**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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

######  

**The Registrant meets the conditions set forth in GeneralInstruction H (1)(a) and (b) of Form 10-Q and is thereforefiling this Form with the reduced disclosure format.**

 

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

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008**

 

**OR**

 

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

######  

##### **Commissionfile 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 area code: **631-357-8920**

 

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

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

 

**Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See definition of “large accelerated filer”, “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.  (Check one):**

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

 

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

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

 

**As of August 8, 2008, the registrant had 100,000 commonshares, $25 par value, outstanding, all of which are held by Allstate LifeInsurance Company.**

 

 

 

----

 

##### **ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

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

##### **June 30,2008**

 
| **PART 1.**  | **FINANCIAL  INFORMATION**                                                                                                   | ** ** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                         |       |
| Item 1.           | Financial Statements                                                                                                         |       |
|              |                                                                                                                         |       |
|              | Condensed Statements of  Operations for the Three-Month and Six-Month Periods Ended June 30, 2008  and 2007 (unaudited) | 3          |
|              |                                                                                                                         |       |
|              | Condensed Statements of  Financial Position as of June 30, 2008 (unaudited) and December 31,  2007                 | 4          |
|              |                                                                                                                         |       |
|              | Condensed Statements of  Cash Flows for the Six-Month Periods EndedJune 30, 2008 and 2007 (unaudited)                   | 5          |
|              |                                                                                                                         |       |
|              | Notes to Condensed  Financial Statements (unaudited)                                                                         | 6          |
|              |                                                                                                                         |       |
|              | Report of Independent  Registered Public Accounting Firm                                                                     | 19         |
|              |                                                                                                                         |       |
| Item 2.           | Management’s Discussion  and Analysis of Financial Condition and Results of Operations                                  | 20         |
|              |                                                                                                                         |       |
| Item 4.           | Controls and Procedures                                                                                                      | 45         |
|              |                                                                                                                         |       |
| **PART II.** | **OTHER  INFORMATION**                                                                                                       | ** ** |
|              |                                                                                                                         |       |
| Item 1.           | Legal Proceedings                                                                                                            | 46         |
|              |                                                                                                                         |       |
| Item 1A.          | Risk Factors                                                                                                                 | 46         |
|              |                                                                                                                         |       |
| Item 6.           | Exhibits                                                                                                                     | 46         |

 

----

 

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

 

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

#### ** **

#### **ALLSTATE LIFE INSURANCE COMPANY OFNEW YORK**

** **

**CONDENSED STATEMENTS OF OPERATIONS**

 
| ** **                                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**                                         | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                             | ** ** | **(unaudited) **                           | ** ** | **(unaudited)**                               | ** ** |
| **Revenues**                                                           |       |                                            |       |                                          |       |   |   |   |   |
| Premiums                                                               |       | $                                               | 15,896     |                                          | $          | 18,683 |   | $ | 25,097 |   | $ | 36,415 |   |
| Contract charges                                                       |       | 15,465                                          |       | 14,741                                        |       | 30,946 |   | 29,139 |   |
| Net investment income                                                  |       | 100,218                                         |       | 96,939                                        |       | 199,964 |   | 190,907 |   |
| Realized capital gains and losses                                      |       | (60,113                                         | )          | (839                                          | )          | (58,392 | ) | (2,744 | ) |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
|                                                                   |       | 71,466                                          |       | 129,524                                       |       | 197,615 |   | 253,717 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| **Costs and expenses**                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Contract benefits                                                      |       | 46,354                                          |       | 48,705                                        |       | 85,159 |   | 91,538 |   |
| Interest credited to contractholder funds                              |       | 44,578                                          |       | 43,248                                        |       | 87,879 |   | 86,898 |   |
| Amortization of deferred policy acquisition costs                      |       | 1,167                                           |       | 11,213                                        |       | 2,618 |   | 28,973 |   |
| Operating costs and expenses                                           |       | 10,981                                          |       | 8,410                                         |       | 20,003 |   | 17,554 |   |
|                                                                   |       | 103,080                                         |       | 111,576                                       |       | 195,659 |   | 224,963 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| (Loss) gain on disposition of operations                               |       | (90                                             | )          | 253                                           |       | (358 | ) | (132 | ) |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| **(Loss) income from operations before income tax  (benefit) expense** |       | (31,704                                         | )          | 18,201                                        |       | 1,598 |   | 28,622 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Income tax (benefit) expense                                           |       | (11,145                                         | )          | 6,497                                         |       | 580 |   | 10,245 |   |
|                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| **Net (loss) income**                                                  |       | $                                               | (20,559    | )                                             | $          | 11,704 |   | $ | 1,018 |   | $ | 18,377 |   |

 

See notes to condensedfinancial statements.

 

3

----

 

**ALLSTATE LIFE INSURANCE COMPANY OFNEW YORK**

 

**CONDENSED STATEMENTS OF FINANCIALPOSITION**

 
| ** **                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in thousands, except par value data)**          | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                         |       |              |       |                  |       |
| Investments                                                                        |       |              |       |                  |       |
| Fixed income securities, at fair value (amortized cost $5,786,138 and  $5,928,899) |       | $                 | 5,969,202  |                  | $          | 6,271,128 |   |
| Mortgage loans                                                                     |       | 710,143           |       | 725,301               |       |
| Short-term                                                                         |       | 485,919           |       | 22,688                |       |
| Policy loans                                                                       |       | 38,570            |       | 38,509                |       |
| Other                                                                              |       | —            |       | 3                     |       |
|                                                                               |       |              |       |                  |       |
| Total investments                                                                  |       | 7,203,834         |       | 7,057,629             |       |
|                                                                               |       |              |       |                  |       |
| Cash                                                                               |       | 11,586            |       | 7,356                 |       |
| Deferred policy acquisition costs                                                  |       | 344,030           |       | 278,664               |       |
| Accrued investment income                                                          |       | 63,351            |       | 64,514                |       |
| Reinsurance recoverables                                                           |       | 360,850           |       | 381,431               |       |
| Receivable from affiliates, net                                                    |       | 832               |       | —                |       |
| Current income taxes receivable                                                    |       | 5,978             |       | 146                   |       |
| Other assets                                                                       |       | 52,693            |       | 47,079                |       |
| Separate Accounts                                                                  |       | 804,994           |       | 948,358               |       |
|                                                                               |       |              |       |                  |       |
| **Total assets**                                                                   |       | $                 | 8,848,148  |                  | $          | 8,785,177 |   |
|                                                                               |       |              |       |                  |       |
| **Liabilities**                                                                    |       |              |       |                  |       |
| Contractholder funds                                                               |       | $                 | 5,033,362  |                  | $          | 4,848,461 |   |
| Reserve for life-contingent contract benefits                                      |       | 1,987,367         |       | 2,016,971             |       |
| Deferred income taxes                                                              |       | 9,955             |       | 39,737                |       |
| Other liabilities and accrued expenses                                             |       | 372,215           |       | 241,756               |       |
| Payable to affiliates, net                                                         |       | —            |       | 8,035                 |       |
| Reinsurance payable to parent                                                      |       | 971               |       | 987                   |       |
| Separate Accounts                                                                  |       | 804,994           |       | 948,358               |       |
|                                                                               |       |              |       |                  |       |
| **Total liabilities**                                                              |       | 8,208,864         |       | 8,104,305             |       |
|                                                                               |       |              |       |                  |       |
| **Commitments and Contingent Liabilities (Note 5)**                                |       |              |       |                  |       |
|                                                                               |       |              |       |                  |       |
| **Shareholder’s equity**                                                      |       |              |       |                  |       |
| Common stock, $25 par value, 100 thousand shares authorized and  outstanding       |       | 2,500             |       | 2,500                 |       |
| Additional capital paid-in                                                         |       | 140,000           |       | 140,000               |       |
| Retained income                                                                    |       | 474,202           |       | 473,184               |       |
| Accumulated other comprehensive income:                                            |       |              |       |                  |       |
| Unrealized net capital gains and losses                                            |       | 22,582            |       | 65,188                |       |
|                                                                               |       |              |       |                  |       |
| **Total accumulated other comprehensive income**                                   |       | 22,582            |       | 65,188                |       |
|                                                                               |       |              |       |                  |       |
| **Total shareholder’s equity**                                                |       | 639,284           |       | 680,872               |       |
|                                                                               |       |              |       |                  |       |
| **Total liabilities and shareholder’s equity**                                |       | $                 | 8,848,148  |                  | $          | 8,785,177 |   |

 

#### See notes to condensedfinancial statements.

 

4

----

 

#### **ALLSTATE LIFE INSURANCE COMPANY OFNEW YORK**

####  

**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**                                                     | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                               | ** ** |
| **Cash flows from operating activities**                                           |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 1,018      |   | $ | 18,377 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                          |       |   |   |
| Amortization and other non-cash items                                              |       | (38,626                                       | )          | (38,242 | ) |
| Realized capital gains and losses                                                  |       | 58,392                                        |       | 2,744 |   |
| Loss on disposition of operations                                                  |       | 358                                           |       | 132 |   |
| Interest credited to contractholder funds                                          |       | 87,879                                        |       | 86,898 |   |
| Changes in:                                                                        |       |                                          |       |   |   |
| Life-contingent contract benefits and contractholder funds                         |       | (7,171                                        | )          | 4,633 |   |
| Deferred policy acquisition costs                                                  |       | (26,995                                       | )          | 8,487 |   |
| Income taxes payable                                                               |       | (12,673                                       | )          | 3,366 |   |
| Other operating assets and liabilities                                             |       | (17,257                                       | )          | (38,986 | ) |
| Net cash provided by operating activities                                          |       | 44,925                                        |       | 47,409 |   |
|                                                                               |       |                                          |       |   |   |
| **Cash flows from investing activities**                                           |       |                                          |       |   |   |
| Proceeds from sales of fixed income securities                                     |       | 242,065                                       |       | 250,282 |   |
| Proceeds from sales of mortgage loans                                              |       | 4,563                                         |       | — |   |
| Investment collections                                                             |       |                                          |       |   |   |
| Fixed income securities                                                            |       | 85,616                                        |       | 59,785 |   |
| Mortgage loans                                                                     |       | 33,158                                        |       | 34,291 |   |
| Investment purchases                                                               |       |                                          |       |   |   |
| Fixed income securities                                                            |       | (215,531                                      | )          | (363,326 | ) |
| Mortgage loans                                                                     |       | (23,692                                       | )          | (15,969 | ) |
| Change in short-term investments, net                                              |       | (309,163                                      | )          | 14,674 |   |
| Change in other investments, net                                                   |       | (4,267                                        | )          | (877 | ) |
| Net cash used in investing activities                                              |       | (187,251                                      | )          | (21,140 | ) |
|                                                                               |       |                                          |       |   |   |
| **Cash flows from financing activities**                                           |       |                                          |       |   |   |
| Contractholder fund deposits                                                       |       | 381,813                                       |       | 212,874 |   |
| Contractholder fund withdrawals                                                    |       | (235,257                                      | )          | (235,830 | ) |
| Net cash provided by (used in) financing activities                                |       | 146,556                                       |       | (22,956 | ) |
|                                                                               |       |                                          |       |   |   |
| **Net increase in cash**                                                           |       | 4,230                                         |       | 3,313 |   |
| **Cash at beginning of period**                                                    |       | 7,356                                         |       | 7,090 |   |
| **Cash at end of period**                                                          |       | $                                             | 11,586     |   | $ | 10,403 |   |

###  

#### See notes to condensedfinancial statements.

 

5

----

 

**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

### **1.  General**

###  

### **Basis of presentation**

###  

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

The condensed financialstatements and notes as of June 30, 2008 and for the three-month andsix-month periods ended June 30, 2008 and 2007 are unaudited.  The condensed financial statements reflectall adjustments (consisting only of normal recurring accruals) which are, inthe opinion of management, necessary for the fair presentation of the financialposition, results of operations and cash flows for the interim periods.  These condensed financial statements andnotes should be read in conjunction with the financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2007.  Theresults of operations for the interim periods should not be consideredindicative of results to be expected for the full year.

 

**Premiumsand Contract Charges**

 

The followingtable summarizes premiums and contract charges by product.

 
| ** **                                  | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**                   | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Premiums**                                |       |                                            |       |                                          |       |   |   |   |   |
| Traditional life insurance                  |       | $                                               | 7,867      |                                          | $          | 5,978 |   | $ | 12,990 |   | $ | 12,362 |   |
| Immediate annuities with life contingencies |       | 6,022                                           |       | 11,188                                        |       | 8,172 |   | 20,987 |   |
| Accident and health and other               |       | 2,007                                           |       | 1,517                                         |       | 3,935 |   | 3,066 |   |
| Total premiums                              |       | 15,896                                          |       | 18,683                                        |       | 25,097 |   | 36,415 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| **Contract charges**                        |       |                                            |       |                                          |       |   |   |   |   |
| Interest-sensitive life insurance           |       | 13,985                                          |       | 12,585                                        |       | 27,697 |   | 24,836 |   |
| Fixed annuities                             |       | 1,480                                           |       | 2,156                                         |       | 3,249 |   | 4,303 |   |
| Total contract charges                      |       | 15,465                                          |       | 14,741                                        |       | 30,946 |   | 29,139 |   |
| Total premiums and contract charges         |       | $                                               | 31,361     |                                          | $          | 33,424 |   | $ | 56,043 |   | $ | 65,554 |   |

 

### **Adopted accounting standards**

###  

*Statement of Position 05-1, Accounting by InsuranceEnterprises for Deferred Acquisition Costs in Connection with Modifications orExchanges of Insurance Contracts (“SOP 05-1”)*

 

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

 

6

----

 

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

 

InFebruary 2006, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 155, which permits the fair value remeasurement at the date ofadoption of any hybrid financial instrument containing an embedded derivativethat otherwise would require bifurcation under paragraph 12 or 13 of SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”(“SFAS No. 133”);clarifies which interest-only strips and principal-only strips are not subjectto the requirements of SFAS No. 133; establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or hybrid financial instruments that contain embeddedderivatives requiring bifurcation; and clarifies that concentrations of creditrisk in the form of subordination are not embedded derivatives. The Companyadopted the provisions of SFAS No. 155 on January 1, 2007, which wereeffective for all financial instruments acquired, issued or subject to aremeasurement event occurring after the beginning of the first fiscal yearbeginning after September 15, 2006. The Company elected not to remeasure existing hybrid financialinstruments that contained embedded derivatives requiring bifurcation at thedate of adoption pursuant to paragraph 12 or 13 of SFAS No. 133.  The adoption of SFAS No. 155 did nothave a material effect on the results of operations or financial position ofthe Company.

 

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

 

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

 

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

 

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

 

*SFAS No. 159, The Fair ValueOption for Financial Assets and Financial Liabilities — Including an amendmentof FASB Statement No. 115 (“SFAS No. 159”)*

 

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

 

7

----

 

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

 

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

 

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

 

### **Pendingaccounting standard**

###  

*SFAS No. 161, Disclosuresabout Derivative Instruments and Hedging Activities – an amendment of FASBStatement No. 133 (“SFAS No. 161”)*

 

InMarch 2008, the FASB issued SFAS No. 161, which amends and expandsthe disclosure requirements for derivatives currently accounted for inaccordance with SFAS No. 133.  The new disclosures are designed toenhance the understanding of how and why an entity uses derivative instrumentsand how derivative instruments affect an entity’s financial position, resultsof operations, and cash flows.  The standard requires, on a quarterlybasis, quantitative disclosures about the potential cash outflows associatedwith the triggering of credit-related contingent features, if any; tabulardisclosures about the classification and fair value amounts of derivativeinstruments reported in the statement of financial position; disclosure of thelocation and amount of gains and losses on derivative instruments reported inthe statement of operations; and qualitative information about how and why anentity uses derivative instruments and how derivative instruments and relatedhedged items affect the entity’s financial statements.  SFAS No. 161is effective for fiscal periods beginning after November 15, 2008, and isto be applied on a prospective basis only.  SFAS No. 161 affectsdisclosures and therefore will not impact the Company’s results of operationsor financial position.

 

### **2.   Supplemental Cash Flow Information**

###  

Liabilitiesfor collateral received in conjunction with the Company’s securities lendingactivities are reported in other liabilities and accrued expenses in theCondensed Statements of Financial Position. The accompanying cash flows are included in cash flows from operatingactivities in the Condensed Statements of Cash Flows along with the activitiesresulting from management of the proceeds, which are as follows:

 
| ** **                                     | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**                 | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net change in fixed income securities          |       | $                                             | 13,114     |   | $ | (108,438 | ) |
| Net change in short-term investments           |       | (149,818                                      | )          | (84,970 | ) |
| Operating cash flow used                       |       | $                                             | (136,704   | ) | $ | (193,408 | ) |
|                                           |       |                                          |       |   |   |
| Liabilities for collateral, beginning of  year |       | $                                             | (198,138   | ) | $ | (199,486 | ) |
| Liabilities for collateral, end of period      |       | (334,842                                      | )          | (392,894 | ) |
| Operating cash flow provided                   |       | $                                             | 136,704    |   | $ | 193,408 |   |

 

8

----

 

**3.  Fair Value ofFinancial Assets and Financial Liabilities**

 

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

 

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

 

*Financial Liabilities*  Primarily free-standing derivatives (exchange listed and OTC) andderivatives embedded in certain contractholder liabilities.

 

Financialinstruments measured at fair value on a non-recurring basis include:

 

*Financial Assets*: Mortgage loans written-down to fair valuein connection with recognizing other-than-temporary impairments.

 

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

 

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

 

·                  Establishes a three-level hierarchy for fairvalue measurements based upon the transparency of inputs to the valuation as ofthe measurement date;

 

·                  Expands disclosures about financialinstruments measured at fair value.

 

In determining fair value, the Company principallyuses the market approach which generally utilizes market data for the same orsimilar instruments.  To a lesser extent,the Company uses the income approach which involves determining fair valuesfrom discounted cash flow methodologies. SFAS No. 157 establishes a hierarchy for inputs used in determiningfair value that maximize the use of observable inputs and minimizes the use ofunobservable inputs by requiring that observable inputs be used whenavailable.  Certain financial assets arenot carried at fair value on a recurring basis, including investments such asmortgage loans and policy loans, and thus are only categorized in the fairvalue hierarchy when held at fair value on a non-recurring basis.

 

 Observable inputs are those used by marketparticipants in valuing financial instruments that are developed based onmarket data obtained from independent sources. In the absence of sufficient observable inputs, unobservable inputsreflect the Company’s estimates of the assumptions market participants woulduse in valuing financial assets and financial liabilities and are developedbased on the best information available in the circumstances.

 

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

 

9

----

 

Financialassets and financial liabilities recorded on the Condensed Statements of FinancialPosition at fair value are categorized based on the reliability of inputs tothe valuation techniques as follows:

 

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

 

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

 

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

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

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

 

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

 

Theavailability of observable inputs varies by instrument. In situations wherefair value is based on internally developed pricing models or inputs that areunobservable in the market, the determination of fair value requires morejudgment.  The degree of judgmentexercised by the Company in determining fair value is typically greatest forinstruments categorized in Level 3. In many instances, inputs used to measure fairvalue fall into different levels of the fair value hierarchy.  In those instances, for disclosure purposes,the level in the fair value hierarchy within which the fair value measurementis categorized is determined based on the lowest level input that issignificant to the fair value measurement in its entirety.

 

**Summary of Valuation Techniques for Financial Assets andFinancial Liabilities on a Recurring Basis**

 

**Level 1 Measurements**

 

FixedIncome Securities:U.S. Treasuries are in Level 1 and valuation is based on unadjusted quotedprices for identical assets in active markets that the Company can access.

 

Short-term: Comprise actively traded money market fundsthat have daily quoted net asset values for identical assets that the Companycan access.

 

SeparateAccount Assets:  Comprise actively traded mutual funds thathave daily quoted net asset values for identical assets that the Company canaccess. Net asset values for the actively traded mutual funds in which theseparate account assets are invested are obtained daily from the fund managers.

 

**Level 2 Measurements**

 

FixedIncome Securities:

 

*Corporate, including privately placed*: Valued based on inputs including quoted prices for identical or similarassets in markets that are not active. Also includes privately placed securities totaling $316.3 million thatare valued based on market-observable external ratings from independent thirdparty rating agencies.

 

*Municipal:*  Externally rated municipals arevalued based on inputs including quoted prices for identical or similar assetsin markets that are not active.  Includedin municipals are $5.0 million of auction rate securities (“ARS”) other thanthose backed by student loans.  ARSbacked by student loans are included in Level 3.

 

*U.S. Government and Agencies:* Valued based on inputs including quoted prices for identical or similarassets in markets that are not active.

 

*CMBS:*Valuation is principally based on inputs including quoted prices for identicalor similar assets in markets that are not active and are categorized as Level2.

 

*Preferred Stock; MBS; Foreign Government:* Valued based on inputs including quoted prices for identical or similarassets in markets that are not active.

 

Short-term: Commercial paper and other short-term arevalued based on inputs including amortized cost, which approximates fair value,and quoted prices for identical or similar assets in markets that are notactive.

 

10

----

 

**Level 3 Measurements**

 

FixedIncome Securities:

 

*Corporate Privately Placed Securities:* Valued based on non-binding broker quotes and models that are widelyaccepted in the financial services industry and use internally assigned creditratings as inputs and instrument specific inputs.  Instrument specific inputs used in internalfair value determinations include: coupon rate, weighted average life, sectorof the issuer and call provisions. Privately placed securities are categorized as Level 3 as a result ofthe significance of non-market observable inputs. The $1.2 billion of privatelyplaced fixed income securities included in Level 3 comprise $1.1 billion valuedusing an internal model and $120.7 million valued using non-binding brokerquotes.  The internally modeledsecurities are valued based on internal ratings, which are not observable inthe market.  Multiple internal ratingscomprise a National Association of Insurance Commissioners (“NAIC”) ratingcategory and when used in the internal model provide a more refineddetermination of fair value.  The Company’sinternal ratings are primarily consistent with the NAIC ratings which aregenerally updated annually.

 

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

 

*Other CDO:*  Valued based on non–bindingbroker quotes received from brokers who are familiar with the investments.  Due to the reduced availability of actualmarket prices or relevant observable inputs as a result of the decrease inliquidity that has been experienced in the market for these securities, all CLOand other CDO are categorized as Level 3.

 

*CMBS;  Commercial RealEstate Collateralized Debt Obligations (“CRE CDO”):* CRE CDO, which are reported as CMBS, andother CMBS, are valued based on non-binding broker quotes and are categorizedas Level 3.

 

*Municipals:*  Certain distressed municipal securitiesfor which valuation is based on valuation models that are widely accepted inthe financial services industry and require projections of future cash flowsthat are not market—observable are included in Level 3.  Included in this category are $119.2 millionof ARS that are backed by student loans. ARS backed by student loans are valued based on a discounted cash flowmodel with certain inputs to the valuation model that are significant to thevaluation, but are not market observable, including estimates of future couponrates if auction failures continue, maturity assumptions, and illiquiditypremium.

 

OtherInvestments:* *Certain Free-Standing OTC derivatives, suchas caps are valued using valuation models that are widely accepted in thefinancial services industry.  Inputsinclude non-market observable inputs such as volatility assumptions that aresignificant to the valuation of the instruments.

 

ContractholderFunds:  Derivatives embedded in annuity contracts arevalued internally using models widely accepted in the financial servicesindustry that determine a single best estimate of fair value for a block ofcontractholder liabilities that contain certain embedded derivatives.  The models use stochastically determined cashflows based on the contractual elements of embedded derivatives and otherapplicable market data.  These arecategorized as Level 3 as a result of the significance of non-market observableinputs.

 

OtherAssets:  Includes a structured settlement annuityreinsurance agreement accounted for as a derivative instrument pursuant to therequirements of SFAS No. 133. Valued internally utilizing a model that uses interest rate andvolatility assumptions to generate stochastically determined cash flows. Thisitem is categorized as Level 3 as a result of the significance of non-marketobservable inputs.

 

**Financial Assets on a Non-Recurring Basis**

 

Mortgageloans written-down to fair value in connection with recognizing changes inintent to hold until they recover in value and other-than-temporary impairmentsare primarily valued using valuation models that are widely accepted in thefinancial services industry.  Inputsinclude non-market observable inputs such as credit spreads.  At June 30, 2008, the fair value ofmortgage loans totaled $7.8 million and were categorized as Level 3.

 

11

----

 

Thefollowing table summarizes the Company’s financial assets and financialliabilities measured at fair value on a recurring and non-recurring basis as ofJune 30, 2008:

 
| **($ in thousands)**            | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets** | ** **  | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Other  Valuations  and** | ** **    | **Balance as of** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------|-------------|--------------------------------------------|------------|---------------------------------------|------------|----------------------------|---------------|-----------------------------|------------|
| ** **                                | ** ** | **(Level 1)**                                                              | ** **  | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **Netting**                | ** **    | **June 30, 2008** | ** ** |
| **Financial assets**                      |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| Fixed income securities                   |       | $                                                                               | 147,095     |                                       | $          | 4,319,292                             |       | $                          | 1,502,815     |                        |       |   | $ | 5,969,202 |   |
| Short-term investments                    |       | 25,049                                                                          |        | 460,870                                    |       | —                                |       |                       |          | 485,919                     |       |
| Other investments:                        |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| Free-standing derivatives                 |       | —                                                                          |        | —                                     |       | 485                                   |       |                       |          | 485                         |       |
| **Total recurring basis assets**          | ** ** | **172,144**                                                                     | ** **  | **4,780,162**                              | ** ** | **1,503,300**                         | ** ** | ** **                 | ** **    | **6,455,606**               | ** ** |
|                                      |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| Non-recurring basis                       | ** ** | —                                                                          | ** **  | —                                     |       | 7,816                                 |       |                       |          | 7,816                       |       |
| Valued at cost or amortized cost          |       |                                                                            |        |                                       |       |                                  |       | $                          | 740,897       |                        | 740,897    |   |
| Counterparty and cash collateral          |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| netting (1)                               |       |                                                                            |        |                                       |       |                                  |       | (485                       | )             | (485                        | )          |
| **Total investments**                     | ** ** | **172,144**                                                                     | ** **  | **4,780,162**                              | ** ** | **1,511,116**                         | ** ** | **740,412**                | ** **    | **7,203,834**               | ** ** |
|                                      |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| Separate account assets                   |       | 804,994                                                                         |        | —                                     |       | —                                |       |                       |          | 804,994                     |       |
| Other assets                              |       | 171                                                                             |        | —                                     |       | (2,067                                | )          |                       |          | (1,896                      | )          |
|                                      |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| **Total financial assets**                | ** ** | **$**                                                                           | **977,309** | ** **                                 | **$**      | **4,780,162**                         | ** ** | **$**                      | **1,509,049** | ** **                  | **$**      | **740,412** | ** ** | **$** | **8,006,932** | ** ** |
| % of Total financial assets               |       | 12.2                                                                            | %           | 59.7                                       | %          | 18.9                                  | %          | 9.2                        | %             | 100.0                       | %          |
|                                      |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| **Financial liabilities**                 |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| Contractholder funds:                     |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| Derivatives embedded in annuity contracts |       |                                                                            |        | $                                          | —     |                                  | $          | (1,896                     | )             |                        |       | $ | (1,896 | ) |
| Other liabilities:                        |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |   |   |
| Free-standing derivatives                 |       |                                                                            |        | (488                                       | )          | (3,234                                | )          |                       |          | (3,722                      | )          |
| Counterparty and cash collateral          |       |                                                                            |        |                                       |       |                                  |       |                       |          |                        |       |
| netting (1)                               |       |                                                                            |        |                                       |       |                                  |       | $                          | 485           |                        | 485        |   |
| **Total financial liabilities**           | ** ** | ** **                                                                      | ** **  | **$**                                      | **(488**   | **)**                                 | **$**      | **(5,130**                 | **)**         | **$**                       | **485**    | ** ** | **$** | **(5,133** | **)** |
| **% of Total financial liabilities**      |       | ** **                                                                      |        | 9.5                                        | %          | 99.9                                  | %          | (9.4                       | )%            | 100.0                       | %          |
|                                           |            |                                                                                 |             |                                            |            |                                       |            |                            |               |                             |            |  |  |  |  |  |  |  |

 

----

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

----

 

Asrequired by SFAS No. 157, when the inputs used to measure fair value fallwithin different levels of the hierarchy, the level within which the fair valuemeasurement is categorized is based on the lowest level input that issignificant to the fair value measurement in its entirety.  Thus, a Level 3 fair value measurement mayinclude inputs that are observable (Level 1 or Level 2) and unobservable (Level3).  Gains and losses for such assets andliabilities categorized within the Level 3 table may include changes in fairvalue that are attributable to both observable inputs (Level 1 and Level 2) andunobservable inputs (Level 3). Net transfers in and/or out of Level 3 arereported as having occurred at the beginning of the period; therefore, allrealized and unrealized gains and losses on these securities for the period arereflected in the table below. Further, it should be noted that the followingtable does not take into consideration the effect of offsetting Level 1 andLevel 2 financial instruments entered into that economically hedge certainexposures to the Level 3 positions.

 

12

----

 

 

The following table provides a summary of changes in fair value duringthe three—month period ended June 30, 2008 of Level 3 financial assets andfinancial liabilities held at fair value on a recurring basis at June 30,2008.

 
| ** **                                         | ** ** | ** **                                            | ** **    | **Total realized and unrealized  Gains (Losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** **  | ** **                                                          | ** ** | ** **                                           | **Total  Gains (Losses)  included in** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------------|---------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|---------------------------------------------------------------------|------------|------------------------------------------------------|--------------------------------------------------|------------|
| **($ in thousands)**                     | ** ** | **Balance as of  March 31, 2008** | ** **    | **Net Income**** ****(1)**                                                         | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  Sales, Issuances  and Settlements,  net** | ** **  | **Net  Transfers In  and/or (Out)  of Level 3** | ** ** | **Balance as of  June 30, 2008** | ** **                                       | ** ** | **Net Income for  Instruments  Still Held at  June 30, 2008**** ****(4)** | ** ** |
| **Financial  assets**                              |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| Fixed income  securities                           |       | $                                                     | 1,485,610     |                                                                                         | $          | (18,391                                                 | )          | $                                                                 | (24,321     | )                                                                   | $          | (17,596                                              | )                                                | $          | 77,513 |   | $ | 1,502,815 |   |   | $ | (19,677 | ) |
| Other  investments:                                |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| Free-standing  derivatives, net                    |       | (3,326                                                | )             | 136                                                                                          |       | —                                                  |       | 441                                                               |        | —                                                              |       | (2,749                                               | )                                                | (2)        | 1,582 |   |
| **Total  investments**                             |       | 1,482,284                                             |          | (18,255                                                                                      | )          | (24,321                                                 | )          | (17,155                                                           | )           | 77,513                                                              |       | 1,500,066                                            | (3)                                              | (18,095    | ) |
| Other assets                                       |       | 506                                                   |          | (2,573                                                                                       | )          | —                                                  |       | —                                                            |        | —                                                              |       | (2,067                                               | )                                                |       | (2,573 | ) |
| **Total  recurring Level 3 financial assets**      | ** ** | **$**                                                 | **1,482,790** | ** **                                                                                   | **$**      | **(20,828**                                             | **)**      | **$**                                                             | **(24,321** | **)**                                                               | **$**      | **(17,155**                                          | **)**                                            | **$**      | **77,513** | ** ** | **$** | **1,497,999** | ** ** | ** ** | **$** | **(20,668** | **)** |
|                                               |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| **Financial  liabilities**                         |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| Contractholder  funds:                             |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| Derivatives  embedded in annuity contracts         |       | $                                                     | (1,253        | )                                                                                            | $          | (675                                                    | )          | $                                                                 | —      |                                                                | $          | 32                                                   |                                             | $          | — |   | $ | (1,896 | ) |   | $ | (675 | ) |
| **Total  recurring Level 3 financial liabilities** | ** ** | **$**                                                 | **(1,253**    | **)**                                                                                        | **$**      | **(675**                                                | **)**      | **$**                                                             | **—**  | ** **                                                          | **$**      | **32**                                               | ** **                                       | **$**      | **—** | ** ** | **$** | **(1,896** | **)** | ** ** | **$** | **(675** | **)** |

 

----

(1)          The amounts above total$(21.5) million and are reported in the Condensed Statements of Operations asfollows: $(22.3) million in Realizedcapital gains and losses; $1.5 million in Net investment income, and $(676)thousand in Contract benefits.

(2)          Comprises $485 thousandof financial assets and $(3.2) million of financial liabilities.

(3)          Comprises $1.50 billionof investments and $(3.2) million of free—standing derivatives included infinancial liabilities.

(4)          The amounts above represent gains and lossesincluded in net income for the period of time that the financial asset orfinancial liability was determined to be in Level 3. These gains and lossestotal $(21.4) million and are reported in the Condensed Statements ofOperations as follows: $(22.2) million in Realized capital gains and losses;$1.5 million in Net investment income, and $(676) thousand in Contractbenefits.

----

 

Thefollowing table provides a summary of changes in fair value during the six–monthperiod ended June 30, 2008 of Level 3 financial assets and financialliabilities held at fair value on a recurring basis at June 30, 2008.

 
| ** **                                         | ** ** | ** **                                         | ** **    | **Total realized and unrealized  Gains (Losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** **  | ** **                                                          | ** ** | ** **                                           | **Total  Gains (Losses)  included in** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|---------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|---------------------------------------------------------------------|------------|------------------------------------------------------|--------------------------------------------------|------------|
| **($ in thousands)**                     | ** ** | **Balance as of  January 1,  2008** | ** **    | **Net Income**** ****(1)**                                                         | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  Sales, Issuances  and Settlements,  net** | ** **  | **Net  Transfers In  and/or (Out)  of Level 3** | ** ** | **Balance as of  June 30, 2008** | ** **                                       | ** ** | **Net Income for  Instruments  Still Held at  June 30, 2008 ****(4)** | ** ** |
| **Financial  assets**                              |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| Fixed income  securities                           |       | $                                                  | 1,469,898     |                                                                                         | $          | (10,393                                                 | )          | $                                                                 | (46,191     | )                                                                   | $          | (14,145                                              | )                                                | $          | 103,646 |   | $ | 1,502,815 |   |   | $ | (19,289 | ) |
| Other  investments:                                |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| Free-standing  derivatives, net                    |       | (980                                               | )             | (2,336                                                                                       | )          | —                                                  |       | 567                                                               |        | —                                                              |       | (2,749                                               | )                                                | (2)        | 1,602 |   |
| **Total  investments**                             |       | 1,468,918                                          |          | (12,729                                                                                      | )          | (46,191                                                 | )          | (13,578                                                           | )           | 103,646                                                             |       | 1,500,066                                            | (3)                                              | (17,687    | ) |
| Other assets                                       |       | (1,733                                             | )             | (334                                                                                         | )          | —                                                  |       | —                                                            |        | —                                                              |       | (2,067                                               | )                                                |       | (334 | ) |
| **Total  recurring Level 3 financial assets**      | ** ** | **$**                                              | **1,467,185** | ** **                                                                                   | **$**      | **(13,063**                                             | **)**      | **$**                                                             | **(46,191** | **)**                                                               | **$**      | **(13,578**                                          | **)**                                            | **$**      | **103,646** | ** ** | **$** | **1,497,999** | ** ** | ** ** | **$** | **(18,021** | **)** |
|                                               |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| **Financial  liabilities**                         |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| Contractholder  funds:                             |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |                                             |       |   |   |
| Derivatives  embedded in annuity contracts         |       | $                                                  | 174           |                                                                                         | $          | (2,103                                                  | )          | $                                                                 | —      |                                                                | $          | 33                                                   |                                             | $          | — |   | $ | (1,896 | ) |   | $ | (2,103 | ) |
| **Total  recurring Level 3 financial liabilities** | ** ** | **$**                                              | **174**       | ** **                                                                                   | **$**      | **(2,103**                                              | **)**      | **$**                                                             | **—**  | ** **                                                          | **$**      | **33**                                               | ** **                                       | **$**      | **—** | ** ** | **$** | **(1,896** | **)** | ** ** | **$** | **(2,103** | **)** |

 

----

(1)          The amounts above total$(15.2) million and are reported in the Condensed Statements of Operations asfollows: $(16.1) million in Realizedcapital gains and losses; $3.0 million in Net investment income, and $(2.1)million in Contract benefits.

(2)          Comprises $485 thousandof financial assets and $(3.2) million of financial liabilities.

(3)          Comprises $1.50 billionof investments and $(3.2) million of free—standing derivatives included infinancial liabilities.

(4)          The amounts above represent gains and losses included in net income forthe period of time that the financial asset or financial liability wasdetermined to be in Level 3. These gains and losses total $(20.1)million and are reported in the Condensed Statements of Operations as follows:$(21.0) million in Realized capitalgains and losses; $3.0 million in Net investment income, and $(2.1) million inContract benefits.

 

13

----

 

**4.  Reinsurance**

 

Theeffects of reinsurance on premiums and contract charges are as follows:

 

 

 
| **($ in thousands)**                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Premiums and contract charges**                  |       |                                            |       |                                          |       |   |   |   |   |
| Direct                                             |       | $                                               | 40,168     |                                          | $          | 44,373 |   | $ | 74,221 |   | $ | 86,062 |   |
| Assumed – non-affiliate                       |       | 227                                             |       | 347                                           |       | 513 |   | 685 |   |
| Ceded                                              |       |                                            |       |                                          |       |   |   |   |   |
| Affiliate                                          |       | (984                                            | )          | (992                                          | )          | (1,976 | ) | (1,984 | ) |
| Non-affiliate                                      |       | (8,050                                          | )          | (10,304                                       | )          | (16,715 | ) | (19,209 | ) |
| Premiums and contract charges, net of  reinsurance |       | $                                               | 31,361     |                                          | $          | 33,424 |   | $ | 56,043 |   | $ | 65,554 |   |

 

The effects of reinsuranceon contract benefits are as follows:

 
| **($ in thousands)**        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Contract benefits**                 |       |                                            |       |                                          |       |   |   |   |   |
| Direct                                |       | $                                               | 50,085     |                                          | $          | 50,301 |   | $ | 95,931 |   | $ | 98,393 |   |
| Assumed – non-affiliate          |       | 103                                             |       | 237                                           |       | 379 |   | 489 |   |
| Ceded                                 |       |                                            |       |                                          |       |   |   |   |   |
| Affiliate                             |       | (666                                            | )          | (97                                           | )          | (2,160 | ) | (1,272 | ) |
| Non-affiliate                         |       | (3,168                                          | )          | (1,736                                        | )          | (8,991 | ) | (6,072 | ) |
| Contract benefits, net of reinsurance |       | $                                               | 46,354     |                                          | $          | 48,705 |   | $ | 85,159 |   | $ | 91,538 |   |

 

The effects of reinsuranceon interest credited to contractholder funds are as follows:

 
| **($ in thousands)**                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Interest credited to contractholder funds**                  |       |                                            |       |                                          |       |   |   |   |   |
| Direct                                                         |       | $                                               | 47,481     |                                          | $          | 46,741 |   | $ | 93,776 |   | $ | 93,881 |   |
| Assumed – non-affiliate                                   |       | 5                                               |       | 9                                             |       | 14 |   | 15 |   |
| Ceded– non-affiliate                                      |       | (2,908                                          | )          | (3,502                                        | )          | (5,911 | ) | (6,998 | ) |
| Interest credited to contractholder funds,  net of reinsurance |       | $                                               | 44,578     |                                          | $          | 43,248 |   | $ | 87,879 |   | $ | 86,898 |   |

 

Inaddition to amounts included in the tables above are reinsurance premiums cededto ALIC of $822 thousand and $797 thousand for the second quarter of June 30,2008 and 2007, respectively, and $1.64 million and $1.58 million for the firstsix months of 2008 and 2007, respectively, under the terms of the structuredsettlement annuity reinsurance agreement. These amounts are reflected as a component of realized capital gains andlosses on the Condensed Statements of Operations as the treaty is recorded as aderivative instrument pursuant to the requirements of SFAS No. 133.

 

14

----

 

### **5.  Guarantees and Contingent Liabilities**

###  

**Guaranty funds**

 

Understate insurance guaranty fund laws, insurers doing business in a state can beassessed, up to prescribed limits, for certain obligations of insolventinsurance companies to policyholders and claimants.  Amounts assessed to each company aretypically related to its proportion of business written in each state.

TheNew York Liquidation Bureau (the “Bureau”) has publicly reported that ExecutiveLife Insurance Company of New York (“Executive Life”), currently under itsjurisdiction as part of a 1992 court-ordered rehabilitation plan, may only beable to meet future obligations of its annuity contracts for the next fifteenyears.  The shortfall is estimated to bein the range of $650 million to $750 million. If Executive Life were to be declared insolvent in the future, theCompany would likely have exposure to guaranty fund assessments or other costs.

Basedon currently available information, the outcome of this situation is uncertainat this time.  The Bureau may eventuallytake actions to address this situation that may lead to guaranty fundassessments or other costs to the Company. Under current law, the Company may be allowed to recoup a portion of theamount of any additional guaranty fund assessment in periods subsequent to therecognition of the assessment by offsetting future premium taxes.  The Company’s market share in New York wasapproximately 5.5% in 2006 based on industry annuity premium.

 

**Guarantees**

 

Relatedto the disposal through reinsurance of our variable annuity business toPrudential Financial, Inc. and its subsidiary in 2006, the Company andALIC have agreed to indemnify Prudential for certain pre–closing contingentliabilities (including extra–contractual liabilities of the Company and ALIC,and liabilities specifically excluded from the transaction) that the Companyand ALIC have agreed to retain.  Inaddition, the Company and ALIC will indemnify Prudential for certain post–closingliabilities that may arise from the acts of the Company, ALIC and its agents,including in connection with the Company’s and ALIC’s provision of transitionservices. The Reinsurance Agreements contain no limitations or indemnificationswith regard to insurance risk transfer, and transferred all of the future risksand responsibilities for performance on the underlying variable annuitycontracts to Prudential, including those related to benefit guarantees, inaccordance with the provisions of SFAS No. 113 “Accounting and Reportingfor Reinsurance of Short–Duration and Long–Duration Contracts”. Management doesnot believe this agreement will have a material adverse effect on results ofoperations, cash flows or the financial position of the Company.

Inthe normal course of business, the Company provides standard indemnificationsto contractual counterparties in connection with numerous transactions,including acquisitions and divestures. The types of indemnifications typically provided includeindemnifications for breaches of representations and warranties, taxes andcertain other liabilities, such as third party lawsuits.  The indemnification clauses are oftenstandard contractual terms and are entered into in the normal course ofbusiness based on an assessment that the risk of loss would be remote.  The terms of the indemnifications vary induration and nature.  In many cases, themaximum obligation is not explicitly stated and the contingencies triggeringthe obligation to indemnify have not occurred and are not expected tooccur.  Consequently, the maximum amountof the obligation under such indemnifications is not determinable.  Historically, the Company has not made anymaterial payments pursuant to these obligations.

Theaggregate liability balance related to all guarantees was not material as of June 30,2008.

 

**Regulation**

 

The Company is subject to changing social, economicand regulatory conditions.  From time totime regulatory authorities or legislative bodies seek to impose additionalregulations regarding agent and broker compensation and otherwise expandoverall regulation of insurance products and the insurance industry.  The ultimate changes and eventual effects ofthese initiatives on the Company’s business, if any, are uncertain.

 

15

----

 

**Legal and regulatory proceedings and inquiries**

 

***Background***

 

The Company and certain affiliates are involved in anumber of lawsuits, regulatory inquiries, and other legal proceedings arisingout of various aspects of its business. As background to the “Proceedings” subsection below, please note thefollowing:

 

·                  Thesematters raise difficult and complicated factual and legal issues and aresubject to many uncertainties and complexities, including the underlying factsof each matter; novel legal issues; variations between jurisdictions in whichmatters are being litigated, heard or investigated; differences in applicablelaws and judicial interpretations; the length of time before many of thesematters might be resolved by settlement, through litigation or otherwise; thefact that some of the lawsuits are putative class actions in which a class hasnot been certified and in which the purported class may not be clearly defined;the fact that some of the lawsuits involve multi-state class actions in whichthe applicable law(s) for the claims at issue is in dispute and thereforeunclear; and the current challenging legal environment faced by largecorporations and insurance companies.

 

·                  Theoutcome on these matters may also be affected by decisions, verdicts, and settlements,and the timing of such decisions, verdicts, and settlements, in otherindividual and class action lawsuits that involve the Company, other insurers,or other entities and by other legal, governmental, and regulatory actions thatinvolve the Company, other insurers, or other entities.

 

·                  Inthe lawsuits, plaintiffs seek a variety of remedies including equitable reliefin the form of injunctive and other remedies and monetary relief in the form ofcontractual and extra-contractual damages. In some cases, the monetary damages sought include punitivedamages.  Often specific informationabout the relief sought, such as the amount of damages, is not availablebecause plaintiffs have not requested specific relief in their pleadings.  In Allstate’s experience, when specificmonetary demands are made in pleadings, they bear little relation to theultimate loss, if any, to the Company.

 

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

 

·                  Forthe reasons specified above, it is often not possible to make meaningfulestimates of the amount or range of loss that could result from the mattersdescribed below in the “Proceedings” subsection.  The Company reviews these matters on anongoing basis and follows the provisions of SFAS No. 5, “Accounting forContingencies”, when making accrual and disclosure decisions.  When assessing reasonably possible andprobable outcomes, the Company bases its decisions on its assessment of theultimate outcome following all appeals.

 

·                  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 unfavorable outcome in one or more of these matters,the ultimate liability may be in excess of amounts currently reserved and maybe material to the Company’s operating results or cash flows for a particularquarterly 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**

 

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

 

16

----

 

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

 

·                  These matters include a lawsuit filed in 2001by the U.S. Equal Employment Opportunity Commission (“EEOC”) allegingretaliation under federal civil rights laws (the “EEOC I” suit) and a classaction filed in 2001 by former employee agents alleging retaliation and agediscrimination under the Age Discrimination in Employment Act (“ADEA”), breachof contract and ERISA violations (the “Romero I” suit).   In 2004, in the consolidated EEOC I andRomero I litigation, the trial court issued a memorandum and order that, amongother things, certified classes of agents, including a mandatory class ofagents who had signed a release, for purposes of effecting the court’sdeclaratory judgment that the release is voidable at the option of the releasesigner.  The court also ordered that anagent who voids the release must return to AIC “any and all benefits receivedby the [agent] in exchange for signing the release.”  The court also stated that, “on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order and in January 2007,the judge denied their request.  In June 2007,the court granted AIC’s motions for summary judgment.  Following plaintiffs’ filing of a notice of appeal,the Third Circuit issued an order in December 2007 stating that the noticeof appeal was not taken from a final order within the meaning of the federallaw and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should notsummarily be dismissed and that the question of whether the matter isappealable at this time will be addressed by the Court along with the merits ofthe appeal.

 

·                  The EEOC also filed another lawsuit in 2004alleging age discrimination with respect to a policy limiting the rehire ofagents affected by the agency program reorganization (the “EEOC II” suit).  In EEOC II, in 2006, the court grantedpartial summary judgment to the EEOC. Although the court did not determine that AIC was liable for agediscrimination under the ADEA, it determined that the rehire policy resulted ina disparate impact, reserving for trial the determination on whether AIC hadreasonable factors other than age to support the rehire policy.  In June 2008, the Eighth Circuit Courtof Appeals affirmed summary judgment in the EEOC’s favor.  AIC filed a petition for rehearing *en banc*.

 

·                  AIC is also defending a certified classaction filed by former employee agents who terminated their employment prior tothe agency program reorganization. Plaintiffs allege that they were constructively discharged so thatAllstate could avoid paying ERISA and other benefits offered under thereorganization.  They claim that theconstructive discharge resulted from the implementation of agency standards,including mandatory office hours and a requirement to have licensed staffavailable during business hours.  Thecourt approved the form of class notice which was sent to approximately 1,800potential class members in November 2007. Fifteen individuals opted out. AIC’s motions for judgment on the pleadings were partially granted.  In May 2008, the Court granted summaryjudgment in AIC’s favor on all class claims. Plaintiffs moved for reconsideration and in the alternative to decertifythe class.  AIC opposed this motion andfiled a motion for summary judgment with respect to the remaining non-classclaim.

 

·                  A putative nationwide class action has alsobeen filed by former employee agents alleging various violations of ERISA,including a worker classification issue. These plaintiffs are challenging certain amendments to the AgentsPension Plan and are seeking to have exclusive agent independent contractorstreated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was thesubject of further proceedings on appeal, and was reversed and remanded to thetrial court in 2005.  In June 2007,the court granted AIC’s motion to dismiss the case.  Following plaintiffs’ filing of a notice ofappeal, the Third Circuit issued an order in December 2007 stating thatthe notice of appeal was not taken from a final order within the meaning of thefederal law and thus not appealable at this time. In March 2008, the ThirdCircuit decided that the appeal should not summarily be dismissed and that thequestion of whether the matter is appealable at this time will be addressed bythe Court along with the merits of the appeal.

 

In all of these various matters, plaintiffs seek compensatory andpunitive damages, and equitable relief. AIC has been vigorously defending these lawsuits and other mattersrelated to its agency program reorganization.

 

17

----

 

**Other Matters**

 

Variousother legal, governmental, and regulatory actions, including state marketconduct exams, and other governmental and regulatory inquiries are currentlypending that involve the Company and specific aspects of its conduct ofbusiness.  Like other members of theinsurance industry, the Company is the target of a number of lawsuits and othertypes of proceedings, some of which involve claims for substantial orindeterminate amounts.  These actions arebased on a variety of issues and target a range of the Company’spractices.  The outcome of these disputesis currently unpredictable.

 

Oneor more of these matters could have an adverse effect on the Company’soperating results or cash flows for a particular quarterly or annualperiod.  However, based on informationcurrently known to it, management believes that the ultimate outcome of allmatters described 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.

 

**6.  OtherComprehensive Income**

 

The components of other comprehensive (loss) income on a pretax andafter-tax basis are as follows:

 
| ** **                                                              | ** ** | **Three months ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **($ in thousands)**                                          | ** ** | **Pretax**                                          | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding losses arising during  the period                    |       | $                                                   | (82,523    | ) | $ | 28,883 |   | $ | (53,640 | ) | $ | (59,053 | ) | $ | 20,669 |   | $ | (38,384 | ) |
| Less: reclassification adjustment of  realized capital gains and losses |       | (52,620                                             | )          | 18,417 |   | (34,203 | ) | (311 | ) | 109 |   | (202 | ) |
| Unrealized net capital gains and losses                                 |       | (29,903                                             | )          | 10,466 |   | (19,437 | ) | (58,742 | ) | 20,560 |   | (38,182 | ) |
| Other comprehensive loss                                                |       | $                                                   | (29,903    | ) | $ | 10,466 |   | (19,437 | ) | $ | (58,742 | ) | $ | 20,560 |   | (38,182 | ) |
|                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                                                       |       |                                                |       |   |   | (20,559 | ) |   |   |   |   | 11,704 |   |
|                                                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive loss                                                      |       |                                                |       |   |   | $ | (39,996 | ) |   |   |   |   | $ | (26,478 | ) |

 
| ** **                                                              | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **($ in thousands)**                                          | ** ** | **Pretax**                                        | ** ** | **Tax** | ** ** | **After-  tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-  tax** | ** ** |
|                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding losses arising during  the period                    |       | $                                                 | (116,934   | ) | $ | 40,926 |   | $ | (76,008 | ) | $ | (58,729 | ) | $ | 20,555 |   | $ | (38,174 | ) |
| Less: reclassification adjustment of  realized capital gains and losses |       | (51,387                                           | )          | 17,985 |   | (33,402 | ) | 942 |   | (330 | ) | 612 |   |
| Unrealized net capital gains and losses                                 |       | (65,547                                           | )          | 22,941 |   | (42,606 | ) | (59,671 | ) | 20,885 |   | (38,786 | ) |
| Other comprehensive loss                                                |       | $                                                 | (65,547    | ) | $ | 22,941 |   | (42,606 | ) | $ | (59,671 | ) | $ | 20,885 |   | (38,786 | ) |
|                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                              |       |                                              |       |   |   | 1,018 |   |   |   |   |   | 18,377 |   |
|                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive loss                                                      |       |                                              |       |   |   | $ | (41,588 | ) |   |   |   |   | $ | (20,409 | ) |

 

18

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholder ofAllstate Life Insurance Company of New York:

 

Wehave reviewed the accompanying condensed statement of financial position ofAllstate Life Insurance Company of New York (the “Company”, an affiliate of TheAllstate Corporation) as of June 30, 2008, and the related condensedstatements of operations for the three-month and six-month periods ended June 30,2008 and 2007, and the condensed statements of cash flows for the six-monthperiods ended June 30, 2008 and 2007. These interim financial statements are the responsibility of the Company’smanagement.

 

Weconducted our reviews in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financial information consists principally ofapplying analytical procedures and making inquiries of persons responsible forfinancial and accounting matters.  It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

 

Basedon our reviews, we are not aware of any material modifications that should bemade to such condensed interim financial statements for them to be inconformity with accounting principles generally accepted in the United Statesof America.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the statement of financial positionof Allstate Life Insurance Company of New York as of December 31, 2007,and the related statements of operations and comprehensive income, shareholder’sequity, and cash flows for the year then ended (not presented herein); and inour report dated March 13, 2008, which report includes an explanatoryparagraph relating to a change in the Company’s method of accounting foruncertainty in income taxes and accounting for deferred acquisition costsassociated with internal replacements in 2007, we expressed an unqualifiedopinion on those financial statements. In our opinion, the information set forth in the accompanying condensedstatement of financial position as of December 31, 2007 is fairly stated,in all material respects, in relation to the statement of financial positionfrom which it has been derived.

 

 
| /s/  Deloitte & Touche LLP |   |
|-------------------------------------|--------|
|                                |   |
| Chicago,  Illinois                  |   |
| August 7,  2008                |   |

 

19

----

 

**Item2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH ANDSIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007**

 

### **OVERVIEW**

###  

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

 

### **OPERATIONS**

###  

Summarizedfinancial data is presented in the following table.

 
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**            | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                |       |                                            |       |                                          |       |   |   |   |   |
| **Revenues**                              |       |                                            |       |                                          |       |   |   |   |   |
| Premiums                                  |       | $                                               | 15,896     |                                          | $          | 18,683 |   | $ | 25,097 |   | $ | 36,415 |   |
| Contract charges                          |       | 15,465                                          |       | 14,741                                        |       | 30,946 |   | 29,139 |   |
| Net investment income                     |       | 100,218                                         |       | 96,939                                        |       | 199,964 |   | 190,907 |   |
| Realized capital gains and losses         |       | (60,113                                         | )          | (839                                          | )          | (58,392 | ) | (2,744 | ) |
| Total revenues                            |       | 71,466                                          |       | 129,524                                       |       | 197,615 |   | 253,717 |   |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| **Costs and expenses**                    |       |                                            |       |                                          |       |   |   |   |   |
| Contract benefits                         |       | (46,354                                         | )          | (48,705                                       | )          | (85,159 | ) | (91,538 | ) |
| Interest credited to contractholder funds |       | (44,578                                         | )          | (43,248                                       | )          | (87,879 | ) | (86,898 | ) |
| Amortization of DAC                       |       | (1,167                                          | )          | (11,213                                       | )          | (2,618 | ) | (28,973 | ) |
| Operating costs and expenses              |       | (10,981                                         | )          | (8,410                                        | )          | (20,003 | ) | (17,554 | ) |
| Total costs and expenses                  |       | (103,080                                        | )          | (111,576                                      | )          | (195,659 | ) | (224,963 | ) |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| (Loss) gain on disposition of operations  |       | (90                                             | )          | 253                                           |       | (358 | ) | (132 | ) |
| Income tax benefit (expense)              |       | 11,145                                          |       | (6,497                                        | )          | (580 | ) | (10,245 | ) |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Net (loss) income                         |       | $                                               | (20,559    | )                                             | $          | 11,704 |   | $ | 1,018 |   | $ | 18,377 |   |
|                                      |       |                                            |       |                                          |       |   |   |   |   |
| Investments at June 30               |       |                                            |       |                                          |       | $ | 7,203,834 |   | $ | 6,913,312 |   |

 

*Net loss*****in the second quarter of 2008****of $20.6 million compared to net income of$11.7 million in the same period of 2007, and net income of $1.0 million in thefirst six months of 2008 compared to net income of $18.4 million in the firstsix months of 2007.  The changes were theresult of an increase in net realized capital losses in the current yearperiods compared to the prior year periods.

 

**Analysis of Revenues**Total revenues decreased 44.8% or $58.1million in the second quarter of 2008 and decreased 22.1% or $56.1 million inthe first six months of 2008, compared to the same periods of 2007, due mostlyto higher  net realized capital losses inthe current year periods compared to the prior year periods, and, to a muchlesser extent, lower premiums, partially offset by higher net investment incomeand contract charges in the current year periods compared to the prior yearperiods.

 

*Premiums*****represent revenues generated from traditionallife insurance, immediate annuities with life contingencies, accident andhealth and other insurance products that have significant mortality ormorbidity risk.

 

*Contract charges*****are revenues generated frominterest-sensitive and variable life insurance, and fixed annuities for whichdeposits are classified as contractholder funds or separate accountsliabilities.  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 incontractholder funds are considered in the evaluation of growth and asindicators of future levels of revenues.

 

20

----

 

The following table summarizes premiums and contractcharges by product.

 
| ** **                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**              | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| **Premiums**                                | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional life insurance                  |       | $                                               | 7,867      |                                          | $          | 5,978 |   | $ | 12,990 |   | $ | 12,362 |   |
| Immediate annuities with life contingencies |       | 6,022                                           |       | 11,188                                        |       | 8,172 |   | 20,987 |   |
| Accident and health and other               |       | 2,007                                           |       | 1,517                                         |       | 3,935 |   | 3,066 |   |
| **Total premiums**                          |       | 15,896                                          |       | 18,683                                        |       | 25,097 |   | 36,415 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| **Contract charges**                        |       |                                            |       |                                          |       |   |   |   |   |
| Interest-sensitive life insurance           |       | 13,985                                          |       | 12,585                                        |       | 27,697 |   | 24,836 |   |
| Fixed annuities                             |       | 1,480                                           |       | 2,156                                         |       | 3,249 |   | 4,303 |   |
| **Total contract charges (1)**              |       | 15,465                                          |       | 14,741                                        |       | 30,946 |   | 29,139 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| **Premiums and contract charges**           |       | $                                               | 31,361     |                                          | $          | 33,424 |   | $ | 56,043 |   | $ | 65,554 |   |

 

----

(1)          Total contract charges for the second quarter of 2008 and 2007 includecontract charges related to the cost of insurance of $9.6 million and $8.4million, respectively.  Total contractcharges for the first six months of 2008 and 2007 include contract chargesrelated to the cost of insurance of $19.2 million and $16.7 million,respectively.

----

 

Total premiums decreased 14.9% and 31.1% in the second quarter andfirst six months of 2008, respectively, compared to the same periods of2007.  The decline in both periods wasprimarily the result of lower sales of life contingent immediate annuities dueto competitive market conditions, partially offset by higher sales oftraditional life and accident and health insurance policies.

Contract charges increased 4.9% and 6.2% in the second quarter andfirst six months of 2008, respectively, compared to the same periods of 2007due to higher contract charges on interest-sensitive life insurance policiesresulting from increased contract charge rates and growth in business in force,partially offset by decreased contract charges on fixed annuities resultingprimarily from lower surrender charges.

 

21

----

 

*Contractholder funds* represent interest-bearing liabilitiesarising from the sale of fixed annuities, interest-sensitive life insurancepolicies and variable life deposits allocated to fixed accounts.  The balance of contractholder funds is equalto the cumulative deposits received and interest credited to the contractholderless cumulative contract  benefits,surrenders, withdrawals and contract charges for mortality or administrativeexpenses.

 The following table shows the changes incontractholder funds.

 
| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                          |       |                                            |       |                                          |       |   |   |   |   |
| **Contractholder funds, beginning balance**         |       | $                                               | 4,866,228  |                                          | $          | 4,696,297 |   | $ | 4,848,461 |   | $ | 4,708,428 |   |
| **Deposits**                                        |       |                                            |       |                                          |       |   |   |   |   |
| Fixed annuities                                     |       | 230,199                                         |       | 89,389                                        |       | 322,324 |   | 159,021 |   |
| Interest-sensitive life insurance                   |       | 26,853                                          |       | 27,145                                        |       | 52,835 |   | 50,274 |   |
| Variable life deposits allocated to fixed  accounts |       | 18                                              |       | 14                                            |       | 29 |   | 29 |   |
| Total deposits                                      |       | 257,070                                         |       | 116,548                                       |       | 375,188 |   | 209,324 |   |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| **Interest credited**                               |       | 47,602                                          |       | 44,342                                        |       | 92,718 |   | 88,556 |   |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| **Benefits, withdrawals and other adjustments**     |       |                                            |       |                                          |       |   |   |   |   |
| Benefits                                            |       | (33,231                                         | )          | (37,111                                       | )          | (74,444 | ) | (75,167 | ) |
| Surrenders and partial withdrawals                  |       | (77,200                                         | )          | (80,360                                       | )          | (160,807 | ) | (160,663 | ) |
| Contract charges                                    |       | (13,292                                         | )          | (11,902                                       | )          | (26,129 | ) | (23,594 | ) |
| Net transfers to separate accounts                  |       | (2                                              | )          | —                                        |       | (7 | ) | — |   |
| Other adjustments (1)                               |       | (13,813                                         | )          | (15,946                                       | )          | (21,618 | ) | (35,016 | ) |
| Total benefits, withdrawals and other  adjustments  |       | (137,538                                        | )          | (145,319                                      | )          | (283,005 | ) | (294,440 | ) |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| **Contractholder funds, ending balance**            |       | $                                               | 5,033,362  |                                          | $          | 4,711,868 |   | $ | 5,033,362 |   | $ | 4,711,868 |   |

 

----

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

----

 

Contractholderfunds increased 3.4% in the second quarter of 2008, compared to an increase of0.3% in the second quarter of 2007, and increased 3.8% in the first six monthsof 2008, compared to an increase of 0.1% in the same period in the prioryear.  Average contractholder fundsincreased 5.2% and 4.9% in the second quarter and first six months of 2008,respectively, compared to the same periods in 2007.

Contractholderdeposits increased 120.6% and 79.2% in the second quarter and first six monthsof 2008, compared to the same periods of 2007 primarily due to higher depositson fixed annuities.  Deposits on fixedannuities increased 157.5% and 102.7% in the second quarter and first sixmonths of 2008, respectively, compared to the same periods of 2007, dueprimarily to an improved sales environment for fixed annuities relative tocompeting products resulting from a steeper interest rate yield curve.

Surrendersand partial withdrawals decreased 3.9% in the second quarter of 2008 comparedto the same period of 2007 and were consistent in the first six months of 2008compared to the same period in the prior year. The decrease in the second quarter of 2008 was due to lower surrendersand partial withdrawals on fixed annuities and, to a lesser extent,interest-sensitive life insurance products. In the first six months of 2008, slightly higher surrenders and partialwithdrawals on fixed annuities were mostly offset by slightly lower surrendersand partial withdrawals on interest-sensitive life insurance products.  The annualized surrender and partialwithdrawal rate on deferred fixed annuities and interest-sensitive lifeinsurance products, based on the beginning of period contractholder funds, was8.2% and 8.6% in the first six months of 2008 and 2007, respectively.

 

22

----

 

*Net investment income* increased 3.4% and 4.7% in the secondquarter and first six months of 2008, respectively,  compared to the same periods of 2007 due tohigher average portfolio balances, partially offset by lower investment yields.

 

*Net realized capital gains and losses* reflected net losses of $60.1 million and$839 thousand in the second quarter of 2008 and 2007, respectively, and $58.4million and $2.7 million in the first six months of 2008 and 2007,respectively.  For further discussion ofrealized capital gains and losses, see the Investments section of MD&A.

 

**Analysis of Costs and Expenses**Total costs and expenses decreased 7.6% and13.0% in the second quarter and first six months of 2008, respectively,compared with the same periods of 2007, due to lower amortization of deferredpolicy acquisition costs (“DAC”) and contract benefits, partially offset byhigher operating costs and expenses and interest credited to contractholderfunds.

 

*Contract benefits* decreased 4.8% and 7.0% in the second quarter and first six months of2008, respectively, compared to the same periods in 2007, mostly resulting fromlower contract benefits on annuities due primarily to the impact of lower salesof immediate annuities with life contingencies on reserve changes.

Weanalyze our mortality and morbidity results using the difference betweenpremiums and contract charges earned for the cost of insurance and contractbenefits excluding the portion related to the implied interest on immediateannuities with life contingencies (“benefit spread”).  This implied interest totaled $27.3 millionand $26.8 million in the second quarter of 2008 and 2007, respectively, andtotaled $54.6 million and $53.4 million in the first six months of 2008 and2007, respectively.  The benefit spread by product group isdisclosed in the following table.

 
| ** **                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)** | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Life insurance                 |       | $                                               | 7,801      |                                          | $          | 5,210 |   | $ | 16,047 |   | $ | 12,363 |   |
| Annuities                      |       | (1,271                                          | )          | (37                                           | )          | (2,258 | ) | 2,619 |   |
| Total benefit spread           |       | $                                               | 6,530      |                                          | $          | 5,173 |   | $ | 13,789 |   | $ | 14,982 |   |

 

*Interest credited to contractholder funds* increased 3.1% and 1.1% in the secondquarter and first six months of 2008****comparedto the same periods in the prior year due primarily to higher averagecontractholder funds partially offset by lower amortization of deferred salesinducements.  Amortization of deferredsales inducements (“DSI”) reflected a credit to income of $505 thousand and$1.3 million in the second quarter and first six months of 2008, respectively,compared to a charge to income of $1.3 million and $3.7 million in the secondquarter and first six months of 2007, respectively. The changes of $1.8 millionand $5.0 million in the second quarter and first six months of 2008,respectively, compared to the same periods in the prior year, werepredominantly the result of increased realized capital losses recorded in thecurrent year periods on assets that support fixed annuities.  We expect an increased rate of DSIamortization in future periods as a result of the deceleration of amortizationrecorded in the second quarter of 2008.

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

 
| ** **                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Annuities                                                |       | $                                               | 17,276     |                                          | $          | 16,506 |   | $ | 34,552 |   | $ | 30,977 |   |
| Life insurance                                           |       | 759                                             |       | 1,077                                         |       | 1,797 |   | 1,458 |   |
| Net investment income on investments  supporting capital |       | 10,263                                          |       | 9,330                                         |       | 21,113 |   | 18,189 |   |
| Total investment spread                                  |       | $                                               | 28,298     |                                          | $          | 26,913 |   | $ | 57,462 |   | $ | 50,624 |   |

 

23

----

 

Tofurther analyze investment spreads, the following table summarizes the weightedaverage investment yield on assets supporting product liabilities and capital,interest crediting rates on investment type products and investment spreads oninvestment type products for the three months ended June 30.

 
| ** **                                                           | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | **2008**                                         | ** ** | **2007**                                                     | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest-sensitive life insurance                                    |       | 5.7                                              | %          | 5.7                                                          | %          | 4.6                                               | %          | 4.4 | % | 1.1 | % | 1.3 | % |
| Deferred fixed annuities                                             |       | 5.6                                              |       | 5.6                                                          |       | 3.5                                               |       | 3.4 |   | 2.1 |   | 2.2 |   |
| Immediate fixed annuities with and without  life contingencies       |       | 7.2                                              |       | 7.6                                                          |       | 6.5                                               |       | 6.7 |   | 0.7 |   | 0.9 |   |
| Investments supporting capital, traditional  life and other products |       | 6.0                                              |       | 5.9                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

Thefollowing table summarizes the weighted average investment yield on assetssupporting product liabilities and capital, interest crediting rates oninvestment type products and investment spreads on investment type products forthe six months ended June 30.

 
| ** **                                                           | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | **2008**                                         | ** ** | **2007**                                                     | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest-sensitive life insurance                                    |       | 5.8                                              | %          | 5.6                                                          | %          | 4.5                                               | %          | 4.6 | % | 1.3 | % | 1.0 | % |
| Deferred fixed annuities                                             |       | 5.6                                              |       | 5.6                                                          |       | 3.5                                               |       | 3.3 |   | 2.1 |   | 2.3 |   |
| Immediate fixed annuities with and without  life contingencies       |       | 7.2                                              |       | 7.5                                                          |       | 6.5                                               |       | 6.7 |   | 0.7 |   | 0.8 |   |
| Investments supporting capital, traditional  life and other products |       | 6.1                                              |       | 5.8                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

Thefollowing table summarizes our product liabilities as of June 30 andindicates the account value of those contracts and policies in which aninvestment spread is generated.

 
| ** **                                                      | ** ** | **As of June  30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------|------------|
| **($ in thousands)**                                  | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| Immediate fixed annuities with life  contingencies              |       | $                                       | 1,635,972  |   | $ | 1,594,225 |   |
| Other life contingent contracts and other                       |       | 351,395                                 |       | 316,367 |   |
| Reserve for life-contingent contract  benefits                  |       | $                                       | 1,987,367  |   | $ | 1,910,592 |   |
|                                                            |       |                                    |       |   |   |
| Interest-sensitive life insurance                               |       | $                                       | 555,746    |   | $ | 499,786 |   |
| Deferred fixed annuities                                        |       | 3,886,589                               |       | 3,643,078 |   |
| Immediate fixed annuities without life  contingencies and other |       | 591,027                                 |       | 569,004 |   |
| Contractholder funds                                            |       | $                                       | 5,033,362  |   | $ | 4,711,868 |   |

 

*Amortization of DAC* decreased 89.6% or $10.0 million in thesecond quarter of 2008 and 91.0% or $26.4 million in the first six months of2008, compared to the same periods of 2007. The decrease in both periods was predominantly the result of reducedactual gross profits for fixed annuities due to realized capital lossesrecorded in the current year periods.  Inaddition, for the six-month period, the decrease was also largely impacted bythe recognition in the current year period of amortization deceleration (creditto income) of $8.8 million compared to amortization acceleration (charge toincome) of $5.8 million in the prior year period due to our annualcomprehensive review of DAC assumptions (commonly referred to as “DAC unlocking”).  We expect an increased rate of DACamortization in future periods as a result of the deceleration recorded in thesecond quarter of 2008.

Accretionof DAC relating to realized capital gains and losses increased income by $10.0million and $10.8 million, pretax, in the second quarter and first six monthsof 2008, respectively, compared to an increase to income of $1.0 million and$300 thousand, pretax, in the second quarter and first six months of 2007,respectively.  The impact of realizedcapital gains and losses on amortization of DAC is dependent upon therelationship between the assets that give rise to the gain or loss and theproduct liability supported by the assets. Fluctuations result from changes in the impact of realized capital gainsand losses on actual and expected gross profits.

 

24

----

 

In accordance with our annual comprehensive reviewof DAC assumptions, in the first six months of 2008, the Company recognized netamortization deceleration totaling $8.8 million, including $6.5 million forfixed annuities and $2.3 million for interest-sensitive life insuranceproducts.  In the first six months of2007, net amortization acceleration totaled $5.8 million and included netamortization deceleration of $1.5 million for interest-sensitive life insuranceproducts and net amortization acceleration of $7.3 million for fixedannuities.  The first six months of 2008net amortization deceleration of $6.5 million on fixed annuities was dueprimarily to higher than expected investment spreads partially offset by increasedexpenses and the net amortization deceleration of $2.3 million oninterest-sensitive life insurance products was due to higher than expectedbenefit spreads partially offset by increased expenses.

* *

*Operating costs and expenses* increased 30.6% and 14.0% in the secondquarter and first six months of 2008, respectively, compared to the same periodof 2007 due primarily to higher expenses related to growth initiatives.

* *

*Loss on disposition of operations* for the second quarter of 2008 was $90thousand compared to a gain of $253 thousand for the second quarter of 2007.For the first six months of 2008 and 2007, loss on disposition of operationstotaled $358 thousand and $132 thousand, respectively.  The (loss) gain on disposition of operationsin each period was related to adjustments associated with a previous perioddisposition.

* *

*Income tax benefit* of $11.1 million was recognized in thesecond quarter of 2008 compared to income tax expense of $6.5 million in thesame period in the prior year.  Thechange reflects the shift from net pretax income in the prior year to a netpretax loss in the current year.  Incometax expense of $580 thousand and $10.2 million was recognized in the first sixmonths of 2008 and 2007, respectively. This decline was consistent with the decrease in pretax income.

 

**INVESTMENTS**

 

Wedeveloped additional risk mitigation and return optimization programs in thesecond quarter of 2008 in response to an altered outlook for continued weaknessin the U.S. financial markets and economy including continued volatility in thefinancial markets, continued reduced liquidity in certain asset classes andfurther unfavorable economic trends.  Inaddition, the potential for systemic investment supply and demand imbalanceshas remained above normal due to the deteriorating credit strength of financialinstitutions.  The risk mitigation andreturn optimization programs are designed to protect certain portions of ourinvestment portfolio from significant decreases in value. They consist ofpotential future reductions in certain real estate and financial-related marketsectors.  These actions will position usto take advantage of market opportunities and also will help protect ourinvestment portfolio from the continued turmoil in the financial markets.  We will monitor the progress of these programsas market and economic conditions continue to develop and will adapt ourdecisions as appropriate.

Therisk mitigation and return optimization programs were designed to reduce TheAllstate Corporation’s exposure to residential and commercial real estate andfinancial related markets including approximately $276.3 million of amortizedcost held by the Company, prior to change in intent write-downs. Acomprehensive review identified specific investments that could besignificantly impacted by continued deterioration in the economy includingcertain real estate and financial-related market sectors that may be sold.  This includes a portion of our residentialand commercial real estate securities including securities collateralized byresidential and commercial mortgage loans, mortgage loans and securities issuedby financial institutions.   As a result,we have change in intent write-downs on securities with a fair value ofapproximately $229.8 million at June 30, 2008. Approximately $47 millionof realized capital losses were recognized in the second quarter of 2008related to our change in intent write-downs, with minimal net impact onshareholder’s equity as these investments were carried at fair value withunrealized losses reflected within accumulated other comprehensive income at March 31,2008.

AtJune 30, 2008, our exposure to residential and commercial real estate isapproximately $1.9 billion, comprised primarily of mortgage-backed securities (“MBS”),commercial mortgage-backed securities (“CMBS”), asset-backed residentialmortgage-backed securities (“ABS RMBS”) and mortgage loans.  Our exposure to financial-related marketsectors totaled approximately $820.5 million at June 30, 2008, andincludes fixed income holdings in banks, brokerages, finance companies andinsurance.

 

25

----

 

Anyfunds raised from the eventual disposition of these securities will be investedin accordance with our asset-liability management strategies.  To the extent markets remain unstable, wewill invest in high quality, lower risk investments over the short-term.  Net investment income from potentialreinvested funds may be lower as proceeds invested at current yields could belower than the yields on the investments written-down.

 

Animportant component of our financial results is the return on our investmentportfolio.  The composition of theinvestment portfolio at June 30, 2008 is presented in the table below.

 
| ** **                     | ** ** | ** **      | ** ** | **Percent**       | ** ** |
|--------------------------------|------------|-----------------|------------|-------------------|------------|
| **($ in thousands)** | ** ** | **Investments** | ** ** | **of total** | ** ** |
|                           |       |            |       |              |       |
| Fixed income securities (1)    |       | $               | 5,969,202  |              | 82.9       | % |
| Mortgage loans                 |       | 710,143         |       | 9.9               |       |
| Short-term                     |       | 485,919         |       | 6.7               |       |
| Policy loans                   |       | 38,570          |       | 0.5               |       |
| Total                          |       | $               | 7,203,834  |              | 100.0      | % |

----

(1) Fixed income securities are carriedat fair value.  Amortized cost basis forthese securities was $5.79 billion.

----

 

Totalinvestments increased to $7.20 billion at June 30, 2008, from $7.06billion at December 31, 2007, due to positive cash flows from operatingand financing activities, including increased funds associated with securitieslending, partially offset by decreased net unrealized capital gains on fixedincome securities.

 

Totalinvestments at amortized cost related to collateral received in connection withsecurities lending business activities increased to $334.8 million at June 30,2008, from $198.1 million at December 31, 2007.

 

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

 
| **($ in thousands)**             | ** ** | **June 30, 2008** | ** ** | **% to Total  Investments** | ** ** | **December 31, 2007** | ** ** | **% to Total   Investments** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|---------------------------------|------------|---------------------------------------------|------------|
| U.S. government and agencies          |       | $                           | 806,214    |                                  | 11.2       | %                               | $          | 797,191                                     |       | 11.3 | % |
| Municipal                             |       | 435,900                     |       | 6.1                                   |       | 433,307                         |       | 6.1                                         |       |
| Corporate                             |       | 3,222,789                   |       | 44.7                                  |       | 3,378,811                       |       | 47.9                                        |       |
| Foreign government                    |       | 340,849                     |       | 4.7                                   |       | 333,540                         |       | 4.7                                         |       |
| Mortgage-backed securities            |       | 400,374                     |       | 5.6                                   |       | 419,617                         |       | 6.0                                         |       |
| Commercial mortgage-backed securities |       | 670,216                     |       | 9.3                                   |       | 791,941                         |       | 11.2                                        |       |
| Asset-backed securities               |       | 84,474                      |       | 1.2                                   |       | 106,877                         |       | 1.5                                         |       |
| Redeemable preferred stock            |       | 8,386                       |       | 0.1                                   |       | 9,844                           |       | 0.2                                         |       |
| Total fixed income securities         |       | $                           | 5,969,202  |                                  | 82.9       | %                               | $          | 6,271,128                                   |       | 88.9 | % |

 

At June 30, 2008, 96.9% of the fixed incomesecurities portfolio was rated investment grade, which is defined as a securityhaving a rating from the National Association of Insurance Commissioners (“NAIC”)of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, Aor BBB from Standard & Poor’s (“S&P”), Fitch or Dominion or arating of aaa, aa, a, or bbb from A.M. Best; or a comparable internalrating if an externally provided rating is not available.

 

Duringthe second quarter of 2008, certain financial markets continued to experienceprice declines due to market and liquidity disruptions.  We experienced this illiquidity anddisruption particularly in our prime residential mortgage-backed securities (“Prime”),Alt-A residential mortgage-backed securities (“Alt-A”), commercial real estatecollateralized debt obligations (“CRE CDO”) and ABS RMBS portfolios.  These portfolios totaled $156.2 million, orless than 5.0% of our total investments at June 30, 2008.  Certain other asset-backed and real estateinvestment markets experienced similar illiquidity, but to a much lesserdegree.

 

We determine the fair values of securities comprising the illiquidportfolios by obtaining information from an independent third-party valuationservice provider and brokers. We confirmed the reasonableness of the fair valueof these portfolios as of June 30, 2008 by analyzing available marketinformation including, but not limited to,

 

26

----

 

collateralquality, anticipated cash flows, credit enhancements, default rates, lossseverities, the securities’ relative position within their respective capitalstructures, and credit ratings from statistical rating agencies.

Investmentwrite-downs during the second quarter of 2008 were recorded on our CRE CDOtotaling $6.5 million.  Investmentwrite-downs during the first six months of 2008 were recorded on our CRE CDOand ABS RMBS totaling $6.5 million and $633 thousand, respectively. Change inintent write-downs included losses on our CRE CDO totaling $5.5 million and ABSRMBS totaling $4.1 million for the three months ended June 30, 2008.  We continue to believe that the unrealizedlosses on these securities are not necessarily predictive of the ultimateperformance of the underlying collateral. In the absence of further deterioration in the collateral relative toour positions in the securities’ respective capital structures, which could beother-than-temporary, the unrealized losses should reverse over the remaininglives of the securities.

The cash flows of theunderlying mortgages or collateral for MBS, CRE CDO and ABS are generallyapplied in a pre-determined order and are designed so that each security issuedqualifies for a specific original rating. The security issue is typically referred to as the “class”.  For example, the “senior” portion or “top” ofthe capital structure which would originally qualify for a rating of Aaa isreferred to as the “Aaa class” and typically has priority in receiving theprincipal repayments on the underlying mortgages.  In addition, the portion of the capitalstructure originally rated Aaa may further be divided into multiplesub-classes, “super senior”, “senior” ,”senior support” for Prime and Alt-Aissues, and  “first”, “second”, “third” forABS RMBS issues where the principal repayments are typically paid sequentially(i.e., all of the underlying mortgage principal repayments are received by thefirst originally rated Aaa class in the structure until it is paid in full,then all of the underlying mortgage principal repayments are received by thesecond originally rated Aaa class in the structure until it is paid infull).  Although securities within thevarious Aaa classes are paid sequentially, they typically share any losses on apro-rata basis after losses are absorbed by classes with lower original ratingsor what may be referred to as more “junior” or “subordinate” securities in thecapital structure.  The underlyingmortgages have fixed interest rates, variable interest rates (such asadjustable rate mortgages (“ARM”)) or are hybrid, meaning that they containfeatures of both fixed and variable rate mortgages.

*MBS* totaled $400.4 million and 100.0% were ratedinvestment grade at June 30, 2008. The MBS portfolio is subject to interest rate risk since pricevolatility and the ultimate realized yield are affected by the rate ofprepayment of the underlying mortgages. The credit risk associated with our MBS is mitigated due to the factthat 82.4% of the portfolio consists of securities that were issued by, or haveunderlying collateral that is guaranteed by, U.S. government agencies or U.S.government sponsored entities (“U.S. Agency”).

The following table showsMBS by type and Moody’s equivalent rating.

 
| **($ in thousands)** | ** ** | **Fair value at   June 30, 2008** | ** ** | **% to Total   Investments** | ** ** | **Aaa** | ** ** |
|--------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------|------------|---------|------------|
| **MBS**                        |       |                                                       |       |                                        |       |    |       |
| U.S. Agency                    |       | $                                                          | 330,087    |                                        | 4.6        | %       | 100.0      | % |
| Prime                          |       | 44,813                                                     |       | 0.6                                         |       | 100.0   |       |
| Alt-A                          |       | 25,474                                                     |       | 0.4                                         |       | 100.0   |       |
| Total MBS                      |       | $                                                          | 400,374    |                                        | 5.6        | %       |       |   |

 

Primeare collateralized by residential mortgage loans issued to primeborrowers.  As of June 30, 2008,fair value represents 93.6% of amortized cost of these securities.  We have collected $1.2 million and $2.6million of principal repayments consistent with the expected cash flows duringthe second quarter and first six months of 2008, respectively.

 

Allof our Prime MBS positions comprised fixed rate mortgages, and include securities issued before 2005 that arein the Aaa class of the capital structure. The following table shows our primeportfolio as of June 30, 2008 based upon our participation in the capitalstructure.

 
| **($ in thousands)**                   | ** ** | ** **            | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Capital structure   classification** | ** ** | **Fair   value** | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gain/Loss** | ** ** |
| **Aaa – Fixed rate**                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Super Senior                                     |       | $4,705                |       | $4,945 |   | $(240 | ) |
| Senior                                           |       | 40,108                |       | 42,914 |   | (2,806 | ) |
| Total                                            |       | $44,813               |       | $47,859 |   | $(3,046 | ) |
|                                                  |            |                       |            |  |  |  |  |  |

 

27

----

 

Alt-A  can be issued by trusts backed by pools ofresidential mortgages with either fixed or variable interest rates.  The mortgage pools can include 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.  As of June 30, 2008, all of our Alt-Aportfolio are in the Aaa class were issued prior to 2005 at fixed rates and hadnet unrealized losses of $4.1 million. Fair value represents 86.0% of the amortized cost of these securities.

*CMBS* totaled $670.2 million all of which were rated investment grade at June 30,2008.  The CMBS portfolio is subject tocredit risk, but unlike other structured securities, is generally not subjectto prepayment risk due to protections within the underlying commercialmortgages whereby borrowers are effectively restricted from prepaying theirmortgages due to changes in interest rates. Approximately 93.2% of the CMBS investments are pools of commercialmortgages, broadly diversified across property types and geographicalarea.  The following table shows CMBS bytype and Moody’s equivalent rating.

 
| **($ in thousands)** | ** ** | **Fair value at  June 30, 2008** | ** ** | **% to Total   Investments** | ** ** | **Aaa** | ** ** | **Aa** | ** ** | **A**  | ** ** | **Baa** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------|------------|---------|------------|--------|------------|--------|------------|---------|------------|
| CMBS                           |       | $                                                    | 643,788    |                                        | 8.9        | %       | 76.6       | %      | 17.1       | %      | 6.0        | %       | 0.3        | % |
| CRE CDO                        |       | 26,428                                               |       | 0.4                                         |       | 40.7    |       | 30.2   |       | 24.3   |       | 4.8     |       |
| Total CMBS                     |       | $                                                    | 670,216    |                                        | 9.3        | %       |       |   |       |   |       |    |       |   |

 

        CRE CDO are investmentssecured primarily by commercial mortgage-backed securities and other commercialmortgage debt obligations.  Thesesecurities are generally less liquid and have a higher risk profile than othercommercial mortgage-backed securities. As of June 30, 2008, fair value represents 100.7% of the amortizedcost of these securities.  We collected$6 thousand and $14 thousand of principal repayments consistent with theexpected cash flows during the second quarter and first six months of 2008,respectively.  Investment write-downsduring both the second quarter and first six months of 2008 were recorded onour CRE CDO totaling $6.5 million. In addition, $5.5 million of change inintent write-downs were recorded during the second quarter of 2008.

Thefollowing table shows our CRE CDO portfolio at June 30, 2008 by vintageyear, based upon our participation in the capital structure.

 

 
| **($ in thousands)**                   | ** ** | **Vintage Year** | ** ** | ** ** | ** ** | ** **   | ** ** | ** **      | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|------------|------------|--------------|------------|-----------------|------------|
| **Capital structure/  Current rating** | ** ** | **2006**              | ** ** | **2005**   | ** ** | **Pre-2005** | ** ** | **Fair  Value** | ** ** | **Amortized   Cost** | ** ** | **Unrealized   Gain/Loss** | ** ** |
| ** **                                       | ** ** | ** **            | ** ** | ** ** | ** ** | ** **   | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Aaa                                              |       | $                     | —     |       | $          | —       |       | $               | 10,762     |   | $ | 10,762 |   | $ | 10,517 |   | $ | 245 |   |
| Aa                                               |       | 4,024                 |       | —     |       | 3,950        |       | 7,974           |       | 8,027 |   | (53 | ) |
| A                                                |       | —                |       | 1,516      |       | 4,911        |       | 6,427           |       | 6,427 |   | — |   |
| Baa                                              |       | —                |       | 1,265      |       | —       |       | 1,265           |       | 1,265 |   | — |   |
| Total                                            |       | $                     | 4,024      |       | $          | 2,781        |       | $               | 19,623     |   | $ | 26,428 |   | $ | 26,236 |   | $ | 192 |   |

 

*ABS* totaled $84.5 million and 99.2% were rated investment grade at June 30,2008.  ABS by type are listed in thetable below.

 
| **($ in thousands)**        | ** ** | **Fair value at  June 30, 2008** | ** ** | **% to Total  Investments** | ** ** | **Aaa** | ** ** | **Aa** | ** ** | **A**  | ** ** | **Ba or   lower** | ** ** |
|---------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|---------|------------|--------|------------|--------|------------|-----------------------------|------------|
| **ABS**                               |       |                                                 |       |                                  |       |    |       |   |       |   |       |                        |       |
| ABS RMBS                              |       | $                                                    | 59,454     |                                  | 0.8        | %       | 71.9       | %      | 7.3        | %      | 10.3       | %                           | 10.5       | % |
| Other collateralized debt obligations |       | 25,020                                               |       | 0.4                                   |       | 57.1    |       | 15.3   |       | 27.6   |       | —                      |       |
| Total ABS                             |       | $                                                    | 84,474     |                                  | 1.2        | %       |       |   |       |   |       |                        |       |   |

 

ABSRMBS portfolio includes securities that are collateralized by mortgage loansissued to borrowers that cannot qualify for Prime or Alt-A financing terms duein part to weak or limited credit history. It also includes securities that are collateralized by certain secondlien mortgages regardless of the borrower’s credit history.

 

28

----

 

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

 
| **($ in thousands)** | ** ** | **Fair value at   June 30, 2008** | ** ** | **% to Total   Investments** | ** ** |
|--------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------|------------|
| **ABS RMBS**                   |       |                                                       |       |                                        |       |
| First lien:                    |       |                                                       |       |                                        |       |
| Fixed rate(1)                  |       | $                                                          | 12,213     |                                        | 0.2        | % |
| Variable rate(1)               |       | 31,529                                                     |       | 0.4                                         |       |
| Total first lien(2)            |       | 43,742                                                     |       | 0.6                                         |       |
| Second lien :                  |       |                                                       |       |                                        |       |
| Insured                        |       | 10,160                                                     |       | 0.1                                         |       |
| Other                          |       | 5,552                                                      |       | 0.1                                         |       |
| Total second lien(3)           |       | 15,712                                                     |       | 0.2                                         |       |
| Total ABS RMBS                 |       | $                                                          | 59,454     |                                        | 0.8        | % |

 

----

(1)          Fixed rate and variable rate refer to theprimary interest rate characteristics of the underlying mortgages at the timeof issuance.

(2)          The credit ratings of the first lien ABS RMBSwere 89.3% Aaa, 0.8% Aa, 1.7% A, 6.4% Baa and 1.8% Ba or lower at June 30,2008.

(3)          The credit ratings of the second lien ABS RMBSwere 23.7% Aaa, 25.2% Aa, 34.1% A, 8.3% Baa and 8.7% Ba or lower at June 30,2008.

----

Asof June 30, 2008, the ABS RMBS portfolio had net unrealized losses of$11.0 million.  Fair value represents84.4% of the amortized cost of these securities.  ABS RMBS securities with a fair value lessthan 70% of amortized cost totaled $8.6 million, with unrealized losses of $8.0million.  During the second quarter andfirst six months of 2008, we sold $7 thousand of ABS RMBS.  We also collected $4.1 million and $7.9million of principal repayments consistent with the expected cash flows duringthe second quarter and first six months of 2008, respectively.  Investment write-downs during the first sixmonths of 2008 were recorded on our ABS RMBS totaling $633 thousand.  In addition, $4.1 million of change in intentwrite-downs were recorded during the second quarter of 2008.

Whenbuying ABS RMBS securities from 2006 and 2007 vintages, we concentrated ourholdings in securities that were senior or at the top of the structure and thatwere generally within the first three Aaa sub-classes of the capital structure,as it was expected that, in the unlikely event of losses in the underlyingcollateral, these sub-classes within the Aaa class would likely either be paidin full or receive substantial principal repayments before underlying mortgagelosses would breach that level.  However,when the underlying mortgage product was fixed-rate in nature, which weassessed to have stronger underwriting origination standards than variable ratecollateral, we invested somewhat lower in the capital structure, such assecurities below the first three Aaa sub-classes.  The vast majority of our investment in eitherof these vintages was concentrated within originally rated Aaa or Aasecurities.

 

29

----

 

Thefollowing table includes first lien non-insured ABS RMBS by vintage, theinterest rate characteristics of the underlying mortgage product and ourparticipation in the capital structure. The information in this table, togetherwith the second lien non-insured, comprise the $48.0 million of non-insured ABSRMBS.

 
| **($ in thousands)**                 | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **Capital structure classification** | ** ** | **Variable  Rate** | ** ** | **Fixed   Rate** | ** ** | **Total Fair   Value** | ** ** | **Total   Amortized  Cost (1)** | ** ** | **Variable  Rate** | ** ** | **Fixed   Rate** | ** ** | **Total Fair   Value** | ** ** | **Total   Amortized  Cost **(1) | ** ** |
|                                           |       |               |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| First or Second Aaa class                      |       | $                  | 5,407      |                  | $          | 1,705 |   | $ | 7,112 |   | $ | 7,471 |   | $ | 19,653 |   | $ | 759 |   | $ | 20,412 |   | $ | 21,305 |   |
| Third Aaa class                                |       | —             |       | —                |       | — |   | — |   | 4,981 |   | 1,704 |   | 6,685 |   | 7,295 |   |
| Other Aaa (2)                                  |       | —             |       | 8,045                 |       | 8,045 |   | 8,045 |   | — |   | — |   | — |   | — |   |
| Total Aaa First Lien  Non-Insured ABS     |       |               |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RMBS                                           |       | $                  | 5,407      |                  | $          | 9,750 |   | $ | 15,157 |   | $ | 15,516 |   | $ | 24,634 |   | $ | 2,463 |   | $ | 27,097 |   | $ | 28,600 |   |

 
| **($ in thousands)**                 | ** ** | **2005**           | ** ** | **Total**             | ** ** |
|------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **Capital structure classification** | ** ** | **Variable  Rate** | ** ** | **Fixed   Rate** | ** ** | **Total Fair   Value** | ** ** | **Total   Amortized  Cost (1)** | ** ** | **Variable  Rate** | ** ** | **Fixed   Rate** | ** ** | **Total Fair   Value** | ** ** | **Total   Amortized  Cost (1)** | ** ** | **Unrealized  Gain/Loss** | ** ** |
|                                           |       |               |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| First or Second Aaa class                      |       | $                  | 158        |                  | $          | — |   | $ | 158 |   | $ | 159 |   | $ | 25,218 |   | $ | 2,464 |   | $ | 27,682 |   | $ | 28,935 |   | $ | (1,253 | ) |
| Third Aaa class                                |       | —             |       | —                |       | — |   | — |   | 4,981 |   | 1,704 |   | 6,685 |   | 7,295 |   | (610 | ) |
| Other Aaa (1)                                  |       | —             |       | —                |       | — |   | — |   | — |   | 8,045 |   | 8,045 |   | 8,045 |   | — |   |
| Total Aaa First Lien  Non-Insured ABS     |       |               |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RMBS                                           |       | $                  | 158        |                  | $          | — |   | $ | 158 |   | $ | 159 |   | $ | 30,199 |   | $ | 12,213 |   | $ | 42,412 |   | $ | 44,275 |   | $ | (1,863 | ) |
|                                                |            |                    |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Includes primarily pass-through securities and“NAS” bonds.  NAS bonds are typicallylocked out from receiving principal prepayments for a specified period of timeafter which they receive prepayment allocations according to a specifiedformula.

----

Wealso own approximately $5.6 million of second lien ABS RMBS non-insuredsecurities, representing 73.8% of amortized cost.  Approximately $2.7 million or 48.2% of thisportfolio are 2006 and 2007 vintage years.

At June 30, 2008, $11.5 million or 19.3% of the total ABS RMBSsecurities that are insured by 4 bond insurers and 93.0% were rated investmentgrade. $52.8 million or 88.8% of the portfolio consisted of securities thatwere issued during 2005, 2006 and 2007. At June 30, 2008, 75.6% of securities issued during 2005, 2006 and2007 were rated Aaa, 0.9% rated Aa, 11.6% rated A and 11.9% rated Ba or lower.

Thefollowing table shows our insured ABS RMBS portfolio at June 30, 2008 by bondinsurer and vintage year for the first lien and second lien collateral.

 
| **($ in thousands)**                            |       | **Vintage Year** |       |     |       |     |       |         |       |
|-----------------------------------------------------------|------------|-----------------------|------------|----------|------------|----------|------------|--------------|------------|
| ** **                                                | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** | **Pre-2005** | ** ** | **Fair   Value** | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gain/Loss** | ** ** |
| **First Lien:**                                           |       |                  |       |     |       |     |       |         |       |   |   |   |   |   |   |
| Financial Guarantee Insurance Company  (“FGIC”) |       | $                     | 799        |     | $          | 179      |       | $            | —     |   | $ | — |   | $ | 978 |   | $ | 1,129 |   | $ | (151 | ) |
| Ambac Financial Group, Inc. (“AMBAC”)      |       | —                |       | 352      |       | —   |       | —       |       | 352 |   | 363 |   | (11 | ) |
| Total First Lien                                          |       | 799                   |       | 531      |       | —   |       | —       |       | 1,330 |   | 1,492 |   | (162 | ) |
| **Second Lien:**                                          |       |                  |       |     |       |     |       |         |       |   |   |   |   |   |   |
| AMBAC                                                     |       | —                |       | —   |       | 129      |       | 3,828        |       | 3,957 |   | 4,837 |   | (880 | ) |
| MBIA, Inc (“MBIA”)                              |       | 5,360                 |       | —   |       | —   |       | —       |       | 5,360 |   | 9,984 |   | (4,624 | ) |
| Financial Security  Assurance, Inc.(“FSA”) |       | 843                   |       | —   |       | —   |       | —       |       | 843 |   | 2,360 |   | (1,517 | ) |
| Total Second Lien                                         |       | 6,203                 |       | —   |       | 129      |       | 3,828        |       | 10,160 |   | 17,181 |   | (7,021 | ) |
| Total Insured ABS RMBS                                    |       | $                     | 7,002      |     | $          | 531      |       | $            | 129        |   | $ | 3,828 |   | $ | 11,490 |   | $ | 18,673 |   | $ | (7,183 | ) |

 

30

----

 

*Other collateralized debtobligations* totaled$25.0 million and all were rated investment grade at June 30, 2008.  Other collateralized debt obligations consistprimarily of obligations secured by high yield and investment grade corporatecredits including $5.6 million of collateralized loan obligations; $8.7 millionof primarily bank trust preferred CDOs and $3.8 million of market valueCDOs.  As of June 30, 2008, netunrealized losses on the other CDOs were $3.9 million. Other CDOs with a fairvalue less than 70% of amortized cost totaled $6.9 million, or 27.5% of thetotal other CDOs at June 30, 2008, with unrealized losses of $3.1 million.

As of June 30, 2008, we hold $236.6 million offixed income securities that are insured by bond insurers, includingapproximately $218.8 million or 50.2% of our municipal bond portfolio and $11.5million of our ABS RMBS.  50.2% of ourmunicipal bond portfolio is insured by five bond insurers and 45.8% have aMoody’s equivalent rating of Aaa or Aa. Our practices for acquiring and monitoring municipal bonds are primarilybased on the quality of the underlying security.  As of June 30, 2008, we believe thevaluations already reflected a decline in the value of the insurance, andfurther such declines, if any, are not expected to be material.  While the valuation of these holdings may betemporarily impacted by negative and rapidly changing market developments, wecontinue to have the intent and ability to hold the bonds and expect to receiveall of the contractual cash flows.  As ofJune 30, 2008, 46.3% of our insured municipal bond portfolio was insuredby MBIA, 21.3% by AMBAC, 10.9% by FSA and 15.6% by FGIC.

Included in our municipal bond portfolio at June 30,2008 are $124.2 million of auction rate securities (“ARS”) that have long-termstated maturities, with the interest rate reset based on auctions thatgenerally occur every 7, 28 or 35 days depending on the specific security.  This is compared to a balance of ARS at December 31,2007 of $133.7 million, with the decline representing primarily redemptionsduring the second quarter of 2008.  Our holdings primarily have a Moody’s equivalent rating of Aaa. We makeour investment decisions based on the underlying credit of each security.  Approximately $119.2 million of our holdingsare pools of student loans for which at least 85% of the collateral was insuredby the U.S. Department of Education at the time we purchased the security.  As of June 30, 2008, $95.4 million ofour ARS backed by student loans were 100% insured by the U.S Department ofEducation and $23.8 million were 90-99% insured. During the second quarter of2008, all of our ARS holdings experienced failed auctions and we received thefailed auction rate or, for those which contain maximum reset rate formulas, wereceived the contractual maximum rate. We anticipate that failed auctions maypersist and most of our holdings will continue to pay the failed auction rateor, for those that contain maximum rate reset formulas, the maximum rate, asdescribed below.  Auctions continue to beconducted as scheduled for each of the securities.

We estimate that approximately one third of ourstudent loan backed ARS include maximum rate reset formulas whereby when thefailed auction rate exceeds an annual contractual maximum rate over a precedingstipulated period, the coupon interest rate is temporarily reset to the maximumrate, which can vary between zero and the failed auction rate.  This maximum rate formula causes the resetinterest rate on these securities to be lower than the failed auction rate inorder to reduce the annual interest rate to not exceed the annual contractualmaximum rate.  Generally, the annualcontractual maximum rate is higher than the historical rates paid on thesesecurities.  During the second quarter of2008, $18.4 million of our ARS reset using the maximum rate reset formula.

* *

*Fannie Mae* direct fixed income exposure investmentstotaled $24.9 million as of June 30, 2008 and had unrealized net capitalgains of $2.1 million.

* *

*Unrealized net capital gains* totaled $182.6 million as of June 30,2008, compared to unrealized net capital gains of $341.5 million at December 31,2007.  The decline was primarily due toinvestment grade fixed income securities as the yields supporting fair valuesincreased, resulting from widening credit spreads and relatively flat risk freeinterest rates. This decrease in fixed income unrealized net capital gains morethan offset the increase in unrealized net capital gains resulting from therealization of capital losses on write-downs, change in intent to hold torecovery and sales.  We continue toexperience volatility in the balance of our unrealized net capital gains andlosses as we did between the years 2004/2005 and 2006/2007.

 

31

----

 

The following table presents total unrealized gainsand losses.

 
| ** **                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in thousands)**        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| U.S. government and agencies          |       | $                 | 213,346    |                  | $          | 220,299 |   |
| Municipal                             |       | (11,857           | )          | 11,552                |       |
| Corporate                             |       | (18,919           | )          | 63,866                |       |
| Foreign government                    |       | 72,424            |       | 73,689                |       |
| Mortgage-backed securities            |       | (5,907            | )          | (113                  | )          |
| Commercial mortgage-backed securities |       | (50,163           | )          | (19,250               | )          |
| Asset-backed securities               |       | (14,934           | )          | (8,326                | )          |
| Redeemable preferred stock            |       | (926              | )          | 512                   |       |
| Fixed income securities               |       | 183,064           |       | 342,229               |       |
| Derivatives                           |       | (447              | )          | (766                  | )          |
| **Unrealized net gains and losses**   |       | $                 | 182,617    |                  | $          | 341,463 |   |

* *

The net unrealized gain for the fixed incomeportfolio totaled $183.1 million, comprised of $367.2 million of unrealizedgains and $184.1 million of unrealized losses at June 30, 2008.  This is compared to a net unrealized gain forthe fixed income portfolio totaling $342.2 million at December 31, 2007,comprised of $437.5 million of unrealized gains and $95.3 million of unrealizedlosses.  Included in gross unrealizedlosses at June 30, 2008 were $22.0 million of fixed income securities witha fair value below 70% of amortized cost, or 0.4% of our fixed income portfolioat June 30, 2008.

 

The percentage of fair value to amortized cost forthe remaining fixed income gross unrealized losses at June 30, 2008 areshown in the following table.

 
| **($ in thousands)**                                  | ** ** | **Unrealized  (loss) gain** | ** ** | **Fair value** | ** ** | **% to Total  Fixed  Income  Investments** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|------------------------------------------------------|------------|
| > 80% of amortized cost                                      |       | $                                | (141,457   | )                   | $          | 2,693,453                                            |       | 45.1 | % |
| 70% to 80% of amortized cost                                    |       | (28,408                          | )          | 96,572              |       | 1.6                                                  |       |
| < 70% of amortized cost                                      |       | (14,246                          | )          | 21,991              |       | 0.4                                                  |       |
| Gross unrealized losses on fixed income  securities             |       | (184,111                         | )          | 2,812,016           |       | 47.1                                                 |       |
| Gross unrealized gains on fixed income  securities              |       | 367,176                          |       | 3,157,186           |       | 52.9                                                 |       |
| **Net unrealized gains and losses on fixed  income securities** |       | $                                | 183,065    |                | $          | 5,969,202                                            |       | 100.0 | % |

 

70.3% of the fixed income securities with a fairvalue less than 70% of amortized cost were ABS RMBS and other CDOs with a fairvalue totaling $15.4 million.  Wecontinue to believe that the unrealized losses on these securities are notnecessarily predictive of the ultimate performance.  The unrealized losses should reverse over theremaining lives of the securities, in the absence of further deterioration inthe collateral relative to our positions in the securities’ respective capitalstructures.

Of the gross unrealized losses in the fixed incomeportfolio at June 30, 2008, $173.4 million or 94.2% were related toinvestment grade securities and are primarily interest rate related.  Most of the remaining $10.7 million of losseswere in the corporate fixed income portfolio and primarily comprised securitiesin the consumer goods, utilities, capital goods, financial services andcommunications sectors.  The gross unrealizedlosses in these sectors were primarily related to changes in interest rates andcredit spreads, and company specific conditions.

We have a comprehensive portfolio monitoring processto identify and evaluate, on a case-by-case basis, fixed income securitieswhose carrying value may be other-than-temporarily impaired.  The process includes a quarterly review ofall securities using a screening process to identify situations where the fairvalue, compared to amortized cost, is below established thresholds for certaintime periods, or which are identified through other monitoring criteria such asratings, ratings downgrades or payment defaults.  The securities identified, in addition toother securities for which we may have a concern, are evaluated based on factsand circumstances for inclusion on our watch-list and potential recognition ofinvestment write-downs.  All investmentsin an unrealized loss position at

 

32

----

 

June 30,2008 were included in our portfolio monitoring process for determining whetherdeclines in value were other-than-temporary. We also conduct a portfolio review to recognize impairment on securitiesin an unrealized loss position for which we do not have the intent and abilityto hold until recovery as a result of approved programs involving thedisposition of investments for reasons such as changes in economic and marketoutlooks, duration, revisions to strategic asset allocations, unanticipatedliquidity actions,  investment risk mitigationactions, as well as changes in intent to hold certain investments by portfoliomanagers.

 

The following table summarizes fixed incomesecurities in a gross unrealized loss position according to significance, agingand investment grade classification.

 
| ** **                                                                                                                                                  | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **($ in thousands, except number of  issues)**                                                                           | ** ** | **Investment  Grade**       | ** ** | **Below  Investment  Grade**    | ** ** | **Total** | ** ** | **Investment  Grade** | ** ** | **Below  Investment  Grade** | ** ** | **Total** | ** ** |
| Category (I): Unrealized   loss less than 20% of cost (1)                                                                                         |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                                                            |       | 477                         |       | 51                              |       | 528 |   | 381 |   | 60 |   | 441 |   |
| Fair Value                                                                                                                                                  |       | $                           | 2,592,566  |                            | $          | 99,101 |   | $ | 2,691,667 |   | $ | 2,014,259 |   | $ | 103,660 |   | $ | 2,117,919 |   |
| Unrealized                                                                                                                                                  |       | $                           | (133,982   | )                               | $          | (7,029 | ) | $ | (141,011 | ) | $ | (74,751 | ) | $ | (8,180 | ) | $ | (82,931 | ) |
|                                                                                                                                                        |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| Category (II): Unrealized loss greater than  or equal to 20% of cost for a period of less than 6 consecutive months (1)                                     |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                                                            |       | 25                          |       | 8                               |       | 33 |   | 9 |   | 5 |   | 14 |   |
| Fair Value                                                                                                                                                  |       | $                           | 105,155    |                            | $          | 9,972 |   | $ | 115,127 |   | $ | 22,380 |   | $ | 4,830 |   | $ | 27,210 |   |
| Unrealized                                                                                                                                                  |       | $                           | (36,640    | )                               | $          | (3,634 | ) | $ | (40,274 | ) | $ | (9,208 | ) | $ | (3,208 | ) | $ | (12,416 | ) |
|                                                                                                                                                        |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| Category (III): Unrealized loss greater  than or equal to 20% of cost for a period of 6 or more consecutive months,  but less than 12 consecutive months(1) |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| Number of Issues                                                                                                                                            |       | 2                           |       | —                          |       | 2 |   | — |   | — |   | — |   |
| Fair Value                                                                                                                                                  |       | $                           | 5,222      |                            | $          | — |   | $ | 5,222 |   | $ | — |   | $ | — |   | $ | — |   |
| Unrealized                                                                                                                                                  |       | $                           | (2,827     | )                               | $          | — |   | $ | (2,827 | ) | $ | — |   | $ | — |   | $ | — |   |
|                                                                                                                                                        |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| Total Number  of Issues                                                                                                                                     |       | 504                         |       | 59                              |       | 563 |   | 390 |   | 65 |   | 455 |   |
| Total Fair  Value                                                                                                                                           |       | $                           | 2,702,943  |                            | $          | 109,073 |   | $ | 2,812,016 |   | $ | 2,036,639 |   | $ | 108,490 |   | $ | 2,145,129 |   |
| Total  Unrealized Losses                                                                                                                                    |       | $                           | (173,449   | )                               | $          | (10,663 | ) | $ | (184,112 | ) | $ | (83,959 | ) | $ | (11,388 | ) | $ | (95,347 | ) |
|                                                                                                                                                             |            |                             |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Cost represents amortized cost.

 

----

The largest individual unrealized loss was $3.4million for category (I), $4.6 million for category (II) and $1.6 millionfor category (III) as of June 30, 2008.

Categories (I) and (II) have generallybeen adversely affected by overall economic conditions including interest rateincreases and the market’s evaluation of certain sectors.  The degree to which and/or length of timethat the securities have been in an unrealized loss position does not suggestthat these securities pose a high risk of being other-than-temporarilyimpaired.  Category (III) hasprimarily been historically adversely affected by industry and issue specific,or issuer specific conditions.  All ofthe securities in these categories are monitored for other-than-temporaryimpairment.

We continue to believe that the unrealized losses onthese securities are not necessarily predictive of the ultimateperformance.  The unrealized lossesshould reverse over the remaining lives of the securities, including in theabsence of further deterioration in the collateral relative to our positions inthe securities’ respective capital structures. We have the intent and abilityto hold these securities until recovery.

Whenever our initial analysis indicates that a fixedincome security’s unrealized loss of 20% or more for at least 36 months istemporary, additional evaluations and management approvals are required tosubstantiate that a

 

33

----

 

write-downis not appropriate.  As of June 30,2008, no securities met these criteria.

We also monitor the quality of our fixed incomeportfolio by categorizing certain investments as “problem”, “restructured” or “potentialproblem.”  Problem fixed incomesecurities are in default with respect to principal or interest and/or areinvestments issued by companies that have gone into bankruptcy subsequent toour acquisition.  Restructured fixedincome investments have rates and terms that are not consistent with marketrates or terms prevailing at the time of the restructuring.  Potential problem fixed income investmentsare current with respect to contractual principal and/or interest, but becauseof other facts and circumstances, we have concerns regarding the borrower’sability to pay future principal and interest, which causes us to believe theseinvestments may be classified as problem or restructured in the future.

As of June 30, 2008, fixed income securitiescategorized as potential problem totaled $5.6 million.  The Company recognized cumulative write-downson these securities of $1.1 million.  TheCompany had $83 thousand of fixed income securities categorized as problem asof June 30, 2008 and had none categorized as restructured.  Further, as of December 31, 2007, theCompany had no fixed income securities categorized as problem, restructured orpotential problem.

We also evaluated each of these investments throughour portfolio monitoring process at June 30, 2008 and recorded write-downswhen appropriate.  We further concludedthat any remaining unrealized losses on these investments were temporary innature and that we have the intent and ability to hold the securities untilrecovery.  While these balances mayincrease in the future, particularly if economic conditions are unfavorable,management expects that****the totalamount of investments in these categories will remain low relative to the totalfixed income securities portfolio.

 

**Net Investment Income** The following table presents net investmentincome.

 
| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**    | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Fixed income securities           |       | $                                               | 90,468     |                                          | $          | 89,424 |   | $ | 182,024 |   | $ | 176,288 |   |
| Mortgage loans                    |       | 10,449                                          |       | 9,914                                         |       | 20,968 |   | 20,053 |   |
| Short-term and other              |       | 3,318                                           |       | 4,527                                         |       | 5,931 |   | 8,278 |   |
| Investment income, before expense |       | 104,235                                         |       | 103,865                                       |       | 208,923 |   | 204,619 |   |
| Investment expense                |       | (4,017                                          | )          | (6,926                                        | )          | (8,959 | ) | (13,712 | ) |
| **Net investment income**         |       | $                                               | 100,218    |                                          | $          | 96,939 |   | $ | 199,964 |   | $ | 190,907 |   |

** **

**Net Realized Capital Gains and Losses **The following tables present the components of realized capital gainsand losses and the related tax effect.

 
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **($ in thousands)**                    | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Investment write-downs (1)                        |       | $                                               | (6,973     | )                                             | $          | — |   | $ | (7,606 | ) | $ | — |   |
| Sales                                             |       | (191                                            | )          | 3,535                                         |       | 5,352 |   | 6,160 |   |
| Change in intent write-downs                      |       | (47,223                                         | )          | (4,297                                        | )          | (50,755 | ) | (5,613 | ) |
| Valuation of derivative instruments               |       | (2,831                                          | )          | 52                                            |       | (3,071 | ) | (1,973 | ) |
| Settlement of derivative instruments              |       | (2,895                                          | )          | (129                                          | )          | (2,312 | ) | (1,318 | ) |
| Realized capital gains and losses, pretax         |       | (60,113                                         | )          | (839                                          | )          | (58,392 | ) | (2,744 | ) |
| Income tax benefit                                |       | 21,039                                          |       | 301                                           |       | 20,437 |   | 1,025 |   |
| **Realized capital gains and losses,  after-tax** |       | $                                               | (39,074    | )                                             | $          | (538 | ) | $ | (37,955 | ) | $ | (1,719 | ) |

 

----

(1)          Investment write-downs includeother-than-temporary impairments except for those related to changes in intentto hold.

----

The above table includes realized capital gains andlosses as a result of sales, change in intent write-downs and othertransactions such as calls and prepayments. We may sell or change our assertion to hold a security until recoveryfor impaired fixed income securities that were in an unrealized loss positionat the previous reporting date, or other investments where the fair value hasdeclined below the carrying value, in situations where new facts andcircumstances emerge or increase in significance that are anticipated toadversely impact a security’s future valuation; including negative developmentsin a holding, subsequent credit deterioration of an issuer or holding,subsequent further deterioration in capital markets (i.e. debt) and of domesticeconomic conditions to levels previously unanticipated, subsequent furtherdeterioration in the financial services and real estate industries,

 

34

----

 

unanticipatedliquidity needs, and unanticipated federal income tax situations involvingcapital gain (loss) carryforwards and carrybacks with specific expiration dates,investment risk mitigation actions, and other new facts and circumstances thatwould cause a change in our previous intent to hold a security to recovery ormaturity.

Investment write-downs from fixed income securitiesfor the three months and six months ended June 30, 2008 totaled $7.0million and $7.6 million, respectively. $6.5 million, or 93.1% and $7.1 million, or 93.7% of the fixed incomesecurity write-downs for the three months and six months ended June 30,2008, respectively, relate to impaired securities that were performing in linewith anticipated or contractual cash flows, but which were written downprimarily because of further expected deterioration in the performance of theunderlying collateral.  As of June 30,2008, for these securities, there have been no defaults or defaults that haveoccurred in classes lower in the capital structure.  $480 thousand of the fixed income securitywrite-downs for both the three months and six months ended June 30, 2008,respectively, primarily related to securities experiencing a significantdeparture from anticipated residual cash flows, however, we believe they retaineconomic value.

Investment write-downs and cash received on theseinvestments were as follows:

 
| **($ in thousands)**                                                                              | ** ** | **Three Months Ended  June 30, 2008** | ** ** | **Six Months Ended  June 30, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Performing in accordance with anticipated  or contractual cash flows** | ** ** | **Investment  write-downs**                               | ** ** | **Cash  received (3)**                             | ** ** | **Investment  write-downs** | ** ** | **Cash  received** | ** ** |
|                                                                                                        |       |                                                      |       |                                                    |       |   |   |   |   |
| *ABS RMBS*                                                                                                  |       | $                                                         | —     |                                                    | $          |   | $ | (633 | ) | $ | 99 |   |
| *CMBS/CRE CDO*                                                                                              |       | (6,493                                                    | )          | 186                                                     |       | (6,493 | ) | 418 |   |
| **Subtotal****(1)**                                                                                         | ** ** | **(6,493**                                                | **)**      | **186**                                                 | ** ** | **(7,126** | **)** | **517** | ** ** |
|                                                                                                        |       |                                                      |       |                                                    |       |   |   |   |   |
| **Departure  from anticipated or contractual cash flows**                                                   |       |                                                      |       |                                                    |       |   |   |   |   |
| Future cash flows very uncertain - *Corporate*                                                              |       |                                                      |       |                                                    |       |   |   |   |   |
| Food manufacturer                                                                                           |       | (480                                                      | )          | —                                                  |       | (480 | ) | 37 |   |
| **Subtotal**                                                                                                |       | (480                                                      | )          | —                                                  |       | (480 | **)** | **37** | ** ** |
| ** **                                                                                                  |       |                                                      |       |                                                    |       |   | ** ** | ** ** | ** ** |
| **Total fixed income securities**                                                                           | ** ** | **$**                                                     | **(6,973** | **)**                                                   | **$**      | **186** | ** ** | **$** | **(7,606** | **)** | **$** | **554** | ** ** |
|                                                                                                             |            |                                                           |            |                                                         |            |  |  |  |  |  |  |  |  |

 

----

(1)          Written down primarily because of expected deterioration in theperformance of the underlying collateral. As of June 30, 2008, for the securities with direct interest in thelender, there have been no defaults.  Forsecurities supported by collateral, there have been no defaults or defaultshave occurred in classes lower in the capital structure.

(2)          While these fixed income security write-downs were valued at asignificant discount to cost, we believe these securities retain economicvalue.

(3)          Cash received includes both income and principal collected during theperiod.

----

Notwithstanding our intent and ability to hold thesesecurities with impairment write-downs, we concluded that we could notreasonably assert that the recovery period would be temporary.

Change in intent write-downs for the three monthsended June 30, 2008 totaled $47.2 million and comprised net realizedlosses on fixed income of $45.5 million and mortgage loans of $1.7 million,compared to realized losses on fixed income of $2.2 million and mortgage loansof $2.1 million for the same period of prior year.  Change in intent write-downs for the sixmonths ended June 30, 2008 totaled $50.8 million and comprised netrealized losses on fixed income of $49.0 million and mortgage loans of $1.8million, compared to net realized losses on fixed income of $3.5 million andnet realized losses on mortgage loans of $2.1 million, for the same period ofprior year.

 

35

----

 

Change in intent write-downs for the three monthsended June 30, 2008 are presented in the table below.

 
| **($ in thousands)**                                                                                                                                                                                                                                                                                                            | ** ** | ** **                    | ** ** | **Financial Accounting  Standards Board  Statement No. 157,*Fair Value*** | ** ** | ** **                                     | ** **                     | **Net realized  capital loss**              | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------|--------------------------------|-------------------------------------------------------|------------|
| **Criteria**                                                                                                                                                                                                                                                                                                                              | ** ** | **Security Type**        | ** ** | ***Measurements*********(“SFAS No. 157”)  Level**                              | ** ** | **Fair value at  June 30,2008** | ** **                     | **Three Months  Ended  June 30, 2008** | ** ** |
|                                                                                                                                                                                                                                                                                                                                      |       |                          |       |                                                                                               |       |                                           |                           |                                                  |       |
| *Risk Mitigation*                                                                                                                                                                                                                                                                                                                         |       |                          |       |                                                                                               |       |                                           |                           |                                                  |       |
|                                                                                                                                                                                                                                                                                                                                      |       |                          |       |                                                                                               |       |                                           |                           |                                                  |       |
| Targeted reductions in commercial real  estate exposure where it is anticipated that future downside risk remains.  Considerations included position held in the capital structure, vintage year,  illiquidity and deteriorating fundamentals.                                                                                            |       | CRE CDO  CMBS  Mortgage loans |       | 3  2  3  3                                                                                         |       | $                                              | 26,428   38,213  2,083   9,560 |                                                  | $          | (5,520   (17,709   (3,819   (1,744 | )  )  )  ) |
|                                                                                                                                                                                                                                                                                                                                      |       |                          |       |                                                                                               |       |                                           |                           |                                                  |       |
| Targeted reductions in residential real  estate where management believes there is a risk of future material declines  in price in the event of continued deterioration in the economy.  Considerations included position held in the capital structure, projected  performance of the collateral, and expected internal rates of return. |       | ABS RMBS                      |       | 3                                                                                                  |       | 14,921                                         |                           | (4,148                                                | )          |
|                                                                                                                                                                                                                                                                                                                                      |       |                          |       |                                                                                               |       |                                           |                           |                                                  |       |
| Targeted reductions in financial sector  exposure included securities issued by certain regional banks and certain  large financial institutions.                                                                                                                                                                                         |       | Financial  Sector  Other      |       | 2  2  3                                                                                            |       | 108,547  19,015  11,056                        |                           | (11,928  (1,239  (907                                 | )  )  )    |
| Total Risk Mitigation                                                                                                                                                                                                                                                                                                                     |       |                          |       |                                                                                               |       | 229,823                                        |                           | (47,014                                               | )          |
| Individual Identification                                                                                                                                                                                                                                                                                                                 |       |                          |       |                                                                                               |       | 24,730                                         |                           | (209                                                  | )          |
| Other                                                                                                                                                                                                                                                                                                                                     |       |                          |       |                                                                                               |       | 14,252                                         |                           | —                                                |       |
| Total change in intent                                                                                                                                                                                                                                                                                                                    |       |                          |       |                                                                                               |       | $                                              | 268,805                        |                                                  | $          | (47,223 | ) |

 

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

 

**APPLICATION OF CRITICAL ACCOUNTING ESTIMATES**

** **

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

In applying policies, management makes subjectiveand complex judgments that frequently require estimates about matters that areinherently uncertain. Many of these policies, estimates and related judgmentsare common in the insurance and financial services industries; others arespecific to our businesses and operations. It is reasonably likely that changes in these estimates could occur fromperiod to period and result in a material impact on our financial statements.

Our critical accounting estimate for the fair valueof financial assets and financial liabilities follows.  For a description of critical accountingestimates not discussed below, see the Application of Critical AccountingEstimates section of the MD&A found under Part II. Item 7. of theAllstate Life Insurance Company of New York Annual Report on Form 10-K for2007.

 

36

----

 

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

 

•                   Defines fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date, and establishes a framework for measuringfair value;

•                   Establishes a three-level hierarchy for fair value measurements basedupon the transparency of inputs to the valuation as of the measurement date;

•                   Expands disclosures about financial instruments measured at fair value.

We categorize our financial assets and financialliabilities measured at fair value based on the priority of the inputs to thevaluation technique, into a three-level fair value hierarchy. The fair valuehierarchy gives the highest priority to quoted prices in active markets foridentical assets or liabilities which we can access (Level 1); the secondhighest priority for similar assets or liabilities in active markets, quotedprices for identical or similar assets or liabilities in non-active markets, orvaluation models whose inputs are observable (Level 2); and the lowest priorityto unobservable inputs (Level 3).  Ifinputs used to measure a financial instrument fall within different levels of thefair value hierarchy, the categorization is based on the lowest level inputthat is significant to the fair value measurement of the entireinstrument.  Certain financial assets arenot carried at fair value on a recurring basis, including investments such asmortgage loans and policy loans, and thus are only required to be categorizedin the fair value hierarchy when held at fair value on a non-recurring basis.

The availability of market observable information isthe principal factor in determining the level that financial instruments areassigned in the three-level hierarchy. Observable inputs are those used bymarket participants in valuing financial instruments that are developed basedon market data obtained from independent sources.  In the absence of sufficient observableinputs, unobservable inputs reflect our estimates of the assumptions marketparticipants would use in valuing financial assets and financial liabilitiesand are developed based on the best information available in thecircumstances.  The degree of managementjudgment involved in determining fair values is inversely related to theavailability of market observable information.

Financial assets and financial liabilities recordedon the Condensed Statements of Financial Position at fair value are categorizedbased on the reliability of inputs to the valuation techniques as follows:

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

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

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

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

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

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

We utilize a combination of third party valuationservice providers, brokers, and internal valuation models to determine fairvalue.  We gain assurance on the overallreasonableness and consistent application of input assumptions, valuationmethodologies, and compliance with accounting standards for fair valuedetermination through the execution of various processes and controls designedto ensure that our financial assets and financial liabilities are appropriatelyvalued and our ongoing monitoring of the fair values received or derived internally.

We are responsible for the determination of thevalue of the financial assets and financial liabilities carried at fair valueand the supporting assumptions and methodologies.  In certain situations, we employ independentthird-party valuation service providers to gather, analyze, and interpretmarket information and derive fair values based upon relevant assumptions andmethodologies for individual instruments. In situations where our valuation service providers are unable to obtainsufficient market observable information upon which to estimate the fair valuefor a particular security, fair value is determined either by requestingbrokers who are knowledgeable about these securities to provide a quote or byemploying internal valuation models that are widely accepted in the financialservices industry.  Changing

 

37

----

 

marketconditions in the second quarter of 2008 were incorporated into valuationassumptions and reflected in the fair values which were validated bycalibration and other analytical techniques to available market observabledata.

Valuation service providers typically obtain dataabout market transactions and other key valuation model inputs from multiplesources and, through the use of proprietary algorithms, produce valuationinformation in the form of a single fair value for individual securities forwhich a fair value has been requested under the terms of our agreements.  For certain types of securities, fair valuesare derived from the valuation service providers’ proprietary valuationmodels.  The inputs used by the valuationservice providers include, but are not limited to, market prices from recentlycompleted transactions and transactions of comparable securities, interest rateyield curves, credit spreads, currency rates, and other market-observableinformation, as applicable. Valuation service providers also use proprietarydiscounted cash flow models that are widely accepted in the financial servicesindustry and similar to those used by other market participants to value thesame financial instruments.  Thevaluation models take into account, among other things, market observableinformation as of the measurement date, as described above, as well as thespecific attributes of the security being valued including its term, interestrate, credit rating, industry sector, and where applicable, collateral qualityand other issue or issuer specific information. Executing valuation models effectively requires seasoned professionaljudgment and experience.  In cases wheremarket transactions or other market observable data is limited, the extent towhich judgment is applied varies inversely with the availability of marketobservable information.

For certain of our financial assets carried at fairvalue, where our valuation service providers cannot provide fair valuedeterminations, we obtain non-binding price quotes from brokers familiar withthe security who, similar to our valuation service providers, may considertransactions or activity in similar securities, as applicable, among otherinformation.  The brokers providing pricequotes are generally from the brokerage divisions of leading financialinstitutions with market making, underwriting and distribution expertise.

 The fair value of financial assets andfinancial liabilities, including privately-placed securities and certainderivatives embedded in certain contractholder liabilities, where our valuationservice providers or brokers do not provide fair value determinations, isdetermined using valuation methods and models widely accepted in the financialservices industry.  Internally developedvaluation models, which include inputs that may not be market observable and assuch involve some degree of judgment, are considered appropriate for each classof security to which they are applied.

Our internal pricing methods are primarily based onmodels using discounted cash flow methodologies that determine a single bestestimate of fair value for individual financial instruments.  In addition, our models use internallyassigned credit ratings as inputs (which are generally consistent with anyexternal ratings and those we use to report our holdings by credit rating) andstochastically determined cash flows for certain derivatives embedded in certaincontractholder liabilities, both of which are difficult to independentlyobserve and verify.  Instrument specificinputs used in our internal fair value determinations include: coupon rate,weighted average life, sector of the issuer, call provisions, and thecontractual elements of derivatives embedded in certain contractholderliabilities.  Market specific inputs usedin these fair values, which we believe are representative of inputs othermarket participants would use to determine fair value of the same instrumentsinclude: interest rate yield curves, quoted market prices of comparablesecurities, credit spreads, estimated liquidity premiums, and other applicablemarket data including lapse and anticipated market return estimates forderivatives embedded in certain contractholder liabilities.  As a result of the significance of non-marketobservable inputs, including internally assigned credit ratings and stochasticcash flow estimates as described above, judgment is required in developingthese fair values. The fair value of these financial assets and financialliabilities may differ from the amount received to sell an asset or the amountpaid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. Moreover, the use of different valuation assumptions may have a materialeffect on the financial assets’ and financial liabilities’ fair values.

Fair value of our investments comprise anaggregation of numerous, single best estimates for each security in the CondensedStatements of Financial Position. Because of this detailed approach there is no single set of assumptionsthat determine our fair value estimates. Moreover, management does not compile a range of estimates for itemsreported at fair value because we do not believe that a range would providemeaningful information.  Level 1 andLevel 2 measurements represent valuations where all significant inputs aremarket observable. Level 3 measurements have one or more significant inputsthat are not market observable and as a result these fair value determinationshave greater potential variability as it relates to their significantinputs.  The Level 3 principal componentsare privately placed securities valued using internal models, broker quotedsecurities, ABS RMBS, Alt-A, ARS backed by student loans, and other CDO. Ingeneral, the greater the reliance on significant inputs that are not marketobservable, the greater potential variability of the fair value determinations.ABS RMBS and Alt-A reflected the most significant impacts to their respectivefair value determinations, due to the continued illiquidity that existed forthese classes of securities. For broker quoted securities’ fair valuedeterminations, we believe the

 

38

----

 

brokersproviding the quotes may consider market observable transactions or activity insimilar securities, as applicable, and other information as calibrationpoints.  Privately placed securities’fair value determinations, which were based on internal ratings that are notmarket observable are calibrated to market observable information in the formof external NAIC ratings and credit spreads. We believe our most significant exposure to changes in fair value is dueto market risk.  Our exposure to changesin market conditions is discussed fully in the Market Risk section of theMD&A included in our 2007 Form 10-K.

We employ specific control processes to determinethe reasonableness of the fair values of our financial assets and financialliabilities.  Our processes are designedto ensure that the values received or internally estimated are accuratelyrecorded and that the data inputs and the valuation techniques utilized areappropriate, consistently applied, and that the assumptions are reasonable andconsistent with the objective of determining fair value.  For example, on a continuing basis, we assessthe reasonableness of individual security values received from valuationservice providers that exceed certain thresholds as compared to previous valuesreceived from those valuation service providers. In addition, we may validatethe reasonableness of fair values by comparing information obtained from ourvaluation service providers to other third party valuation sources for selectedfinancial assets. When fair value determinations are expected to be morevariable, we validate them through reviews by members of management who haverelevant expertise and who are independent of those charged with executinginvesting transactions.

 

The following table identifies investments as of June 30,2008 by source of value determination:

 
| ** **                                                                             | ** ** | **Investments** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------|------------|
| **($ in thousands)**                                                              | ** ** | **Fair  Value** | ** ** | **Percent  to total** | ** ** |
| Fair value based on internal sources (1)                                               |       | $               | 1,545,467  |   | 21.5 | % |
| Fair value based on external sources (2)                                               |       | 4,909,654       |       | 68.1 |   |
| Total fixed income securities and certain  short-term securities                       |       | 6,455,121       |       | 89.6 |   |
| Mortgage loans, policy loans, and  short-term investments, investments, valued at cost |       | 748,713         |       | 10.4 |   |
| Total                                                                                  |       | $               | 7,203,834  |   | 100.0 | % |

 

(1)          Includes short-term, commercial paper and other of $460.9 millionreported in Level 2.

(2)          Includes $336.6 million that are valued using broker quotes.

----

For more detailed information on our accountingpolicy for the fair value of financial assets and financial liabilities andinformation on the financial assets and financial liabilities included in theLevels promulgated by SFAS No. 157, see Note 3 to the Condensed FinancialStatements.

 

39

----

 

The following table provides additional detailregarding Level 1, 2 and 3 financial assets and financial liabilities by theirclassification in the Condensed Statement of Financial Position at June 30, 2008.

 
| ** **                                                 | ** ** | **Quoted Prices  in Active  Markets for  Identical  Assets** | ** **  | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Other  Valuations  and** | ** **    | **Balance as of** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------------|-------------|--------------------------------------------|------------|---------------------------------------|------------|----------------------------|---------------|-----------------------------|------------|
| **($ in thousands)**                             | ** ** | **(Level 1)**                                                          | ** **  | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **Netting**                | ** **    | **June 30, 2008** | ** ** |
| **Financial assets**                                       | ** ** | ** **                                                                  | ** **  | ** **                                 | ** ** | ** **                            | ** ** | ** **                 | ** **    | ** **                  | ** ** |
| Fixed income securities:                                   | ** ** | ** **                                                                  | ** **  | ** **                                 | ** ** | ** **                            | ** ** | ** **                 | ** **    | ** **                  | ** ** |
| Corporate                                                  |       |                                                                        |        |                                       | $          | 1,672,838                             |       | $                          | 35,095        |                        |       |   | $ | 1,707,933 |   |
| Corporate privately placed securities                      |       |                                                                        |        | 316,328                                    |       | 1,198,528                             |       |                       |          | 1,514,856                   |       |
| Municipal                                                  |       |                                                                        |        | 311,676                                    |       |                                  |       |                       |          | 311,676                     |       |
| Municipal-ARS                                              |       |                                                                        |        | 4,999                                      |       | 119,225                               |       |                       |          | 124,224                     |       |
| U.S. government and agencies                               |       | $                                                                           | 147,095     |                                       | 659,119    |                                  |       |                       |          |                        | 806,214    |   |
| ABS RMBS                                                   |       | —                                                                      |        |                                       |       | 59,454                                |       |                       |          | 59,454                      |       |
| Alt-A                                                      |       | —                                                                      |        |                                       |       | 25,474                                |       |                       |          | 25,474                      |       |
| Other CDO                                                  |       | —                                                                      |        |                                       |       | 25,020                                |       |                       |          | 25,020                      |       |
| CRE CDO                                                    |       | —                                                                      |        |                                       |       | 26,428                                |       |                       |          | 26,428                      |       |
| CMBS                                                       |       | —                                                                      |        | 641,705                                    |       | 2,083                                 |       |                       |          | 643,788                     |       |
| Preferred stock                                            |       | —                                                                      |        | 8,386                                      |       |                                  |       |                       |          | 8,386                       |       |
| MBS                                                        |       | —                                                                      |        | 363,392                                    |       | 11,508                                |       |                       |          | 374,900                     |       |
| Foreign government                                         |       | —                                                                      |        | 340,849                                    |       |                                  |       |                       |          | 340,849                     |       |
| Total fixed income securities                              |       | 147,095                                                                     |        | 4,319,292                                  |       | 1,502,815                             |       |                       |          | 5,969,202                   |       |
| Short-term investments:                                    |       |                                                                        |        |                                       |       |                                  |       |                       |          |                        |       |
| Commercial paper and other                                 |       | —                                                                      |        | 460,870                                    |       | —                                |       |                       |          | 460,870                     |       |
| Money market funds                                         |       | 25,049                                                                      |        | —                                     |       | —                                |       |                       |          | 25,049                      |       |
| Total short-term investments                               |       | 25,049                                                                      |        | 460,870                                    |       |                                  |       |                       |          | 485,919                     |       |
| Other investments:                                         |       |                                                                        |        |                                       |       |                                  |       |                       |          |                        |       |
| Free-standing derivatives                                  |       | —                                                                      |        | —                                     |       | 485                                   |       |                       |          | 485                         |       |
| Total other investments                                    |       | —                                                                      |        | —                                     |       | 485                                   |       |                       |          | 485                         |       |
| **Total recurring basis assets**                           |       | 172,144                                                                     |        | 4,780,162                                  |       | 1,503,300                             |       |                       |          | 6,455,606                   |       |
| Non-recurring basis                                        |       |                                                                        |        |                                       |       | 7,816                                 |       |                       |          | 7,816                       |       |
| Valued at cost, amortized cost or using the  equity method |       | —                                                                      |        | —                                     |       | —                                |       | $                          | 740,897       |                        | 740,897    |   |
| Counterparty and cash collateral netting (1)               |       | —                                                                      |        | —                                     |       | —                                |       | (485                       | )             | (485                        | )          |
| **Total investments**                                      | ** ** | **172,144**                                                                 | ** **  | **4,780,162**                              | ** ** | **1,511,116**                         | ** ** | **740,412**                | ** **    | **7,203,834**               | ** ** |
| Separate account assets                                    |       | 804,994                                                                     | ** **  | **—**                                 | ** ** | **—**                            |       |                       |          | 804,994                     |       |
| Other assets                                               |       | 171                                                                         |        | —                                     |       | (2,067                                | )          |                       |          | (1,896                      | )          |
| **Total financial assets**                                 | ** ** | **$**                                                                       | **977,309** | ** **                                 | **$**      | **4,780,162**                         | ** ** | **$**                      | **1,509,049** | ** **                  | **$**      | **740,412** | ** ** | **$** | **8,006,932** | ** ** |
| % of Total financial assets                                |       | 12.2                                                                        | %           | 59.7                                       | %          | 18.9                                  | %          | 9.2                        | %             | 100.0                       | %          |
| ** **                                                 | ** ** | ** **                                                                  | ** **  | ** **                                 | ** ** | ** **                            | ** ** | ** **                 | ** **    | ** **                  | ** ** |
| **Financial liabilities**                                  | ** ** | ** **                                                                  | ** **  | ** **                                 | ** ** | ** **                            | ** ** | ** **                 | ** **    | ** **                  | ** ** |
| Contractholder funds:                                      | ** ** | ** **                                                                  | ** **  | ** **                                 | ** ** | ** **                            | ** ** | ** **                 | ** **    | ** **                  | ** ** |
| Derivatives embedded annuity contracts                     |       |                                                                        |        |                                       | $          | —                                |       | $                          | (1,896        | )                           | —     |   | $ | (1,896 | ) |
| Other liabilities:                                         |       |                                                                        |        |                                       |       |                                  |       |                       |          |                        |       |
| Free-standing derivatives                                  | ** ** | ** **                                                                  |        | (488                                       | )          | (3,234                                | )          | —                     |          | (3,722                      | )          |
| Counterparty and cash collateral netting (1)               |       |                                                                        |        |                                       |       |                                  |       |                       | 485           |                        | 485        |   |
| **Total Financial liabilities**                            | ** ** | ** **                                                                  | ** **  | ** **                                 | ** ** | **(488**                              | **)**      | **$**                      | **(5,130**    | **)**                       | **$**      | **485** | ** ** | **$** | **(5,133** | **)** |
| % of Total financial liabilities                           |       |                                                                        |        | 9.5                                        | %          | 99.9                                  | %          | (9.4                       | )%            | 100.0                       | %          |
|                                                            |            |                                                                             |             |                                            |            |                                       |            |                            |               |                             |            |  |  |  |  |  |  |  |

 

----

(1)   In accordance with *Financial Accounting Standards Board**(“FASB”)****Staff Position No. FIN 39–1, Amendment of FASBInterpretation No. 39*,we net all fair value amounts recognized for derivative instruments and fairvalue amounts recognized for the right to reclaim cash collateral or theobligation to return cash collateral executed with the samecounterparty under a master netting agreement.

----

 

40

----

 

Thefollowing table provides a summary of changes in fair value during the three—monthperiod ended June 30, 2008 of Level 3 financial assets and financialliabilities held at fair value on a recurring basis at June 30, 2008.

 
| ** **                                 | ** ** | ** **                                            | ** **    | **Total realized and unrealized  Gains (Losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** **  | ** **                                                          | ** ** | **Total  Gains (Losses)  included in**     | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|---------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in thousands)**             | ** ** | **Balance as of  March 31, 2008** | ** **    | **Net Income ****(1)**                                                             | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  Sales, Issuances  and Settlements,  net** | ** **  | **Net  Transfers In  and/or (Out)  of Level 3** | ** ** | **Balance as of  June 30, 2008** | ** ** | **Net Income for  Instruments  Still Held at  June 30, 2008 ****(4)** | ** ** |
| **Financial  assets**                      |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |       |   |   |
| Fixed income  securities:                  |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |       |   |   |
| Corporate                                  |       | $                                                     | 35,798        |                                                                                         | $          | (3                                                      | )          | $                                                                 | (907        | )                                                                   | $          | (89                                                  | )          | $ | 296 |   | $ | 35,095 |   | $ | (3 | ) |
| Corporate  privately placed securities     |       | 1,238,956                                             |          | 1,623                                                                                        |       | (30,827                                                 | )          | (6,141                                                            | )           | (5,083                                                              | )          | 1,198,528                                            |       | 337 |   |
| Municipal                                  |       | —                                                |          | —                                                                                       |       | —                                                  |       | (3,400                                                            | )           | 3,400                                                               |       | —                                               |       | — |   |
| Municipal–ARS                         |       | 46,350                                                |          | —                                                                                       |       | (3,475                                                  | )          | (2,550                                                            | )           | 78,900                                                              |       | 119,225                                              |       | — |   |
| ABS RMBS                                   |       | 67,224                                                |          | (4,148                                                                                       | )          | 444                                                     |       | (4,066                                                            | )           | —                                                              |       | 59,454                                               |       | (4,148 | ) |
| Alt–A                                 |       | 26,603                                                |          | 5                                                                                            |       | (1,134                                                  | )          | —                                                            |        | —                                                              |       | 25,474                                               |       | 5 |   |
| Other CDO                                  |       | 26,131                                                |          | —                                                                                       |       | (972                                                    | )          | (139                                                              | )           | —                                                              |       | 25,020                                               |       | — |   |
| CRE CDO                                    |       | 29,894                                                |          | (12,019                                                                                      | )          | 8,559                                                   |       | (6                                                                | )           | —                                                              |       | 26,428                                               |       | (12,019 | ) |
| CMBS                                       |       | 1,914                                                 |          | (3,815                                                                                       | )          | 3,984                                                   |       | —                                                            |        | —                                                              |       | 2,083                                                |       | (3,815 | ) |
| MBS                                        |       | 12,740                                                |          | (34                                                                                          | )          | 7                                                       |       | (1,205                                                            | )           | —                                                              |       | 11,508                                               |       | (34 | ) |
| Total fixed  income securities             |       | 1,485,610                                             |          | (18,391                                                                                      | )          | (24,321                                                 | )          | (17,596                                                           | )           | 77,513                                                              |       | 1,502,815                                            |       | (19,677 | ) |
| Other  investments:                        |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |       |   |   |
| Free–standing  derivatives, net       |       | (3,326                                                | )             | 136                                                                                          |       | —                                                  |       | 441                                                               |        | —                                                              |       | (2,749                                               | )(2)       | 1,582 |   |
| Total other  investments                   |       | (3,326                                                | )             | 136                                                                                          |       | —                                                  |       | 441                                                               |        | —                                                              |       | (2,749                                               | )          | 1,582 |   |
| **Total  investments**                     |       | 1,482,284                                             |          | (18,255                                                                                      | )          | (24,321                                                 | )          | (17,155                                                           | )           | 77,513                                                              |       | 1,500,066                                            | (3)        | (18,095 | ) |
| Other assets                               |       | 506                                                   |          | (2,573                                                                                       | )          | —                                                  |       | —                                                            |        | —                                                              |       | (2,067                                               | )          | (2,573 | ) |
| **Total  Level 3   Financial assets**      | ** ** | **$**                                                 | **1,482,790** | ** **                                                                                   | **$**      | **(20,828**                                             | **)**      | **$**                                                             | **(24,321** | **)**                                                               | **$**      | **(17,155**                                          | **)**      | **$** | **77,513** | ** ** | **$** | **1,497,999** | ** ** | **$** | **(20,668** | **)** |
|                                       |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |       |   |   |
| **Financial  Liabilities**                 |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |       |   |   |
| Contractholder  funds:                     |       |                                                  |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                |       |                                                 |       |   |   |
| Derivatives  embedded in annuity contracts |       | $                                                     | (1,253        | )                                                                                            | $          | (675                                                    | )          | $                                                                 | —      |                                                                | $          | 32                                                   |       | $ | — |   | $ | (1,896 | ) | $ | (675 | ) |
| **Total  Level 3 financial liabilities**   | ** ** | **$**                                                 | **(1,253**    | **)**                                                                                        | **$**      | **(675**                                                | **)**      | **$**                                                             | **—**  | ** **                                                          | **$**      | **32**                                               | ** ** | **$** | **—** | ** ** | **$** | **(1,896** | **)** | **$** | **(675** | **)** |

 

----

| (1)    | The amounts above total $(21.5) million and are  reported in the Condensed Statements of Operations as follows: $(22.3)  million in Realized capital gains and losses; $1.5 million in Net investment  income, and $(676) thousand in Contract benefits.                                                                                                                                                                                     |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Comprises $485 million of financial assets and  $(3.2) million of financial liabilities.                                                                                                                                                                                                                                                                                                                                                     |
| (3)    | Comprises $1.50 billion of investments and $(3.2)  million of Free–Standing Derivatives included in Financial Liabilities.                                                                                                                                                                                                                                                                                                              |
| (4)    | The amounts above represent gains and losses  included in net income for the period of time that the financial asset or  financial liability was determined to be in Level 3. These gains and losses  total $(21.4) million and are reported in the Condensed Statements of  Operations as follows: $(22.2) million in realized capital gains and losses;  $1.5 million in net investment income, and $(676) thousand in Contract  benefits. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

41

----

 

Thefollowing table provides a summary of changes in fair value during thesix—month period ended June 30, 2008 of Level 3 financial assets andfinancial liabilities held at fair value on a recurring basis at June 30,2008.

 
| ** **                                         | ** ** | ** **                                         | ** **    | **Total realized and unrealized  Gains (Losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** **  | ** **                                                                       | ** ** | **Total  Gains (Losses)  included in**     | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|---------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **($ in thousands)**                     | ** ** | **Balance as of  January 1,  2008** | ** **    | **Net Income ****(1)**                                                             | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  Sales, Issuances  and Settlements,  net** | ** **  | **Net  Transfers In  and/or (Out)  of Level 3 ****(2)** | ** ** | **Balance as of  June 30, 2008** | ** ** | **Net Income for  Instruments  Still Held at  June 30, 2008** | ** ** |
| **Financial  assets**                              |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                             |       |                                                 |       |   |   |
| Fixed income  securities:                          |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                             |       |                                                 |       |   |   |
| Corporate                                          |       | $                                                  | 38,270        |                                                                                         | $          | 6,792                                                   |       | $                                                                 | (10,149     | )                                                                                | $          | (114                                                 | )          | $ | 296 |   | $ | 35,095 |   | $ | (3 | ) |
| Corporate  privately placed securities             |       | 1,211,628                                          |          | 3,223                                                                                        |       | (29,768                                                 | )          | 7,995                                                             |        | 5,450                                                                            |       | 1,198,528                                            |       | 1,448 |   |
| Municipal                                          |       | —                                             |          | —                                                                                       |       | —                                                  |       | (3,400                                                            | )           | 3,400                                                                            |       | —                                               |       | — |   |
| Municipal–ARS                                 |       | 33,200                                             |          | —                                                                                       |       | (3,475                                                  | )          | (5,000                                                            | )           | 94,500                                                                           |       | 119,225                                              |       | — |   |
| ABS RMBS                                           |       | 76,110                                             |          | (4,780                                                                                       | )          | (3,938                                                  | )          | (7,938                                                            | )           | —                                                                           |       | 59,454                                               |       | (4,780 | ) |
| ABS CDO                                            |       | —                                             |          | —                                                                                       |       | —                                                  |       | —                                                            |        | —                                                                           |       | —                                               |       | (56 | ) |
| Alt–A                                         |       | 28,836                                             |          | 10                                                                                           |       | (3,372                                                  | )          | —                                                            |        | —                                                                           |       | 25,474                                               |       | 9 |   |
| Other CDO                                          |       | 30,768                                             |          | 269                                                                                          |       | (2,882                                                  | )          | (3,135                                                            | )           | —                                                                           |       | 25,020                                               |       | — |   |
| CRE CDO                                            |       | 33,067                                             |          | (12,024                                                                                      | )          | 5,399                                                   |       | (14                                                               | )           | —                                                                           |       | 26,428                                               |       | (12,024 | ) |
| CMBS                                               |       | 3,727                                              |          | (3,812                                                                                       | )          | 2,168                                                   |       | —                                                            |        | —                                                                           |       | 2,083                                                |       | (3,812 | ) |
| MBS                                                |       | 14,292                                             |          | (71                                                                                          | )          | (174                                                    | )          | (2,539                                                            | )           | —                                                                           |       | 11,508                                               |       | (71 | ) |
| Total fixed  income securities                     |       | 1,469,898                                          |          | (10,393                                                                                      | )          | (46,191                                                 | )          | (14,145                                                           | )           | 103,646                                                                          |       | 1,502,815                                            |       | (19,289 | ) |
| Other  investments:                                |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                             |       |                                                 |       |   |   |
| Free–standing  derivatives, net               |       | (980                                               | )             | (2,236                                                                                       | )          | —                                                  |       | 567                                                               |        | —                                                                           |       | (2,749                                               | )(2)       | 1,602 |   |
| Total other  investments                           |       | (980                                               | )             | (2,236                                                                                       | )          | —                                                  |       | 567                                                               |        | —                                                                           |       | (2,749                                               | )(2)       | 1,602 |   |
| **Total  investments**                             |       | 1,468,918                                          |          | (12,729                                                                                      | )          | (46,191                                                 | )          | (13,578                                                           | )           | 103,646                                                                          |       | 1,500,066                                            | (3)        | (17,687 | ) |
|                                               |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                             |       |                                                 |       |   |   |
| Other assets                                       |       | (1,733                                             | )             | (334                                                                                         | )          | —                                                  |       | —                                                            |        | —                                                                           |       | (2,067                                               | )          | (334 | ) |
| **Total  recurring Level 3   financial assets**    | ** ** | **$**                                              | **1,467,185** | ** **                                                                                   | **$**      | **(13,063**                                             | **)**      | **$**                                                             | **(46,191** | **)**                                                                            | **$**      | **(13,578**                                          | **)**      | **$** | **103,646** | ** ** | **$** | **1,497,999** | ** ** | **$** | **(18,021** | **)** |
|                                               |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                             |       |                                                 |       |   |   |
| **Financial  liabilities**                         |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                             |       |                                                 |       |   |   |
| Contractholder  funds:                             |       |                                               |          |                                                                                         |       |                                                    |       |                                                              |        |                                                                             |       |                                                 |       |   |   |
| Derivatives  embedded in annuity contracts         |       | $                                                  | 174           |                                                                                         | $          | (2,103                                                  | )          | $                                                                 | —      |                                                                             | $          | 33                                                   |       | $ | — |   | $ | (1,896 | ) | $ | (2,103 | ) |
| **Total  recurring Level 3 financial liabilities** | ** ** | **$**                                              | **174**       | ** **                                                                                   | **$**      | **(2,103**                                              | **)**      | **$**                                                             | **—**  | ** **                                                                       | **$**      | **33**                                               | ** ** | **$** | **—** | ** ** | **$** | **(1,896** | **)** | **$** | **(2,103** | **)** |

 

----

| (1) | The amounts above total $(15.2) million and are  reported in the Condensed Statements of Operations as follows: $(16.1)  million in Realized capital gains and losses; $3.0 million in Net investment  income, and $(2.1) million in Contract benefits.                                                                                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Comprises $485 thousand of financial assets and  $(3.2) million of financial liabilities.                                                                                                                                                                                                                                                                                                                                                     |
| (3) | Comprises $1.50 billion of investments and $(3.2)  million of Free–Standing Derivatives included in Financial Liabilities.                                                                                                                                                                                                                                                                                                               |
| (4) | The amounts above represent gains and losses  included in net income for the period of time that the financial assets or  financial liability was determined to be in Level 3. These gains and losses  total $(20.1) million and are reported in the Condensed Statements of  Operations as follows: $(21.0) million in Realized capital gains and losses;  $3.0 million in Net investment income, and; $(2.1) million in Contract  benefits. |

 

----

 

Transfersinto and out of Level 3 during the six months ended June 30, 2008 areattributable to a change in the availability of market observable informationfor individual securities within the respective categories.  Due to a further deterioration in liquidityfor the segment of the ARS market backed by student loans, certain marketobservable data utilized for valuation purposes became unavailable during thesecond quarter of 2008.  As of June 30,2008, $119.2 million or 96.0% of our total ARS holdings were valued using adiscounted cash flow model.  Certaininputs to the valuation model that are significant to the overall valuation andnot market observable included: estimates of future coupon rates if auctionfailures continue, maturity assumptions, and illiquidity premium.  As a result of the reliance on certainnon-market observable inputs, the portion of the ARS portfolio backed bystudent loans have been transferred to Level 3 for the period ended June 30,2008. These same securities were classified as Level 2 measurements for theperiod ended March 31, 2008.  OurARS holdings that are not backed by student loans have a fair value equal totheir corresponding par value based on market observable inputs and, therefore,continue to have a Level 2 classification.

 

42

----

 

The followingtable presents fair value as a percent of amortized cost for Level 3investments at June 30, 2008.

 
| **($ in thousands)**          | ** ** | **Fair value** | ** ** | **Fair value as a  % of  Amortized cost** | ** ** |
|-----------------------------------------|------------|---------------------|------------|--------------------------------------------------------------------|------------|
| ** **                              | ** ** | ** **          | ** ** | ** **                                                         | ** ** |
| Fixed income securities:                |       |                |       |                                                               |       |
| Corporate                               |       | $                   | 35,095     |                                                               | 94.0       | % |
| Corporate - privately placed securities |       | 1,198,528           |       | 101.0                                                              |       |
| Municipal - ARS                         |       | 119,225             |       | 97.2                                                               |       |
| ABS RMBS                                |       | 59,454              |       | 84.4                                                               |       |
| Alt-A                                   |       | 25,474              |       | 86.0                                                               |       |
| Other CDO                               |       | 25,020              |       | 86.5                                                               |       |
| CRE CDO                                 |       | 26,428              |       | 100.7                                                              |       |
| CMBS                                    |       | 2,083               |       | 100.6                                                              |       |
| MBS                                     |       | 11,508              |       | 97.8                                                               |       |
| Total fixed income securities           |       | 1,502,815           |       | 99.1                                                               |       |
| Other investments:                      |       |                |       |                                                               |       |
| Free-standing derivatives               |       | 485                 |       | 100.0                                                              |       |
| Sub-total recurring Level 3 investments |       | 1,503,300           |       | 99.1                                                               |       |
| Non-recurring basis                     |       | 7,816               |       | 100.0                                                              |       |
| **Total Level 3 investments**           |       | $                   | 1,511,116  |                                                               | 99.1       |   |

 

Non-recurring investmentsinclude certain mortgage loans and other investments at fair value due to ourchange in intent write-downs and credit impairments at June 30, 2008.

 

### **CAPITAL RESOURCES AND LIQUIDITY**

###  

**CapitalResources**consistof shareholder’s equity, representing funds deployed or available to bedeployed to support business operations. The following table summarizes our capital resources.

 
| **($ in thousands)**                                    | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                         |       |                    |       |                        |       |
| Common stock, additional capital paid-in and retained income |       | $                       | 616,702    |                        | $          | 615,684 |   |
| Accumulated other comprehensive income                       |       | 22,582                  |       | 65,188                      |       |
| Total shareholder’s equity                              |       | $                       | 639,284    |                        | $          | 680,872 |   |

 

*Shareholder’sequity* decreasedin the first six months of 2008, due to decreased unrealized net capital gainson fixed income securities slightly offset by net income.

 

**FinancialRatings and Strength** Our ratings are influenced bymany factors including our operating and financial performance, asset quality,liquidity, asset/liability management, overall portfolio mix, financialleverage (i.e., debt), exposure to risks, the current level of operatingleverage, Allstate Life Insurance Company’s (“ALIC”) and Allstate InsuranceCompany’s (“AIC”) ratings and other factors. There have been no changes to ourinsurance financial strength ratings since December 31, 2007.  S&P affirmed AIC’s and ALIC’s ratings in July 2008.  Moody’s placed ALIC’s and our ratings underreview.

 

**LiquiditySources and Uses **As reflected in our Condensed Statementsof Cash Flows, lower operating cash flows in the first six months of 2008,compared to the first six months of 2007, were primarily related to a decreasein premiums and higher income tax payments, partially offset by the settlementof an inter-company obligation in the prior year and higher net investmentincome.

 

43

----

 

Cash flows used ininvesting activities increased in the first six months of 2008, compared to thefirst six months of 2007, primarily due to the investment of highercontractholder fund deposits.

 

Cash flows from financingactivities shifted to a source of cash in the first six months of 2008 comparedto a use of cash in the first six months of 2007.  The change was the result of increasedcontractholder fund deposits.  Forquantification of the changes in contractholder funds, see the Operationssection of the MD&A.

 

We have an inter-companyloan agreement with The Allstate Corporation. The amount of inter-company loans available to us is at the discretionof The Allstate Corporation.  The maximumamount of loans The Allstate Corporation will have outstanding to all itseligible subsidiaries at any given point in time is limited to $1.00billion.  We had no amounts outstandingunder the inter-company loan agreement at June 30, 2008 or December 31,2007.  The Allstate Corporation usescommercial paper borrowings and bank lines of credit to fund intercompanyborrowings.

 

44

----

 

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

###  

*Evaluationof Disclosure Controls and Procedures. *We maintain disclosure controls andprocedures as defined in Rule 13a-15(e) and 15(d)-15(e) underthe Securities Exchange Act of 1934. Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based upon this evaluation, the principalexecutive officer and the principal financial officer concluded that ourdisclosure controls and procedures are effective in providing reasonableassurance that material information required to be disclosed in our reportsfiled with or submitted to the Securities and Exchange Commission under theSecurities Exchange Act is made known to management, including the principalexecutive officer and the principal financial officer, as appropriate to allowtimely decisions regarding required disclosure.

 

### *Changes in Internal Control overFinancial Reporting. *During the fiscal quarter ended June 30,2008, there have been no changes in our internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. 

###  

45

----

 

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

###  

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

###  

Informationrequired for this Part II, Item 1, is incorporated by reference to thediscussion under the heading “Regulation” and under the heading “Legal andregulatory proceedings and inquiries” in Note 5 of the Company’s CondensedFinancial Statements in Part I, Item 1, of this Form 10-Q.

 

**Item 1A.Risk Factors**

 

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

 

These forward-lookingstatements do not relate strictly to historical or current facts and may beidentified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,”“anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” andother words with similar meanings. These statements may address, among otherthings, our strategy for growth, product development, regulatory approvals,market position, expenses, financial results, litigation and reserves.  We believe that these statements are based onreasonable estimates, assumptions and plans. However, if the estimates,assumptions or plans underlying the forward-looking statements prove inaccurateor if other risks or uncertainties arise, actual results could differmaterially from those communicated in these forward-looking statements.  Risk factors which could cause actual resultsto differ materially from those suggested by such forward-looking statementsinclude but are not limited to those discussed or identified in this document(including the risks described below), in our public filings with theSecurities and Exchange Commission, and those incorporated by reference in Part I,Item 1A of Allstate Life Insurance Company of New York Annual Report on Form 10-Kfor 2007.

 

**Theimpact of our investment strategies may be adversely affected by developmentsin the investment markets**

 

The cost and impact ofour investment portfolio risk mitigation and return optimization programs maybe adversely affected by unexpected developments in the investment markets.

 

### **Item 6.    Exhibits**

###  

(a)   Exhibits

 

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

 

46

----

 

### **SIGNATURE**

###  

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                 | Allstate Life  Insurance Company of New York |
|----------------------|----------------------------------------------|
|                 | (Registrant)                                 |
|                 |                                         |
|                 |                                         |
| August 8,  2008 | By                                           | /s/ Samuel H.  Pilch |   |
|                 | Samuel H. Pilch                              |
|                 | Controller                                   |
|                 | (chief  accounting officer and duly          |
|                 | authorized  officer of Registrant)           |

 

47

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                   |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| 15                   |       | Acknowledgement of  awareness from Deloitte & Touche LLP dated August 7, 2008,  concerning unaudited interim financial information. |
|                 |       |                                                                                                                                              |
| 31.1                 |       | Rule 15d-14(a) Certification  of Principal Executive Officer                                                                            |
|                 |       |                                                                                                                                              |
| 31.2                 |       | Rule 15d-14(a) Certification  of Principal Financial Officer                                                                            |
|                 |       |                                                                                                                                              |
| 32                   |       | Section 1350  Certifications                                                                                                                 |

 

48

----