to $343.3 million at September30, 2007, from $199.5 million at December 31, 2006.

Fixed income securities by type are listed in the table below.

 
| ** **                            | ** ** | **September 30,  2007** | ** ** | **% to Total  Investments** | ** ** | **December 31,  2006** | ** ** | **% to Total  Investments** | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| **($ in thousands)**        | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **                  | ** ** | ** **                            | ** ** |
| U.S. government and agencies          |       | $                            | 757,151    |                                  | 10.8       | %                           | $          | 729,111                               |       | 10.8 | % |
| Municipal                             |       | 451,536                      |       | 6.4                                   |       | 323,003                     |       | 4.8                                   |       |
| Corporate                             |       | 3,300,431                    |       | 46.9                                  |       | 3,304,762                   |       | 48.7                                  |       |
| Asset-backed securities               |       | 116,966                      |       | 1.7                                   |       | 109,022                     |       | 1.6                                   |       |
| Commercial mortgage-backed securities |       | 798,515                      |       | 11.4                                  |       | 673,179                     |       | 9.9                                   |       |
| Mortgage-backed securities            |       | 418,074                      |       | 5.9                                   |       | 433,196                     |       | 6.4                                   |       |
| Foreign government                    |       | 316,722                      |       | 4.5                                   |       | 304,947                     |       | 4.5                                   |       |
| Redeemable preferred stock            |       | 9,440                        |       | 0.1                                   |       | 9,919                       |       | 0.1                                   |       |
| Total fixed income securities         |       | $                            | 6,168,835  |                                  | 87.7       | %                           | $          | 5,887,139                             |       | 86.8 | % |

 

At September 30, 2007, 96.5% of the fixedincome securities portfolio was rated investment grade, which is defined as asecurity having a rating from the National Association of InsuranceCommissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody’s ora rating of AAA, AA, A or BBB from Standard & Poor’s, Fitch or Dominion ora rating of aaa, aa, a, or bbb from A.M. Best; or a comparable internal ratingif an externally provided rating is not available.

Duringthe third quarter of 2007, the financial markets experienced liquiditydeclines, primarily in the residential mortgage and asset-backed commercialpaper markets. Certain other asset-backed and real estate investment marketsexperienced similar illiquidity, but to a much lesser degree. After gainingassurance as to the reasonableness of our vendor pricing services, we have beenable to continue to value our portfolio of these securities based uponindependent market quotations.

 

23

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Asset-backedand mortgage-backed fixed income securities by type are listed in the tablebelow.

 
| **($ in thousands)**                                                                                      | ** ** | **Aaa** | ** ** | **Aa** | ** ** | **A**  | ** ** | **Baa** | ** ** | **Fair value at  September 30,  2007** | ** ** | **% toTotal  Investments** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------|------------|--------|------------|--------|------------|---------|------------|-------------------------------------------------------|------------|---------------------------------|------------|
| **Asset-backed securities**                                                                                         |       |    |       |   |       |   |       |    |       |                                                  |       |                            |       |
| Asset-backed securities collateralized by  sub- prime residential mortgage-backed loans (“ABS RMBS”) |       | 95.6    | %          | 4.4    | %          | — |       | —  |       | $                                                     | 85,425     |                            | 1.2        | % |
| Other collateralized debt obligations                                                                               |       | 49.9    | %          | 12.4   | %          | 27.9   | %          | 9.8     | %          | 31,541                                                |       | 0.5                             | %          |
| Total Asset-backed securities                                                                                       |       |    |       |   |       |   |       |    |       | $                                                     | 116,966    |                            | 1.7        | % |
|                                                                                                                |       |    |       |   |       |   |       |    |       |                                                  |       |                            |       |
| **Mortgage-backed securities**                                                                                      |       |    |       |   |       |   |       |    |       |                                                  |       |                            |       |
| U.S. Agency                                                                                                         |       | 100     | %          | — |       | — |       | —  |       | $                                                     | 340,249    |                            | 4.8        | % |
| Prime                                                                                                               |       | 100     | %          | — |       | — |       | —  |       | 48,877                                                |       | 0.7                             |       |
| Alt-A                                                                                                               |       | 100     | %          | — |       | — |       | —  |       | 28,948                                                |       | 0.4                             |       |
| Total Mortgage-backed securities                                                                                    |       |    |       |   |       |   |       |    |       | $                                                     | 418,074    |                            | 5.9        | % |

 

Certain of our asset-backed and mortgage-backed securities arecollateralized by residential mortgage loans that are characterized byborrowers of differing levels of creditworthiness: U.S. agency, prime, Alt-A andsub-prime. Our practice for acquiring and monitoring ABS RMBS (alsoknown as “sub prime RMBS”) and Alt-A mortgage-backed securities takes intoconsideration the quality of the originator, quality of the servicer, securitycredit rating, underlying characteristics of the mortgages, borrowercharacteristics, level of credit enhancement in the transaction, and bondinsurer strength, where applicable. The originators and servicers of theunderlying mortgage loans are primarily subsidiaries of large banks and broker/dealers.These securities are structured to experience losses according to the senioritylevel of each tranche, with the least senior tranche taking the first loss.

AtSeptember 30, 2007, we did not record any investment write-downs related to ourABS RMBS or Alt-A residential mortgage-backed securities. Although we do notcurrently anticipate other-than-temporary impairments in these securities, adeterioration of future market conditions could cause us to alter that outlook.In addition, based on our analysis and the seniority of our securities’ claimon the underlying collateral, we currently expect to receive all payments onthese securities in accordance with their original contractual terms.

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

 
| **($ in thousands)** | ** ** | **Fair value at  September 30,  2007** | ** ** | **% to Total  Investments** | ** ** |
|--------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|
| **ABS RMBS**                   |       |                                                  |       |                                  |       |
| First lien:                    |       |                                                  |       |                                  |       |
| Fixed rate (1)                 |       | $                                                     | 14,852     |                                  | 0.2        | % |
| Variable rate (1)              |       | 42,790                                                |       | 0.6                                   |       |
| Total first lien (2)           |       | 57,642                                                |       | 0.8                                   |       |
| Second lien:                   |       |                                                  |       |                                  |       |
| Insured                        |       | 18,254                                                |       | 0.3                                   |       |
| Other                          |       | 9,529                                                 |       | 0.1                                   |       |
| Total second lien (3)          |       | 27,783                                                |       | 0.4                                   |       |
| Total ABS RMBS                 |       | $                                                     | 85,425     |                                  | 1.2        | % |

 

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(1)          Fixed rate and variable rate refer to theprimary interest rate characteristic of the underlying mortgages at the time ofissuance.

(2)          The credit ratings of the first lien ABS RMBSwere 100% Aaa, at September 30, 2007.

(3)          The credit ratings of the second lien ABS RMBSwere 86.6% Aaa, and 13.4% Aa at September 30, 2007.

 

*ABS RMBS*includes securities that are collateralized by mortgage loans issued toborrowers that cannot qualify for prime or alternative financing terms due inpart to an impaired or limited credit history. It also includes securities thatare collateralized by certain second lien mortgages regardless of the borrower’scredit profile. As of September 30, 2007, the ABS RMBS portfolio had grossunrealized losses of $2.0 million. This is compared to net unrealized losses of$613 thousand, which were comprised of $14 thousand of unrealized gains and$627 thousand of unrealized losses at June 30, 2007. During the third quarterof 2007, two second lien ABS RMBS with a value of 

 

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$3.7million were downgraded within the investment grade ratings. Since September30, 2007, one tranche with a value of $734 thousand was downgraded within theinvestment grade rating. During the third quarter of 2007, we collected $6.3million of principal repayments consistent with the expected cash flows. Theserepayments represent more than 6% of the amortized cost of our outstanding ABSRMBS portfolio at June 30, 2007.

AtSeptember 30, 2007, $20.8 million or 24.3% of the total ABS RMBS securitiesthat are rated Aaa are currently insured by 4 bond insurers. $74.7 million or87.5% of the portfolio consisted of securities that were issued during 2006 and2007. At September 30, 2007, 95.0% of these securities were rated Aaa and 5.0%rated Aa. The expected weighted average life of our 2006 and 2007 ABS RMBSportfolio was estimated to be approximately 3.0 to 3.50 years at origination. Asthe underlying mortgages are repaid, the weighted average life at originationof the remaining positions will lengthen.

*Other collateralized debt obligations* consist of investments secured primarily byportfolios of credit card loans, auto loans, student loans and other consumerand corporate obligations.

*Alt-A mortgage-backed securities* are included in our mortgage-backed fixedincome securities and reflect securities that are collateralized by residentialmortgage loans issued to borrowers with stronger credit profiles than sub-primeborrowers, but who do not qualify for prime financing terms due to highloan-to-value ratios or limited supporting documentation. All of the Alt-Aportfolio was at a fixed rate at the time of issue. At September 30, 2007, theAlt-A portfolio had net unrealized losses of $650 thousand, which werecomprised of $139 thousand of unrealized gains and $789 thousand of unrealizedlosses. At June 30, 2007, these securities had net unrealized losses of $982thousand, which were comprised of $1.4 million of unrealized gains and $2.4million of unrealized losses. None of these securities were issued during 2006and 2007.

*Unrealized net capital gains**on fixed income securities*at September 30, 2007 were $268.6 million, a decrease of $76.3 million or 22.1%since December 31, 2006. The net unrealized gain was comprised of $360.6million of unrealized gains and $92.1 million of unrealized losses at September30, 2007. This is compared to net unrealized gains totaling $344.9 million atDecember 31, 2006, comprised of $399.2 million of unrealized gains and $54.3million of unrealized losses.

Of the gross unrealized losses in the fixedincome portfolio at September 30, 2007, $85.8 million or 93.2% were related toinvestment grade securities and are believed to be primarily interest raterelated. All of the remaining $6.3 million of losses were in the corporatefixed income portfolio and were primarily comprised of securities in theconsumer goods, utilities, capital goods, and communications sectors. The grossunrealized losses in these sectors were primarily company specific and interestrate related.

Ourportfolio monitoring process identifies and evaluates, on a case-by-case basis,fixed income securities whose carrying value may be other-than-temporarilyimpaired. The process includes a quarterly review of all securities using ascreening process to identify those securities whose fair value compared toamortized cost is below established thresholds for certain time periods, orwhich are identified through other monitoring criteria such as ratingsdowngrades or payment defaults. The securities identified, and other securitiesfor which we may have a concern, are evaluated based on facts and circumstancesfor inclusion on our watch-list. We also conduct a portfolio review torecognize impairment on securities in an unrealized loss position for which wedo not have the intent and ability to hold until recovery as a result ofapproved programs involving the disposition of investments such as changes induration, revisions to strategic asset allocations and liquidity actions, aswell as certain dispositions anticipated by portfolio managers. All securitiesin an unrealized loss position at September 30, 2007 were included in ourportfolio monitoring process for determining which declines in value were notother-than-temporary.

 

We also monitor the quality of our fixed 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 haverates and terms that are not consistent with market rates or terms prevailingat the time of the restructuring. Potential problem fixed income securities arecurrent with respect to contractual principal and/or interest, but because ofother facts and circumstances, we have concerns regarding the borrower’sability to pay future principal and interest, which causes us to believe thesesecurities may be classified as problem or restructured in the future.

 

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The Companyhad no problem, restructured or potential problem fixed income securities atSeptember 30, 2007. The following table summarizes problem, restructured andpotential problem fixed income securities at December 31, 2006.

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

 

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

 

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

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**           | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                              |       |                                                 |       |                                                |       |   |   |   |   |
| Fixed income securities           |       | $                                                    | 90,369     |                                                | $          | 84,977 |   | $ | 266,657 |   | $ | 256,028 |   |
| Mortgage loans                    |       | 10,317                                               |       | 9,595                                               |       | 30,370 |   | 28,634 |   |
| Short-term and other              |       | 3,444                                                |       | 4,316                                               |       | 11,722 |   | 11,302 |   |
| Investment income, before expense |       | 104,130                                              |       | 98,888                                              |       | 308,749 |   | 295,964 |   |
| Investment expense                |       | (7,136                                               | )          | (6,352                                              | )          | (20,848 | ) | (16,708 | ) |
| **Net investment income**         |       | $                                                    | 96,994     |                                                | $          | 92,536 |   | $ | 287,901 |   | $ | 279,256 |   |

 

Net investment income increased 4.8% and 3.1%in the three months and nine months ended September 30, 2007 as compared to thesame periods in the prior year.

 

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

 
| ** **                                        | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                           | ** ** | **2007**                                                   | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Investment write-downs                            |       | $                                                          | —     |                                                | $          | — |   | $ | — |   | $ | (258 | ) |
| Dispositions                                      |       | 3,310                                                      |       | (1,716                                              | )          | 3,857 |   | (24,083 | ) |
| Valuation of derivative instruments               |       | (3,524                                                     | )          | (3,964                                              | )          | (5,497 | ) | (3,325 | ) |
| Settlement of derivative instruments              |       | 895                                                        |       | 939                                                 |       | (423 | ) | 3,573 |   |
| Realized capital gains and losses, pretax         |       | 681                                                        |       | (4,741                                              | )          | (2,063 | ) | (24,093 | ) |
| Income tax benefit (expense)                      |       | (257                                                       | )          | 1,739                                               |       | 768 |   | 9,058 |   |
| **Realized capital gains and losses,  after-tax** |       | $                                                          | 424        |                                                | $          | (3,002 | ) | $ | (1,295 | ) | $ | (15,035 | ) |

 

Dispositions in the above table include sales, losses recognized inanticipation of dispositions and other transactions such as calls andprepayments. We may sell impaired fixed income securities that were in anunrealized loss position at the previous reporting date in situations where newfactors such as negative developments, subsequent credit deterioration,changing liquidity needs, and newly identified market opportunities cause achange in our previous intent to hold a security until recovery or maturity.

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

Inthe third quarter of 2007, we recognized $220 thousand of losses related to achange in our intent to hold certain securities with unrealized losses untilthey recover in value. The change in our intent is primarily related tostrategic asset allocation decisions and ongoing comprehensive reviews of ourportfolio. We identified $108.0 million of securities which we did not have theintent to hold until recovery.

 

### **CAPITAL RESOURCES AND LIQUIDITY**

###  

**CapitalResources**consist of shareholder’s equity, representingfunds deployed or available to be deployed to support business operations. Thefollowing table summarizes our capital resources.

 
| **(in thousands)**                                       | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                          |       |                         |       |                        |       |
| Common stock, additional capital paid-in  and retained income |       | $                            | 604,537    |                        | $          | 574,958 |   |
| Accumulated other comprehensive income                        |       | 52,316                       |       | 78,038                      |       |
| Total shareholder’s equity                               |       | $                            | 656,853    |                        | $          | 652,996 |   |

 

*Shareholder’s equity* increased in the first nine months of 2007due primarily to net income, partially offset by lower unrealized net capitalgains on fixed income securities.

 

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**Financial Ratings and Strength**Our ratings are influenced by many factors including our operating andfinancial performance, asset quality, liquidity, asset/liability management,overall portfolio mix, financial leverage (i.e., debt), exposure to risks, thecurrent level of operating leverage, Allstate Life Insurance Company’s andAllstate Insurance Company’s ratings and other factors. There have been nochanges to our insurance financial strength ratings since December 31, 2006.

 

**LiquiditySources and Uses  **Asreflected in our Condensed Statements of Cash Flows, higher operating cashflows in the first nine months of 2007, compared to the first nine months of2006, were primarily the result of lower income tax payments and policyacquisition expenses and higher investment income, partially offset by thesettlement of an intercompany obligation in 2007 and lower contract charges dueto the disposition of the variable annuity business in 2006.

Decreased cashflows used in investing activities were due to a decline in net cash providedby financing activities partially offset by higher net cash provided byoperating activities. Also, cash flows used in investing activities in theprior year include the settlement of the disposal of our variable annuitybusiness.

Cash flowsfrom financing activities declined in the first nine months of 2007 compared tothe same period in the prior year due to lower contractholder depositspartially offset by lower contractholder withdrawals. For quantification of thechanges in contractholder funds, see the Operations section of MD&A.

We have aninter-company loan agreement with The Allstate Corporation. The amount ofinter-company loans available to us is at the discretion of The AllstateCorporation. The maximum amount of loans the Allstate Corporation will haveoutstanding to all its eligible subsidiaries at any given point in time islimited to $1.00 billion. We had no amounts outstanding under the inter-companyloan agreement at September 30, 2007 or December 31, 2006. The AllstateCorporation uses commercial paper borrowings and bank lines of credit to fundintercompany borrowings

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

 

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

###  

*Evaluationof Disclosure Controls and Procedures.*We maintain disclosurecontrols and procedures as defined in Rule 13a-15(e) and 15(d)-15(e) under theSecurities Exchange Act of 1934. Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis report. Based upon this evaluation, the principal executive officer andthe principal financial officer concluded that our disclosure controls andprocedures are effective in providing reasonable assurance that materialinformation required to be disclosed in our reports filed with or submitted tothe Securities and Exchange Commission under the Securities Exchange Act ismade known to management, including the principal executive officer and theprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

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

 

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

###  

### **Item 1.    LegalProceedings**

###  

Information required forthis Part II, Item 1, is incorporated by reference to the discussion under theheading “Regulation” and under the heading “Legal and Regulatory Proceedingsand Inquiries” in Note 4 of the Company’s Condensed Financial Statements inPart I, Item 1, of this Form 10-Q.

 

**Item 1A. Risk Factors**

 

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

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

 

**Basedon our analysis and the seniority of our securities’ claim on the underlyingcollateral, we currently do not anticipate other-than-temporary impairments andwe expect to receive all payments on our asset-backed residentialmortgage-backed securities (“ABS RMBS”), and Alt-A mortgage-backed securitiesportfolios in accordance with their original contractual terms.**

Changesin the actual or expected performance of mortgage-related securities, theactual or perceived financial strength and claims paying ability of bondinsurers, or the valuation and market for these types of securities could leadus to reconsider our payment outlook and determine that write-downs areappropriate in the future.

 

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

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

 

### **Item 6.    Exhibits**

###  

(a)   Exhibits

 

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

 

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### **SIGNATURE**

###  

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

 
|              |   | Allstate  Life Insurance Company of New York |
|-------------------|--------|----------------------------------------------|
|              |   | (Registrant)                                 |
|              |   |                                         |
| November  5, 2007 |   | By                                           | /s/ Samuel  H. Pilch |   |
|              |   | Samuel H.  Pilch                             |
|              |   | Controller                                   |
|              |   | (chief  accounting officer and duly          |
|              |   | authorized  officer of Registrant)           |

 

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| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
| 15                   |       |            | Acknowledgement of awareness from Deloitte  & Touche LLP dated November 2, 2007, concerning unaudited interim  financial information. |
|                 |       |            |   |
| 31.1                 |       |            | Rule 15d-14(a) Certification of Principal Executive Officer |
|                 |       |            |   |
| 31.2                 |       |            | Rule 15d-14(a) Certification of Principal Financial Officer |
|                 |       |            |   |
| 32                   |       |            | Section 1350 Certifications |

 

E-1

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