** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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

###### ** **

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

 

**x QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009**

 

**OR**

 

**o TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF**

###### **THESECURITIES 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 has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (****§****232.405of this chapter) during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).**
| **Yes****o****    No****o** |
|--------------------------------------------|

 

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.**

** **
| **Large accelerated filer****o** | ** ** | **Accelerated  filer****o** | ** ** | **Non-accelerated  filer****x** | ** ** | **Smaller  reporting company****o** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|-------------------------------------|

**(Do notcheck if a smaller reporting company)**

** **

**Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).**
| **Yes****o****    No****x** |
|--------------------------------------------|

 

**As of May 12, 2009, the registrant had 100,000common shares, $25 par value, outstanding, all of which are held by AllstateLife Insurance Company.**

 

 

 

----

 

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

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

##### **March 31, 2009**

 
| ** **        | ** **                                                                                                      | **PAGE**   |
|-------------------|-----------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                                                      | ** ** |
| **PART 1.**  | **FINANCIAL INFORMATION**                                                                                       | ** ** |
|              |                                                                                                            |       |
| Item 1.           | Financial  Statements                                                                                           |       |
|              |                                                                                                            |       |
|              | Condensed  Statements of Operations for the Three-Month Periods Ended March 31,  2009 and 2008 (unaudited) | 1          |
|              |                                                                                                            |       |
|              | Condensed  Statements of Financial Position as of March 31, 2009 (unaudited) and  December 31, 2008   | 2          |
|              |                                                                                                            |       |
|              | Condensed  Statements of Cash Flows for the Three-Month Periods Ended March 31,  2009 and 2008 (unaudited) | 3          |
|              |                                                                                                            |       |
|              | Notes  to Condensed Financial Statements (unaudited)                                                            | 4          |
|              |                                                                                                            |       |
|              | Report  of Independent Registered Public Accounting Firm                                                        | 20         |
|              |                                                                                                            |       |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     | 21         |
|              |                                                                                                            |       |
| Item 4.           | Controls  and Procedures                                                                                        | 47         |
|              |                                                                                                            |       |
| **PART II.** | **OTHER INFORMATION**                                                                                           | ** ** |
|              |                                                                                                            |       |
| Item 1.           | Legal  Proceedings                                                                                              | 48         |
|              |                                                                                                            |       |
| Item 1A.          | Risk  Factors                                                                                                   | 48         |
|              |                                                                                                            |       |
| Item 6.           | Exhibits                                                                                                        | 48         |

 

----

 

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

####  

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

####  

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

####  

**CONDENSED STATEMENTS OFOPERATIONS**

** **
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**                       | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                           | ** ** | **(unaudited)**                                  | ** ** |
| **Revenues**                                         |       |                                             |       |   |   |
| Premiums                                             |       | $                                                | 11,464     |   | $ | 10,011 |   |
| Contract charges                                     |       | 13,726                                           |       | 14,671 |   |
| Net investment income                                |       | 93,678                                           |       | 99,746 |   |
| Realized capital gains and losses                    |       | 99,218                                           |       | 1,721 |   |
|                                                 |       | 218,086                                          |       | 126,149 |   |
|                                                 |       |                                             |       |   |   |
| **Costs and expenses**                               |       |                                             |       |   |   |
| Contract benefits                                    |       | 37,779                                           |       | 38,805 |   |
| Interest credited to contractholder funds            |       | 56,834                                           |       | 43,301 |   |
| Amortization of deferred policy acquisition costs    |       | 72,667                                           |       | 1,451 |   |
| Operating costs and expenses                         |       | 12,789                                           |       | 9,022 |   |
|                                                 |       | 180,069                                          |       | 92,579 |   |
|                                                 |       |                                             |       |   |   |
| Loss on disposition of operations                    |       | —                                           |       | (268 | ) |
|                                                 |       |                                             |       |   |   |
| **Income from operations before income tax expense** |       | 38,017                                           |       | 33,302 |   |
|                                                 |       |                                             |       |   |   |
| Income tax expense                                   |       | 13,348                                           |       | 11,725 |   |
|                                                 |       |                                             |       |   |   |
| **Net income**                                       |       | $                                                | 24,669     |   | $ | 21,577 |   |

 

**See notes tocondensed financial statements.**

 

1

----

 

**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

 

**CONDENSED STATEMENTS OF FINANCIALPOSITION**

 
| ** **                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in thousands, except par value data)**          | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                         |       |               |       |                  |       |
| Investments                                                                        |       |               |       |                  |       |
| Fixed income securities, at fair value (amortized cost $5,478,083 and  $5,776,451) |       | $                  | 5,031,358  |                  | $          | 5,496,365 |   |
| Mortgage loans                                                                     |       | 670,446            |       | 700,268               |       |
| Equity securities, at fair value (cost $80)                                        |       | 72                 |       | —                |       |
| Short-term, at fair value (amortized cost $900,839 and $409,737)                   |       | 900,839            |       | 409,802               |       |
| Policy loans                                                                       |       | 40,019             |       | 39,672                |       |
| Other                                                                              |       | 2,341              |       | 2,478                 |       |
| Total investments                                                                  |       | 6,645,075          |       | 6,648,585             |       |
|                                                                               |       |               |       |                  |       |
| Cash                                                                               |       | 55,319             |       | 4,965                 |       |
| Deferred policy acquisition costs                                                  |       | 548,518            |       | 538,248               |       |
| Reinsurance recoverables                                                           |       | 369,854            |       | 367,957               |       |
| Accrued investment income                                                          |       | 59,946             |       | 61,581                |       |
| Deferred income taxes                                                              |       | 54,109             |       | 65,397                |       |
| Other assets                                                                       |       | 68,640             |       | 64,440                |       |
| Separate Accounts                                                                  |       | 479,091            |       | 533,760               |       |
| **Total assets**                                                                   |       | $                  | 8,280,552  |                  | $          | 8,284,933 |   |
|                                                                               |       |               |       |                  |       |
| **Liabilities**                                                                    |       |               |       |                  |       |
| Contractholder funds                                                               |       | $                  | 5,101,455  |                  | $          | 5,086,965 |   |
| Reserve for life-contingent contract benefits                                      |       | 1,806,535          |       | 1,953,157             |       |
| Current income taxes payable                                                       |       | 40,767             |       | 12,769                |       |
| Other liabilities and accrued expenses                                             |       | 249,262            |       | 172,286               |       |
| Payable to affiliates, net                                                         |       | 7,315              |       | 8,457                 |       |
| Reinsurance payable to parent                                                      |       | 4,931              |       | 971                   |       |
| Separate Accounts                                                                  |       | 479,091            |       | 533,760               |       |
| **Total liabilities**                                                              |       | 7,689,356          |       | 7,768,365             |       |
| **Commitments and Contingent Liabilities (Note 6)**                                |       |               |       |                  |       |
|                                                                               |       |               |       |                  |       |
| **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                                                                    |       | 507,651            |       | 482,982               |       |
| Accumulated other comprehensive loss:                                              |       |               |       |                  |       |
| Unrealized net capital gains and losses                                            |       | (58,955            | )          | (108,914              | )          |
| **Total accumulated other comprehensive loss**                                     |       | (58,955            | )          | (108,914              | )          |
| **Total shareholder’s equity**                                                |       | 591,196            |       | 516,568               |       |
| **Total liabilities and shareholder’s equity**                                |       | $                  | 8,280,552  |                  | $          | 8,284,933 |   |

 

**See notes tocondensed financial statements.**

 

2

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

####  

**CONDENSED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**                                                     | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                                  | ** ** |
| **Cash flows from operating activities**                                           |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 24,669     |   | $ | 21,577 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                             |       |   |   |
| Amortization and other non-cash items                                              |       | (17,232                                          | )          | (18,706 | ) |
| Realized capital gains and losses                                                  |       | (99,218                                          | )          | (1,721 | ) |
| Loss on disposition of operations                                                  |       | —                                           |       | 268 |   |
| Interest credited to contractholder funds                                          |       | 56,834                                           |       | 43,301 |   |
| Changes in:                                                                        |       |                                             |       |   |   |
| Life-contingent contract benefits and contractholder funds                         |       | (5,699                                           | )          | (3,413 | ) |
| Deferred policy acquisition costs                                                  |       | 63,750                                           |       | (9,648 | ) |
| Income taxes                                                                       |       | 12,385                                           |       | 10,764 |   |
| Other operating assets and liabilities                                             |       | 3,176                                            |       | 1,624 |   |
| Net cash provided by operating activities                                          |       | 38,665                                           |       | 44,046 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash flows from investing activities**                                           |       |                                             |       |   |   |
| Proceeds from sales of fixed income securities                                     |       | 601,507                                          |       | 132,449 |   |
| Investment collections                                                             |       |                                             |       |   |   |
| Fixed income securities                                                            |       | 96,898                                           |       | 41,885 |   |
| Mortgage loans                                                                     |       | 28,614                                           |       | 20,253 |   |
| Investment purchases                                                               |       |                                             |       |   |   |
| Fixed income securities                                                            |       | (252,394                                         | )          | (129,725 | ) |
| Mortgage loans                                                                     |       | —                                           |       | (5,750 | ) |
| Change in short-term investments, net                                              |       | (456,381                                         | )          | (113,731 | ) |
| Change in other investments, net                                                   |       | (521                                             | )          | 1,345 |   |
| Net cash provided by (used in) investing activities                                |       | 17,723                                           |       | (53,274 | ) |
|                                                                               |       |                                             |       |   |   |
| **Cash flows from financing activities**                                           |       |                                             |       |   |   |
| Contractholder fund deposits                                                       |       | 110,535                                          |       | 133,749 |   |
| Contractholder fund withdrawals                                                    |       | (116,569                                         | )          | (124,825 | ) |
| Net cash (used in) provided by financing activities                                |       | (6,034                                           | )          | 8,924 |   |
|                                                                               |       |                                             |       |   |   |
| **Net increase (decrease) in cash**                                                |       | 50,354                                           |       | (304 | ) |
| **Cash at beginning of period**                                                    |       | 4,965                                            |       | 7,356 |   |
| **Cash at end of period**                                                          |       | $                                                | 55,319     |   | $ | 7,052 |   |

 

**See notes tocondensed financial statements.**

 

3

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**ALLSTATE LIFE INSURANCECOMPANY OF NEW YORK**

**NOTES TO CONDENSEDFINANCIAL STATEMENTS**

**(unaudited)**

 

### **1.   General**

###  

### **Basis of presentation**

###  

The accompanying condensedfinancial statements include the accounts of Allstate Life Insurance Company ofNew York (the “Company”), a wholly owned subsidiary of Allstate Life InsuranceCompany (“ALIC”), which is wholly owned by Allstate Insurance Company (“AIC”).  All of the outstanding common stock of AIC isowned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of TheAllstate Corporation (the “Corporation”).

 

The condensed financialstatements and notes as of March 31, 2009 and for the three-month periodsended March 31, 2009 and 2008 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 and notesshould be read in conjunction with the financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2008.  The results of operations for theinterim periods should not be considered indicative of results to be expectedfor the full year.

 

Toconform to the 2009 presentation, certain amounts in the prior year condensedfinancial statements and notes have been reclassified.

 

**Premiums and Contract Charges**

 

The following table summarizes premiums and contract charges byproduct.

 

| ** **                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| **($ in thousands)**              | ** ** | **March 31,**               | ** ** |
| ** **                                  | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Premiums**                                |       |                             |       |   |   |
| Traditional life insurance (1)              |       | $                                | 5,590      |   | $ | 5,933 |   |
| Immediate annuities with life contingencies |       | 3,588                            |       | 2,150 |   |
| Accident and health                         |       | 2,286                            |       | 1,928 |   |
| Total premiums                              |       | 11,464                           |       | 10,011 |   |
|                                        |       |                             |       |   |   |
| **Contract charges**                        |       |                             |       |   |   |
| Interest-sensitive life insurance (1)       |       | 12,498                           |       | 12,902 |   |
| Fixed annuities                             |       | 1,228                            |       | 1,769 |   |
| Total contract charges                      |       | 13,726                           |       | 14,671 |   |
| Total premiums and contract charges         |       | $                                | 25,190     |   | $ | 24,682 |   |

 

----

(1)          To conform tothe current period presentation, certain amounts in the prior period have beenreclassified.

 

**Adopted accounting standards**

 

*Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“SFAS No. 157”)*

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157,which redefines fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between market participantsat the measurement date, establishes a framework for measuring fair value inaccounting principles generally accepted in the United States of America (“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. FAS 157-2, “Effective Date ofFASB Statement No. 157” (“FSP FAS 157-2”), which permits the deferralof the effective 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 financial liabilitiesrecognized or disclosed at fair value on a recurring or non-recurring basis asof January 1, 2008.

 

4

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Consistent with the provisions of FSP FAS 157-2, the Companyadopted SFAS No. 157 for non-financial assets and liabilities measured atfair value on a non-recurring basis on January 1, 2009.  In October 2008, the FASB issued FASBStaff Position No. FAS 157-3, “Determining the Fair Value of aFinancial Asset When the Market for That Asset Is Not Active” (“FSPFAS 157-3”), which clarifies the application of SFAS No. 157 in amarket that is not active.  The Companyadopted the provisions of FSP FAS 157-3 as of September 30,2008.  The adoption of SFAS No. 157and FSP FAS 157-3 did not have a material effect on the Company’s resultsof operations or financial position (see Note 3).

 

*SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities - an amendmentof FASB Statement No. 133 (“SFAS No. 161”)*

 

In March 2008, theFASB issued SFAS No. 161, which amends and expands the disclosurerequirements for derivatives currently accounted for in accordance with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”).  The new disclosures are designed to enhancethe understanding of how and why an entity uses derivative instruments and howderivative instruments affect an entity’s financial position, results ofoperations, and cash flows.  The standardrequires, on a quarterly basis, quantitative disclosures about the potentialcash outflows associated with the triggering of credit-risk-contingentfeatures, if any; tabular disclosures about the classification and fair valueamounts of derivative instruments reported in the statement of financialposition; disclosure of the location and amount of gains and losses onderivative instruments reported in the statement of operations; and qualitativeinformation about how and why an entity uses derivative instruments and howderivative instruments and related hedged items affect the entity’s financialstatements.  SFAS No. 161 iseffective for fiscal periods beginning after November 15, 2008, and is tobe applied on a prospective basis only. SFAS No. 161 affects disclosures and therefore implementation hadno impact on the Company’s results of operations or financial position (seeNote 4).

 

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

 

In February 2007,the FASB issued SFAS No. 159 which provides reporting entities, on anongoing basis, an option to report selected financial assets, includinginvestment securities, and financial liabilities, including most insurancecontracts, at fair value through earnings. SFAS No. 159 establishes presentation and disclosure requirementsdesigned to facilitate comparisons between companies that choose differentmeasurement alternatives for similar types of financial assets andliabilities.  The standard also requiresadditional information to aid financial statement users’ understanding of theimpacts of a reporting entity’s decision to use fair value on its earnings andrequires entities to display, on the face of the statement of financialposition, the fair value of those assets and liabilities for which thereporting entity has chosen to measure at fair value.  SFAS No. 159 was effective as of thebeginning of a reporting entity’s first fiscal year beginning after November 15,2007.  The Company did not apply the fairvalue option to any existing financial assets or liabilities as of January 1,2008 and did not elect to apply the option prospectively to any financialassets or liabilities acquired subsequent to the effective date.  Consequently, the adoption of SFAS No. 159had no impact on the Company’s results of operations or financial position.

 

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

 

In April 2007, theFASB issued FSP FIN 39-1, which amends FASB Interpretation No. 39, “Offsettingof Amounts Related to Certain Contracts”. FSP FIN 39-1 replaces the terms “conditional contracts” and “exchangecontracts” with the term “derivative instruments” and requires a reportingentity to offset fair value amounts recognized for the right to reclaim cashcollateral or the obligation to return cash collateral against fair valueamounts recognized for derivative instruments executed with the samecounterparty under the same master netting arrangement that have been offset inthe statement of financial position.  FSPFIN 39-1 was effective for fiscal years beginning after November 15,2007, with early adoption permitted.  Theadoption of FSP FIN 39-1 did not have a material impact on the Company’sresults of operations or financial position.

 

5

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*FSP No. FAS 133-1 and FIN 45-4, Disclosures aboutCredit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133and FASB Interpretation No. 45; and Clarification of the Effective Date ofFASB Statement No. 161 (“FSP FAS 133-1 and FIN 45-4”)*

 

In September 2008,the FASB issued FSP FAS 133-1 and FIN 45-4, which amends SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”),and FIN 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”),to both enhance and synchronize the disclosure requirements of the twostatements with respect to the potential for adverse effects of changes incredit risk on the financial statements of the sellers of credit derivativesand certain guarantees.  SFAS No. 133was amended to require disclosures by sellers of credit derivatives, includingcredit derivatives embedded in a hybrid instrument.  FIN 45 was amended to require anadditional disclosure about the current status of the payment/performance riskof a guarantee.  The FSP clarifies theFASB’s intent that the disclosures required by SFAS No. 161 should beprovided for any reporting period (annual or quarterly interim) beginning afterNovember 15, 2008.  The provisionsof this FASB staff position that amend SFAS No. 133 and FIN 45 areeffective for reporting periods ending after November 15, 2008, and theprovisions that clarify the effective date of SFAS No. 161 are effectiveupon the adoption of that statement; therefore, the disclosure requirements,which have no impact to the Company’s results of operations or financialposition, were adopted at December 31, 2008.

 

*FSP No. EITF 99-20-1, Amendments to the ImpairmentGuidance of EITF Issue No. 99-20 (“FSP EITF 99-20-1”)*

 

In January 2009, theFASB issued FSP EITF 99-20-1, which amends FASB Emerging Issues Task Force(“EITF”) No. 99-20 “Recognition of Interest Income and Impairment onPurchased Beneficial Interest and Beneficial Interests That Continue to Be Heldby a Transferor or in Securitized Financial Assets,” (“EITF 99-20”), toalign the impairment guidance in EITF No. 99-20 with the impairmentguidance and related implementation guidance in SFAS No. 115 “Accountingfor Certain Investments in Debt and Equity Securities”.  The provisions of this FASB staff positionare effective for reporting periods ending after December 15, 2008.  The adoption of FSP EITF 99-20-1 did not have amaterial effect on the results of operations or financial position of theCompany.

 

**Pending accounting standards**

 

*FSP No. FAS 115-2 andFAS 124-2, Recognition and Presentation of Other-Than-TemporaryImpairments (“FSP FAS 115-2 and FAS 124-2”)*

 

In April 2009, theFASB issued FSP FAS 115-2 and FAS 124-2 which amends SFAS No. 115and SFAS No. 124 “Accounting for Certain Investments Held byNot-for-Profit Organizations”, to provide recognition guidance for debtsecurities classified as available-for-sale and held-to-maturity and subject toother-than-temporary impairment (“OTTI”) guidance.  If the fair value of a debt security is lessthan its amortized cost basis at the reporting date, an entity shall assesswhether the impairment is an OTTI.  FSPFAS 115-2 and FAS 124-2 defines the situations under which an OTTIshould be considered to have occurred. When an entity intends to sell the security or more likely than not itwill be required to sell the security before recovery of its amortized costbasis, an OTTI is recognized in earnings. When the entity does not expect to recover the entire amortized costbasis of the security even if it does not intend to sell the security, theentity must consider a number of factors and use its best estimate of thepresent value of cash flows expected to be collected from the debt security in orderto determine whether a credit loss exists, and the period over which the debtsecurity is expected to recover.  Theamount of total OTTI related to the credit loss shall be recognized in earningswhile the amount of the total OTTI related to other factors shall be recognizedin other comprehensive income.  Both thestatement of operations and the statement of accumulated other comprehensiveincome are required to display the OTTI related to credit losses and the OTTIrelated to other factors on the face of each statement.

 

FSP FAS 115-2 andFAS 124-2 expands the disclosure requirements of SFAS No. 115 (forboth debt and equity securities) and requires a more detailed, risk-orientedbreakdown of security types and related information, and requires the annualdisclosures to be made for interim periods. In addition, new disclosures are required to help users of financialstatements understand the significant inputs used in determining a credit lossas well as a rollforward of that amount each period.  FSP FAS 115-2 and FAS 124-2 areeffective for interim periods ending after June 15, 2009 with earlyadoption permitted in conjunction with the early adoption of FSP No. FAS157-4, “Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly” (“FSP FAS 157-4”). The disclosures are not required 

 

6

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for earlier periods presented for comparative purposes.  FSP FAS 115-2 and FSP 124-2 shallbe applied to existing and new investments held by an entity as of thebeginning of the interim period in which it is adopted.  A cumulative effect adjustment to the openingbalance of retained earnings will be recognized for debt securities with anexisting OTTI at the beginning of the interim period in which the FSP isadopted.  The Company will adopt theprovisions of FSP FAS 115-2 and FAS 124-2 as of April 1,2009.  The specific requirements of theFSP applicable to the Company’s portfolio are being interpreted, studied andassessed.  The potential cumulativeeffect to retained income as of April 1, 2009 is not yet reliablyestimable since the Company is still assessing the requirements; however, theCompany expects that it will result in an increase to retained income, offsetby a decrease to accumulated other comprehensive income by the same amount.

 

*FSP FAS 157-4**, Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”)*

 

In April 2009, theFASB issued FSP FAS 157-4, which amends SFAS No. 157, to provideadditional guidance for estimating fair value when the volume and level ofactivity for an asset or liability have significantly decreased. Guidance onidentifying circumstances that indicate a transaction is not orderly is alsoprovided.  If it is concluded that therehas been a significant decrease in the volume and level of market activity foran asset or liability in relation to normal market activity for an asset orliability, transactions or quoted prices may not be determinative of fairvalue, and further analysis of the transactions or quoted prices may be needed.  A significant adjustment to the transactionsor quoted prices may be necessary to estimate fair value which may bedetermined based on the point within a range of fair value estimates that ismost representative of fair value under the current market conditions.  Determination of whether the transaction isorderly is based on the weight of the evidence. The disclosure requirements of SFAS No. 157 are increased sincedisclosures of the inputs and valuation technique(s) used to measure fairvalue and a discussion of changes in valuation techniques and related inputsduring the reporting period are required.

 

FSP FAS 157-4defines the disclosures required for major categories by SFAS No. 157 tobe the major security types as defined in FASB Statement No. 115.  FSP FAS 157-4 does not requiredisclosures for earlier periods presented for comparative purposes at initialadoption.  FSP FAS 157-4 iseffective for interim periods ending after June 15, 2009 with earlyadoption permitted but only in conjunction with the early adoption of FSPFAS 115-2 and FAS 124-2. Revisions resulting from a change in valuation technique or itsapplication shall be accounted for as a change in accounting estimate anddisclosed, along with a quantification of the total effect of the change invaluation technique and related inputs, if practicable, by major category.  The Company will adopt the provisions of FSPFAS 157-4 as of April 1, 2009. Quantification of the estimated effects of the application of the FSPFAS 157-4 requirements will be based on the market conditions andportfolio holdings at the time of adoption and are therefore not yet reliablyestimable; however, the Company does not expect a material impact to itsresults of operations or financial position upon adoption.

 

*FSP No. FAS 107-1 andAPB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSPFAS 107-1 and APB 28-1”)*

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1 which amends FASB Statement No. 107,“Disclosures about Fair Value of Financial Instruments”, to require disclosuresabout fair value of financial instruments for interim reporting periods as wellas in annual financial statements; and amends Accounting Principles BoardOpinion No. 28, “Interim Financial Reporting”, to require thosedisclosures in summarized financial information at interim reportingperiods.  FSP FAS 107-1 andAPB 28-1 is effective for interim periods ending after June 15,2009.  The disclosures are not requiredfor earlier periods presented for comparative purposes and earlier adoption ispermitted in conjunction with the early adoption of FSP FAS 115-2 andFAS 124-2 and FSP FAS 157-4. The Company will adopt the provisions of FSP FAS 107-1 andAPB 28-1 for second quarter 2009. FSP FAS 107-1 and APB 28-1 affects disclosures and thereforeimplementation will not impact the Company’s results of operations or financialposition.

 

7

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

###  

Non-cash investment exchangesand modifications, which primarily reflect refinancings of fixed incomesecurities, totaled $1.4 million for the three-month period ended March 31, 2009.

 

Liabilitiesfor collateral received in conjunction with the Company’s securities lendingbusiness activities are reported in other liabilities and accrued expenses inthe Condensed 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:

 
| ** **                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Net change in proceeds managed**            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net change in fixed income securities         |       | $                                                | —     |   | $ | (13,009 | ) |
| Net change in short-term investments          |       | (33,796                                          | )          | (178,581 | ) |
| Operating cash flow used                      |       | $                                                | (33,796    | ) | $ | (191,590 | ) |
|                                          |       |                                             |       |   |   |
| **Net change in liabilities**                 |       |                                             |       |   |   |
| Liabilities for collateral, beginning of year |       | $                                                | (117,297   | ) | $ | (198,138 | ) |
| Liabilities for collateral, end of period     |       | (151,093                                         | )          | (389,728 | ) |
| Operating cash flow provided                  |       | $                                                | 33,796     |   | $ | 191,590 |   |

 

**3.  Fair Value ofAssets and Liabilities**

 

The Company adopted theprovisions of SFAS No. 157 as of January 1, 2008 for its financialassets and liabilities that are measured at fair value and as of January 1,2009 for its non-financial assets and liabilities measured at fair value on anon-recurring basis.  SFAS No. 157established a hierarchy for inputs used in determining fair value that maximizethe use of observable inputs and minimizes the use of unobservable inputs by requiringthat observable inputs be used when available.

 

Assets and liabilitiesrecorded on the Condensed Statements of Financial Position at fair value arecategorized in the fair value hierarchy based on the observability of inputs tothe valuation techniques as follows:

 

*Level 1**        *Assets and liabilities whose values are based onunadjusted quoted prices for identical assets or liabilities in an activemarket that the Company can access.

 

*Level 2***        **Assets and liabilities whose values are based on thefollowing:

 

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**        *Assets and liabilities whose values are based onprices or valuation techniques that require inputs that are both unobservableand significant to the overall fair value measurement.  These inputs reflect the Company’s estimatesof the assumptions that market participants would use in valuing the assets andliabilities.

 

The availability ofobservable inputs varies by instrument. In situations where fair value is basedon internally developed pricing models or inputs that are unobservable in themarket, the determination of fair value requires more judgment.  The degree of judgment exercised by theCompany in determining fair value is typically greatest for instrumentscategorized in Level 3. In many instances, valuation inputs used to measurefair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on thelowest level input that is significant to the fair value measurement in its entirety.  The Company uses prices and inputs that arecurrent as of the measurement date, including during periods of marketdisruption.  In periods of marketdisruption, the ability to observe prices and inputs may be reduced for manyinstruments.  This condition could causean instrument to be reclassified from Level 1 to Level 2, or from Level 2 toLevel 3.

 

8

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Certain assets are not carried at fair value on a recurring basis,including investments such as mortgage loans and policy loans.  Accordingly, such investments are onlyincluded in the fair value hierarchy disclosure when the investment is subjectto remeasurement at fair value after initial recognition and the resultingremeasurement is reflected in the condensed financial statements. As of March 31,2009, 77.5% of total assets are measured at fair value and 0.6% of totalliabilities are measured at fair value.

 

Thefollowing table summarizes the Company’s assets and liabilities measured atfair value on a recurring and non-recurring basis as of March 31, 2009:

 
| ** **                                | ** ** | **Quoted prices  in active  markets for  identical assets** | ** ** | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** | **Counterparty  and cash  collateral** | ** ** | **Balance as of  March 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| **($ in thousands)**            | ** ** | **(Level 1)**                                                              | ** ** | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **netting****(1)**                          | ** ** | **2009**                                    | ** ** |
| **Assets:**                               | ** ** | ** **                                                                      | ** ** | ** **                                 | ** ** | ** **                            | ** ** | ** **                                  | ** ** | ** **                                  | ** ** |
| Fixed income securities                   |       | $                                                                               | 153,073    |                                       | $          | 3,555,964                             |       | $                                           | 1,322,321  |                                        |       |   | $ | 5,031,358 |   |
| Equity securities                         |       | —                                                                          |       | 72                                         |       | —                                |       |                                        |       | 72                                          |       |
| Short-term investments                    |       | 28,945                                                                          |       | 871,894                                    |       | —                                |       |                                        |       | 900,839                                     |       |
| Other investments:                        |       |                                                                            |       |                                       |       |                                  |       |                                        |       |                                        |       |
| Free-standing derivatives                 |       | —                                                                          |       | 1,677                                      |       | 670                                   |       | $                                           | (6         | )                                           | 2,341      |   |
| Separate account assets                   |       | 479,091                                                                         |       | —                                     |       | —                                |       |                                        |       | 479,091                                     |       |
| Other assets                              |       | —                                                                          |       | —                                     |       | (2,503                                | )          |                                        |       | (2,503                                      | )          |
| **Total recurring basis assets**          |       | 661,109                                                                         |       | 4,429,607                                  |       | 1,320,488                             |       | (6                                          | )          | 6,411,198                                   |       |
| Non-recurring basis (2)                   |       | —                                                                          |       | —                                     |       | 9,206                                 |       |                                        |       | 9,206                                       |       |
| **Total assets at fair value**            |       | $                                                                               | 661,109    |                                       | $          | 4,429,607                             |       | $                                           | 1,329,694  |                                        | $          | (6 | ) | $ | 6,420,404 |   |
| % of total assets at fair value           |       | 10.3                                                                            | %          | 69.0                                       | %          | 20.7                                  | %          | —                                      | %          | 100.0                                       | %          |
|                                      |       |                                                                            |       |                                       |       |                                  |       |                                        |       |                                        |       |
| **Liabilities:**                          |       |                                                                            |       |                                       |       |                                  |       |                                        |       |                                        |       |
| Contractholder funds:                     |       |                                                                            |       |                                       |       |                                  |       |                                        |       |                                        |       |
| Derivatives embedded in annuity contracts |       | $                                                                               | —     |                                       | $          | —                                |       | $                                           | (33,368    | )                                           |       |   | $ | (33,368 | ) |
| Other liabilities:                        |       |                                                                            |       |                                       |       |                                  |       |                                        |       |                                        |       |
| Free-standing derivatives                 |       | —                                                                          |       | (10,579                                    | )          | (5,637                                | )          | $                                           | 6          |                                        | (16,210    | ) |
| **Total liabilities at fair value**       |       | $                                                                               | —     |                                       | $          | (10,579                               | )          | $                                           | (39,005    | )                                           | $          | 6 |   | $ | (49,578 | ) |
| % of total liabilities at fair value      |       | —                                                                          | %          | 21.3                                       | %          | 78.7                                  | %          | —                                      | %          | 100.0                                       | %          |

 

----

(1)          In accordance with FSPFIN 39-1, the Companynets 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 same counterparty undera master netting agreement.  At March 31,2009, the right to reclaim cash collateral was offset by securities held, andthere was no obligation to return collateral.

 

(2)          Includes mortgage loanswritten-down to fair value in connection with recognizing other-than-temporaryimpairments.

 

9

----

 

The following table summarizesthe Company’s assets and liabilities measured at fair value on a recurring andnon-recurring basis as of December 31, 2008:

 
| ** **                                | ** ** | **Quoted prices  in active  markets for  identical assets** | ** ** | **Significant  other  observable  inputs** | ** ** | **Significant  unobservable  inputs** | ** ** | **Balance as of  December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|------------------------------------------------|------------|
| **($ in thousands)**            | ** ** | **(Level 1)**                                                              | ** ** | **(Level 2)**                         | ** ** | **(Level 3)**                    | ** ** | **2008**                                       | ** ** |
| **Assets:**                               | ** ** | ** **                                                                      | ** ** | ** **                                 | ** ** | ** **                            | ** ** | ** **                                     | ** ** |
| Fixed income securities                   |       | $                                                                               | 154,119    |                                       | $          | 4,007,707                             |       | $                                              | 1,334,539  |   | $ | 5,496,365 |   |
| Short-term investments                    |       | 33,315                                                                          |       | 376,487                                    |       | —                                |       | 409,802                                        |       |
| Other investments:                        |       |                                                                            |       |                                       |       |                                  |       |                                           |       |
| Free-standing derivatives                 |       | —                                                                          |       | 1,764                                      |       | 714                                   |       | 2,478                                          |       |
| Separate account assets                   |       | 533,760                                                                         |       | —                                     |       | —                                |       | 533,760                                        |       |
| Other assets                              |       | —                                                                          |       | —                                     |       | (1,829                                | )          | (1,829                                         | )          |
| **Total recurring basis assets**          |       | 721,194                                                                         |       | 4,385,958                                  |       | 1,333,424                             |       | 6,440,576                                      |       |
| Non-recurring basis (1)                   |       | —                                                                          |       | —                                     |       | 10,589                                |       | 10,589                                         |       |
| **Total assets at fair value**            |       | $                                                                               | 721,194    |                                       | $          | 4,385,958                             |       | $                                              | 1,344,013  |   | $ | 6,451,165 |   |
| % of total assets at fair value           |       | 11.2                                                                            | %          | 68.0                                       | %          | 20.8                                  | %          | 100.0                                          | %          |
|                                      |       |                                                                            |       |                                       |       |                                  |       |                                           |       |
| **Liabilities:**                          |       |                                                                            |       |                                       |       |                                  |       |                                           |       |
| Contractholder funds:                     |       |                                                                            |       |                                       |       |                                  |       |                                           |       |
| Derivatives embedded in annuity contracts |       | $                                                                               | —     |                                       | $          | —                                |       | $                                              | (30,051    | ) | $ | (30,051 | ) |
| Other liabilities:                        |       |                                                                            |       |                                       |       |                                  |       |                                           |       |
| Free-standing derivatives                 |       | —                                                                          |       | (20,849                                    | )          | (5,450                                | )          | (26,299                                        | )          |
| **Total liabilities at fair value**       |       | $                                                                               | —     |                                       | $          | (20,849                               | )          | $                                              | (35,501    | ) | $ | (56,350 | ) |
| % of total liabilities at fair value      |       | —                                                                          | %          | 37.0                                       | %          | 63.0                                  | %          | 100.0                                          | %          |

 

----

(1)          Includes mortgage loanswritten-down to fair value in connection with recognizing other-than-temporaryimpairments.

 

As required by SFAS No. 157, when the inputs used to measure fairvalue fall within different levels of the hierarchy, the level within which thefair value measurement is categorized is based on the lowest level input thatis significant 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).

 

10

----

 

The following tableprovides a summary of changes in fair value during the three months ended March 31,2009 of Level 3 assets and liabilities held at fair value on a recurringbasis.  Net transfers in and/or out ofLevel 3 are reported as having occurred at the beginning of the quarter thetransfer occurred; therefore, for all transfers into Level 3, all realized andchanges in unrealized gains and losses in the quarter of transfer are reflectedin the table below.

 
| ** **                                 | ** ** | ** **                  | ** ** | ** **                              | ** ** | ** **            | ** ** | ** **       | ** ** | ** **               | ** ** | ** **                  | ** ** | **Total**                   | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|-----------------------|------------|------------------|------------|--------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | ** **                  | ** ** | ** **                              | ** ** | ** **            | ** ** | ** **       | ** ** | ** **               | ** ** | ** **                  | ** ** | **gains (losses)**     | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | **Total realized and**        | ** ** | ** **            | ** ** | ** **       | ** ** | ** **               | ** ** | **included in**        | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | **unrealized gains (losses)** | ** ** | **Purchases,**        | ** ** | ** **       | ** ** | ** **               | ** ** | **Net income**         | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | **included in:**                   | ** ** | **sales,**            | ** ** | ** **       | ** ** | ** **               | ** ** | **for financial**      | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | ** **                              | ** ** | **OCI on**       | ** ** | **issuances**    | ** ** | **Net**                  | ** ** | ** **                  | ** ** | **instruments**             | ** ** |
| ** **                                 | ** ** | **Balance as of** | ** ** | ** **                              | ** ** | **Statement**         | ** ** | **and**          | ** ** | **transfers in**    | ** ** | **Balance as of** | ** ** | **still held at** | ** ** |
| ** **                                 | ** ** | **December 31,**       | ** ** | **Net**                                 | ** ** | **of Financial** | ** ** | **settlements,** | ** ** | **and/or (out)**    | ** ** | **March 31,**          | ** ** | **March 31,**          | ** ** |
| **($ in thousands)**             | ** ** | **2008**                    | ** ** | **income ****(1)**                 | ** ** | **Position**          | ** ** | **net**          | ** ** | **of Level 3** | ** ** | **2009**                    | ** ** | **2009 ****(3)**       | ** ** |
| **Assets**                                 |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                        |       |
| Fixed income  securities                   |       | $                           | 1,334,539  |                                    | $          | (3,219                | )          | $                | (24,123    | )                        | $          | (37,896                     | )          | $                           | 53,020     |   | $ | 1,322,321 |   | $ | (3,071 | ) |
| Other  investments:                        |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                        |       |
| Free-standing  derivatives, net            |       | (4,736                      | )          | (405                                    | )          | —                |       | 174              |       | —                   |       | (4,967                      | )(2)       | 48                          |       |
| Other assets                               |       | (1,829                      | )          | (674                                    | )          | —                |       | —           |       | —                   |       | (2,503                      | )          | (674                        | )          |
| **Total  recurring Level 3 assets**        |       | $                           | 1,327,974  |                                    | $          | (4,298                | )          | $                | (24,123    | )                        | $          | (37,722                     | )          | $                           | 53,020     |   | $ | 1,314,851 |   | $ | (3,697 | ) |
|                                       |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                        |       |
| **Liabilities**                            |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                        |       |
| Contractholder  funds:                     |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                        |       |
| Derivatives  embedded in annuity contracts |       | $                           | (30,051    | )                                       | $          | (3,242                | )          | $                | —     |                     | $          | (75                         | )          | $                           | —     |   | $ | (33,368 | ) | $ | (3,242 | ) |
| **Total  recurring Level 3 liabilities**   |       | $                           | (30,051    | )                                       | $          | (3,242                | )          | $                | —     |                     | $          | (75                         | )          | $                           | —     |   | $ | (33,368 | ) | $ | (3,242 | ) |

 

----

(1)         The effect to net incometotals $(7.5) million and is reported in the Condensed Statements of Operationsas follows: $(7.1) million in realizedcapital gains and losses; $2.8 million in net investment income; and $(3.2)million in contract benefits.

(2)         Comprises$670 thousand of assets and $(5.6) million of liabilities.

(3)         Theamounts represent gains and losses included in net income for the period oftime that the asset or liability was determined to be in Level 3.  These gains and losses total $(6.9) millionand are reported in the Condensed Statements of Operations as follows: $(6.5)million in realized capital gains andlosses; $2.8 million in net investment income; and $(3.2) million in contractbenefits.

 

11

----

 

The following tableprovides a summary of changes in fair value during the three months ended March 31,2008 of Level 3 assets and liabilities held at fair value on a recurring basis. Net transfers in and/or out of Level 3 are reported ashaving occurred at the beginning of the quarter the transfer occurred;therefore, for all transfers into Level 3, all realized and changes inunrealized gains and losses in the quarter of transfer are reflected in thetable below.

 
| ** **                                 | ** ** | ** **                  | ** ** | ** **                              | ** ** | ** **            | ** ** | ** **       | ** ** | ** **               | ** ** | ** **                  | ** ** | **Total**                     | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|-----------------------|------------|------------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | ** **                  | ** ** | ** **                              | ** ** | ** **            | ** ** | ** **       | ** ** | ** **               | ** ** | ** **                  | ** ** | ** gains (losses)** | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | **Total realized and**        | ** ** | ** **            | ** ** | ** **       | ** ** | ** **               | ** ** | **included in**        | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | **unrealized gains (losses)** | ** ** | **Purchases,**        | ** ** | ** **       | ** ** | ** **               | ** ** | **Net income**         | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | **included in:**                   | ** ** | **sales,**            | ** ** | ** **       | ** ** | ** **               | ** ** | **for financial**      | ** ** |
| ** **                                 | ** ** | ** **                  | ** ** | ** **                              | ** ** | **OCI on**       | ** ** | **issuances**    | ** ** | **Net**                  | ** ** | ** **                  | ** ** | **instruments**               | ** ** |
| ** **                                 | ** ** | **Balance as of** | ** ** | ** **                              | ** ** | **Statement of** | ** ** | **and**          | ** ** | **transfers in**    | ** ** | **Balance as of** | ** ** | **still held at**   | ** ** |
| ** **                                 | ** ** | **January 1,**         | ** ** | **Net**                                 | ** ** | **Financial**         | ** ** | **settlements,** | ** ** | **and/or (out)**    | ** ** | **March 31,**          | ** ** | **March 31,**            | ** ** |
| **($ in thousands)**             | ** ** | **2008**                    | ** ** | **income ****(1)**                 | ** ** | **Position**          | ** ** | **net**          | ** ** | **of Level 3** | ** ** | **2008**                    | ** ** | **2008 ****(3)**         | ** ** |
| **Assets**                                 |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                          |       |
| Fixed income  securities                   |       | $                           | 1,469,898  |                                    | $          | 7,998                 |       | $                | (21,870    | )                        | $          | 3,451                       |       | $                             | 26,133     |   | $ | 1,485,610 |   | $ | 388 |   |
| Other  investments:                        |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                          |       |
| Free-standing  derivatives, net            |       | (980                        | )          | (2,472                                  | )          | —                |       | 126              |       | —                   |       | (3,326                      | )**(2)**   | 20                            |       |
| Other assets                               |       | (1,733                      | )          | 2,239                                   |       | —                |       | —           |       | —                   |       | 506                         |       | 2,239                         |       |
| **Total  recurring Level 3 assets**        |       | $                           | 1,467,185  |                                    | $          | 7,765                 |       | $                | (21,870    | )                        | $          | 3,577                       |       | $                             | 26,133     |   | $ | 1,482,790 |   | $ | 2,647 |   |
|                                       |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                          |       |
| **Liabilities**                            |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                          |       |
| Contractholder  funds:                     |       |                        |       |                                    |       |                  |       |             |       |                     |       |                        |       |                          |       |
| Derivatives  embedded in annuity contracts |       | $                           | 174        |                                    | $          | (1,428                | )          | $                | —     |                     | $          | 1                           |       | $                             | —     |   | $ | (1,253 | ) | $ | (1,428 | ) |
| **Total  recurring Level 3 liabilities**   |       | $                           | 174        |                                    | $          | (1,428                | )          | $                | —     |                     | $          | 1                           |       | $                             | —     |   | $ | (1,253 | ) | $ | (1,428 | ) |

 

----

(1)         The effect to net incometotals $6.3 million and is reported in the Condensed Statements of Operationsas follows: $6.3 million in realizedcapital gains and losses; $1.4 million in net investment income; and $(1.4)million in contract benefits.

(2)         Comprises$897 thousand of assets and $(4.2) million of liabilities.

(3)         Theamounts represent gains and losses included in net income for the period oftime that the asset or liability was determined to be in Level 3.  These gains and losses total $1.2 million andare reported in the Condensed Statements of Operations as follows: $1.2 millionin realized capital gains and losses;$1.4 million in net investment income; and $(1.4) million in contract benefits.

 

**4.  Derivative****Financial****Instruments**

 

The Company primarily uses derivatives for risk reduction.  In addition, the Company has derivativesembedded in non-derivative “host” contracts, which are required to be separatedfrom the host contract and accounted for at fair value as derivativeinstruments.  With the exception ofnon-hedge embedded derivatives, all of the Company’s derivatives are evaluatedfor their ongoing effectiveness as either accounting hedge or non-hedgederivative financial instruments on at least a quarterly basis.  The Company does not use derivatives fortrading purposes.  Non-hedge accountingis generally used for “portfolio” level hedging strategies where the terms ofthe individual hedged items do not meet the strict homogeneity requirementsprescribed in SFAS No. 133 to permit the application of SFAS No. 133’shedge accounting model.

 

Asset-liability management is a risk management strategy thatis principally employed to balance the respective interest-rate sensitivitiesof the Company’s assets and liabilities. Depending upon the attributes of theassets acquired and liabilities issued, derivative instruments such as interestrate swaps and caps are acquired to change the interest rate characteristics ofexisting assets and liabilities to ensure the relationship is maintained withinspecified ranges and to reduce exposure to rising or falling interest rates.

 

The Company uses foreign currency swapsprimarily to reduce the foreign currency risk associated with holding foreigncurrency denominated investments.  TheCompany also has a reinsurance treaty that is recorded as a derivativeinstrument, under which it primarily cedes re-investment related risk on itsstructured settlement annuities to ALIC.

 

Whenderivatives meet specific criteria, they may be designated as accounting hedgesand accounted for as fair value, cash flow, foreign currency fair value orforeign currency cash flow hedges.  TheCompany designates its foreign currency swap contractsas cash flow hedges when the hedging instrument is highly effective inoffsetting the exposure of variations in cash flows for the hedged risk thatcould affect net income.  Amounts arereclassified to net investment income as the hedged item affects net income.

 

12

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TheCompany’s primary embedded derivatives are guaranteed minimum accumulation andwithdrawal benefits related to the Company’s variable annuity business, whichis fully reinsured.

 

The notional amounts specified in the contracts are used to calculatethe exchange of contractual payments under the agreements and are generally notrepresentative of the potential for gain or loss on these agreements.

 

Fair value, which is equal to the carrying value, is the estimatedamount that the Company would receive (pay) to terminate the derivativecontracts at the reporting date.  Thecarrying value amounts for over-the-counter (“OTC”) free-standing derivativeshave been further adjusted for the effects, if any, of legally enforceablemaster netting agreements and are presented on a net basis in the CondensedStatements of Financial Position in accordance with FASB Interpretation No. 39.

 

The net impact to pre-tax income for derivatives includes valuation andsettlements of derivatives which are reported in net income.  For cash flow hedges, gains and lossesamortized from accumulated other comprehensive income are reported in net income.

 

The following table provides a summary of the volume and fair valuepositions of derivative instruments as well as their reporting location in theCondensed Statements of Financial Position at March 31, 2009.

 
| ** **                                                                     | ** ** | **Asset derivatives**           | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **($ in thousands, except number of contracts)** | ** ** | **Balance sheet location** | ** ** | **Volume-  notional  amount** | ** ** | **Fair  value,  net** | ** ** | **Gross  asset** | ** ** | **Gross  liability** | ** ** |
| **Derivatives designated as accounting hedging  instruments**                  |       |                                 |       |   |   |   |   |   |   |   |   |
| Foreign currency contracts                                                     |       | Other  investments                   |       | $ | 7,500 |   | $ | 1,677 |   | $ | 1,677 |   | $ | — |   |
|                                                                           |       |                                 |       |   |   |   |   |   |   |   |   |
| **Derivatives not designated as accounting hedging  instruments**              |       |                                 |       |   |   |   |   |   |   |   |   |
| Interest rate contracts                                                        |       | Other  investments                   |       | 52,000 |   | 664 |   | 664 |   | — |   |
| Structured settlement annuity reinsurance agreement                            |       | Other  assets                        |       | — |   | (2,503 | ) | (2,503 | ) | — |   |
|                                                                           |       |                                 |       |   |   |   |   |   |   |   |   |
| **Total derivative assets**                                                    |       |                                 |       | $ | 59,500 |   | $ | (162 | ) | $ | (162 | ) | $ | — |   |

 
| ** **                                                        | ** ** | **Liability derivatives**                 | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                        | ** ** | **Balance sheet location**           | ** ** | **Volume-  notional  amount** | ** ** | **Fair  value,  net** | ** ** | **Gross  asset** | ** ** | **Gross  liability** | ** ** |
| **Derivatives not designated as accounting hedging  instruments** |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest rate contracts                                           |       | Other  liabilities & accrued expenses |       | $ | 691,700 |   | $ | (16,210 | ) | $ | 6 |   | $ | (16,216 | ) |
| Embedded derivatives                                              |       | Contractholder  funds                          |       | 181,073 |   | (33,368 | ) | — |   | (33,368 | ) |
|                                                              |       |                                           |       |   |   |   |   |   |   |   |   |
| **Total derivative liabilities**                                  |       |                                           |       | $ | 872,773 |   | $ | (49,578 | ) | $ | 6 |   | $ | (49,584 | ) |
|                                                              |       |                                           |       |   |   |   |   |   |   |   |   |
| **Total derivatives**                                             |       |                                           |       | $ | 932,273 |   | $ | (49,740 | ) |   |   |   |   |

 

13

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The following table provides a summary of the impacts of the Company’s foreigncurrency contracts in cash flow hedging relationships in the CondensedStatements of Operations and the Condensed Statements of Financial Position forthe three month period ended March 31, 2009.  Amortization of net gains from accumulatedother comprehensive income related to cash flow hedges is expected to be $50thousand during the next twelve months.

 
| **($ in thousands)**                                                                                            | ** ** | ** **                         | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
|                                                                                                                      |       |                               |       |
| Location of loss reclassified from accumulated OCI into income  (effective portion)                                       |       | Net  investment income             |       |
|                                                                                                                      |       |                               |       |
| Amount of loss recognized in OCI on derivatives during the period  (effective portion)                                    |       | $                                  | (79)       |   |   |
|                                                                                                                      |       |                               |       |   |   |
| Amount of gain recognized in OCI on derivatives during the term of  the hedging relationship (effective portion)          |       | $                                  | 1,670      |   |   |
|                                                                                                                      |       |                               |       |   |   |
| Amount of gain reclassified from accumulated OCI into income  (effective portion)                                         |       | $                                  | 12         |   |   |
|                                                                                                                      |       |                               |       |   |   |
| Location of gain recognized in income on derivative (ineffective  portion and amount excluded from effectiveness testing) |       | Realized  capital gains and losses |       |
|                                                                                                                      |       |                               |       |
| Amount of gain recognized in income on derivatives (ineffective  portion and amount excluded from effectiveness testing)  |       | $                                  | —     |   |   |
|                                                                                                                           |            |                                    |            |  |  |  |  |

 

The following table presents gains and losses from valuation andsettlements reported on derivatives not designated as accounting hedginginstruments in the Condensed Statements of Operations for the three monthperiod ended March 31, 2009.

 

| **($ in thousands)**                      | ** ** | **Realized  capital gains  and losses** | ** ** | **Contract  benefits** | ** ** | **Total gain  (loss)  recognized  in net  income on  derivatives** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|------------------------|------------|-----------------------------------------------------------------------------------|------------|
| Interest rate contracts                             |       | $                                                 | 9,864      |                   | $          | —                                                                            |       | $ | 9,864 |   |
| Embedded derivative financial instruments           |       | —                                            |       | (3,317                 | )          | (3,317                                                                            | )          |
| Structured settlement annuity reinsurance agreement |       | (1,510                                            | )          | —                 |       | (1,510                                                                            | )          |
| Total                                               |       | $                                                 | 8,354      |                   | $          | (3,317                                                                            | )          | $ | 5,037 |   |

 

The Company manages its exposure tocredit risk by utilizing highly rated counterparties, establishing risk controllimits, executing legally enforceable master netting agreements (“MNAs”) andobtaining collateral where appropriate.  The Company uses master netting agreements forOTC derivative transactions, including interest rate swap, foreign currencyswap and interest rate cap agreements. These agreements permit either party to net payments due fortransactions covered by the agreements. Under the provisions of the agreements, collateral is either pledged orobtained when certain predetermined exposure limits are exceeded.  As of March 31, 2009, the Companypledged $13.1 million in securities to counterparties.  The Company has not incurred any losses onderivative financial instruments due to counterparty nonperformance.

 

Counterparty credit exposurerepresents the Company’s potential loss if all of the counterpartiesconcurrently fail to perform under the contractual terms of the contracts andall collateral, if any, becomes worthless. This exposure is measured by the fair value of OTC free-standingderivative contracts with a positive fair value at the reporting date reducedby the effect, if any, of legally enforceable master netting agreements.

 

The following table summarizesthe counterparty credit exposure by counterparty credit rating as it relates tointerest rate swap, foreign currency swap, and interest rate cap agreements.

 
| **($ in thousands)** | ** ** | **March 31, 2009**      | ** ** | **December 31, 2008**   | ** ** |
|--------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **Rating ****(1)**        | ** ** | **Number  of  counter-  parties** | ** ** | **Notional  Amount ****(2)** | ** ** | **Credit  exposure ****(2)** | ** ** | **Exposure,  net of  collateral ****(2)** | ** ** | **Number  of  counter-  parties** | ** ** | **Notional  Amount ****(2)** | ** ** | **Credit  Exposure ****(2)** | ** ** | **Exposure,  net of  collateral ****(2)** | ** ** |
|                           |       |                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| A                              |       | 1                                 |       | $                                 | 59,500     |   | $ | 2,342 |   | $ | 2,342 |   | 1 |   | $ | 59,500 |   | $ | 2,478 |   | $ | 2,478 |   |
|                                |            |                                   |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Rating is thelower of Standard and Poor’s (“S&P”) or Moody’s ratings.

(2)          Only OTCderivatives with a net positive fair value are included for each counterparty.

 

14

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Market risk is the risk that the Companywill incur losses due to adverse changes in market rates and prices.  Market risk exists for all of the derivativefinancial instruments the Company currently holds, as these instruments maybecome less valuable due to adverse changes in market conditions.  To limit this risk, the Company’s seniormanagement has established risk control limits. In addition, changes in fair value of the derivative financialinstruments that the Company uses for risk management purposes are generallyoffset by the change in the fair value or cash flows of the hedged riskcomponent of the related assets, liabilities or forecasted transactions.

 

Certainof the Company’s derivative instruments contain credit-risk-contingenttermination events, cross-default provisions and credit support annexagreements.  Credit-risk-contingenttermination events allow the counterparties to terminate the derivative oncertain dates if the Company’s financial strength credit ratings by Moody’s orS&P fall below a certain level or in the event the Company is no longerrated by both Moody’s and S&P. Credit-risk-contingent cross-default provisions allow the counterpartiesto terminate the derivative instruments if the Company defaults bypre-determined threshold amounts on certain debt instruments.  Credit-risk-contingent credit support annexagreements specify the amount of collateral the Company must post to counterparties based onthe Company’s financial strength credit ratings by Moody’s or S&P, or inthe event the Company is no longer rated by both Moody’s and S&P.

 

The maximum amount of additional exposure for contracts with credit-riskcontingent features if all features were triggered is $100 thousand.

 

**5. ****Reinsurance**

 

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

 
| **($ in thousands)**                    | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Premiums and contract charges**                 |       |                                             |       |   |   |
| Direct                                            |       | $                                                | 36,314     |   | $ | 34,053 |   |
| Assumed — non-affiliate                      |       | 200                                              |       | 286 |   |
| Ceded                                             |       |                                             |       |   |   |
| Affiliate                                         |       | (4,418                                           | )          | (992 | ) |
| Non-affiliate                                     |       | (6,906                                           | )          | (8,665 | ) |
| Premiums and contract charges, net of reinsurance |       | $                                                | 25,190     |   | $ | 24,682 |   |

 

The effects of reinsurance on contractbenefits are as follows:

 
| **($ in thousands)**        | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Contract benefits**                 |       |                                             |       |   |   |
| Direct                                |       | $                                                | 53,826     |   | $ | 45,846 |   |
| Assumed — non-affiliate          |       | 197                                              |       | 276 |   |
| Ceded                                 |       |                                             |       |   |   |
| Affiliate                             |       | (2,430                                           | )          | (1,494 | ) |
| Non-affiliate                         |       | (13,814                                          | )          | (5,823 | ) |
| Contract benefits, net of reinsurance |       | $                                                | 37,779     |   | $ | 38,805 |   |

 

15

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

 
| **($ in thousands)**                                | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                    | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Interest credited to contractholder funds**                 |       |                                             |       |   |   |
| Direct                                                        |       | $                                                | 59,161     |   | $ | 46,295 |   |
| Assumed — non-affiliate                                  |       | —                                           |       | 9 |   |
| Ceded — non-affiliate                                    |       | (2,327                                           | )          | (3,003 | ) |
| Interest credited to contractholder funds, net of reinsurance |       | $                                                | 56,834     |   | $ | 43,301 |   |

 

In addition to amounts includedin the tables above are reinsurance premiums ceded to ALIC of $836 thousand and$819 thousand for the three months ended March 31, 2009 and 2008,respectively, under the terms of the structured settlement annuity reinsuranceagreement.  These amounts are reflectedas a component of realized capital gains and losses on the Condensed Statementsof Operations as the treaty is recorded as a derivative instrument pursuant tothe requirements of SFAS No. 133.

 

### **6.  Guarantees and ContingentLiabilities**

###  

**Guaranty funds**

 

Under state insurance guaranty fund laws,insurers doing business in a state can be assessed, up to prescribed limits,for certain obligations of insolvent insurance companies to policyholders andclaimants.  Amounts assessed to each companyare typically related to its proportion of business written in each state.  The Company’s policy is to accrue a guarantyfund assessment when the entity for which the insolvency relates has beendeclared financially insolvent by a court of competent jurisdiction and, incertain states, that is also a final order of liquidation, and the amount ofloss is reasonably estimable.

 

The New York Liquidation Bureau (the “Bureau”)has publicly reported that Executive Life Insurance Company of New York (“ExecutiveLife”) is currently under its jurisdiction as part of a 1992 court-orderedrehabilitation plan and may only be able to meet future obligations of itsannuity contacts for the next fifteen years. However, Executive Life does nothave a liquidity problem at this time, and an order of liquidation has not beensought by the Bureau.  The shortfall wasestimated by the Bureau to be $1.27 billion at October 29, 2008.

 

If Executive Lifewere to be declared insolvent in the future, the Company may have exposure tofuture guaranty fund assessments.  TheCompany’s exposure will ultimately depend on the level of guaranty fund systemparticipation, as well as the viability of a plan of the Bureau to obtainvoluntary contributions, primarily from the original insurance companies thatacquired structured settlement annuity contracts from Executive Life.  Under current law, the Company may be allowedto recoup a portion of the amount of any additional guaranty fund assessment inperiods subsequent to the recognition of the assessment by offsetting futurepremium taxes.  The Company’s New Yorkmarket share was approximately 4.1% in 2007 based on industry annuity premium.

 

**Guarantees**

 

Related to the disposalthrough reinsurance of our variable annuity business to Prudential Financial, Inc.and its subsidiary in 2006, the Company and ALIC, have agreed to indemnifyPrudential for certain pre-closing contingent liabilities (includingextra-contractual liabilities of the Company and ALIC and liabilitiesspecifically excluded from the transaction) that Company and ALIC have agreedto retain.  In addition, the Company andALIC will each indemnify Prudential for certain post-closing liabilities thatmay arise from the acts of the Company and ALIC and their agents, including inconnection with the Company’s and ALIC’s provision of transition services.  The Reinsurance Agreements contain nolimitations or indemnifications with regard to insurance risk transfer, andtransferred all of the future risks and responsibilities for performance on theunderlying variable annuity contracts to Prudential, including those related tobenefit guarantees, in accordance with the provisions of SFAS No. 113 “Accountingand Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”.  Management does not believe this agreement willhave a material adverse effect on results of operations, cash flows orfinancial position of the Company.

 

16

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

 

 The aggregate liability balance related to allguarantees was not material as of March 31, 2009.

 

**Regulation**

 

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

 

**Legaland regulatory proceedings and inquiries**

 

***Background***

 

The Company and certainaffiliates are involved in a number of lawsuits, regulatory inquiries, andother legal proceedings arising out of various aspects of its business.  As background to the “Proceedings” subsectionbelow, please note the following:

 

·                 These matters raise difficult and complicatedfactual and legal issues and are subject to many uncertainties andcomplexities, including the underlying facts of each matter; novel legalissues; variations between jurisdictions in which matters are being litigated,heard or investigated; differences in applicable laws and judicialinterpretations; the length of time before many of these matters might beresolved by settlement, through litigation or otherwise; the fact that some ofthe lawsuits are putative class actions in which a class has not been certifiedand in which the purported class may not be clearly defined; the fact that someof the lawsuits involve multi-state class actions in which the applicable law(s) forthe claims at issue is in dispute and therefore unclear; and the current challenginglegal environment faced by large corporations and insurance companies.

 

·                 The outcome of these matters may also beaffected by decisions, verdicts, and settlements, and the timing of suchdecisions, verdicts, and settlements, in other individual and class actionlawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatoryactions that involve the Company, other insurers, or other entities.

 

·                 In the lawsuits, plaintiffs seek a variety ofremedies including equitable relief in the form of injunctive and otherremedies and monetary relief in the form of contractual and extra-contractualdamages.  In some cases, the monetarydamages sought include punitive damages. Often specific information about the relief sought, such as the amountof damages, is not available because plaintiffs have not requested specificrelief in their pleadings.  In theCompany’s experience, when specific monetary demands are made in pleadings,they bear little relation to the ultimate loss, if any, to the Company.

 

·                 In connection with regulatory examinationsand proceedings, government authorities may seek various forms of relief,including penalties, restitution and changes in business practices.  The Company may not be advised of the natureand extent of relief sought until the final stages of the examination orproceeding.

 

·                 For the reasons specified above, it is oftennot possible to make meaningful estimates of the amount or range of loss thatcould result from the matters described 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.

 

17

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·                  Due to thecomplexity and scope of the matters disclosed in the “Proceedings” subsectionbelow and the many uncertainties that exist, the ultimate outcome of thesematters 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, if any,and may be material to the Company’s operating results or cash flows for aparticular quarterly or annual period. However, based on information currently known to it, management believesthat the ultimate outcome of all matters described below, as they are resolvedover time, is not likely to have a material adverse effect on the financialposition of the Company.

 

***Proceedings***

 

Legalproceedings involving Allstate agencies and AIC may impact the Company, evenwhen the Company is not directly involved, because the Company sells itsproducts through a variety of distribution channels including Allstateagencies.  Consequently, informationabout the more significant of these proceedings is provided in the followingparagraph.

 

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

 

·                 The EEOC also filed another lawsuit in 2004 alleging age discriminationwith respect to a policy limiting the rehire of agents affected by the agencyprogram reorganization (the “EEOC II” suit). In EEOC II, in 2006, the court granted partial summary judgment to theEEOC.  Although the court did notdetermine that AIC was liable for age discrimination under the ADEA, itdetermined that the rehire policy resulted in a disparate impact, reserving fortrial the determination on whether AIC had reasonable factors other than age tosupport the rehire policy.  AIC’sinterlocutory appeal from the partial summary judgment was granted.  In June 2008, the Eighth Circuit Courtof Appeals affirmed summary judgment in the EEOC’s favor.  In September 2008, the Court of Appealsgranted AIC’s petition for rehearing *en banc* andvacated its earlier decision affirming the trial court’s grant of summaryjudgment in favor of the EEOC.  The Courtof Appeals then dismissed the appeal, determining that it lacked jurisdictionto consider the appeal at this stage in the litigation.

 

·                 A putative nationwide class action has alsobeen filed by former employee agents alleging various violations of ERISA, including a worker classificationissue.  These plaintiffs are challengingcertain amendments to the Agents Pension Plan and are seeking to have exclusiveagent independent contractors treated as employees for benefit purposes.  This matter was dismissed with prejudice bythe trial court, was the subject of further proceedings on appeal, and wasreversed and remanded to the trial court in 2005.  In June 2007, the court granted AIC’s motion todismiss the case.  Following plaintiffs’filing of a notice of appeal, the Third Circuit issued an order in December 2007stating that the notice of appeal was not taken from a final order within themeaning of the federal law and thus not appealable at this time. In March 2008,the Third Circuit decided that the appeal should not summarily be dismissed andthat the question of whether the matter is appealable at this time will beaddressed by the Court along with the merits of the appeal.

 

18

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

** **

*** Other matters***

*** ***

Various other legal,governmental, and regulatory actions, including state market conduct exams, and othergovernmental and regulatory inquiries are currently pending thatinvolve the Company and specific aspects of its conduct of business.  Like other members of the insurance industry,the Company is the target of a number of lawsuits and proceedings, some ofwhich involve claims for substantial or indeterminate amounts. These actions are based on a variety of issues and target a range of theCompany’s practices.  The outcome of these disputes iscurrently unpredictable.

 

One or more of these matters could have an adverseeffect on 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 in this “Other matters” subsection,in excess of amounts currently reserved, if any, as they are resolved over timeis not likely to have a material effect on the operating results, cash flows orfinancial position of the Company.

 

**7.         OtherComprehensive Income (Loss)**

** **

Thecomponents of other comprehensive income (loss) on a pre-tax and after-taxbasis are as follows:

 
| ** **                                                                             | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                             | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| ** **                                                                             | ** ** | ** **                       | ** ** | ** ** | ** ** | **After-** | ** ** | ** ** | ** ** | ** ** | ** ** | **After-** | ** ** |
| **($ in thousands)**                                                         | ** ** | **Pre-tax**                      | ** ** | **Tax** | ** ** | **tax** | ** ** | **Pre-tax** | ** ** | **Tax** | ** ** | **tax** | ** ** |
| * *                                                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding gains and losses arising during the period, net of  related offsets |       | $                                | 169,060    |   | $ | (59,171 | ) | $ | 109,889 |   | $ | (34,671 | ) | $ | 12,134 |   | $ | (22,537 | ) |
| Less: reclassification adjustment of realized capital gains and  losses                |       | 92,200                           |       | (32,270 | ) | 59,930 |   | 973 |   | (341 | ) | 632 |   |
| Unrealized net capital gains and losses                                                |       | 76,860                           |       | (26,901 | ) | 49,959 |   | (35,644 | ) | 12,475 |   | (23,169 | ) |
| Other comprehensive income (loss)                                                      |       | $                                | 76,860     |   | $ | (26,901 | ) | 49,959 |   | $ | (35,644 | ) | $ | 12,475 |   | (23,169 | ) |
|                                                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                             |       |                             |       |   |   | 24,669 |   |   |   |   |   | 21,577 |   |
|                                                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Comprehensive income (loss)                                                            |       |                             |       |   |   | $ | 74,628 |   |   |   |   |   | $ | (1,592 | ) |

 

19

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

Tothe Board of Directors and Shareholder of

AllstateLife Insurance Company of New York:

 

We have reviewed the accompanying condensed statementof financial position of Allstate Life Insurance Company of New York (the “Company”),an affiliate of The Allstate Corporation, as of March 31, 2009, and therelated condensed statements of operations, and cash flows for the three-monthperiods ended March 31, 2009 and 2008. 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.

 

We have previously audited, in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates), the statement of financial position of Allstate Life Insurance Companyof New York as of December 31, 2008, and the related statements ofoperations and comprehensive income, shareholder’s equity, and cash flows forthe year then ended (not presented herein); and in our report dated March 17,2009, which report includes an explanatory paragraph relating to a change inthe Company’s method of accounting for uncertainty in income taxes andaccounting for deferred acquisition costs associated with internal replacementsin 2007, we expressed an unqualified opinion on those financialstatements.  In our opinion, theinformation set forth in the accompanying condensed statement of financialposition as of December 31, 2008 is fairly stated, in all materialrespects, in relation to the statement of financial position from which it hasbeen derived.

 

 

/s/Deloitte & Touche LLP

 

Chicago,Illinois

May 11,2009

 

20

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**Item 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS**

### **OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2009 AND2008**

###  

### **OVERVIEW**

###  

The following discussionhighlights significant factors influencing the condensed financial position andresults of operations of Allstate Life Insurance Company of New York (referredto 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 2008.  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.

 

| **($ in thousands)**            | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Revenues**                              |       |                                             |       |   |   |
| Premiums                                  |       | $                                                | 11,464     |   | $ | 10,011 |   |
| Contract charges                          |       | 13,726                                           |       | 14,671 |   |
| Net investment income                     |       | 93,678                                           |       | 99,746 |   |
| Realized capital gains and losses         |       | 99,218                                           |       | 1,721 |   |
| Total revenues                            |       | 218,086                                          |       | 126,149 |   |
|                                      |       |                                             |       |   |   |
| **Costs and expenses**                    |       |                                             |       |   |   |
| Contract benefits                         |       | (37,779                                          | )          | (38,805 | ) |
| Interest credited to contractholder funds |       | (56,834                                          | )          | (43,301 | ) |
| Amortization of DAC                       |       | (72,667                                          | )          | (1,451 | ) |
| Operating costs and expenses              |       | (12,789                                          | )          | (9,022 | ) |
| Total costs and expenses                  |       | (180,069                                         | )          | (92,579 | ) |
|                                      |       |                                             |       |   |   |
| Loss on disposition of operations         |       | —                                           |       | (268 | ) |
| Income tax expense                        |       | (13,348                                          | )          | (11,725 | ) |
| Net income                                |       | $                                                | 24,669     |   | $ | 21,577 |   |
|                                      |       |                                             |       |   |   |
| Investments at March 31              |       | $                                                | 6,645,075  |   | $ | 7,244,411 |   |

** **

*Net income*****inthe first quarter of 2009****of $24.7million compared to $21.6 million in the same period of 2008. The increase innet income of $3.1 million was primarily the result of higher realized capitalgains, partially offset by deferred policy acquisition costs (“DAC”) anddeferred sales inducement costs (“DSI”) amortization acceleration for changesin assumptions and lower net investment income.

** **

**Analysis of Revenues**Total revenues increased 72.9% or $91.9million in the first quarter of 2009 compared to the same period of 2008 due tohigher net realized capital gains, partially offset by lower net investmentincome and contract charges.

 

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

 

*Contract charges*****are revenues generated from interest-sensitive and variablelife insurance, and fixed annuities for which deposits are classified ascontractholder funds or separate accounts liabilities.  Contract charges are assessed against thecontractholder account values for maintenance, administration, cost ofinsurance and surrender prior to the contractually specified dates.  As a result, changes in contractholder fundsare considered in the evaluation of growth and as indicators of future levelsof revenues.

 

21

----

 

The following table summarizespremiums and contract charges by product.

 

| **($ in thousands)**              | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Premiums**                                | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Traditional life insurance (1)              |       | $                                                | 5,590      |   | $ | 5,933 |   |
| Immediate annuities with life contingencies |       | 3,588                                            |       | 2,150 |   |
| Accident and health                         |       | 2,286                                            |       | 1,928 |   |
| **Total premiums**                          |       | 11,464                                           |       | 10,011 |   |
|                                        |       |                                             |       |   |   |
| **Contract charges**                        |       |                                             |       |   |   |
| Interest-sensitive life insurance (1)       |       | 12,498                                           |       | 12,902 |   |
| Fixed annuities                             |       | 1,228                                            |       | 1,769 |   |
| **Total contract charges**(2)               |       | 13,726                                           |       | 14,671 |   |
| **Premiums and contract charges**           |       | $                                                | 25,190     |   | $ | 24,682 |   |

 

----

(1) To conform to the current periodpresentation, certain amounts in the prior period have been reclassified.

(2) Total contract charges for the first quarterof 2009 and 2008 include contract charges related to the cost of insurancetotaling $8.0 million and $9.6 million, respectively.

 

Total premiums increased 14.5% in the first quarter of 2009 compared tothe same period of 2008due primarilyto higher sales of immediate annuities with life contingencies, partiallyoffset by lower traditional life insurance premiums.  The decline in premiums on traditional lifeinsurance was the result of higher premiums ceded to ALIC due to a greaterutilization of reinsurance.

 

Total contract charges decreased 6.4% in the firstquarter of 2009 compared to the same period of 2008 due to lower contractcharges on fixed annuities and interest-sensitive life insurance policies.  The decline in contract charges on fixedannuities was primarily the result of lower surrender charges.  The decline in contract charges on interest-sensitivelife insurance policies was the result of higher cost of insurance contractcharges ceded to ALIC due to a greater utilization of reinsurance, partiallyoffset by increased contract charge rates.

 

22

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

 

| ** **                                         | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**                     | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Contractholder funds, beginning balance**        |       | $                                                | 5,086,965  |   | $ | 4,848,461 |   |
|                                               |       |                                             |       |   |   |
| **Deposits**                                       |       |                                             |       |   |   |
| Fixed annuities                                    |       | 77,097                                           |       | 92,125 |   |
| Interest-sensitive life insurance                  |       | 25,774                                           |       | 25,982 |   |
| Variable life deposits allocated to fixed accounts |       | 13                                               |       | 11 |   |
| Total deposits                                     |       | 102,884                                          |       | 118,118 |   |
|                                               |       |                                             |       |   |   |
| **Interest credited**                              |       | 47,629                                           |       | 45,116 |   |
|                                               |       |                                             |       |   |   |
| **Benefits, withdrawals and other adjustments**    |       |                                             |       |   |   |
| Benefits                                           |       | (42,276                                          | )          | (41,213 | ) |
| Surrenders and partial withdrawals                 |       | (74,276                                          | )          | (83,607 | ) |
| Contract charges                                   |       | (13,775                                          | )          | (12,837 | ) |
| Net transfers to separate accounts                 |       | (17                                              | )          | (5 | ) |
| Other adjustments (1)                              |       | (5,679                                           | )          | (7,805 | ) |
| Total benefits, withdrawals and other adjustments  |       | (136,023                                         | )          | (145,467 | ) |
| **Contractholder funds, ending balance**           |       | $                                                | 5,101,455  |   | $ | 4,866,228 |   |

 

----

(1)         The table above illustrates the changes incontractholder funds, which are presented gross of reinsurance recoverables onthe Condensed Statements of Financial Position. The table above is intended to supplement our discussion and analysis ofrevenues, which are presented net of reinsurance on the Condensed Statements ofOperations.  As a result, the net changein contractholder funds associated with products reinsured to third parties isreflected as a component of the other adjustments line.

 

Contractholder fundsincreased 0.3% and 0.4% in the first quarter of 2009 and 2008,respectively.  Average contractholderfunds increased 4.9% in the first quarter of 2009 compared to the first quarterof 2008.

 

Contractholderdeposits decreased 12.9% in the first quarter of 2009 compared to the sameperiod of 2008 due primarily to lower deposits on fixed annuities. Deposits onfixed annuities decreased 16.3% in the first quarter of 2009 compared to thesame period of 2008 due to pricing actions relating to our efforts to improvereturns on new business and reduce our concentration in spread based productsas well as highly competitive market conditions.

 

Surrenders and partialwithdrawals on deferred fixed annuities and interest-sensitive life insuranceproducts decreased 11.2% to $74.3 million in the first quarter of 2009 from$83.6 million in the same period of 2008 due to a 12.6% reduction in surrendersand partial withdrawals on fixed annuities. The annualized surrender and partial withdrawal rate on deferred fixedannuities and interest-sensitive life products, based on the beginning ofperiod contractholder funds, was 7.1% in the first quarter of 2009 compared to8.5% in the first quarter of 2008.

 

*Net investment income*decreased 6.1% or $6.1 million to $93.7 million in the first quarter of 2009compared to $99.7 million in the same period of 2008.  For further discussion of net investmentincome, see the Investments section of the MD&A.

 

*Net realized capital gains and losses*reflected net gains of $99.2 million and $1.7 million in the first quarters of2009 and 2008, respectively.  For furtherdiscussion of realized capital gains and losses, see the Investments section ofthe MD&A.

 

**Analysis of Costs and Expenses **Total costs and expenses increased 94.5% or $87.5 million in the firstquarter of 2009 compared with the same period of 2008 due to higheramortization of DAC, interest credited to contractholder funds and operatingcosts and expenses, partially offset by lower contract benefits.

 

23

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*Contract benefits* decreased 2.6%in the first quarter of 2009 compared to the same period of 2008 due primarilyto improved mortality experience on life insurance products.

 

We analyze ourmortality and morbidity results using the difference between premiums andcontract charges earned for the cost of insurance and contract benefitsexcluding the portion related to the implied interest on immediate annuitieswith life contingencies (“benefit spread”). This implied interest totaled $27.7 million and $27.3 million in thefirst quarter of 2009 and 2008, respectively.  The benefit spread by product group is disclosed inthe following table.

 
| ** **                     | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)** | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Life insurance                 |       | $                                                | 9,229      |   | $ | 8,246 |   |
| Annuities                      |       | 91                                               |       | (987 | ) |
| Total benefit spread           |       | $                                                | 9,320      |   | $ | 7,259 |   |

 

Benefit spread increased 28.4% in the firstquarter of 2009 compared to the same period of 2008 due primarily to improvedmortality experience on life insurance products and growth in life insurancebusiness in force.

 

*Interest credited to contractholder funds*increased 31.3% or $13.5 million in the first quarter of 2009 compared to thesame period of 2008 due primarily to the acceleration of amortization of DSIdue to changes in assumptions, an unfavorable change in amortization of DSIrelating to realized capital gains and losses, and higher averagecontractholder funds.  The accelerationof amortization of DSI due to changes in assumptions increased interestcredited to contractholder funds by $6.7 million in the first quarter of 2009compared to amortization deceleration which decreased interest credited tocontractholder funds by $2.1 million in the first quarter of 2008.

 

In order to analyze theimpact of net investment income and interest credited to contractholders on netincome, we monitor the difference between net investment income and the sum ofinterest credited to contractholder funds and the implied interest on immediateannuities with life contingencies, which is included as a component of contractbenefits on the Condensed Statements of Operations (“investment spread”).

 

The investment spread byproduct group is shown in the following table.

 
| ** **                                              | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**                          | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Annuities                                               |       | $                                                | (11        | ) | $ | 17,276 |   |
| Life insurance                                          |       | 32                                               |       | 1,038 |   |
| Net investment income on investments supporting capital |       | 9,157                                            |       | 10,850 |   |
| Total investment spread                                 |       | $                                                | 9,178      |   | $ | 29,164 |   |

 

Investment spreaddeclined 68.5% in the first quarter of 2009 compared to the same period of 2008due primarily to the acceleration of amortization of DSI due to changes inassumptions and lower net investment income.

 

24

----

 

To further analyze investmentspreads, the following table summarizes the weighted average investment yieldon assets supporting product liabilities and capital, interest crediting ratesand investment spreads for the three months ended March 31.

 
| ** **                                                          | ** ** | **Weighted average  investment yield** | ** ** | **Weighted average  interest crediting rate** | ** ** | **Weighted average  investment spread** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                                         | ** ** | **2008**                                                     | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest-sensitive life insurance                                   |       | 5.1                                              | %          | 5.8                                                          | %          | 4.9                                               | %          | 4.4 | % | 0.2 | % | 1.4 | % |
| Deferred fixed annuities                                            |       | 5.1                                              |       | 5.6                                                          |       | 3.4                                               |       | 3.4 |   | 1.7 |   | 2.2 |   |
| Immediate fixed annuities with and without life contingencies       |       | 6.5                                              |       | 7.3                                                          |       | 6.5                                               |       | 6.6 |   | — |   | 0.7 |   |
| Investments supporting capital, traditional life and other products |       | 5.2                                              |       | 6.2                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

The followingtable summarizes our product liabilities and indicates the account value ofthose contracts and policies in which an investment spread is generated.

 
| ** **                                                     | ** ** | **March  31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------|------------|
| **($ in thousands)**                                 | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| Immediate fixed annuities with life contingencies              |       | $                        | 1,654,405  |   | $ | 1,625,280 |   |
| Other life contingent contracts and other                      |       | 152,130                  |       | 402,161 |   |
| Reserve for life-contingent contract benefits                  |       | $                        | 1,806,535  |   | $ | 2,027,441 |   |
|                                                           |       |                     |       |   |   |
| Interest-sensitive life                                        |       | $                        | 585,160    |   | $ | 542,361 |   |
| Deferred fixed annuities                                       |       | 3,883,565                |       | 3,737,663 |   |
| Immediate fixed annuities without life contingencies and other |       | 632,730                  |       | 586,204 |   |
| Contractholder funds                                           |       | $                        | 5,101,455  |   | $ | 4,866,228 |   |

 

*Amortization of DAC* increased $71.2 million inthe first quarter of 2009 compared to the same period of 2008.  The increase in the first quarter of 2009 wasprimarily attributable to amortization acceleration for changes in assumptionsfor our annuities and an unfavorable change in (amortization) accretionrelating to realized capital gains and losses. The components of amortization of DAC are summarized in the following table.

 
| ** **                                                                                                        | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**                                                                                    | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Amortization of DAC before amortization relating to realized capital  gains and losses and changes in assumptions |       | $                                                | (14,238    | ) | $ | (10,919 | ) |
| Amortization (acceleration) deceleration for changes in assumptions  (“DAC unlocking”)                  |       | (41,924                                          | )          | 8,764 |   |
| (Amortization) accretion relating to realized capital gains and  losses (1)                                       |       | (16,505                                          | )          | 704 |   |
| Total amortization of DAC                                                                                         |       | $                                                | (72,667    | ) | $ | (1,451 | ) |

 

----

| (1) |   | The impact of realized capital gains and losses  on amortization of DAC is dependent upon the relationship between the assets  that give rise to the gain or loss and the product liability supported by the  assets. Fluctuations result from changes in the impact of realized capital  gains and losses on actual and expected gross profits. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

During the first quarterof 2009, we completed our annual comprehensive review of the profitability ofinvestment products to determine DAC balances for our interest-sensitive lifeinsurance and annuity contracts.  The reviewcovered assumptions for investment returns, including capital gains and losses,interest crediting rates to policyholders, the effect of any hedges,persistency, mortality and expenses in all product lines.  This review resulted in an acceleration ofDAC amortization (charge to income) totaling $41.9 million pre-tax, includingamortization acceleration of $45.2 million related to fixed annuities,partially offset by amortization deceleration of

 

25

----

 

$3.3 million related tointerest-sensitive life insurance.  Theprincipal assumption impacting estimated future gross profits and the relatedDAC amortization for fixed annuities was an increase in the level of expectedrealized capital losses in 2009 and 2010 and, to a lesser extent, reducedinvestment spread.  Reduced estimatedfuture gross profits for fixed annuities resulted in accelerated DACamortization.  For our interest-sensitivelife insurance products, the amortization deceleration was due to higherestimated future gross profits due to a favorable change in our mortalityassumptions, partially offset by increased expected capital losses and, to alesser extent, reduced investment spread.

 

In the first quarter of2008, our annual comprehensive review of the profitability of investment productsresulted in the deceleration of DAC amortization (credit to income) for changesin assumptions of $8.8 million, including $6.5 million related tofixed annuities and $2.3 million related to interest-sensitive life insurance. The first quarter 2008 net amortization deceleration of $6.5 million onfixed annuities was due primarily to higher than expected investment spreadspartially offset by increased expenses. The first quarter 2008 net amortization deceleration of $2.3 million oninterest-sensitive life insurance was due to higher than expected benefitspreads partially offset by increased expenses.

 

The following table providesthe effect on DAC amortization of changes in assumptions relating to the grossprofit components of investment margin, benefit margin and expense margin.

 
| ** **                      | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**  | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Investment margin               |       | $                                                | (50,219    | ) | $ | 8,497 |   |
| Benefit margin                  |       | 7,483                                            |       | 4,029 |   |
| Expense margin                  |       | 812                                              |       | (3,762 | ) |
| Net (acceleration) deceleration |       | $                                                | (41,924    | ) | $ | 8,764 |   |

 

*Operating costs and expenses*increased 41.8% or $3.8 million in the first quarter of 2009 compared to thesame period of 2008 due primarily to higher restructuring expenses andincreased assessments from the New York State Insurance Department for administrativecosts.  Restructuring expenses in thefirst quarter of 2009 were recorded in connection with our previously announcedplan to improve efficiency and narrow our focus of product offerings.

 

*Income tax expense* increased 13.8% or $1.6million in the first quarter of 2009 compared to the same period in the prioryear due to higher income from operations before income tax expense.

 

**INVESTMENTS**

 

We continue tomake progress on strategic risk mitigation efforts toward reducing portfoliorisk and overall exposure to commercial real estate.  Commercial real estate exposure was reducedby $60.2 million through targeted dispositions and principal repayments fromborrowers.  Additionally, through ongoingasset liability management practices, we reduced the duration gap between ourfixed income portfolio and our liabilities to lessen our exposure to increasesin interest rates.

 

The composition of theinvestment portfolio at March 31, 2009 is presented in the table below.

 
| **($ in thousands)** | ** ** | **Investments** | ** ** | **Percent  to total** | ** ** |
|--------------------------------|------------|-----------------|------------|----------------------------|------------|
| Fixed income securities (1)    |       | $               | 5,031,358  |                       | 75.7       | % |
| Mortgage loans                 |       | 670,446         |       | 10.1                       |       |
| Equity securities (2)          |       | 72              |       | —                     |       |
| Short-term (3)                 |       | 900,839         |       | 13.6                       |       |
| Policy loans                   |       | 40,019          |       | 0.6                        |       |
| Other                          |       | 2,341           |       | —                     |       |
| Total                          |       | $               | 6,645,075  |                       | 100.0      | % |

 

----

(1)    Fixed income securities are carried atfair value. Amortized cost basis for these securities was $5.48 billion.

 

(2)    Equity securities are carried at fairvalue. Cost basis for these securities was $80 thousand.

 

(3)    Short-term investments are carried atfair value. Amortized cost basis for these investments was $900.8 million.

 

26

----

 

Total investments at March 31,2009 were slightly lower than at December 31, 2008 as increased unrealizednet capital losses were almost entirely offset by positive operating cash flowsand increased funds associated with collateral received in connection withsecurities lending.

 

Total investments at amortized cost related to collateral received inconnection with securities lending business activities increased to $151.1million at March 31, 2009, from $117.3 million at December 31,2008.  These investments are included as a component ofshort-term investments.

 

*Fixed income securities* are listed in the tablebelow.

 
| **($ in thousands)**                           | ** ** | **Fair value at  March 31,  2009** | ** ** | **Percent to  total  investments** | ** ** | **Fair value at  December 31,  2008** | ** ** | **Percent to  total  investments** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
| U.S. government and agencies                             |       | $                                                 | 529,808    |                                    | 8.0        | %                                                    | $          | 917,731                                 |       | 13.8 | % |
| Municipal                                                |       | 402,410                                           |       | 6.1                                     |       | 385,381                                              |       | 5.8                                     |       |
| Corporate                                                |       | 2,765,299                                         |       | 41.6                                    |       | 2,887,137                                            |       | 43.4                                    |       |
| Foreign government                                       |       | 312,765                                           |       | 4.7                                     |       | 371,542                                              |       | 5.6                                     |       |
| Mortgage-backed securities (“MBS”)             |       | 506,969                                           |       | 7.6                                     |       | 396,177                                              |       | 6.0                                     |       |
| Commercial mortgage-backed securities (“CMBS”) |       | 454,935                                           |       | 6.8                                     |       | 468,868                                              |       | 7.0                                     |       |
| Asset-backed securities (“ABS”)                |       | 53,838                                            |       | 0.8                                     |       | 64,070                                               |       | 1.0                                     |       |
| Redeemable preferred stock                               |       | 5,334                                             |       | 0.1                                     |       | 5,459                                                |       | 0.1                                     |       |
| Total fixed income securities                            |       | $                                                 | 5,031,358  |                                    | 75.7       | %                                                    | $          | 5,496,365                               |       | 82.7 | % |

 

At March 31, 2009,96.7% of the fixed income securities portfolio was rated investment grade,which is defined as a security having a rating from the National Association of InsuranceCommissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa, A or Baa fromMoody’s, a rating of AAA, AA, A or BBB from Standard and Poor’s (“S&P”),Fitch or Dominion or a rating of aaa, aa, a or bbb from A.M. Best; or acomparable internal rating if an externally provided rating is not available.

 

*MunicipalBonds* totaled$402.4 million at March 31, 2009, substantially all of which aretaxable.  The following table summarizesthe municipal bond portfolio by Moody’s equivalent rating as of March 31,2009.

 
| **($ in thousands)** | ** ** | **Par  value** | ** ** | **Amortized  cost** | ** ** | **Fair  value** | ** ** | **Unrealized  gain/(loss)** | ** ** | **Fair value  as a percent of  amortized cost** | ** ** |
|--------------------------------|------------|----------------|------------|---------------------|------------|-----------------|------------|-----------------------------|------------|--------------------------------------------------------------------------|------------|
| Rating                         |       |           |       |                |       |            |       |                        |       |                                                                     |       |
| Aaa                            |       | $              | 139,240    |                | $          | 114,129         |       | $                           | 100,098    |                                                                     | $          | (14,031 | ) | 87.7 | % |
| Aa                             |       | 204,111        |       | 123,309             |       | 112,919         |       | (10,390                     | )          | 91.6                                                                     |       |
| A (2)                          |       | 163,131        |       | 131,690             |       | 109,241         |       | (22,449                     | )          | 83.0                                                                     |       |
| Baa (3)                        |       | 194,245        |       | 99,987              |       | 78,852          |       | (21,135                     | )          | 78.9                                                                     |       |
| Ba or lower (3)                |       | 2,000          |       | 2,071               |       | 1,300           |       | (771                        | )          | 62.8                                                                     |       |
| Total (1)                      |       | $              | 702,727    |                | $          | 471,186         |       | $                           | 402,410    |                                                                     | $          | (68,776 | ) | 85.4 |   |

 

----

| (1)    |   | Includes auction rate securities (“ARS”) with par value of $105.6  million, amortized cost of $105.6 million, fair value of $92.8 million and  unrealized capital losses of $12.8 million. For a more detailed discussion on  ARS, see the Allstate Life Insurance Company of New York Annual Report on  Form 10-K for 2008. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| (2)    |   | Includes pre-refunded municipals with fair values of $2.5 million at  March 31, 2009. Pre-refunded municipals are generally escrowed by Aaa  rated securities, such as U.S. government or governmental agency securities.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| (3)    |   | On April 13, 2009, one of the bond insurers, Ambac Assurance  Corporation, was downgraded by Moody’s from a rating of Baa to Ba. We estimate  that this will impact the classification of the Moody’s equivalent rating for  approximately $17.0 million of fair value of insured municipal bonds.                           |

 

The unrealized net capitalloss of $68.8 million at March 31, 2009 in our municipal bond portfolio isdriven primarily by higher yields, including widening credit spreads, since thetime of initial purchase.

 

*Corporatebonds*totaled$2.77 billion of March 31, 2009.  Asof March 31, 2009, $1.25 billion or 45.2% consisted of privately placedcorporate securities, compared to $1.33 billion or 45.9% at December 31,2008. * *Privatelyplaced securities primarily consist of corporate issued senior debt securitiesthat are in unregistered form or are directly

 

27

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negotiated with theborrower.  Privately placed corporatesecurities are rated by the NAIC in instances when information is provided tothem.  Approximately 33.9% of theprivately placed corporate securities in our portfolio are rated by anindependent rating agency.

 

**The following table summarizesthe corporate fixed income portfolio by Moody’s equivalent rating as of March 31,2009.**

** **
| ** **                     | ** ** | **Corporate-Public** | ** ** | **Corporate-Private**      | ** ** | **Total Corporate** | ** ** |
|--------------------------------|------------|----------------------|------------|----------------------------|------------|--------------------------|------------|
| **($ in thousands)** | ** ** | **Fair  value**      | ** ** | **Unrealized  gain(loss)** | ** ** | **Fair  value**          | ** ** | **Unrealized  gain(loss)** | ** ** | **Fair  value** | ** ** | **Unrealized  gain(loss)** | ** ** |
| **Rating ****(1)**        |       |                 |       |                       |       |                     |       |   |   |   |   |   |   |
| Aaa                            |       | $                    | —     |                       | $          | —                   |       | $ | 96,568 |   | $ | 1,191 |   | $ | 96,568 |   | $ | 1,191 |   |
| Aa                             |       | 93,662               |       | 448                        |       | 90,949                   |       | (2,261 | ) | 184,611 |   | (1,813 | ) |
| A                              |       | 605,007              |       | (31,263                    | )          | 347,248                  |       | (16,227 | ) | 952,255 |   | (47,490 | ) |
| Baa                            |       | 727,902              |       | (89,133                    | )          | 602,073                  |       | (75,142 | ) | 1,329,975 |   | (164,275 | ) |
| Ba or lower                    |       | 87,555               |       | (25,293                    | )          | 114,335                  |       | (43,740 | ) | 201,890 |   | (69,033 | ) |
| Total                          |       | $                    | 1,514,126  |                       | $          | (145,241                 | )          | $ | 1,251,173 |   | $ | (136,179 | ) | $ | 2,765,299 |   | $ | (281,420 | ) |

 

The unrealized net capitalloss of $281.4 million at March 31, 2009 was driven primarily by wideningcredit spreads since the time of initial purchase resulting from deterioratingmacro economic conditions and continued credit market deterioration.

 

*CollateralizedMBS, CMBS and ABS securities*are detailed in the following table by Moody’sequivalent rating as of March 31, 2009.

 
| **($ in thousands)**                                                          | ** ** | **Fair value** | ** ** | **Percent to total  investments** | ** ** | **Aaa** | ** ** | **Aa** | ** ** | **A**  | ** ** | **Baa ****(1)** | ** ** | **Ba or  Lower ****(1)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|---------|------------|--------|------------|--------|------------|----------------------|------------|------------------------------------|------------|
| **MBS**                                                                                 |       |                |       |                                        |       |    |       |   |       |   |       |                 |       |                               |       |
| U.S. government sponsored entities (“U.S. Agency”)                            |       | $                   | 442,479    |                                        | 6.7        | %       | 100.0      | %      | —     |   | —     |                 | —     |                               | —     |   |
| Prime residential mortgage-backed securities (“Prime”)                        |       | 41,616              |       | 0.6                                         |       | 100.0   |       | — |       | — |       | —               |       | —                             |       |
| Alt-A residential mortgage-backed securities (“Alt-A”)                        |       | 22,874              |       | 0.3                                         |       | 100.0   |       | — |       | — |       | —               |       | —                             |       |
| Total MBS                                                                               |       | $                   | 506,969    |                                        | 7.6        | %       |       |   |       |   |       |                 |       |                               |       |   |
|                                                                                    |       |                |       |                                        |       |    |       |   |       |   |       |                 |       |                               |       |
| **CMBS**                                                                                |       | $                   | 454,935    |                                        | 6.8        | %       | 88.2       |   | 4.8        | %      | 5.6        | %                    | 1.4        | %                                  | —     |   |
|                                                                                    |       |                |       |                                        |       |    |       |   |       |   |       |                 |       |                               |       |
| **ABS**                                                                                 |       |                |       |                                        |       |    |       |   |       |   |       |                 |       |                               |       |
| Asset-backed residential mortgage-backed securities (“ABS RMBS”)  non-insured |       | $                   | 28,131     |                                        | 0.4        |    | 29.1       |   | 36.8       |   | 1.8        |                 | 4.5        |                               | 27.8       | % |
| ABS RMBS insured                                                                        |       | 6,973               |       | 0.1                                         |       | —  |       | 3.2    |       | 2.2    |       | 46.5                 |       | 48.1                               |       |
| Total ABS RMBS                                                                          |       | 35,104              |       | 0.5                                         |       |    |       |   |       |   |       |                 |       |                               |       |
|                                                                                    |       |                |       |                                        |       |    |       |   |       |   |       |                 |       |                               |       |
| Other collateralized debt obligations (“other CDO”)                           |       | 18,734              |       | 0.3                                         |       | 26.9    |       | — |       | 58.7   |       | —               |       | 14.4                               |       |
| Total ABS                                                                               |       | $                   | 53,838     |                                        | 0.8        | %       |       |   |       |   |       |                 |       |                               |       |   |

 

----

(1)   On April 13, 2009, one of the bond insurers, Ambac AssuranceCorporation, was downgraded by Moody’s from a rating of Baa to Ba. We estimatethat this will impact the classification for the Moody’s equivalent rating forapproximately $3.2 million of carrying value of insured ABS RMBS.

 

During the first quarterof 2009, certain financial markets continued to experience depressed prices dueto market and liquidity disruptions.  We experiencedthis illiquidity and disruption in certain of our MBS, CMBS and ABS fixedincome securities, particularly in our Prime, Alt-A, CMBS, ABS RMBS, and otherCDO portfolios.  These portfolios totaled$573.3 million, or 8.6% of our total investments at March 31, 2009.

 

We determine the fairvalues of securities comprising these illiquid portfolios by obtaininginformation from an independent third-party valuation service provider andbrokers.  We confirmed the reasonablenessof the fair value of these portfolios as of March 31, 2009 by analyzingavailable market information including, but not limited to, collateral quality,anticipated cash flows, credit enhancements, default rates, loss severities,securities’ relative position within their respective capital structures, andcredit ratings from statistical rating agencies.

 

28

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The following tablesummarizes our illiquid portfolios as of March 31, 2009.

*** ***
| **($ in thousands)** | ** ** | **Par  value ****(1)** | ** ** | **Amortized  cost ****(1)**** ****(2)** | ** ** | **Amortized cost  as a percentage  of par value** | ** ** | **Fair  value** | ** ** | **Fair value as a  percentage of  par value** | ** ** | **Unrealized  gain/(loss)** | ** ** |
|--------------------------------|------------|-----------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------|------------|------------------------------------------------------------------------|------------|-----------------------------|------------|
| **MBS**                        |       |                        |       |                                              |       |                                                                  |       |            |       |                                                                   |       |                        |       |
| Prime                          |       | $                           | 46,081     |                                              | $          | 46,270                                                                |       | 100.4           | %          | $                                                                      | 41,616     |                        | 90.3       | % | $ | (4,654 | ) |
| Alt-A                          |       | 30,000                      |       | 29,629                                            |       | 98.8                                                                  |       | 22,874          |       | 76.2                                                                   |       | (6,755                      | )          |
|                           |       |                        |       |                                              |       |                                                                  |       |            |       |                                                                   |       |                        |       |
| **CMBS**                       |       | 752,781                     |       | 715,891                                           |       | 95.1                                                                  |       | 454,935         |       | 60.4                                                                   |       | (260,956                    | )          |
|                           |       |                        |       |                                              |       |                                                                  |       |            |       |                                                                   |       |                        |       |
| **ABS**                        |       |                        |       |                                              |       |                                                                  |       |            |       |                                                                   |       |                        |       |
| ABS RMBS                       |       | 62,555                      |       | 55,383                                            |       | 88.5                                                                  |       | 35,104          |       | 56.1                                                                   |       | (20,279                     | )          |
| Other CDO                      |       | 28,725                      |       | 28,725                                            |       | 100.0                                                                 |       | 18,734          |       | 65.2                                                                   |       | (9,991                      | )          |
| Total                          |       | $                           | 920,142    |                                              | $          | 875,898                                                               |       | 95.2            |       | $                                                                      | 573,263    |                        | 62.3       |   | $ | (302,635 | ) |

 

----

(1)   The difference between par value andamortized cost of $44.2 million is primarily attributable to write-downs. Bothamounts have been reduced by principal payments.

 

(2)   Amortized cost includes other-than-temporary impairment charges,as applicable.

 

Thefollowing table presents realized capital gains and losses and principaltransactions relating to our illiquid portfolios for the three months ended March 31,2009.

 
| ** **                     | ** ** | **Realized capital gains and losses** | ** ** | **Principal transactions** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|
| **($ in thousands)** | ** ** | **Sales**                                                 | ** ** | **Impairment  write-downs**     | ** ** | **Change in  intent  write-downs** | ** ** | **Sold** | ** ** | **Principal  received** | ** ** |
| **MBS**                        | ** ** | ** **                                                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prime                          |       | $                                                         | —     |                            | $          | — |   | $ | — |   | $ | — |   | $ | 670 |   |
|                           |       |                                                      |       |                            |       |   |   |   |   |   |   |
| **CMBS**                       |       | (1,024                                                    | )          | (2,248                          | )          | (1,478 | ) | 623 |   | 721 |   |
|                           |       |                                                      |       |                            |       |   |   |   |   |   |   |
| **ABS**                        |       |                                                      |       |                            |       |   |   |   |   |   |   |
| ABS RMBS                       |       | —                                                    |       | —                          |       | (253 | ) | 13 |   | 3,335 |   |
| Other CDO                      |       | —                                                    |       | —                          |       | — |   | — |   | 63 |   |
| Total                          |       | $                                                         | (1,024     | )                               | $          | (2,248 | ) | $ | (1,731 | ) | $ | 636 |   | $ | 4,789 |   |

 

Securities included inour illiquid portfolios with a fair value less than 70% of amortized cost as ofMarch 31, 2009 are shown in the following table.

 
| **($ in thousands)** | ** ** | **Fair  value** | ** ** | **Unrealized  gain/(loss)** | ** ** |
|--------------------------------|------------|-----------------|------------|-----------------------------|------------|
| CMBS                           |       | $               | 100,745    |                        | $          | (210,222 | ) |
| ABS RMBS                       |       | 10,509          |       | (15,347                     | )          |
| Other CDO                      |       | 13,689          |       | (9,148                      | )          |
| Total                          |       | $               | 124,943    |                        | $          | (234,717 | ) |

 

We continue to believethat the unrealized losses on these securities are not predictive of theultimate performance of the underlying collateral.  In the absence of further deterioration inthe collateral relative to our positions in the securities’ respective capitalstructures, which could be other than temporary, the unrealized losses shouldreverse over the remaining lives of the securities.

 

The cash flows of the underlying mortgages or collateral for MBS, CMBSand ABS are generally applied in a pre-determined order and are designed sothat each security issued qualifies for a specific original rating.  The security issue is typically referred toas the “class”.  For example, the “senior”portion or “top” of the capital structure which would originally qualify for arating of Aaa is referred to as the “Aaa class” and typically has priority inreceiving the principal repayments on the underlying mortgages.  In a sequential structure, underlyingcollateral principal repayments are

 

29

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directed to the most senior rated Aaa class in the structure until paidin full, after which principal repayments are directed to the next most seniorAaa class in the structure until it is paid in full.  Senior Aaa classes generally share any lossesfrom the underlying collateral on a pro-rata basis after losses are absorbed byclasses with lower original ratings including other “junior” or “subordinate”Aaa securities.  For certain senior Aaaclasses of CMBS, the losses may be shared pro-rata.  The underlying mortgages have fixed interestrates, variable interest rates (such as adjustable rate mortgages (“ARM”)) orare hybrid, meaning that they contain features of both fixed and variable ratemortgages.

 

*CMBS* totaled $454.9 million, all of which were ratedinvestment grade at March 31, 2009. The CMBS portfolio is subject to credit risk, but unlike otherstructured securities, is generally not subject to prepayment risk due toprotections within the underlying commercial mortgages whereby borrowers areeffectively restricted from prepaying their mortgages due to changes ininterest rates.  Of the CMBS investments,97.7% are traditional conduit transactions collateralized by pools ofcommercial mortgages, broadly diversified across property types andgeographical area.  The remainderconsists of non-traditional CMBS such as large loan pools and single borrowertransactions.

 

The following table shows our CMBS portfolio at March 31, 2009 byvintage year, based upon our participation in the capital structure.

 
| **($ in thousands)**                          | ** ** | ** **     | ** ** | ** **                       | ** ** | ** **      | ** ** | ** **                  | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------------------------|------------|-----------------|------------|-----------------------------|------------|
| **Capital structure  classification ****(1)** | ** ** | **Par  value** | ** ** | **Amortized  cost ****(2)** | ** ** | **Fair  value** | ** ** | **Unrealized  gain/(loss)** | ** ** |
| Aaa                                                     |       |           |       |                             |       |            |       |                        |       |
| 2007:                                                   |       |           |       |                             |       |            |       |                        |       |
| Super senior (3)                                        |       | $              | 60,000     |                             | $          | 60,497          |       | $                           | 39,071     |   | $ | (21,426 | ) |
| Subordinated senior (5)                                 |       | 28,000         |       | 27,068                           |       | 6,327           |       | (20,741                     | )          |
| Subtotal                                                |       | 88,000         |       | 87,565                           |       | 45,398          |       | (42,167                     | )          |
| 2006:                                                   |       |           |       |                             |       |            |       |                        |       |
| Super senior (3)                                        |       | 28,000         |       | 28,105                           |       | 20,308          |       | (7,797                      | )          |
| Mezzanine senior (4)                                    |       | 37,338         |       | 36,242                           |       | 18,123          |       | (18,119                     | )          |
| Subordinated senior (5)                                 |       | 42,081         |       | 40,291                           |       | 11,251          |       | (29,040                     | )          |
| Subtotal                                                |       | 107,419        |       | 104,638                          |       | 49,682          |       | (54,956                     | )          |
| 2005:                                                   |       |           |       |                             |       |            |       |                        |       |
| Super senior (3)                                        |       | 51,400         |       | 51,390                           |       | 43,982          |       | (7,408                      | )          |
| Subordinated senior (5)                                 |       | 10,000         |       | 9,871                            |       | 4,143           |       | (5,728                      | )          |
| Subtotal                                                |       | 61,400         |       | 61,261                           |       | 48,125          |       | (13,136                     | )          |
| Pre-2005 (6)                                            |       | 288,996        |       | 289,089                          |       | 251,305         |       | (37,784                     | )          |
| Aaa total                                               |       | 545,815        |       | 542,553                          |       | 394,510         |       | (148,043                    | )          |
|                                                    |       |           |       |                             |       |            |       |                        |       |
| Aa                                                      |       | 153,307        |       | 152,195                          |       | 45,632          |       | (106,563                    | )          |
| A                                                       |       | 53,659         |       | 21,143                           |       | 14,793          |       | (6,350                      | )          |
| Total CMBS                                              |       | $              | 752,781    |                             | $          | 715,891         |       | $                           | 454,935    |   | $ | (260,956 | ) |

 

----

| (1)    |   | Capital structure classification reflects original  ratings which may not be consistent with current ratings due to upgrades and  downgrades.                                                                                                                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                         |
| (2)    |   | Amortized cost includes other-than-temporary  impairment charges, as applicable.                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                         |
| (3)    |   | Most senior of the Aaa rated tranches, typically has  a high level of credit enhancement of approximately 30%, meaning actual  losses in the deal have to reach 30% before incurring a first dollar loss.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                         |
| (4)    |   | Middle Aaa rated tranche, typically having credit  enhancement of approximately 20%, are subordinate only to the Super senior  bonds.                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                         |
| (5)    |   | Lowest Aaa rated tranche, typically with credit  enhancement in the low teens. This bond is subordinate to the Super senior  and Mezzanine senior tranches, but still senior to all tranches rated below  Aaa.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                         |
| (6)    |   | Prior to 2005, the Aaa bonds in a transaction were  generally not divided into Super senior, Mezzanine senior, or Subordinated  senior (with the exception of a few deals structured very late in 2004);  therefore all 2004 and prior Aaa-rated securities are grouped into this  category. |

 

30

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The unrealized netcapital loss of $261.0 million at March 31, 2009 on our CMBS portfolio wasa result of widening of credit spreads due to deteriorating macro economic conditionsand continued credit market deterioration. Credit spread widening since the time of initial purchase occurred inall rating classes but was particularly evident in our subordinated senior Aaa andlower rated securities.  These holdingsaccounted for $206.2 million, or 79.0%, of the unrealized net capitalloss.  Our analysis suggests that thevast majority of our CMBS portfolio is well insulated from a severe rise incommercial mortgage default rates.

 

*ABS RMBS* includes securities that are collateralizedby mortgage loans issued to borrowers that cannot qualify for Prime or Alt-Afinancing terms due in part to weak or limited credit history.  It also includes securities that arecollateralized by certain second lien mortgages regardless of the borrower’scredit history.  $29.7 million or 84.6%of the ABS RMBS portfolio consisted of securities that were issued during 2005,2006 and 2007.  At March 31, 2009,20.3% of securities issued during 2005, 2006 and 2007 were rated Aaa, 35.6%rated Aa, 2.3% rated A, 4.2% rated Baa and 37.6% rated Ba or lower.

 

The following tablepresents additional information about our ABS RMBS portfolio including asummary by first and second lien collateral at March 31, 2009.

 
| **($ in thousands)** | ** ** | **Fair Value** | ** ** | **Percent to  total  investments** | ** ** |
|--------------------------------|------------|---------------------|------------|-----------------------------------------|------------|
| First lien:                    |       |                |       |                                    |       |
| Fixed rate (1)                 |       | $                   | 9,908      |                                    | 0.2        | % |
| Variable rate (1)              |       | 15,699              |       | 0.2                                     |       |
| Total first lien (2)           |       | 25,607              |       | 0.4                                     |       |
| Second lien:                   |       |                |       |                                    |       |
| Insured                        |       | 6,436               |       | 0.1                                     |       |
| Other                          |       | 3,061               |       | —                                  |       |
| Total second lien (3)          |       | 9,497               |       | 0.1                                     |       |
| Total ABS RMBS                 |       | $                   | 35,104     |                                    | 0.5        | % |

 

----

| (1) |   | Fixed rate and variable rate refer to the primary  interest rate characteristics of the underlying mortgages at the time of  issuance.   |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The credit ratings of the first lien ABS RMBS were  23.5% Aaa, 40.4% Aa, 2.6% A, 4.9% Baa and 28.6% Ba or lower at March 31,  2009. |
| (3) |   | The credit ratings of the second lien ABS RMBS were  22.7% Aaa, 2.3% Aa, 34.2% Baa and 40.8% Ba or lower at March 31, 2009.         |

 

The following tableincludes first lien non-insured ABS RMBS by vintage year and the interest ratecharacteristics of the underlying mortgage product.

 
| ** **                     | ** ** | **Fair value** | ** ** | ** **      | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------|------------|-----------------|------------|------------|------------|
| **($ in thousands)** | ** ** | **Variable  rate**  | ** ** | **Fixed  rate** | ** ** | **Total**  | ** ** | **Amortized  cost ****(1)** | ** ** | **Unrealized  gain/(loss)** | ** ** |
| 2007                           |       | $                   | 2,969      |            | $          | 8,051      |       | $ | 11,020 |   | $ | 15,146 |   | $ | (4,126 | ) |
| 2006                           |       | 12,193              |       | 1,857           |       | 14,050     |       | 18,950 |   | (4,900 | ) |
| Total                          |       | $                   | 15,162     |            | $          | 9,908      |       | $ | 25,070 |   | $ | 34,096 |   | $ | (9,026 | ) |

 

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(1) Amortizedcost includes other-than-temporary impairment charges, as applicable.

 

We also own $3.1 millionof second lien ABS RMBS non-insured securities, representing 64.9% of amortizedcost.  $900 thousand, or 29.4%, of thisportfolio are 2006 and 2007 vintage years. Together with the first lien non-insured ABS RMBS in the table above,this comprises our $28.1 million of non-insured ABS RMBS.

 

31

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At March 31,2009, $7.0 million or 19.9% of the total ABS RMBS securities are insured by 4bond insurers and 51.9% of these insured securities were rated investmentgrade.  The following table shows ourinsured ABS RMBS portfolio at March 31, 2009 by vintage year for the firstlien and second lien collateral.

 
| ** **                     | ** ** | **Vintage year** | ** ** | **Fair** | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** |
|--------------------------------|------------|-----------------------|------------|----------|------------|---------------|------------|----------------|------------|
| **($ in thousands)** | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005**      | ** ** | **Pre-2005**   | ** ** | **value** | ** ** | **cost ****(1)** | ** ** | **gain/(loss)** | ** ** |
| First lien                     |       | $                     | 381        |     | $          | 156           |       | $              | —     |   | $ | — |   | $ | 537 |   | $ | 837 |   | $ | (300 | ) |
| Second lien                    |       | 3,107                 |       | —   |       | 85            |       | 3,244          |       | 6,436 |   | 15,730 |   | (9,294 | ) |
| Total insured ABS RMBS (2)     |       | $                     | 3,488      |     | $          | 156           |       | $              | 85         |   | $ | 3,244 |   | $ | 6,973 |   | $ | 16,567 |   | $ | (9,594 | ) |

 

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| (1)    |   | Amortized cost includes other-than-temporary impairment  charges, as applicable.                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                          |
| (2)    |   | The  evaluation for other-than-temporary impairment through our portfolio  monitoring process considers the current claims paying resources of the  individual bond insurers. |

 

*Mortgage Loans*****Our mortgage loan portfoliowas $670.4 million at March 31, 2009 and comprised primarily loans securedby first mortgages on developed commercial real estate.  Geographical and property typediversification are key considerations used to manage our exposure.  The portfolio is diversified across severalproperty types.  Our exposure to anymetropolitan area is also highly diversified, with the largest exposure notexceeding 12.2% of the portfolio.  Theaverage debt service coverage ratio represents the amount of cash flowsavailable from the property available by the borrower to meet its principal andinterest payment obligations.  Theaverage debt service coverage ratio of the portfolio as of March 31, 2009was 1.8, and only 4.0% of the mortgage loan portfolio had a debt servicecoverage ratio under 1.0.

 

In the first quarter of2009, $6.2 million of commercial mortgage loans were contractuallydue.  Of these, 63% were paid as due and37.0% were extended generally for less than one year.  In addition, $8.9 million that were notcontractually due in the first quarter of 2009 were paid in full.

 

The net carrying value ofimpaired loans at March 31, 2009 and December 31, 2008 was$9.2 million and $3.4 million, respectively.  We recognized $637 thousand of realizedcapital losses related to valuation allowances on mortgage loans for thequarter ended March 31, 2009.  Totalvaluation allowances of $1.1 million were held at March 31,2009.  Realized capital losses due tochanges in intent to hold mortgage loans to maturity totaled $686 thousandfor the quarter ended March 31, 2009.

 

32

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**Unrealizednet capital losses**totaled $445.1 million as of March 31, 2009, compared to unrealized netcapital losses of $278.3 million as of December 31, 2008 as a result ofwidening credit spreads on certain fixed income securities, increasingrisk-free interest rates and realized capital gains through sales.  The following table presents unrealized netcapital gains and losses, pre-tax and after-tax.

 
| **($ in thousands)**                     | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| U.S. government and agencies                       |       | $                            | 108,695    |                            | $          | 241,076 |   |
| Municipal                                          |       | (68,776                      | )          | (77,283                         | )          |
| Corporate                                          |       | (281,420                     | )          | (271,451                        | )          |
| Foreign government                                 |       | 86,652                       |       | 109,235                         |       |
| MBS                                                |       | 3,295                        |       | (2,001                          | )          |
| CMBS                                               |       | (260,956                     | )          | (252,839                        | )          |
| ABS                                                |       | (30,270                      | )          | (22,992                         | )          |
| Redeemable preferred stock                         |       | (3,945                       | )          | (3,831                          | )          |
| Fixed income securities                            |       | (446,725                     | )          | (280,086                        | )          |
| Equity securities                                  |       | (8                           | )          | —                          |       |
| Short-term investments                             |       | —                       |       | 65                              |       |
| Derivatives                                        |       | 1,670                        |       | 1,749                           |       |
|                                               |       |                         |       |                            |       |
| Unrealized net capital gains and losses, pre-tax   |       | (445,063                     | )          | (278,272                        | )          |
|                                               |       |                         |       |                            |       |
| Amounts recognized for:                            |       |                         |       |                            |       |
| Insurance reserves (1)                             |       | —                       |       | (155,935                        | )          |
| DAC and DSI  (2)                                   |       | 354,363                      |       | 266,647                         |       |
| Total                                              |       | 354,363                      |       | 110,712                         |       |
|                                               |       |                         |       |                            |       |
| Deferred income taxes                              |       | 31,745                       |       | 58,646                          |       |
| Unrealized net capital gains and losses, after-tax |       | $                            | (58,955    | )                               | $          | (108,914 | ) |

 

----

| (1)    |   | The insurance reserves adjustment represents the  amount by which the reserve balance would increase if the net unrealized  gains in the applicable product portfolios were realized and reinvested at current  lower interest rates, resulting in a premium deficiency. Although we evaluate  premium deficiencies on the combined performance of our life insurance and  immediate annuities with life contingencies, the adjustment primarily relates  to structured settlement annuities with life contingencies, in addition to  certain payout annuities with life contingencies. The insurance reserves  adjustment changed to zero as of March 31, 2009 due to decreases in  unrealized gains in the applicable product portfolios. The change in the  unrealized balance resulted from realizing prior unrealized gains upon the  sale of certain securities issued or guaranteed by the U.S. government in the  first quarter of 2009. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (2)    |   | The DAC and DSI adjustment represents the amount by  which the amortization of DAC and DSI would increase or decrease if the  unrealized gains or losses in the respective product portfolios were  realized. Recapitalization of the DAC and DSI balances is limited to the  originally deferred costs plus interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

The netunrealized loss for the fixed income portfolio totaled $446.7 million,comprised of $265.2 million of gross unrealized gains and $711.9 million ofgross unrealized losses at March 31, 2009. This is compared to a net unrealized loss for the fixed income portfoliototaling $280.1 million, comprised of $420.1 million of gross unrealized gainsand $700.2 million of gross unrealized losses at December 31, 2008.

 

33

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Gross unrealized gains and losses as of March 31,2009 on fixed income securities by type and sector are provided in the tablebelow.

 
| ** **                                 | ** ** | ** **             | ** ** | ** **     | ** ** | ** **                | ** ** | ** ** | ** ** | ** **          | ** ** | **Amortized**              | ** ** | ** **                           | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------|------------|---------------------------|------------|------------|------------|---------------------|------------|----------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | ** **             | ** ** | ** **     | ** ** | ** **                | ** ** | ** ** | ** ** | ** **          | ** ** | **cost as a**    | ** ** | ** Fair value**            | ** ** |
| ** **                                 | ** ** | **Par**                | ** ** | **Amortized**  | ** ** | **Gross unrealized** | ** ** | ** ** | ** ** | **percent of** | ** ** | **as a percent** | ** ** |
| **($ in thousands)**             | ** ** | **value ****(1)** | ** ** | ** cost** | ** ** | **Gains **           | ** ** | **Losses** | ** ** | **Fair value** | ** ** | **par value**         | ** ** | ** ****of par value** | ** ** |
| Corporate:                                 |       |                   |       |           |       |                      |       |       |       |                |       |                       |       |                                 |       |
| Banking                                    |       | $                      | 396,057    |           | $          | 385,516                   |       | $          | 1,035      |                | $          | (110,604                   | )          | $                                    | 275,947    |   | 97.3 | % | 69.7 | % |
| Financial services                         |       | 340,885                |       | 330,902        |       | 518                       |       | (51,996    | )          | 279,424             |       | 97.1                       |       | 82.0                                 |       |
| Utilities                                  |       | 634,514                |       | 626,739        |       | 23,183                    |       | (40,544    | )          | 609,378             |       | 99.8                       |       | 96.0                                 |       |
| Consumer goods (cyclical and non-cyclical) |       | 450,599                |       | 450,123        |       | 6,272                     |       | (23,718    | )          | 432,677             |       | 99.9                       |       | 96.0                                 |       |
| Other                                      |       | 244,531                |       | 148,356        |       | 2,575                     |       | (10,970    | )          | 139,961             |       | 60.7                       |       | 57.2                                 |       |
| Capital goods                              |       | 333,956                |       | 325,876        |       | 6,179                     |       | (28,859    | )          | 303,196             |       | 97.6                       |       | 90.8                                 |       |
| Basic industry                             |       | 127,496                |       | 128,428        |       | 670                       |       | (13,332    | )          | 115,766             |       | 100.7                      |       | 90.8                                 |       |
| Transportation                             |       | 188,569                |       | 190,352        |       | 3,314                     |       | (21,735    | )          | 171,931             |       | 100.9                      |       | 91.2                                 |       |
| Energy                                     |       | 195,064                |       | 197,455        |       | 1,412                     |       | (15,814    | )          | 183,053             |       | 101.2                      |       | 93.8                                 |       |
| Communications                             |       | 181,430                |       | 179,965        |       | 3,180                     |       | (10,994    | )          | 172,151             |       | 99.2                       |       | 94.9                                 |       |
| Technology                                 |       | 82,333                 |       | 83,007         |       | 2,103                     |       | (3,295     | )          | 81,815              |       | 100.8                      |       | 99.4                                 |       |
| Total corporate fixed income portfolio     |       | 3,175,434              |       | 3,046,719      |       | 50,441                    |       | (331,861   | )          | 2,765,299           |       | 95.9                       |       | 87.1                                 |       |
|                                       |       |                   |       |           |       |                      |       |       |       |                |       |                       |       |                                 |       |
| ABS                                        |       | 91,280                 |       | 84,108         |       | —                    |       | (30,270    | )          | 53,838              |       | 92.1                       |       | 59.0                                 |       |
| CMBS                                       |       | 752,781                |       | 715,891        |       | —                    |       | (260,956   | )          | 454,935             |       | 95.1                       |       | 60.4                                 |       |
| Municipal                                  |       | 702,727                |       | 471,186        |       | 4,698                     |       | (73,474    | )          | 402,410             |       | 67.1                       |       | 57.3                                 |       |
| MBS                                        |       | 502,371                |       | 503,674        |       | 14,709                    |       | (11,414    | )          | 506,969             |       | 100.3                      |       | 100.9                                |       |
| Foreign government                         |       | 416,553                |       | 226,113        |       | 86,652                    |       | —     |       | 312,765             |       | 54.3                       |       | 75.1                                 |       |
| Redeemable preferred stock                 |       | 8,500                  |       | 9,279          |       | —                    |       | (3,945     | )          | 5,334               |       | 109.2                      |       | 62.8                                 |       |
| U.S. government and agencies               |       | 645,427                |       | 421,113        |       | 108,695                   |       | —     |       | 529,808             |       | 65.2                       |       | 82.1                                 |       |
| Total fixed income securities              |       | $                      | 6,295,073  |           | $          | 5,478,083                 |       | $          | 265,195    |                | $          | (711,920                   | )          | $                                    | 5,031,358  |   | 87.0 |   | 79.9 |   |

 

----

| (1) |   | Included  in par value are zero-coupon securities that are generally purchased at a  deep discount to the par value that is received at maturity. These included  corporate, municipal, foreign government and U.S. government and agencies  zero-coupon securities with par value of $192.2 million, $384.0 million,  $404.6 million and $485.7 million, respectively. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The banking, financial services, utilities and capitalgoods sectors had the highest concentration of gross unrealized losses in ourcorporate fixed income securities portfolio at March 31, 2009.  The gross unrealized losses in these sectorswere generally the result of widening credit spreads since the time of initialpurchase.  As of March 31, 2009,$276.2 million or 83.2% of the gross unrealized losses in the corporate fixedincome portfolio and $367.8 million or 96.8% of the gross unrealized losses onthe remaining fixed income securities related to securities rated investmentgrade.

 

For fixed incomesecurities, 62.5% of the gross unrealized losses at March 31, 2009 werefrom $361.7 million of securities with a fair value below 70% of amortizedcost, or 7.2% of our fixed income portfolio.  Thepercentage of fair value to amortized cost for fixed income securities withgross unrealized losses at March 31, 2009 are shown in the followingtable.

 
| **($ in thousands)**                             | ** ** | **Par  value ****(1)** | ** ** | **Amortized  cost** | ** ** | **Unrealized  gain/(loss)** | ** ** | **Fair  value ****(3)** | ** ** | **Percent to  total fixed  income  securities** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|---------------------|------------|-----------------------------|------------|------------------------------|------------|-----------------------------------------------------------|------------|
| > 80% of amortized cost                                 |       | $                           | 2,221,124  |                | $          | 2,168,355                   |       | $                            | (184,095   | )                                                         | $          | 1,984,260 |   | 39.4 | % |
| 70% to 80% of amortized cost                               |       | 337,049                     |       | 337,428             |       | (83,069                     | )          | 254,359                      |       | 5.1                                                       |       |
| < 70% of amortized cost (2)                             |       | 1,012,678                   |       | 806,412             |       | (444,756                    | )          | 361,656                      |       | 7.2                                                       |       |
| Gross unrealized losses on fixed income securities         |       | 3,570,851                   |       | 3,312,195           |       | (711,920                    | )          | 2,600,275                    |       | 51.7                                                      |       |
| Gross unrealized gains on fixed income securities          |       | 2,724,222                   |       | 2,165,888           |       | 265,195                     |       | 2,431,083                    |       | 48.3                                                      |       |
| Net unrealized gains and losses on fixed income securities |       | $                           | 6,295,073  |                | $          | 5,478,083                   |       | $                            | (446,725   | )                                                         | $          | 5,031,358 |   | 100.0 | % |

 

----

| (1)    |   | Included  in par value are $384.0 million of zero-coupon securities as of  March 31, 2009 that are generally purchased at a deep discount to the  par value that is received at maturity. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                           |
| (2)    |   | Illiquid  portfolios represent $234.7 million of net unrealized losses and $124.9  million of fair value as of March 31, 2009.                                                            |
|   |   |                                                                                                                                                                                           |
| (3)    |   | Illiquid  portfolios represent $302.6 million of net unrealized losses and $573.3  million of fair value as of March 31, 2009.                                                            |

 

34

----

 

The following table presents gross unrealized lossesby type of fixed income security with a fair value below 70% of amortized costat March 31, 2009.

 
| **($ in thousands)** | ** ** | **Fair value** | ** ** | **Gross unrealized  losses** | ** ** |
|--------------------------------|------------|---------------------|------------|-----------------------------------|------------|
| Corporate                      |       | $                   | 176,036    |                              | $          | (166,778 | ) |
| ABS                            |       | 24,198              |       | (24,495                           | )          |
| CMBS                           |       | 100,745             |       | (210,222                          | )          |
| Municipal                      |       | 55,343              |       | (39,316                           | )          |
| Redeemable preferred stock     |       | 5,334               |       | (3,945                            | )          |
| Total fixed income securities  |       | $                   | 361,656    |                              | $          | (444,756 | ) |

 

We continue tobelieve that the unrealized losses on these securities are not predictive ofthe ultimate performance.  The unrealizedlosses should reverse over the remaining lives of the securities.  As of March 31, 2009, we have the intentand ability to hold these securities to recovery.  Our ability to hold to recovery issubstantially enhanced by our liquidity position, which cushions us from theneed to liquidate securities with significant unrealized losses to meet cashobligations.  During the first quarter of2009, our fixed income securities portfolio provided approximately $165.4million in principal and interest cash flows, of which substantially all havebeen received in accordance with the contractual terms.

 

We have a comprehensiveportfolio monitoring process to identify and evaluate, on a case-by-case basis,fixed income and equity securities whose carrying value may beother-than-temporarily impaired.  Theprocess includes a quarterly review of all securities using a screening processto identify situations where the fair value, compared to amortized cost forfixed income securities and cost for equity securities, is below establishedthresholds for certain time periods, or which are identified through othermonitoring criteria such as ratings, ratings downgrades or paymentdefaults.  The securities identified, inaddition to other securities for which we may have a concern, are evaluatedbased on facts and circumstances for inclusion on our watch-list.  All investments in an unrealized loss position at March 31,2009 were included in our portfolio monitoring process for determining whetherdeclines in value were other than temporary.

 

We also conduct a portfolio review to recognizeimpairment on securities in an unrealized loss position for which we do nothave the intent and ability to hold until recovery as a result of approvedprograms involving the disposition of investments for reasons such as negativedevelopments that would change the view of long term investors and their intentto continue to hold the investment, subsequent credit deterioration of anissuer or holding, subsequent further deterioration of capital markets (i.e.debt and equity) and of economic conditions, subsequent further deteriorationin the financial services and real estate industries, changes in duration,revisions to strategic asset allocations, liquidity needs, unanticipatedfederal income tax situations involving capital gains and capital losscarrybacks and carryforwards with specific expiration dates, investment riskmitigation actions, and other new facts and circumstances that would cause achange in our previous intent to hold a security to recovery or maturity.

 

35

----

 

Thefollowing table summarizes fixed income and equity securities in a grossunrealized loss position according to significance, aging and investment gradeclassification.

 
| ** **                                                                                                                                                              | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **($ in thousands except number of  issues)**                                                                                                  | ** ** | **Investment  grade**        | ** ** | **Below  investment  grade**    | ** ** | **Equity** | ** ** | **Total** | ** ** | **Investment  grade** | ** ** | **Below  investment  grade** | ** ** | **Total** | ** ** |
|                                                                                                                                                                    |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Category (I): Unrealized loss less than 20% of amortized cost (1)                                                                                                  |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Number of issues                                                                                                                                                        |       | 387                          |       | 49                              |       | 1 |   | 437 |   | 448 |   | 38 |   | 486 |   |
| Fair value                                                                                                                                                              |       | $                            | 1,881,363  |                            | $          | 102,897 |   | $ | 72 |   | $ | 1,984,332 |   | $ | 2,105,319 |   | $ | 70,192 |   | $ | 2,175,511 |   |
| Unrealized                                                                                                                                                              |       | $                            | (170,943   | )                               | $          | (13,152 | ) | $ | (8 | ) | $ | (184,103 | ) | $ | (187,983 | ) | $ | (8,707 | ) | $ | (196,690 | ) |
|                                                                                                                                                                    |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Category (II): Unrealized loss greater than or equal to 20% of  amortized cost for a period of less than 6 consecutive months                                           |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Number of issues                                                                                                                                                        |       | 133                          |       | 32                              |       | — |   | 165 |   | 150 |   | 30 |   | 180 |   |
| Fair value                                                                                                                                                              |       | $                            | 516,828    |                            | $          | 41,876 |   | $ | — |   | $ | 558,704 |   | $ | 557,986 |   | $ | 46,428 |   | $ | 604,414 |   |
| Unrealized                                                                                                                                                              |       | $                            | (336,283   | )                               | $          | (44,078 | ) | $ | — |   | $ | (380,361 | ) | $ | (431,954 | ) | $ | (26,145 | ) | $ | (458,099 | ) |
|                                                                                                                                                                    |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Category (III): Unrealized loss greater than or equal to 20% of  amortized cost for a period of 6 or more consecutive months, but less  than 12 consecutive months |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Number of issues                                                                                                                                                        |       | 17                           |       | 4                               |       | — |   | 21 |   | 13 |   | 2 |   | 15 |   |
| Fair value                                                                                                                                                              |       | $                            | 34,981     |                            | $          | 4,052 |   | $ | — |   | $ | 39,033 |   | $ | 23,013 |   | $ | 612 |   | $ | 23,625 |   |
| Unrealized                                                                                                                                                              |       | $                            | (98,306    | )                               | $          | (7,839 | ) | $ | — |   | $ | (106,145 | ) | $ | (41,789 | ) | $ | (757 | ) | $ | (42,546 | ) |
|                                                                                                                                                                    |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Category (IV): Unrealized loss greater than or equal to 20% of  amortized cost for 12 or  more consecutive months                                                  |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Number of issues                                                                                                                                                        |       | 11                           |       | 2                               |       | — |   | 13 |   | — |   | 1 |   | 1 |   |
| Fair value                                                                                                                                                              |       | $                            | 15,333     |                            | $          | 2,945 |   | $ | — |   | $ | 18,278 |   | $ | — |   | $ | 2,562 |   | $ | 2,562 |   |
| Unrealized                                                                                                                                                              |       | $                            | (38,451    | )                               | $          | (2,868 | ) | $ | — |   | $ | (41,319 | ) | $ | — |   | $ | (2,884 | ) | $ | (2,884 | ) |
|                                                                                                                                                                    |       |                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total number of issues                                                                                                                                                  |       | 548                          |       | 87                              |       | 1 |   | 636 |   | 611 |   | 71 |   | 682 |   |
| Total fair value (2)                                                                                                                                                    |       | $                            | 2,448,505  |                            | $          | 151,770 |   | $ | 72 |   | $ | 2,600,347 |   | $ | 2,686,318 |   | $ | 119,794 |   | $ | 2,806,112 |   |
| Total unrealized losses                                                                                                                                                 |       | $                            | (643,983   | )                               | $          | (67,937 | ) | $ | (8 | ) | $ | (711,928 | ) | $ | (661,726 | ) | $ | (38,493 | ) | $ | (700,219 | ) |

 

----

| (1)    |   | For  fixed income securities, cost represents amortized cost.                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                             |
| (2)    |   | At  March 31, 2009, 94.2% of the fixed income securities portfolio was rated  investment grade compared to 95.7% at December 31, 2008. |

 

The largestindividual unrealized loss was $2.9 million for category (I), $14.7 million forcategory (II), $14.5 million for category (III), and $8.7 million for category (IV) asof March 31, 2009.

 

Categories (I) and(II) have generally been adversely affected by overall economic conditionsincluding interest rate increases and the market’s evaluation of certainsectors.  The degree to which and/orlength of time that the securities have been in an unrealized loss positiondoes not suggest that these securities pose a high risk of beingother-than-temporarily impaired.

 

Categories (III) and(IV) have historically been affected by industry and issue specific, orissuer specific conditions.  All of thesecurities in these categories are monitored for other-than-temporaryimpairment.

 

At March 31,2009, Category (III) for fixed income was comprised of $23.0 million ofCMBS, $10.7 million of corporate bonds and $5.3 million of ABS RMBS, for atotal of $39.0 million with unrealized losses of $87.2 million, $10.4 millionand $8.5 million, respectively, for a total of $106.1 million of unrealizedlosses.

 

At March 31, 2009,Category (IV) for below investment grade fixed income securities wascomprised of $2.8 million of corporate private and $123 thousand of ABS RMBS,for a total of $2.9 million with unrealized losses of $2.6 million and $287thousand, respectively, for a total of $2.9 million of unrealized losses.

 

We continueto believe that the unrealized losses on these securities are not predictive ofthe ultimate performance.

 

36

----

 

Whenever ourinitial analysis indicates that a fixed income security’s unrealized loss of20% or more for at least 36 months or any equity security’s unrealized loss of20% or more for at least 12 months is temporary, additional evaluations andmanagement approvals are required to substantiate that a write-down is notappropriate.  As of March 31, 2009,no securities met these criteria.

 

We alsomonitor the quality of our fixed income portfolio by categorizing certaininvestments as “problem”, “restructured” or “potential problem.”  Problem fixed income securities are indefault with respect to principal or interest and/or are investments issued bycompanies that have gone into bankruptcy subsequent to our acquisition.  Restructured fixed income securities haverates and terms that are not consistent with market rates or terms prevailingat the time of the restructuring. Potential problem fixed income securities are current with respect tocontractual principal and/or interest, but because of other facts andcircumstances, we have concerns regarding the borrower’s ability to pay futureprincipal and interest according to the original terms, which causes us tobelieve these investments may be classified as problem or restructured in thefuture.

 

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

 
| ** **                            | ** ** | **March 31, 2009** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| **($ in thousands)**        | ** ** | **Par  value ****(1)**  | ** ** | **Amortized  cost ****(1)** | ** ** | **Amortized  cost as a  percent of  par value** | ** ** | **Fair  value** | ** ** | **Fair value as  a percent of  par value** | ** ** | **Percent of  total fixed  income  portfolios** | ** ** |
| Problem                               |       | $                            | 14,912     |   | $ | 5,698 |   | 38.2 | % | $ | 5,745 |   | 38.5 | % | 0.1 | % |
| Potential problem                     |       | 81,627                       |       | 49,932 |   | 61.2 |   | 35,494 |   | 43.5 |   | 0.7 |   |
| Total net carrying value              |       | $                            | 96,539     |   | $ | 55,630 |   | 57.6 |   | $ | 41,239 |   | 42.7 |   | 0.8 | % |
| Cumulative write-downs recognized (2) |       |                         |       | $ | 25,624 |   |   |   |   |   |   |   |   |   |

 
| ** **                            | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Par  value ****(1)**     | ** ** | **Amortized  cost ****(1)** | ** ** | **Amortized  cost as a  percent of  par value** | ** ** | **Fair  value** | ** ** | **Fair value as  a percent of  par value** | ** ** | **Percent of  total fixed  income  portfolios** | ** ** |
| Problem                               |       | $                               | 30,000     |   | $ | 18,824 |   | 62.7 | % | $ | 13,593 |   | 45.3 | % | 0.2 | % |
| Potential problem                     |       | 56,942                          |       | 22,118 |   | 38.8 |   | 22,080 |   | 38.8 |   | 0.4 |   |
| Total net carrying value              |       | $                               | 86,942     |   | $ | 40,942 |   | 47.1 |   | $ | 35,673 |   | 41.0 |   | 0.6 | % |
| Cumulative write-downs recognized (2) |       |                            |       | $ | 41,423 |   |   |   |   |   |   |   |   |   |

 

----

| (1)    |   | The difference between par value  and amortized cost of $40.9 million at March 31, 2009 and $46.0 million  at December 31, 2008 is primarily attributable to write-downs. Par value  has been reduced by principal payments. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                   |
| (2)    |   | Cumulative write-downs recognized only reflects  impairment write-downs related to investments within the problem, potential  problem and restructured categories.                                                                     |

 

At March 31,2009, amortized cost for the problem category was $5.7 million and wascomprised of corporates (primarily privately placed).  The decrease of $13.1 million over December 31,2008 is attributable to the disposal of corporates, partially offset by theaddition of fixed income holdings that are either in default with respect toprincipal or interest and/or are investments issued by companies that went intobankruptcy during the period.  There wereno investments in the problem category with a fair value less than 70% ofamortized cost.

 

At March 31,2009, amortized cost for the potential problem category was $49.9 million andwas comprised of $40.5 million of corporates (primarily privately placed), $4.0million of other CDO, $3.0 million of ABS RMBS, and $2.4 million of CMBS.  The increase over December 31, 2008 isprimarily attributable to the additions of corporates (primarily privatelyplaced) and CMBS.  The amortized cost ofpotential problem investments with a fair value less than 70% of amortized costtotaled $26.9 million, with unrealized losses of $14.3 million and fair valueof $12.6 million.

 

37

----

 

We evaluated each of these investments through our portfolio monitoringprocess at March 31, 2009 and recorded write-downs when appropriate.  We further concluded that any remainingunrealized losses on these investments were temporary in nature and that wehave the intent and ability to hold the securities until recovery.

 

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

 
| ** **                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**    | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Fixed income securities           |       | $                                                | 84,299     |   | $ | 91,556 |   |
| Equity securities                 |       | 3                                                |       | — |   |
| Mortgage loans                    |       | 9,977                                            |       | 10,519 |   |
| Short-term and other              |       | 1,684                                            |       | 2,613 |   |
| Investment income, before expense |       | 95,963                                           |       | 104,688 |   |
| Investment expense                |       | (2,285                                           | )          | (4,942 | ) |
| **Net investment income**         |       | $                                                | 93,678     |   | $ | 99,746 |   |

 

*Net investment income*decreased 6.1% or $6.1 million to $93.7 million in the first quarter of 2009compared to $99.7 million in the same period of 2008.  This decline is due tolower investment yields from decreased market interest rates, carrying agreater amount of short-term investments in connection with tacticallypositioning greater liquidity, and lower funds associated with securitieslending.

 

Total investment expensesdecreased $2.7 million in the first quarter of 2009 compared to the firstquarter of 2008.  The decrease wasprimarily due to lower expenses associated with a lower amount of collateralreceived in connection with securities lending transactions.  The average amount of collateral held inconnection with securities lending was $143.9 million in the first quarter of2009 compared to $312.9 million in the first quarter of 2008, as a result ofactions to reduce our securities lending balances.

 

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

 
| ** **                                   | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in thousands)**               | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Sales (1)                                    |       | $                                                | 98,291     |   | $ | 5,543 |   |
| Impairment write-downs (2)                   |       | (4,636                                           | )          | (633 | ) |
| Change in intent write-downs (1) (3)    |       | (2,791                                           | )          | (3,532 | ) |
| Valuation of derivative instruments          |       | 8,354                                            |       | (240 | ) |
| Settlements of derivative instruments        |       | —                                           |       | 583 |   |
| Realized capital gains and losses, pre-tax   |       | 99,218                                           |       | 1,721 |   |
| Income tax expense                           |       | (34,727                                          | )          | (602 | ) |
| Realized capital gains and losses, after-tax |       | $                                                | 64,491     |   | $ | 1,119 |   |

----

| (1)    |   | To conform to the current period presentation,  certain amounts in the prior periods have been reclassified.                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                               |
| (2)    |   | Impairment write-downs reflect issue specific  other-than-temporary declines in fair value, including instances where we  could not reasonably assert that the recovery period would be temporary. |
|   |   |                                                                                                                                                                                               |
| (3)    |   | Change in intent write-downs reflect instances where  we cannot assert a positive intent to hold until recovery.                                                                                   |

 

*Sales*generated$98.3 million of net realized gains for the three months ended March 31,2009 and were primarily due to $90.5 million of gains on sales of governmentalsecurities.

 

*Impairmentwrite-downs*totaled $4.6 million in 2009 and included write-downs on fixed incomesecurities and mortgage loans of $4.0 million and $637 thousand, respectively.

 

$2.2 million or56.2% of the fixed income security write-downs for the three months ended March 31,2009 related to impaired securities that were performing in line withanticipated or contractual cash flows but were written down primarily becauseof expected deterioration in the performance of the underlying collateral orour assessment

 

38

----

 

of the probability offuture default.  As of March 31,2009, there have been no defaults or defaults impacting classes lower in thecapital structure.  $1.7 million of thefixed income security write-downs for the three months ended March 31,2009 related to securities experiencing a significant departure fromanticipated cash flows; however, we believe they retain economic value.  $45 thousand related to securities for whichfuture cash flows are very uncertain.

 

Impairmentwrite-downs on these investments are presented in the following table.  Notwithstanding our intent and ability tohold these securities with impairment write-downs, we concluded that we couldnot reasonably assert that the recovery period would be temporary.

 

| **($ in thousands)**                                                       | ** ** | **Three months ended****March 31, 2009** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **Performing in accordance with anticipated or  contractual cash flows****(1)** | ** ** | ** **                                    | ** ** |
| CMBS                                                                            |       | $                                             | (2,248     | ) |
|                                                                            |       |                                          |       |
| **Departure from anticipated or contractual cash  flows**                       |       |                                          |       |
| Future cash flows expected –                                               |       |                                          |       |
| Corporate                                                                       |       |                                          |       |
| Entertainment                                                                   |       | (1,610                                        | )          |
| Telecommunications                                                              |       | (46                                           | )          |
| Subtotal (2)                                                                    |       | (1,656                                        | )          |
| Future cash flows very uncertain -                                              |       |                                          |       |
| Corporate-Gaming                                                                |       | (45                                           | )          |
| Investments disposed                                                            |       | (50                                           | )          |
| **Total fixed income securities****(3)**                                        |       | $                                             | (3,999     | ) |
| **Total commercial mortgage write-downs**                                       |       | $                                             | (637       | ) |

 

----

(1)          Written down primarilybecause of expected deterioration in the performance of the underlyingcollateral or our assessment of the probability of future default.  As of March 31, 2009, forthe securities with direct interest in the lender, there have been nodefaults.  For securities supported bycollateral, there have been no defaults or defaults that have occurred inclasses lower in the capital structure.

 

(2)          Experienced a significantdeparture from anticipated residual cash flows. While these fixed income security write-downs were valued at asignificant discount to cost, we believe these securities retain economicvalue.

 

(3)          Impairment write-downs on ourilliquid portfolios were $2.2 million for the three months ended March 31,2009.

 

*Change inintent write-downs*totaling $2.8 million for the three months ended March 31, 2009 included$2.1 million for fixed income securities, $14 thousand for equity securitiesand $686 thousand for mortgage loans compared to $3.5 million for fixed incomesecurities for the same period of the prior year.  The change in intent write-downs in the firstquarter of 2009 were a result of our risk mitigation and return optimizationprograms and ongoing comprehensive reviews of our portfolios resulting inwrite-downs of individually identified securities.

 

Investments forwhich we had changed our intent to hold to recovery totaled $18.3 million and$37.7 million as of March 31, 2009 and December 31, 2008,respectively.  The primary drivers of thechange were as follows:

 

·                  $1.9 million in additions of individuallyidentified fixed income securities as a result of ongoing reviews of ourportfolios.

·                  We sold approximately $1.7 million,recognizing net capital losses of $1.0 million. The sales included approximately $541 thousand from risk mitigation andreturn optimization programs which recognized $1.1 million in net realizedcapital losses.

·                  We re-designated approximately $15.9million of investments to intent to hold to recovery due to our inability todispose of them for values equal to or greater than our view of their intrinsicvalue.  Of these assets $2.7 million wererelated to risk mitigation and return optimization programs and $13.2 millionwere related to individual identification.

·                  Valuation adjustments and other charges,including change in intent write-downs, totaled $2.7 million.

 

39

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*Valuationand settlement of derivative instruments*net realized capital gains totaled $8.4 million forthe three months ended March 31, 2009. For the three months ended March 31, 2008, net realized capitallosses on the valuation and settlement of derivative instruments totaled $343thousand and included $240 thousand of losses on the valuation of derivativeinstruments and $583 thousand of gains on the settlement of derivativeinstruments.

 

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 investmentportfolio view.  Tactical durationmanagement is accomplished through both cash market transactions including newpurchases and derivative activities that generate realized gains and losses.  As a component of our approach to managing portfolioduration, realized gains and losses on certain derivative instruments are mostappropriately considered in conjunction with the unrealized gains and losses onthe fixed income portfolio.  Thisapproach mitigates the impacts of general interest rate changes to the overallfinancial condition of the Company.

 

**Fair Value of Assets andLiabilities**

 

We employ independentthird-party valuation service providers, broker quotes and internal pricingmethods to determine fair values, which provide a single quote or price foreach financial instrument.  We obtain orcalculate only one quote or price per instrument.

 

Fair value is the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date.  For the majority of the Company’s financialassets, all significant inputs are based on market observable data andsignificant management judgment does not affect the periodic determination offair value.  The determination of fairvalue using discounted cash flow models involves management judgment whensignificant model inputs are not based on market observable data.  However, where market observable data isavailable, it takes precedence, and as a result, no range of reasonably likelyinputs exists, from which the basis of a sensitivity analysis could beconstructed.

 

There are two situationswhere discounted cash flow models are used, each of which utilizes asignificant input that is not market observable.  In the first situation, internal models useinternally assigned credit ratings as inputs in the valuation of privatelyplaced securities.  Our internal ratingsare developed at a more finite level than NAIC ratings (e.g., an NAIC rating of1 includes securities rated triple, double and single A by a nationallyrecognized statistical rating organization (“NRSRO”)).  We believe these internal ratings provide fora more reliable estimate of fair value since we can more precisely match theseratings to other market observable valuation inputs, such as credit andliquidity spreads, for performing these valuations.  The second situation where a discounted cashflow model utilizes a significant input that is not market observable relatesto the determination of fair value for our ARS backed by student loans.  The assumption is the anticipated dateliquidity will return to this market (i.e., when auction failures willcease).  Determination of this assumptionallows for matching to market observable inputs when performing these valuations.

 

The followingtable displays the sensitivity of reasonably likely changes in theseassumptions as of March 31, 2009. The selection of these hypothetical scenarios should not be construed asan indication that it would be reasonably likely that all securities would besimilarly affected or as our prediction of future events, but only as anillustration of the estimated potential proportional effect of alternativeassumptions.

 

| **(**$ **in thousands)**                                                                        |   |   |    |
|------------------------------------------------------------------------------------------------------|--------|--------|---------|
| **Privately placed securities with internally  assigned credit ratings**                             |   | $      | 864,652 |   |
| **Percentage change in fair value resulting from:**                                                  |   |   |    |
| Increase in internal ratings one rating notch                                                        |   | 2.6    | %       |
| Decrease in internal ratings one rating notch                                                        |   | (5.0   | )%      |
|                                                                                                 |   |   |    |
| **ARS backed by student loans at fair value**                                                        |   | $      | 92,804  |   |
| **Percentage change in fair value resulting from:**                                                  |   |   |    |
| Decrease in assumption by five months for the anticipated date  liquidity will return to this market |   | 1.4    | %       |
| Increase in assumption by five months for the anticipated date  liquidity will return to this market |   | (1.4   | )%      |

 

40

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Thefollowing table provides additional details regarding Level 1, 2 and 3 assetsand liabilities by their classification in the Condensed Statement of FinancialPosition at March 31, 2009.  Forfurther discussion of Level 1, 2 and 3 assets and liabilities, see Note 3 ofthe Condensed Financial Statements.

 
| **($ in thousands)**                      | ** ** | **Quoted prices in  active markets  for identical  assets  (Level 1)** | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** | **Counterparty  and cash  collateral  netting****(1)** | ** ** | **Balance as of  March 31, 2009** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------|------------|
| **Assets**                                     |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Fixed income securities:                       |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| U.S. government and agencies                   |       | $                                                                      | 153,073    |                                                  | $          | 376,735                                          |       | $                                                      | —     |                                   |       |   | $ | 529,808 |   |
| Municipal                                      |       | —                                                                 |       | 309,606                                               |       | —                                           |       |                                                   |       | 309,606                                |       |
| Municipal - ARS                                |       | —                                                                 |       | —                                                |       | 92,804                                           |       |                                                   |       | 92,804                                 |       |
| Corporate - public                             |       | —                                                                 |       | 1,487,706                                             |       | 26,420                                           |       |                                                   |       | 1,514,126                              |       |
| Corporate privately placed securities          |       | —                                                                 |       | 222,864                                               |       | 1,028,309                                        |       |                                                   |       | 1,251,173                              |       |
| Foreign government                             |       | —                                                                 |       | 312,765                                               |       | —                                           |       |                                                   |       | 312,765                                |       |
| MBS                                            |       | —                                                                 |       | 473,608                                               |       | 10,487                                           |       |                                                   |       | 484,095                                |       |
| Alt-A                                          |       | —                                                                 |       | —                                                |       | 22,874                                           |       |                                                   |       | 22,874                                 |       |
| CMBS                                           |       | —                                                                 |       | 367,346                                               |       | 87,589                                           |       |                                                   |       | 454,935                                |       |
| ABS RMBS                                       |       | —                                                                 |       | —                                                |       | 35,104                                           |       |                                                   |       | 35,104                                 |       |
| Other CDO                                      |       | —                                                                 |       | —                                                |       | 18,734                                           |       |                                                   |       | 18,734                                 |       |
| Preferred stock                                |       | —                                                                 |       | 5,334                                                 |       | —                                           |       |                                                   |       | 5,334                                  |       |
| Total fixed income securities                  |       | 153,073                                                                |       | 3,555,964                                             |       | 1,322,321                                        |       |                                                   |       | 5,031,358                              |       |
|                                           |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Equity securities                              |       | —                                                                 |       | 72                                                    |       | —                                           |       |                                                   |       | 72                                     |       |
|                                           |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Short-term investments:                        |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Commercial paper and other                     |       | —                                                                 |       | 871,894                                               |       | —                                           |       |                                                   |       | 871,894                                |       |
| Money market funds                             |       | 28,945                                                                 |       | —                                                |       | —                                           |       |                                                   |       | 28,945                                 |       |
| Total short-term investments                   |       | 28,945                                                                 |       | 871,894                                               |       | —                                           |       |                                                   |       | 900,839                                |       |
|                                           |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Other investments:                             |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Free-standing derivatives                      |       | —                                                                 |       | 1,677                                                 |       | 670                                              |       | $                                                      | (6         | )                                      | 2,341      |   |
| Total other investments                        |       | —                                                                 |       | 1,677                                                 |       | 670                                              |       | (6                                                     | )          | 2,341                                  |       |
| Separate account assets                        |       | 479,091                                                                |       | —                                                |       | —                                           |       |                                                   |       | 479,091                                |       |
| Other assets                                   |       | —                                                                 |       | —                                                |       | (2,503                                           | )          |                                                   |       | (2,503                                 | )          |
| **Total recurring basis assets**               |       | 661,109                                                                |       | 4,429,607                                             |       | 1,320,488                                        |       | (6                                                     | )          | 6,411,198                              |       |
| Non-recurring basis (2)                        |       | —                                                                 |       | —                                                |       | 9,206                                            |       |                                                   |       | 9,206                                  |       |
| **Total assets at fair value**                 |       | $                                                                      | 661,109    |                                                  | $          | 4,429,607                                        |       | $                                                      | 1,329,694  |                                   | $          | (6 | ) | $ | 6,420,404 |   |
| % of total assets at fair value                |       | 10.3                                                                   | %          | 69.0                                                  | %          | 20.7                                             | %          | —                                                 | %          | 100.0                                  | %          |
|                                           |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| **Liabilities**                                |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Contractholder funds:                          |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Derivatives embedded in annuity contracts      |       | $                                                                      | —     |                                                  | $          | —                                           |       | $                                                      | (33,368    | )                                      |       |   | $ | (33,368 | ) |
| Other liabilities:                             |       |                                                                   |       |                                                  |       |                                             |       |                                                   |       |                                   |       |
| Free-standing derivatives                      |       | —                                                                 |       | (10,579                                               | )          | (5,637                                           | )          | $                                                      | 6          |                                   | (16,210    | ) |
| **Total liabilities at fair value**            | ** ** | **$**                                                                  | **—** | ** **                                            | **$**      | (10,579                                          | )          | **$**                                                  | (39,005    | )                                      | $          | 6 |   | $ | (49,578 | ) |
| % of total financial liabilities at fair value |       | —                                                                 | %          | 21.3                                                  | %          | 78.7                                             | %          | —                                                 | %          | 100.0                                  | %          |

 

----

(1)          In accordance with Financial Accounting StandardsBoard (“FASB”) Staff Position No. FIN 39-1,*Amendmentof FASB Interpretation No. 39*, we net all fair value amountsrecognized for derivative instruments and fair value amounts recognized for theright to reclaim cash collateral or the obligation to return cash collateralexecuted with the same counterparty under a master nettingagreement.  At March 31, 2009, the right to reclaim cash collateralwas offset by securities held, and there was no obligation to returncollateral.

 

(2)          Includes mortgage loans written-down to fair value inconnection with recognizing other-than-temporary impairments.

 

41

----

 

The following tableprovides additional details regarding Level 1, 2 and 3 assets and liabilitiesby their classification as of December 31, 2008.

 
| **($ in thousands)**                 | ** ** | **Quoted prices  in active  markets for  identical  assets  (Level 1)** | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** | **Balance as of  December 31, 2008** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------|------------|
| **Financial assets**                      |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Fixed income securities:                  |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| U.S. government and agencies              |       | $                                                                       | 154,119    |                                                  | $          | 763,612                                          |       | $                                         | —     |   | $ | 917,731 |   |
| Municipal                                 |       | —                                                                  |       | 287,597                                               |       | —                                           |       | 287,597                                   |       |
| Municipal - ARS                           |       | —                                                                  |       | —                                                |       | 97,784                                           |       | 97,784                                    |       |
| Corporate - public                        |       | —                                                                  |       | 1,533,704                                             |       | 27,927                                           |       | 1,561,631                                 |       |
| Corporate privately placed securities     |       | —                                                                  |       | 261,318                                               |       | 1,064,188                                        |       | 1,325,506                                 |       |
| Foreign government                        |       | —                                                                  |       | 371,542                                               |       | —                                           |       | 371,542                                   |       |
| MBS                                       |       | —                                                                  |       | 361,843                                               |       | 10,741                                           |       | 372,584                                   |       |
| Alt-A                                     |       | —                                                                  |       | —                                                |       | 23,593                                           |       | 23,593                                    |       |
| CMBS                                      |       | —                                                                  |       | 422,632                                               |       | 46,236                                           |       | 468,868                                   |       |
| ABS RMBS                                  |       | —                                                                  |       | —                                                |       | 43,868                                           |       | 43,868                                    |       |
| Other CDO                                 |       | —                                                                  |       | —                                                |       | 20,202                                           |       | 20,202                                    |       |
| Preferred stock                           |       | —                                                                  |       | 5,459                                                 |       | —                                           |       | 5,459                                     |       |
| Total fixed income securities             |       | 154,119                                                                 |       | 4,007,707                                             |       | 1,334,539                                        |       | 5,496,365                                 |       |
|                                      |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Short-term investments:                   |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Commercial paper and other                |       | —                                                                  |       | 376,487                                               |       | —                                           |       | 376,487                                   |       |
| Money market funds                        |       | 33,315                                                                  |       | —                                                |       | —                                           |       | 33,315                                    |       |
| Total short-term investments              |       | 33,315                                                                  |       | 376,487                                               |       | —                                           |       | 409,802                                   |       |
|                                      |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Other investments:                        |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Free-standing derivatives                 |       | —                                                                  |       | 1,764                                                 |       | 714                                              |       | 2,478                                     |       |
| Total other investments                   |       | —                                                                  |       | 1,764                                                 |       | 714                                              |       | 2,478                                     |       |
| Separate account assets                   |       | 533,760                                                                 |       | —                                                |       | —                                           |       | 533,760                                   |       |
| Other assets                              |       | —                                                                  |       | —                                                |       | (1,829                                           | )          | (1,829                                    | )          |
| **Total recurring basis assets**          |       | 721,194                                                                 |       | 4,385,958                                             |       | 1,333,424                                        |       | 6,440,576                                 |       |
| Non-recurring basis (1)                   |       | —                                                                  |       | —                                                |       | 10,589                                           |       | 10,589                                    |       |
| **Total assets at fair value**            |       | $                                                                       | 721,194    |                                                  | $          | 4,385,958                                        |       | $                                         | 1,344,013  |   | $ | 6,451,165 |   |
| % of total assets at fair value           |       | 11.2                                                                    | %          | 68.0                                                  | %          | 20.8                                             | %          | 100.0                                     | %          |
|                                      |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| **Liabilities**                           |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Contractholder funds:                     |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Derivatives embedded in annuity contracts |       | $                                                                       | —     |                                                  | $          | —                                           |       | $                                         | (30,051    | ) | $ | (30,051 | ) |
|                                      |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Other liabilities:                        |       |                                                                    |       |                                                  |       |                                             |       |                                      |       |
| Free-standing derivatives                 |       | —                                                                  |       | (20,849                                               | )          | (5,450                                           | )          | (26,299                                   | )          |
| **Total liabilities at fair value**       | ** ** | **$**                                                                   | **—** |                                                  | $          | (20,849                                          | )          | $                                         | (35,501    | ) | $ | (56,350 | ) |
| % of total liabilities at fair value      |       | —                                                                  | %          | 37.0                                                  | %          | 63.0                                             | %          | 100.0                                     | %          |

 

----

(1)          Includes mortgage loans written-down to fair value inconnection with recognizing other-than-temporary impairments.

 

42

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The following tableprovides a summary of changes in fair value during the three-month period endedMarch 31, 2009 of Level 3 assets and liabilities held at fair value on arecurring basis.

 
| ** **                                  | ** ** | ** **                                 | ** ** | **Total  realized and unrealized  gains (losses) included in:** | ** ** | ** **                                         | ** ** | ** **                                               | ** ** | ** **                                      | ** ** | **Total  gains (losses)  included in  Net income for  financial** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **($ in  thousands)**                  | ** ** | **Balance  as of  December 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  March 31,  2009**                          | ** ** | **instruments  still held at  March 31,  2009****(3)** | ** ** |
| **Assets**                                  |       |                                       |       |                                                            |       |                                               |       |                                                     |       |                                            |       |                                                              |       |   |   |
| Fixed income  securities:                   |       |                                       |       |                                                            |       |                                               |       |                                                     |       |                                            |       |                                                              |       |   |   |
| Municipal - ARS                             |       | $                                          | 97,784     |                                                            | $          | —                                             |       | $                                                        | (1,730     | )                                               | $          | (550                                                              | )          | $ | (2,700 | ) | $ | 92,804 |   | $ | — |   |
| Corporate -  public                         |       | 27,927                                     |       | —                                                          |       | (1,482                                             | )          | (25                                                      | )          | —                                          |       | 26,420                                                            |       | — |   |
| Corporate  privately  placed securities     |       | 1,064,188                                  |       | 771                                                             |       | (3,698                                             | )          | (32,952                                                  | )          | —                                          |       | 1,028,309                                                         |       | (189 | ) |
| MBS                                         |       | 10,741                                     |       | (10                                                             | )          | 77                                                 |       | (321                                                     | )          | —                                          |       | 10,487                                                            |       | (9 | ) |
| Alt-A                                       |       | 23,593                                     |       | 5                                                               |       | (724                                               | )          | —                                                   |       | —                                          |       | 22,874                                                            |       | 5 |   |
| CMBS                                        |       | 46,236                                     |       | (4,442                                                          | )          | (9,288                                             | )          | (637                                                     | )          | 55,720                                          |       | 87,589                                                            |       | (3,335 | ) |
| ABS RMBS                                    |       | 43,868                                     |       | 457                                                             |       | (5,873                                             | )          | (3,348                                                   | )          | —                                          |       | 35,104                                                            |       | 457 |   |
| Other CDO                                   |       | 20,202                                     |       | —                                                          |       | (1,405                                             | )          | (63                                                      | )          | —                                          |       | 18,734                                                            |       | — |   |
| Total fixed  income  securities             |       | 1,334,539                                  |       | (3,219                                                          | )          | (24,123                                            | )          | (37,896                                                  | )          | 53,020                                          |       | 1,322,321                                                         |       | (3,071 | ) |
|                                        |       |                                       |       |                                                            |       |                                               |       |                                                     |       |                                            |       |                                                              |       |   |   |
| Other  investments:                         |       |                                       |       |                                                            |       |                                               |       |                                                     |       |                                            |       |                                                              |       |   |   |
| Free-standing  derivatives, net             |       | (4,736                                     | )          | (405                                                            | )          | —                                             |       | 174                                                      |       | —                                          |       | (4,967                                                            | )(2)       | 48 |   |
| Other assets                                |       | (1,829                                     | )          | (674                                                            | )          | —                                             |       | —                                                   |       | —                                          |       | (2,503                                                            | )          | (674 | ) |
| **Total  recurring Level 3  assets**        |       | $                                          | 1,327,974  |                                                            | $          | (4,298                                             | )          | $                                                        | (24,123    | )                                               | $          | (37,722                                                           | )          | $ | 53,020 |   | $ | 1,314,851 |   | $ | (3,697 | ) |
|                                        |       |                                       |       |                                                            |       |                                               |       |                                                     |       |                                            |       |                                                              |       |   |   |
| **Liabilities**                             |       |                                       |       |                                                            |       |                                               |       |                                                     |       |                                            |       |                                                              |       |   |   |
| Contractholder  funds:                      |       |                                       |       |                                                            |       |                                               |       |                                                     |       |                                            |       |                                                              |       |   |   |
| Derivatives  embedded in  annuity contracts |       | $                                          | (30,051    | )                                                               | $          | (3,242                                             | )          | $                                                        | —     |                                            | $          | (75                                                               | )          | $ | — |   | $ | (33,368 | ) | $ | (3,242 | ) |
| **Total  recurring Level 3 liabilities**    |       | $                                          | (30,051    | )                                                               | $          | (3,242                                             | )          | $                                                        | —     |                                            | $          | (75                                                               | )          | $ | — |   | $ | (33,368 | ) | $ | (3,242 | ) |

 

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(1)          The effect to net incometotals $(7.5) million and is reported in the Condensed Statements of Operationsas follows: $(7.1) million in realizedcapital gains and losses; $2.8 million in net investment income; and $(3.2)million in contract benefits.

 

(2)          Comprises $670 thousandof assets and $(5.6) million of liabilities.

 

(3)          The amounts represent gainsand losses included in net income for the period of time that the asset orliability was determined to be in Level 3. These gains and losses total $(6.9) million and are reported in theCondensed Statements of Operations as follows: $(6.5) million in realized capital gains and losses; $2.8 millionin net investment income; and $(3.2) million in contract benefits.

 

43

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The following tableprovides a summary of changes in fair value during the three-month period endedMarch 31, 2008 of Level 3 assets and liabilities held at fair value on arecurring basis.

 
| ** **                                  | ** ** | ** **                                         | ** ** | **Total realized and unrealized  gains (losses) included in:** | ** ** | ** **                                              | ** ** | ** **                                                        | ** ** | ** **                                                          | ** ** | **Total  gains (losses)  included in  Net income for  financial** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **($ 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  March 31,  2008**                 | ** ** | **instruments  still held at  March 31,  2008 ****(3)** | ** ** |
| **Assets**                                  |       |                                               |       |                                                           |       |                                                    |       |                                                              |       |                                                                |       |                                                              |       |   |   |
| Fixed income  securities:                   |       |                                               |       |                                                           |       |                                                    |       |                                                              |       |                                                                |       |                                                              |       |   |   |
| Municipal - ARS                             |       | $                                                  | 33,200     |                                                           | $          | —                                                  |       | $                                                                 | —     |                                                                | $          | (2,450                                                            | )          | $ | 15,600 |   | $ | 46,350 |   | $ | — |   |
| Corporate -  public                         |       | 38,270                                             |       | 6,795                                                          |       | (9,242                                                  | )          | (25                                                               | )          | —                                                              |       | 35,798                                                            |       | — |   |
| Corporate  privately  placed securities     |       | 1,211,628                                          |       | 1,600                                                          |       | 1,059                                                   |       | 14,136                                                            |       | 10,533                                                              |       | 1,238,956                                                         |       | 1,111 |   |
| MBS                                         |       | 14,292                                             |       | (37                                                            | )          | (181                                                    | )          | (1,334                                                            | )          | —                                                              |       | 12,740                                                            |       | (37 | ) |
| Alt-A                                       |       | 28,836                                             |       | 5                                                              |       | (2,238                                                  | )          | —                                                            |       | —                                                              |       | 26,603                                                            |       | 4 |   |
| CMBS                                        |       | 36,794                                             |       | (2                                                             | )          | (4,976                                                  | )          | (8                                                                | )          | —                                                              |       | 31,808                                                            |       | (2 | ) |
| ABS RMBS                                    |       | 76,110                                             |       | (632                                                           | )          | (4,382                                                  | )          | (3,872                                                            | )          | —                                                              |       | 67,224                                                            |       | (632 | ) |
| Other CDO                                   |       | 30,768                                             |       | 269                                                            |       | (1,910                                                  | )          | (2,996                                                            | )          | —                                                              |       | 26,131                                                            |       | (56 | ) |
| Total fixed  income  securities             |       | 1,469,898                                          |       | 7,998                                                          |       | (21,870                                                 | )          | 3,451                                                             |       | 26,133                                                              |       | 1,485,610                                                         |       | 388 |   |
|                                        |       |                                               |       |                                                           |       |                                                    |       |                                                              |       |                                                                |       |                                                              |       |   |   |
| Other  investments:                         |       |                                               |       |                                                           |       |                                                    |       |                                                              |       |                                                                |       |                                                              |       |   |   |
| Free-standing  derivatives, net             |       | (980                                               | )          | (2,472                                                         | )          | —                                                  |       | 126                                                               |       | —                                                              |       | (3,326                                                            | )(2)       | 20 |   |
| Other assets                                |       | (1,733                                             | )          | 2,239                                                          |       | —                                                  |       | —                                                            |       | —                                                              |       | 506                                                               |       | 2,239 |   |
| **Total  recurring Level 3  assets**        |       | $                                                  | 1,467,185  |                                                           | $          | 7,765                                                   |       | $                                                                 | (21,870    | )                                                                   | $          | 3,577                                                             |       | $ | 26,133 |   | $ | 1,482,790 |   | $ | 2,647 |   |
|                                        |       |                                               |       |                                                           |       |                                                    |       |                                                              |       |                                                                |       |                                                              |       |   |   |
| **Liabilities**                             |       |                                               |       |                                                           |       |                                                    |       |                                                              |       |                                                                |       |                                                              |       |   |   |
| Contractholder  funds:                      |       |                                               |       |                                                           |       |                                                    |       |                                                              |       |                                                                |       |                                                              |       |   |   |
| Derivatives  embedded in  annuity contracts |       | $                                                  | 174        |                                                           | $          | (1,428                                                  | )          | $                                                                 | —     |                                                                | $          | 1                                                                 |       | $ | — |   | $ | (1,253 | ) | $ | (1,428 | ) |
| **Total  recurring Level 3  liabilities**   |       | $                                                  | 174        |                                                           | $          | (1,428                                                  | )          | $                                                                 | —     |                                                                | $          | 1                                                                 |       | $ | — |   | $ | (1,253 | ) | $ | (1,428 | ) |

 

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(1)          The effect to net incometotals $6.3 million and is reported in the Condensed Statements of Operationsas follows: $6.3 million in realizedcapital gains and losses; $1.4 million in net investment income; and $(1.4)million in contract benefits.

 

(2)          Comprises $897 thousandof assets and $(4.2) million of liabilities.

 

(3)          The amounts representgains and losses included in net income for the period of time that the assetor liability was determined to be in Level 3. These gains and losses total $1.2 million and are reported in theCondensed Statements of Operations as follows: $1.2 million in realized capital gains and losses; $1.4 millionin net investment income; and $(1.4) million in contract benefits.

 

Net transfers in and/or out of Level 3 arereported as having occurred at the beginning of the quarter the transferoccurred; therefore, for all transfers into Level 3, all realized and changesin unrealized gains and losses in the quarter of transfer are reflected in thetable above.

 

We have two differentsituations where we have classified investments as Level 3.  The first is where quotes continue to bereceived from independent third-party valuation service providers, as allsignificant inputs are market observable, but there has been a significantdecrease in the volume and level of activity for the asset when compared tonormal market activity such that the degree of market observability hasdeclined to a point where categorization as a Level 3 measurement is consideredappropriate.  Among the indicators weconsider in determining whether a significant decrease in the volume and levelof activity for a specific asset has occurred include the following:

 

·                   Level of new issuances in the primary market;

·                   Trading volume in the secondary market;

·                   Level of credit spreads over historical levels;

·                   Bid-ask spread, and

·                   Price consensus among market participants and sources.

 

When transferring these securities into Level3 due to a significant decrease in the volume and level of activity, we do notchange the source of fair value estimates or modify the estimates received fromindependent third-party valuation service providers.  Accordingly, for securities included withinthis group, there was no change in fair value for a change in model resultingin a gain or loss.

 

44

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The second situation where we have classifiedsecurities in Level 3 is where specific inputs to our fair value estimationmodels which are considered significant are not market observable.  This has occurred in three principal categories.  The first is for certain of our privatelyplaced securities for which we utilize internally developed ratings.  The second is broker quotes.  Privately placed securities valued usinginternally developed ratings and securities valued using broker quotes wereassigned to Level 3 when we initially assigned the hierarchy in the firstquarter of 2008.  The third is our ARSbacked by student loans for which a principal assumption, the anticipated dateliquidity will return to this market, is not market observable.

 

Transfers intoLevel 3 involving a change in valuation method during the year ended December 31,2008 included ARS in the second quarter of 2008 when our independentthird-party valuation service provider could no longer provide quotes due tothe failure of auctions caused by the absence of institutional investors andbroker-dealers participating in this market. We migrated from the use of market prices for completed transactions toa discounted cash flow model which resulted in the recognition of an unrealizedcapital loss of $3.5 million as of June 30, 2008.  In addition, transfers into Level 3 ofindividual instruments occur when a specific input is not market observablesuch as situations where a fair value quote is not provided by our independentthird-party valuation service provider and as a result the price is stale orhas been replaced with a broker quote resulting in the security beingclassified as Level 3.  A quote utilizingthe new pricing source is not available as of the prior period, and any gainsor losses related to the change in valuation source for individual securities,while included in the table above, are not ascertainable and are notsignificant.

 

Due to the reduced availability of actual marketprices or relevant observable inputs as a result of the decrease in liquiditythat has been experienced in the market, all ABS RMBS, Alt-A, ARS and certainCMBS are categorized as Level 3. Transfers into and out of Level 3 during the three months ended March 31,2009 are attributable to a change in the availability of market observableinformation for individual securities within the respective categories.

 

The followingtable presents fair value as a percent of amortized cost for Level 3investments at March 31, 2009.

 

| **($ in thousands)**               | ** ** | **Fair  value** | ** ** | **Fair value  as a percent of  par value** | ** ** | **Fair value  as a percent of  amortized cost** | ** ** |
|-----------------------------------------|------------|-----------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|
| Fixed income securities:                |       |            |       |                                       |       |                                            |       |
| Municipal - ARS                         |       | $               | 92,804     |                                       | 87.9       | %                                               | 87.9       | % |
| Corporate - public                      |       | 26,420          |       | 72.2                                       |       | 72.5                                            |       |
| Corporate privately placed securities   |       | 1,028,309       |       | 85.4                                       |       | 94.4                                            |       |
| MBS                                     |       | 10,487          |       | 99.9                                       |       | 97.3                                            |       |
| Alt-A                                   |       | 22,874          |       | 76.2                                       |       | 77.2                                            |       |
| CMBS                                    |       | 87,589          |       | 27.1                                       |       | 30.7                                            |       |
| ABS RMBS                                |       | 35,104          |       | 56.1                                       |       | 63.4                                            |       |
| Other CDO                               |       | 18,734          |       | 65.2                                       |       | 65.2                                            |       |
| Total fixed income securities           |       | 1,322,321       |       | 73.4                                       |       | 80.6                                            |       |
| Other investments:                      |       |            |       |                                       |       |                                            |       |
| Free-standing derivatives               |       | 670             |       | N/A                                        |       | 100.0                                           |       |
| Total other investments                 |       | 670             |       | N/A                                        |       | 100.0                                           |       |
| Sub-total recurring Level 3 investments |       | 1,322,991       |       | 73.4                                       |       | 80.6                                            |       |
| Non-recurring basis                     |       | 9,206           |       | N/A                                        |       | 100.0                                           |       |
| **Total Level 3 investments**           |       | $               | 1,332,197  |                                       | 74.0       |                                            | 80.7       |   |

 

Non-recurring investmentsinclude certain mortgage loans remeasured at fair value due to our change inintent write-downs and other-than-temporary impairments at March 31, 2009.

 

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**DEFERRED TAXES**

 

We evaluate whether a valuation allowance for ourdeferred tax assets is required each reporting period.  A valuation allowance is established if,based on the weight of available evidence, it is more likely than not that someportion or all of the deferred income tax asset will not be realized.  In determining whether a valuation allowanceis needed, all available evidence is considered.  This includes the potential for capital andordinary loss carryback, future reversals of existing taxable temporarydifferences, tax planning strategies and future taxable income exclusive ofreversing temporary differences.

 

With respect to our evaluation of the need for avaluation allowance related to the deferred tax asset on unrealized losses onfixed income securities, we rely on our assertion that we have the intent andability to hold the securities to recovery. As a result, the unrealized losses on these securities would not beexpected to materialize and no valuation allowance on the associated deferredtax asset is needed.

 

With respect to ourevaluation of the need for a valuation allowance related to other capitallosses that have not yet been recognized for tax purposes, we utilize prudentand feasible tax planning strategies. These include strategies that optimize the Corporation’s ability tocarry back capital losses as well as the ability to offset capital losses withcapital gains that could be recognized for tax purposes.  No valuation allowance was needed at March 31,2009.

 

### **CAPITAL RESOURCES AND LIQUIDITY**

###  

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

 

| **($ in thousands)**                                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Common stock, additional capital paid-in and retained income |       | $                        | 650,151    |                        | $          | 625,482 |   |
| Accumulated other comprehensive income                       |       | (58,955                  | )          | (108,914                    | )          |
| Total shareholder’s equity                              |       | $                        | 591,196    |                        | $          | 516,568 |   |

 

*Shareholder’s equity* increased in the first three months of2009 due to decreased unrealized net capital losses on fixed income securitiesand net income.

 

**Financial Ratings and Strength**Our ratings are influenced by many factors including our operating andfinancial performance, asset quality, liquidity, asset/liability management,overall portfolio mix, financial leverage (i.e., debt), exposure to risks, thecurrent level of operating leverage, ALIC’s ratings and AIC’s ratings.

 

On February 2,2009, A.M. Best affirmed our A+ financial strength rating.  On January 29, 2009, S&P downgradedour financial strength rating to AA- from AA. The outlook for the rating remained negative.  On January 29, 2009, Moody’s downgradedour financial strength rating to A1 from Aa3. The outlook for the rating was revised to stable from negative.

 

**LiquiditySources and Uses  **Asreflected in our Condensed Statements of Cash Flows, lower operating cash flowsin the first three months of 2009 compared to the first three months of 2008were primarily related to lower net investment income and higher contractbenefit payments, partially offset by higher premiums received.

 

Cash flows from investingactivities shifted to a source of cash in the first quarter of 2009 from a useof cash in the first quarter of 2008 due primarily to higher proceeds fromsales of fixed income securities and, to a lesser extent, increased collectionson fixed income securities, partially offset by increased purchases ofshort-term investments and higher purchases of fixed income securities.

 

Cash flows from financingactivities shifted to a use of cash in the first quarter of 2009 compared to asource of cash in the first quarter of 2008. The change was the result of lower contractholder fund depositspartially offset by decreased contractholder fund withdrawals.  For quantification of the changes incontractholder funds, see the Operations section of MD&A.

 

46

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###  

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

###  

*Evaluationof Disclosure Controls and Procedures. *Wemaintain disclosure controls and procedures as defined in Rule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934.  Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis report.  Based upon this evaluation,the principal executive officer and the principal financial officer concludedthat our disclosure controls and procedures are effective in providingreasonable assurance that material information required to be disclosed in ourreports filed with or submitted to the Securities and Exchange Commission underthe Securities Exchange Act is made known to management, including theprincipal executive officer and the principal financial officer, as appropriateto allow timely decisions regarding required disclosure.

 

### ***Changes in Internal Control over FinancialReporting. ***During the fiscal quarter ended March 31,2009, there have been no changes in our internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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###  

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

###  

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

###  

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

 

**Item 1A. Risk Factors**

 

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

 

These forward-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.  Thesestatements may address, among other things, our strategy for growth, productdevelopment, regulatory approvals, market position, expenses, financialresults, litigation and reserves.  Webelieve that these statements are based on reasonable estimates, assumptionsand 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 risk described below), in our public filings with the Securitiesand 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 2008.

 

**A largescale pandemic, the continued threat of terrorism, and ongoing military actionsmay adversely affect the level of claim losses we incur and the value of ourinvestment portfolio**

 

Aglobal pandemic and the continued threat of terrorism, both within the UnitedStates and abroad, and ongoing military and other actions and heightenedsecurity measures in response to these types of threats, may cause significantvolatility and losses from declines in the equity markets and from interestrate changes in the United States, Europe and elsewhere, and result in loss oflife, disruptions to commerce and reduced economic activity.  Some of the assets in our investmentportfolio may be adversely affected by declines in the equity markets andreduced economic activity caused by a global pandemic or the continued threatof terrorism.  We seek to mitigate thepotential impact of terrorism on our commercial mortgage portfolio by limitinggeographical concentrations in key metropolitan areas and by requiringterrorism insurance to the extent that it is commercially available.  Additionally, in the event that a globalpandemic or a terrorist act occurs, we could be adversely affected, dependingon the nature of the event.

 

### **Item 6.  Exhibits**

###  

(a)          Exhibits

 

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

 

48

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### **SIGNATURE**

###  

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

 
|               | Allstate  Life Insurance Company of New York |
|--------------------|----------------------------------------------|
|               | (Registrant)                                 |
|               |                                         |   |
| May 12,  2009 | By                                           | /s/ Samuel  H. Pilch |   |
|               | Samuel H.  Pilch                             |
|               | Controller                                   |
|               | (chief  accounting officer and duly          |
|               | authorized  officer of Registrant)           |

 

49

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| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
| 15                   |       |            | Acknowledgement of awareness from  Deloitte & Touche LLP dated May 11, 2009, concerning unaudited  interim financial information. |
|                 |       |            |   |
| 31 (i)               |       |            | Rule 15d-14(a) Certification  of Principal Executive Officer |
|                 |       |            |   |
| 31 (i)               |       |            | Rule 15d-14(a) Certification  of Principal Financial Officer |
|                 |       |            |   |
| 32                   |       |            | Section 1350  Certifications |

 

E-1

----