** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**The Registrant meets the conditions set forth inGeneral Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing thisForm with the reduced disclosure format.**
| **x**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **FOR THE  QUARTERLY PERIOD ENDED JUNE 30, 2006** |
| ** **                                        |
| **OR**                                            |
| ** **                                        |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file number:333-100029**

** **

**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

(Exact name of registrantas specified in its charter)

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

 

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

**Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.**

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

**Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler” in Rule 12b-2 of the Exchange.**

| **Large accelerated filer** |   | **Accelerated  filer** |   | **Non-accelerated  filer** |
|-----------------------------|--------|------------------------|--------|----------------------------|
| **o**                       |   | **o**                  |   | **x**                      |

 

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

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

**None ofthe common equity of the registrant is held by non-affiliates.  Therefore, the aggregate market value ofcommon equity held by non-affiliates of the registrant is zero.**

**As of August 8, 2006, the registrant had 100,000 commonshares, $25 par value, outstanding, all of which are held by Allstate Life InsuranceCompany.**

 

 

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**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

**INDEX TOQUARTERLY REPORT ON FORM 10-Q**

**June 30, 2006**
| **PART 1.**  | ** ** | **FINANCIAL INFORMATION**                                                                                              |   |   |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------|--------|--------|
|         |       |                                                                                                                   |   |   |
| Item 1.      |       | Financial Statements                                                                                                   |   |   |
|         |       |                                                                                                                   |   |   |
|         |       | Condensed Statements of Operations for the  Three-Month and Six-Month Periods Ended June 30, 2006 and 2005 (unaudited) |   | 3      |
|         |       |                                                                                                                   |   |   |
|         |       | Condensed Statements of Financial Position as of  June 30, 2006 (unaudited) and December 31, 2005                      |   | 4      |
|         |       |                                                                                                                   |   |   |
|         |       | Condensed Statements of Cash Flows for the Six-Month  Periods Ended June 30, 2006 and 2005 (unaudited)                 |   | 5      |
|         |       |                                                                                                                   |   |   |
|         |       | Notes to Condensed Financial Statements (unaudited)                                                                    |   | 6      |
|         |       |                                                                                                                   |   |   |
|         |       | Report of Independent Registered Public Accounting  Firm                                                               |   | 13     |
|         |       |                                                                                                                   |   |   |
| Item 2.      |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                            |   | 14     |
|         |       |                                                                                                                   |   |   |
| Item 4.      |       | Controls and Procedures                                                                                                |   | 26     |
|         |       |                                                                                                                   |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                  |   |   |
|         |       |                                                                                                                   |   |   |
| Item 1.      |       | Legal Proceedings                                                                                                      |   | 27     |
|         |       |                                                                                                                   |   |   |
| Item 1A.     |       | Risk Factors                                                                                                           |   | 27     |
|         |       |                                                                                                                   |   |   |
| Item 6.      |       | Exhibits                                                                                                               |   | 27     |
|         |       |                                                                                                                   |   |   |

 

 

2

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**PART 1. FINANCIALINFORMATION**

**ITEM 1.   FINANCIAL STATEMENTS**

**ALLSTATELIFE INSURANCE COMPANY OF NEW YORK**

**CONDENSEDSTATEMENTS OF OPERATIONS**
|                                                       | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2006**                                        | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(unaudited)**                                 | ** ** | **(unaudited)**                                     | ** ** |
| **Revenues**                                          |       |                                            |       |                                                |       |   |   |   |   |
| Premiums                                              |       | $                                               | 20,683     |                                                | $          | 16,174 |   | $ | 34,752 |   | $ | 36,167 |   |
| Contract charges                                      |       | 17,255                                          |       | 15,976                                              |       | 34,842 |   | 31,235 |   |
| Net investment income                                 |       | 93,827                                          |       | 88,503                                              |       | 186,720 |   | 174,995 |   |
| Realized capital gains  and losses                    |       | (4,216                                          | )          | (2,632                                              | )          | (19,352 | ) | (8,509 | ) |
|                                                  |       | 127,549                                         |       | 118,021                                             |       | 236,962 |   | 233,888 |   |
| **Costs and expenses**                                |       |                                            |       |                                                |       |   |   |   |   |
| Contract benefits                                     |       | 50,226                                          |       | 42,901                                              |       | 93,556 |   | 89,984 |   |
| Interest credited to  contractholder funds            |       | 41,174                                          |       | 39,438                                              |       | 83,048 |   | 75,664 |   |
| Amortization of  deferred policy acquisition costs    |       | 11,407                                          |       | 11,157                                              |       | 11,827 |   | 12,088 |   |
| Operating costs and  expenses                         |       | 10,475                                          |       | 13,078                                              |       | 24,361 |   | 22,270 |   |
|                                                  |       | 113,282                                         |       | 106,574                                             |       | 212,792 |   | 200,006 |   |
|                                                  |       |                                            |       |                                                |       |   |   |   |   |
| (Loss) gain on  disposition of operations             |       | (7,748                                          | )          | 1                                                   |       | (7,748 | ) | 1 |   |
| ** **                                            |       |                                            |       |                                                |       |   |   |   |   |
| **Income from operations before  income tax expense** |       | 6,519                                           |       | 11,448                                              |       | 16,422 |   | 33,883 |   |
|                                                  |       |                                            |       |                                                |       |   |   |   |   |
| Income tax expense                                    |       | 1,934                                           |       | 4,508                                               |       | 5,565 |   | 13,058 |   |
|                                                  |       |                                            |       |                                                |       |   |   |   |   |
| **Net income**                                        |       | $                                               | 4,585      |                                                | $          | 6,940 |   | $ | 10,857 |   | $ | 20,825 |   |

 

See notes tocondensed financial statements.

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**ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK**

**CONDENSEDSTATEMENTS OF FINANCIAL POSITION**
|                                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in thousands, except par value data)**          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                         |       |              |       |                  |       |
| Investments                                                                        |       |              |       |                  |       |
| Fixed income securities,  at fair value (amortized cost $5,418,214 and $5,535,396) |       | $                 | 5,586,428  |                  | $          | 5,989,263 |   |
| Mortgage loans                                                                     |       | 660,553           |       | 633,789               |       |
| Short-term                                                                         |       | 212,904           |       | 63,057                |       |
| Policy loans                                                                       |       | 36,908            |       | 36,698                |       |
| Other                                                                              |       | 5,194             |       | 3,740                 |       |
| Total  investments                                                                 |       | 6,501,987         |       | 6,726,547             |       |
|                                                                               |       |              |       |                  |       |
| Cash                                                                               |       | 9,929             |       | 3,818                 |       |
| Deferred policy  acquisition costs                                                 |       | 313,116           |       | 318,551               |       |
| Accrued investment  income                                                         |       | 58,880            |       | 62,452                |       |
| Reinsurance  recoverables                                                          |       | 483,970           |       | 12,729                |       |
| Other assets                                                                       |       | 46,345            |       | 35,760                |       |
| Separate Accounts                                                                  |       | 972,353           |       | 928,824               |       |
| **Total  assets**                                                                  |       | $                 | 8,386,580  |                  | $          | 8,088,681 |   |
|                                                                               |       |              |       |                  |       |
| **Liabilities**                                                                    |       |              |       |                  |       |
| Contractholder funds                                                               |       | $                 | 4,599,676  |                  | $          | 4,349,395 |   |
| Reserve for life-contingent  contract benefits                                     |       | 1,813,569         |       | 1,869,875             |       |
| Deferred income taxes                                                              |       | 12,144            |       | 73,399                |       |
| Current income taxes  payable                                                      |       | 19,827            |       | 5,412                 |       |
| Other liabilities and  accrued expenses                                            |       | 371,019           |       | 188,123               |       |
| Payable to affiliates,  net                                                        |       | 4,751             |       | 5,249                 |       |
| Reinsurance payable to  parent                                                     |       | 972               |       | 971                   |       |
| Separate Accounts                                                                  |       | 972,353           |       | 928,824               |       |
| **Total liabilities**                                                              |       | 7,794,311         |       | 7,421,248             |       |
|                                                                               |       |              |       |                  |       |
| **Commitments and Contingent Liabilities  (Note 4)**                               |       |              |       |                  |       |
| ** **                                                                         |       |              |       |                  |       |
| **Shareholder’s equity**                                                      |       |              |       |                  |       |
| Common stock, $25 par  value, 100 thousand shares authorized and outstanding       |       | 2,500             |       | 2,500                 |       |
| Additional capital paid-in                                                         |       | 140,000           |       | 140,000               |       |
| Retained income                                                                    |       | 408,973           |       | 395,965               |       |
| Accumulated other comprehensive  income:                                           |       |              |       |                  |       |
| Unrealized net  capital gains and losses                                           |       | 40,796            |       | 128,968               |       |
| **Total  accumulated other comprehensive income**                                  |       | 40,796            |       | 128,968               |       |
| **Total shareholder’s equity**                                                |       | 592,269           |       | 667,433               |       |
| **Total liabilities and  shareholder’s equity**                               |       | $                 | 8,386,580  |                  | $          | 8,088,681 |   |

 

See notes to condensed financial statements.

 

4

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**ALLSTATE LIFEINSURANCE COMPANY OF NEW YORK**

**CONDENSEDSTATEMENTS OF CASH FLOWS**
|                                                                                    | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                               | ** ** |
| **Cash flows from operating  activities**                                          | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                             | 10,857     |   | $ | 20,825 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                          |       |   |   |
| Amortization and  other non-cash items                                             |       | (35,257                                       | )          | (28,457 | ) |
| Realized capital  gains and losses                                                 |       | 19,352                                        |       | 8,509 |   |
| Loss (gain) on  disposition of operations                                          |       | 7,748                                         |       | (1 | ) |
| Interest  credited to contractholder funds                                         |       | 83,048                                        |       | 75,664 |   |
| Changes in:                                                                        |       |                                          |       |   |   |
| Life-contingent  contract benefits and contractholder funds                        |       | 16,384                                        |       | 17,867 |   |
| Deferred policy  acquisition costs                                                 |       | (23,319                                       | )          | (25,822 | ) |
| Income taxes  payable                                                              |       | (521                                          | )          | (7,434 | ) |
| Other operating  assets and liabilities                                            |       | 4,269                                         |       | (4,438 | ) |
| Net cash  provided by operating activities                                         |       | 82,561                                        |       | 56,713 |   |
| ** **                                                                         | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Cash flows from investing  activities**                                          |       |                                          |       |   |   |
| Proceeds from sales of  fixed income securities                                    |       | 536,815                                       |       | 303,080 |   |
| Investment collections                                                             |       |                                          |       |   |   |
| Fixed income  securities                                                           |       | 68,978                                        |       | 84,532 |   |
| Mortgage loans                                                                     |       | 36,963                                        |       | 38,902 |   |
| Investment purchases                                                               |       |                                          |       |   |   |
| Fixed income  securities                                                           |       | (431,533                                      | )          | (687,867 | ) |
| Mortgage loans                                                                     |       | (61,661                                       | )          | (93,054 | ) |
| Change in short-term  investments, net                                             |       | (29,970                                       | )          | 37,382 |   |
| Disposition of  operations                                                         |       | (394,915                                      | )          | — |   |
| Change in other  investments, net                                                  |       | 2,401                                         |       | (969 | ) |
| Net cash used in  investing activities                                             |       | (272,922                                      | )          | (317,994 | ) |
|                                                                               |       |                                          |       |   |   |
| **Cash flows from financing  activities**                                          | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Contractholder fund  deposits                                                      |       | 452,790                                       |       | 500,093 |   |
| Contractholder fund  withdrawals                                                   |       | (256,318                                      | )          | (244,595 | ) |
| Net cash  provided by financing activities                                         |       | 196,472                                       |       | 255,498 |   |
|                                                                               |       |                                          |       |   |   |
| **Net increase (decrease) in cash**                                                |       | 6,111                                         |       | (5,783 | ) |
| **Cash at beginning of period**                                                    |       | 3,818                                         |       | 8,624 |   |
| **Cash at end of period**                                                          |       | $                                             | 9,929      |   | $ | 2,841 |   |

 

See notes tocondensed financial statements.

 

5

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**ALLSTATELIFE INSURANCE COMPANY OF NEW YORKNOTES TO CONDENSED FINANCIAL STATEMENTS(unaudited)**

### **1.   General**

### **Basisof Presentation**

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

The condensedfinancial statements and notes as of June 30, 2006 and for the three-month andsix-month periods ended June 30, 2006 and 2005 are unaudited.  The condensed financial statements reflectall adjustments (consisting only of normal recurring accruals) which are, inthe opinion of management, necessary for the fair presentation of the financialposition, results of operations and cash flows for the interim periods.  These condensed financial statements andnotes should be read in conjunction with the financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005.  The results ofoperations for the interim periods should not be considered indicative ofresults to be expected for the full year.

To conform to the2006 presentation, certain amounts in the prior year condensed financialstatements and notes have been reclassified.

### **Adopted accounting standards**

*Financial Accounting Standards BoardStaff Position No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments”  (“FSP FAS 115-1”)*

The Companyadopted Financial Accounting Standards Board (“FASB”) FSP FAS 115-1 as ofJanuary 1, 2006. FSP 115-1 nullifies the guidance in paragraphs 10-18 ofEmerging Issues Task Force Issue No. 03-1 (“EITF Issue 03-1”), “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” andreferences existing other than temporary impairment guidance.  FSP FAS 115-1 clarifies that an investorshould recognize an impairment loss no later than when the impairment is deemedother-than-temporary, even if a decision to sell the security has not beenmade, and also provides guidance on the subsequent accounting for incomerecognition on an impaired debt security. The adoption of FSP FAS 115-1 was required on a prospective basis anddid not have a material effect on the results of operations or financialposition of the Company.

*Statement of Financial Accounting Standards No. 154, “AccountingChanges and Error Corrections” (“SFAS No. 154”)*

TheCompany adopted SFAS No. 154 on January 1, 2006.  SFAS No. 154 replaces Accounting PrinciplesBoard (“APB”) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements”.  SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements for changes in accountingprinciple, unless determination of either the period specific effects or thecumulative effect of the change is impracticable or otherwise promulgated.  The Company had no accounting changes orerror corrections affected by the new standard.

**Pending accounting standards**

***Statement of Position 05-1, “Accountingby Insurance Enterprises for Deferred Acquisition Costs in Connection withModifications or Exchanges of Insurance Contracts” (“SOP 05-1”)***

 In October 2005, the AICPA issued SOP05-1.   SOP 05-1 provides accountingguidance for deferred policy acquisition costs associated with internalreplacements of insurance and investment contracts other than those already describedin SFAS No. 97, “Accounting and Reporting by Insurance Enterprises forCertain Long-Duration Contracts and for Realized Gains and Losses from the Saleof Investments”.  SOP 05-1 defines aninternal replacement as a modification in product benefits, features, rights orcoverages that occurs by the exchange of a contract for a new contract, or byamendment, endorsement or rider to a contract, or by the election of a featureor coverage within a contract.  The provisionsof SOP 05-1 are effective for internal replacements occurring in fiscal yearsbeginning after December 15, 2006.  TheCompany is currently assessing the impact of the SOP on its results ofoperations and financial position.

6

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*SFASNo. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment ofFASB Statements No. 133 and 140” (“SFAS No. 155”)*

In February 2006, the FASB issued SFAS No. 155, which,among other things, permits the fair value remeasurement of any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation under SFAS No. 133; clarifies which interest-onlystrips and principal-only strips are not subject to the requirements of SFASNo.133; and establishes a requirement to evaluate interests in securitizedfinancial assets to identify interests that are freestanding derivatives orhybrid financial instruments that contain an embedded derivative requiringbifurcation.  At the date of initialadoption, the Company must decide whether or not to remeasure its hybrid financialinstruments in accordance with SFAS No. 155 or retain its current accountingunder SFAS No. 133.  All securitiesacquired on or after January 1, 2007 must be accounted for in accordance withthe new guidance.  The Company expects toadopt SFAS No.155 as of January 1, 2007, and has not yet determined if it willutilize the option to remeasure hybrid contracts owned at the date of adoptionand subject to SFAS No. 133.

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

InJuly 2006, the FASB issued FIN 48, which clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes”.  FIN 48 requires an entity to recognize thebenefit of tax positions only when it is more likely than not, based on theposition’s technical merits, that the position would be sustained uponexamination by the respective taxing authorities.  The tax benefit is measured as the largestbenefit that is more than fifty percent likely of being realized upon finalsettlement with the respective taxing authorities.   FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  FIN48 is not expected to have a material effect on the results of operations orfinancial position of the Company.

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

Liabilities for collateral received in conjunctionwith securities lending activities are reported in other liabilities andaccrued expenses in the Condensed Statements of Financial Position. Theaccompanying cash flows are included in cash flows from operating activities inthe Condensed Statements of Cash Flows along with the related changes ininvestments, which are as follows:
|                                                                        | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net change in  fixed income securities                                 |       | $                                             | (52,204    | ) | $ | (121,265 | ) |
| Net change in  short-term investments                                  |       | (114,354                                      | )          | 8,836 |   |
| Operating cash flow used                                               |       | $                                             | (166,558   | ) | $ | (112,429 | ) |
|                                                                   |       |                                          |       |   |   |
| Liabilities for  collateral and security repurchase, beginning of year |       | $                                             | (149,465   | ) | $ | (133,368 | ) |
| Liabilities for  collateral and security repurchase, end of period     |       | (316,023                                      | )          | (245,797 | ) |
| Operating cash  flow provided                                          |       | $                                             | 166,558    |   | $ | 112,429 |   |

 

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### **3.   Reinsurance**

The effects ofreinsurance on premiums and contract charges are as follows:
| (in thousands)                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Premiums  and contract charges**                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                             |       | $                                               | 44,576     |                                          | $          | 36,185 |   | $ | 82,433 |   | $ | 75,855 |   |
| Assumed—non-affiliate                         |       | 349                                             |       | 290                                           |       | 709 |   | 502 |   |
| Ceded                                              |       |                                            |       |                                          |       |   |   |   |   |
| Affiliate                                          |       | (1,270                                          | )          | (1,172                                        | )          | (2,628 | ) | (2,352 | ) |
| Non-affiliate                                      |       | (5,717                                          | )          | (3,153                                        | )          | (10,920 | ) | (6,603 | ) |
| Premiums and  contract charges, net of reinsurance |       | $                                               | 37,938     |                                          | $          | 32,150 |   | $ | 69,594 |   | $ | 67,402 |   |

 

The effects of reinsurance on contractbenefits are as follows:
| (in thousands)                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Contract  benefits**                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct                                 |       | $                                               | 54,603     |                                          | $          | 45,829 |   | $ | 101,728 |   | $ | 94,870 |   |
| Assumed—non-affiliate             |       | 400                                             |       | 96                                            |       | 497 |   | 156 |   |
| Ceded                                  |       |                                            |       |                                          |       |   |   |   |   |
| Affiliate                              |       | (291                                            | )          | (726                                          | )          | (181 | ) | (1,188 | ) |
| Non-affiliate                          |       | (4,486                                          | )          | (2,298                                        | )          | (8,488 | ) | (3,854 | ) |
| Contract  benefits, net of reinsurance |       | $                                               | 50,226     |                                          | $          | 42,901 |   | $ | 93,556 |   | $ | 89,984 |   |

 

In addition to amounts included in the table above are reinsurance premiums ceded to ALIC of $754 thousand and $722 thousand for the second quarter of 2006 and 2005, respectively and $1.49 million and $1.42 million for the first six months of 2006 and 2005, respectively, under the terms of the structured settlement annuity reinsurance agreement.

On June 1, 2006, the Company, its parent ALIC, and theCorporation, completed the disposal of its variable annuity business pursuantto a definitive agreement (the “Agreement”) with PrudentialFinancial, Inc. and its subsidiary, The Prudential Insurance Company ofAmerica (collectively “Prudential”), which was entered into on March 8,2006.  The disposal was effected througha combination of coinsurance and modified coinsurance reinsurance agreements(the “Reinsurance Agreements”).

As a result of the modified coinsurance reinsurance,the separate account assets remain on the Company’s Condensed Statements ofFinancial Position, but the related results of operations are fully reinsuredto Prudential beginning on June 1, 2006 and presented net of reinsurance on theCondensed Statements of Operations.  Incontrast, $445.2 million of assets supporting general account liabilities havebeen transferred to Prudential, net of consideration, under the coinsurancereinsurance provisions.  The general account liabilities, however, remainon the Condensed Statements of Financial Position with a correspondingreinsurance recoverable and the results of operations are presented net ofreinsurance. For purposes of presentation in the Condensed Statements of CashFlows, the Company treated the reinsurance of our variable annuity business asa disposition of operations, consistent with the substance of the transactionwhich was the disposition of a block of business accomplished throughreinsurance. Accordingly, the net consideration transferred to Prudential,$393.6 million (computed as $445.2 million of general account insurance liabilitiestransferred to Prudential on the closing date less consideration of $51.6 million),and the costs of executing the transaction, $1.3 million, pretax, wereclassified as a disposition of operations in the cash flows from investingactivities section of the Condensed Statements of Cash Flows. The ReinsuranceAgreements do not extinguish the Company’s primary liability under the variableannuity contracts.

8

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Under the Agreement, the Company, ALIC and theCorporation have indemnified Prudential for certain pre-closing contingentliabilities (including extra-contractual liabilities of the Company and ALICand liabilities specifically excluded from the transaction) that the Companyand ALIC have agreed to retain.  Inaddition, the Company, ALIC and the Corporation will each indemnify Prudentialfor certain post-closing liabilities that may arise from the acts of theCompany and ALIC, and their agents, including in connection with the Company’sand ALIC’s provision of transition services.

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

Theconsideration was $51.6 million.  Thedisposal resulted in a reinsurance loss of $6.5 million, pretax, which isincluded as a component of loss on disposition of operations on the CondensedStatements of Operations along with other transactional expenses incurred.  In total, the loss on disposition ofoperations for this transaction was $7.7 million, pretax, and $5.0 million,after-tax.  DAC and DSI were reduced by$79.7 million and $6.2 million, respectively, for balances related to thevariable annuity business subject to the Reinsurance Agreements.

In the first five months of 2006, prior to itsdisposition, the Company’s variable annuity business generated approximately $7.5million in contract charges.  Contractcharges, contract benefits, interest credited to contractholder funds andoperating costs and expenses ceded in June of 2006 pursuant to the ReinsuranceAgreements were $1.7 million, $0.2 million, $1.5 million and $0.8 million,respectively.  Further, general accountliabilities of $465.4 million as of June 30, 2006 were ceded to Prudentialpursuant to the coinsurance reinsurance provisions.

The separate account balance related to the modifiedcoinsurance reinsurance was $970.3 million as of June 30, 2006. Separateaccount balances totaling approximately $2.0 million at June 30, 2006 relatedto the variable life business retained by the Company.  In 2005, the Company’s variable annuity businessgenerated approximately $17 million in contract charges. The separateaccount balances were $927 million and general account balances were$501 million as of December 31, 2005.

### **4.    Guarantees and ContingentLiabilities**

**Guarantees**

In the normal course of business, the Company providesstandard indemnifications to counterparties in contracts in connection withnumerous transactions, including acquisitions and divestures.  The types of indemnifications typicallyprovided include indemnifications for breaches of representations andwarranties, taxes and certain other liabilities, such as third partylawsuits.  The indemnification clausesare often standard contractual terms and were entered into in the normal courseof business based on an assessment that the risk of loss would be remote.  The terms of the indemnifications vary induration and nature.  In many cases, themaximum obligation is not explicitly stated and the contingencies triggeringthe obligation to indemnify have not occurred and are not expected tooccur.  Consequently, the maximum amountof the obligation under such indemnifications is not determinable.  Historically, the Company has not made anymaterial payments pursuant to these obligations.

 The aggregate liability balance related to allguarantees was not material as of June 30, 2006.

**Regulation**

The Company is subject tochanging social, economic and regulatory conditions.  From time to time regulatory authorities or legislativebodies seek to impose additional regulations regarding agent and brokercompensation and otherwise expand overall regulation of insurance products andthe insurance industry.  The ultimatechanges and eventual effects of these initiatives on the Company’s business, ifany, are uncertain.

 

9

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**Legal andregulatory 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”sub-section below, please note the following:

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

·                  In the lawsuits, plaintiffs seek avariety of remedies including equitable relief in the form of injunctive andother remedies and monetary relief in the form of contractual andextra-contractual damages.  In somecases, the monetary damages sought include punitive damages.  Often specific information about the reliefsought, such as the amount of damages, is not available because plaintiffs havenot requested specific relief in their pleadings.  In our experience, when specific monetarydemands are made in pleadings, they bear little relation to the ultimate loss,if any, to the Company.

·                  In connection with regulatoryexaminations and proceedings, government authorities may seek various forms ofrelief, including penalties, restitution and changes in businesspractices.  The Company may not beadvised of the nature and extent of relief sought until the final stages of theexamination or proceeding.

·                  For the reasons specified above, itis often not possible to make meaningful estimates of the amount or range ofloss that could result from the matters described below in the “Proceedings”subsection.  The Company reviews thesematters on an on-going basis and follows the provisions of SFAS No. 5, “Accountingfor Contingencies” 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.

·                  Due to the complexity and scope ofthe matters disclosed in the “Proceedings” subsection below and the manyuncertainties that exist, the ultimate outcome of these matters cannot bereasonably predicted.  In the event of anunfavorable outcome in one or more of these matters, the ultimate liability maybe in excess of amounts currently reserved and may be material to the Company’soperating results or cash flows for a particular quarter or annual period.  However, based on information currently knownto it, management believes that the ultimate outcome of all matters describedbelow as they are resolved over time is not likely to have a material adverseeffect on the financial position of the Company.

10

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**Proceedings**

Legal proceedingsinvolving Allstate agencies and AIC may impact the Company, even when theCompany is not directly involved, because the Company sells its productsthrough a variety of distribution channels including Allstate agencies.  Consequently, information about the moresignificant of these proceedings is provided in the following paragraph.

AICis defending certain matters relating to its agency program reorganizationannounced in 1999. These matters include a lawsuit filed in December 2001by the U.S. Equal Employment Opportunity Commission (“EEOC”) allegingretaliation under federal civil rights laws, a class action filed in August2001 by former employee agents alleging retaliation and age discriminationunder the Age Discrimination in Employment Act, breach of contract and ERISAviolations, and a lawsuit filed in October 2004 by the EEOC alleging agediscrimination with respect to a policy limiting the rehire of agents affectedby the agency program reorganization. AIC is also defending a certified class action filed by former employeeagents who terminated their employment prior to the agency programreorganization.  These plaintiffs haveasserted breach of contract and ERISA claims and are seeking actual damagesincluding benefits under Allstate employee benefit plans and payments providedin connection with the reorganization, as well as punitive damages.  In late March 2004, in the first EEOC lawsuitand class action lawsuit, the trial court issued a memorandum and order that,among other things, certified classes of agents, including a mandatory class ofagents who had signed a release, for purposes of effecting the court’sdeclaratory judgment that the release is voidable at the option of the releasesigner.  The court also ordered that anagent who voids the release must return to AIC “any and all benefits receivedby the [agent] in exchange for signing the release.”  The court also “concluded that, on theundisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the courtto clarify and/or reconsider its memorandum and order.  The case otherwise remains pending.  A putative nationwide class action has alsobeen filed by former employee agents alleging various violations of ERISA, includinga worker classification issue.  Theseplaintiffs are challenging certain amendments to the Agents Pension Plan andare seeking to have exclusive agent independent contractors treated asemployees for benefit purposes.  Thismatter was dismissed with prejudice by the trial court, was the subject offurther proceedings on appeal, and was reversed and remanded to the trial courtin April 2005.  In these matters,plaintiffs seek compensatory and punitive damages, and equitable relief.  AIC has been vigorously defending theselawsuits and other matters related to its agency program reorganization. Theoutcome of these disputes is currently uncertain.

TheCompany is currently undergoing a periodic market conduct examination by stateinsurance regulators.  Regulators arefocusing, as they have with other insurers, on the Company’s compliance withthe state’s replacement sales and record-keeping processes with regard to lifeinsurance and annuities among other issues. They have alleged that the Company failed to meet the requirements ofcertain applicable regulations.  Inrelation to this examination, the Company accrued $17 million of additionalcontractholder benefits.  The finaloutcome of this examination is still pending; however, the Company has beguncertain customer remediation steps related to replacement sales.

**Other Matters**

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

11

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Various other legal and regulatory actions arecurrently pending that involve the Company and specific aspects of its conductof business.  Like other members of theinsurance industry, the Company is the target of a number of lawsuits andproceedings, some of which involve claims for substantial or indeterminateamounts.  These actions are based on avariety of issues and target a range of the Company’s practices.  The outcome of these disputes is currentlyunpredictable.

Oneor more of these matters could have an adverse effect on the Company’soperating results or cash flows for a particular quarter or annual period.  However, based on information currently knownto it, management believes that the ultimate outcome of all matters describedin this “Other Matters” subsection in excess of amounts currently reserved, asthey are resolved over time is not likely to have a material effect on theoperating results, cash flows or financial position of the Company.

**5.      Other Comprehensive (Loss) Income**

The components of othercomprehensive income on a pretax and after-tax basis are as follows:
|                                                                                       | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                            | ** ** | **Pretax**                                          | ** ** | **Tax** | ** ** | **After-tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-tax** | ** ** |
| * *                                                                              | * *   | * *                                            | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Unrealized  holding gains (losses) arising  during the period, net of related offsets |       | $                                                   | (53,792    | ) | 18,827 |   | (34,965 | ) | $ | 71,377 |   | $ | (24,982 | ) | $ | 46,395 |   |
| Less:  reclassification adjustment of   realized capital gains and losses             |       | (6,661                                              | )          | 2,331 |   | (4,330 | ) | 1,898 |   | (665 | ) | 1,233 |   |
|                                                                                  |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive (loss) income                                                    |       | $                                                   | (47,131    | ) | 16,496 |   | (30,635 | ) | $ | 69,479 |   | $ | (24,317 | ) | 45,162 |   |
|                                                                                  |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                            |       |                                                |       |   |   | 4,585 |   |   |   |   |   | 6,940 |   |
| Comprehensive (loss)  income                                                          |       |                                                |       |   |   | (26,050 | ) |   |   |   |   | $ | 52,102 |   |

 

 
|                                                                                       | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                            | ** ** | **Pretax**                                          | ** ** | **Tax** | ** ** | **After-tax** | ** ** | **Pretax** | ** ** | **Tax** | ** ** | **After-tax** | ** ** |
| * *                                                                              | * *   | * *                                            | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Unrealized  holding gains (losses) arising  during the period, net of related offsets |       | $                                                   | (160,348   | ) | 56,122 |   | (104,226 | ) | $ | 17,361 |   | $ | (6,076 | ) | $ | 11,285 |   |
| Less:  reclassification adjustment of   realized capital gains and losses             |       | (24,699                                             | )          | 8,645 |   | (16,054 | ) | (7,114 | ) | 2,490 |   | (4,624 | ) |
|                                                                                  |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Other  comprehensive (loss) income                                                    |       | $                                                   | (135,649   | ) | 47,477 |   | (88,172 | ) | $ | 24,475 |   | $ | (8,566 | ) | 15,909 |   |
|                                                                                  |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                            |       |                                                |       |   |   | 10,857 |   |   |   |   |   | 20,825 |   |
| Comprehensive (loss)  income                                                          |       |                                                |       |   |   | (77,315 | ) |   |   |   |   | $ | 36,734 |   |

 

12

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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

We have reviewed the accompanying condensed statement of financialposition of Allstate Life Insurance Company of New York (the “Company”, anaffiliate of The Allstate Corporation) as of June 30, 2006, and the relatedcondensed statements of operations for the three-month and six-month periodsended June 30, 2006 and 2005, and the condensed statements of cash flows forthe six-month periods ended June 30, 2006 and 2005.  These interim financial statements are theresponsibility of the Company’s management.

We conducted our reviews in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than anaudit conducted in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the objective of which is theexpression of an opinion regarding the financial statements taken as awhole.  Accordingly, we do not expresssuch an opinion.

Based on our reviews, we are not aware of any materialmodifications that should be made to such condensed interim financialstatements for them to be in conformity with accounting principles generallyaccepted in the United States of America.

We have previously audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the statement of financialposition of Allstate Life Insurance Company of New York as of December 31,2005, and the related statements of operations and comprehensive income,shareholder’s equity, and cash flows for the year then ended, not presentedherein.  In our report dated March 10,2006, which report includes an explanatory paragraph relating to a change inthe Company’s method of accounting for certain nontraditional long-durationcontracts and for separate accounts in 2004, we expressed an unqualifiedopinion on those financial statements. In our opinion, the information set forth in the accompanying condensedstatement of financial position as of December 31, 2005 is fairly stated, inall material respects, in relation to the statement of financial position fromwhich it has been derived.

/s/Deloitte & Touche LLP

Chicago, IllinoisAugust 4, 2006

13

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**Item 2.****   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND2005**

### **OVERVIEW**

The followingdiscussion highlights significant factors influencing the financial positionand results of operations of Allstate Life Insurance Company of New York(referred to in this document as “we”, “our”, “us” or the “Company”).  It should be read in conjunction with thecondensed financial statements and notes thereto found under Part I. Item 1.contained herein, and with the discussion, analysis, financial statements andnotes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of theAllstate Life Insurance Company of New York Annual Report on Form 10-K for2005.  We operate as a single segmententity, based on the manner in which we use financial information to evaluateperformance and determine the allocation of resources.

### **OPERATIONS**

**Premiums **represent revenues generated from traditional life, immediateannuities with life contingencies, accident and health and other insuranceproducts that have significant mortality or morbidity risk.

**Contractcharges******are revenuesgenerated from interest-sensitive life, variable annuities and fixed annuitiesfor which deposits are classified as contractholder funds or separate accountsliabilities.  Contract charges areassessed against the contractholder account values for maintenance,administration, cost of insurance and surrender prior to the contractuallyspecified dates.  As a result, changes incontractholder funds are considered in the evaluation of growth and asindicators of future levels of revenues. Subsequent to the close of ourreinsurance transaction with Prudential on June 1, 2006, variable annuitycontract charges on the business subject to the transaction are fully reinsuredto Prudential and presented net of reinsurance on the Condensed Statements ofOperations (see Note 3 to the Condensed Financial Statements).

The followingtable summarizes premiums and contract charges by product.
|                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                      | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| **Premiums**                                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Traditional life                             |       | $                                               | 6,216      |                                          | $          | 6,245 |   | $ | 10,825 |   | $ | 12,105 |   |
| Immediate  annuities with life contingencies |       | 13,228                                          |       | 8,823                                         |       | 21,492 |   | 22,042 |   |
| Accident and  health and other               |       | 1,239                                           |       | 1,106                                         |       | 2,435 |   | 2,020 |   |
| **Total  premiums**                          |       | 20,683                                          |       | 16,174                                        |       | 34,752 |   | 36,167 |   |
| ** **                                   | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract  charges**                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-sensitive  life                     |       | 11,370                                          |       | 10,524                                        |       | 22,600 |   | 20,469 |   |
| Fixed annuities                              |       | 2,210                                           |       | 1,634                                         |       | 4,139 |   | 3,427 |   |
| Variable  annuities                          |       | 3,675                                           |       | 3,818                                         |       | 8,103 |   | 7,339 |   |
| **Total  contract charges**                  |       | 17,255                                          |       | 15,976                                        |       | 34,842 |   | 31,235 |   |
| **Premiums and contract charges**            |       | $                                               | 37,938     |                                          | $          | 32,150 |   | $ | 69,594 |   | $ | 67,402 |   |

 

14

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The followingtable summarizes premiums and contract charges by distribution channel.
|                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**           | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                              |       |                                            |       |                                          |       |   |   |   |   |
| **Premiums**                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate  agencies                |       | $                                               | 6,061      |                                          | $          | 6,171 |   | $ | 10,586 |   | $ | 11,909 |   |
| Financial  institutions           |       | —                                          |       | —                                        |       | — |   | 36 |   |
| Specialized  brokers              |       | 13,229                                          |       | 8,823                                         |       | 21,493 |   | 22,005 |   |
| Independent  agents               |       | 1,393                                           |       | 1,180                                         |       | 2,673 |   | 2,217 |   |
| **Total  premiums**               |       | 20,683                                          |       | 16,174                                        |       | 34,752 |   | 36,167 |   |
| ** **                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Contract  charges**             | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allstate  agencies                |       | 10,793                                          |       | 10,218                                        |       | 21,598 |   | 19,924 |   |
| Financial  institutions           |       | 5,893                                           |       | 5,153                                         |       | 12,069 |   | 9,696 |   |
| Specialized  brokers              |       | 384                                             |       | 487                                           |       | 836 |   | 1,398 |   |
| Independent  agents               |       | 185                                             |       | 118                                           |       | 339 |   | 217 |   |
| **Total  contract charges**       |       | 17,255                                          |       | 15,976                                        |       | 34,842 |   | 31,235 |   |
| **Premiums and contract charges** |       | $                                               | 37,938     |                                          | $          | 32,150 |   | $ | 69,594 |   | $ | 67,402 |   |

 

Total premiums increased 27.9% to $20.7 million in the second quarterof 2006 and declined 3.9% to $34.8 million in the first six months of 2006compared to the same periods of 2005. The increase in the second quarter of 2006 was primarily attributable toincreased premiums on immediate annuities with life contingencies.  The decline in the first six months of 2006was due to lower premiums on traditional life products and, to a lesser extent,immediate annuities with life contingencies, partially offset by higheraccident and health and other premiums.

Contract charges increased 8.0% to $17.3 million inthe second quarter of 2006 and 11.5% to $34.8 million in first six months of2006 compared to the same periods of 2005. Excluding contract charges on variable annuities, which are reinsured toPrudential effective June 1, 2006, contract charges increased 11.7% and 11.9%in the second quarter and first six months of 2006, respectively, compared tothe same periods of 2005.  Theseincreases were due to higher contract charges on interest-sensitive life productsand fixed annuities.  Higher contractcharges on interest-sensitive life products were mostly attributable to growthof business in force and increased contract charges on fixed annuities wereprimarily the result of higher surrender charges.

 

15

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*Contractholderfunds* represent interest-bearing liabilities arising from thesale of fixed annuities, interest-sensitive life 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 showsthe changes in contractholder funds.
|                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2006**                                        | ** ** | **2005** (1)                             | ** ** | **2006** | ** ** | **2005 **(1) | ** ** |
| **Contractholder funds, beginning  balance**                    |       | $                                               | 4,426,993  |                                          | $          | 4,033,796 |   | $ | 4,349,395 |   | $ | 3,802,846 |   |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Deposits:**                                                   | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed annuities                                                 |       | 233,582                                         |       | 187,430                                       |       | 380,409 |   | 431,374 |   |
| Interest-sensitive life                                         |       | 23,555                                          |       | 26,639                                        |       | 47,839 |   | 48,826 |   |
| Variable annuity and  life deposits allocated to fixed accounts |       | 6,152                                           |       | 14,870                                        |       | 15,493 |   | 33,981 |   |
| Total deposits                                                  |       | 263,289                                         |       | 228,939                                       |       | 443,741 |   | 514,181 |   |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Interest credited**                                           |       | 44,197                                          |       | 42,956                                        |       | 88,528 |   | 82,620 |   |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Benefits, withdrawals and other  adjustments**                | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefits                                                        |       | (35,952                                         | )          | (80,273                                       | )          | (71,643 | ) | (106,233 | ) |
| Surrenders and partial  withdrawals                             |       | (77,108                                         | )          | (70,600                                       | )          | (166,546 | ) | (119,553 | ) |
| Contract charges                                                |       | (11,023                                         | )          | (10,335                                       | )          | (21,807 | ) | (20,447 | ) |
| Net transfers to  separate accounts                             |       | (7,338                                          | )          | (9,524                                        | )          | (18,129 | ) | (18,739 | ) |
| Other adjustments                                               |       | (3,382                                          | )          | 279                                           |       | (3,863 | ) | 563 |   |
| Total benefits,  withdrawals and other adjustments              |       | (134,803                                        | )          | (170,453                                      | )          | (281,988 | ) | (264,409 | ) |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Contractholder funds, ending balance**                        |       | $                                               | 4,599,676  |                                          | $          | 4,135,238 |   | $ | 4,599,676 |   | $ | 4,135,238 |   |

 

(1)       To conform to the currentpresentation, certain prior period balances have been restated.

----

Contractholder fundsincreased 3.9% and 2.5% in the second quarter of 2006 and 2005, respectively,and increased 5.8% and 8.7% in the first six months of 2006 and 2005,respectively.  Average contractholderfunds increased 10.5% and 12.7% in the second quarter and first six months of2006, respectively, compared to the same periods in 2005.

Contractholder depositsincreased 15.0% in the second quarter and decreased 13.7% in the first sixmonths of 2006, compared to the same periods of 2005.  The increase in the second quarter was theresult of higher deposits on fixed annuities due to a significant increase indeposits on Allstate® Treasury-LinkedAnnuity contracts, which providecontractholders a crediting rate that is indexed to the 5-year treasury rateresulting in upward adjusting crediting rates in a rising interest rateenvironment.  The increase in fixedannuity deposits in the second quarter was partially offset by lower variableannuity and life deposits allocated to the fixed accounts due to the disposalof our variable annuity business during the quarter.  The decline in the first six months of 2006was primarily attributable to lower deposits on fixed annuities.  Fixed annuity deposits declined primarilyfrom the impact of reduced consumer demand for traditional fixed annuitiesrelative to certificates of deposit and other short-term investments in thefirst quarter of 2006 due to the interest rate environment and our continuedfocus on fixed annuity returns.

16

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Surrendersand partial withdrawals on deferred fixed annuities and interest-sensitive lifeproducts increased 9.2% in the second quarter and 39.3% in the first six monthsof 2006, respectively, compared to the same periods of 2005.  The annualized withdrawal rate on these productswas 7.9% for the second quarter and 8.7% for the first six months of 2006 basedon the beginning of period contractholder funds balance.  This compares to an annualized withdrawalrate of 8.1% for the second quarter and 7.3% for the first six months of2005.  Surrenders and withdrawals mayvary with changes in market interest rates and the aging of our in-forcecontracts.

**Netinvestment income** increased 6.0% in the second quarter and6.7% in the first six months of 2006 compared to the same periods in 2005primarily due to higher average portfolio balances and, to a lesser extent,higher yields on fixed income securities. Higher average portfolio balancesresulted from the investment of cash flows from operating and financingactivities related primarily to deposits from fixed annuities, partially offsetby payments related to the disposal of our variable annuity business.

**Net income** analysisis presented in the following table.
|                                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                                                | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Premiums                                                                                               |       | $                                               | 20,683     |                                          | $          | 16,174 |   | $ | 34,752 |   | $ | 36,167 |   |
| Contract charges(1)                                                                                    |       | 17,259                                          |       | 15,976                                        |       | 34,847 |   | 31,235 |   |
| Net investment income                                                                                  |       | 93,827                                          |       | 88,503                                        |       | 186,720 |   | 174,995 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments (2)                             |       | 560                                             |       | 270                                           |       | 984 |   | 484 |   |
| Contract benefits                                                                                      |       | (50,226                                         | )          | (42,901                                       | )          | (93,556 | ) | (89,984 | ) |
| Interest credited to  contractholder funds(3)                                                          |       | (40,237                                         | )          | (38,733                                       | )          | (80,715 | ) | (74,727 | ) |
| Gross margin                                                                                           |       | 41,886                                          |       | 39,289                                        |       | 83,032 |   | 78,170 |   |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Amortization of DAC and  DSI (4)                                                                       |       | (14,098                                         | )          | (10,390                                       | )          | (27,508 | ) | (13,893 | ) |
| Operating costs and  expenses                                                                          |       | (10,475                                         | )          | (13,078                                       | )          | (24,361 | ) | (22,270 | ) |
| Income tax expense                                                                                     |       | (5,766                                          | )          | (6,218                                        | )          | (10,922 | ) | (16,137 | ) |
| Realized capital gains  and losses, after-tax                                                          |       | (2,716                                          | )          | (1,550                                        | )          | (12,033 | ) | (5,285 | ) |
| DAC and DSI  amortization expense on realized capital gains and losses, after-tax (4)                  |       | 1,161                                           |       | (950                                          | )          | 8,297 |   | 539 |   |
| Reclassification of  periodic settlements and accruals on non-hedge derivative instruments,  after-tax |       | (351                                            | )          | (164                                          | )          | (612 | ) | (300 | ) |
| (Loss) gain on  disposition of operations, after-tax                                                   |       | (5,036                                          | )          | 1                                             |       | (5,036 | ) | 1 |   |
| **Net income**                                                                                         |       | $                                               | 4,585      |                                          | $          | 6,940 |   | $ | 10,857 |   | $ | 20,825 |   |

(1)                Loads charged tocontractholders at the inception of interest-sensitive life contracts aredeferred and amortized to income in a manner consistent with deferred policyacquisition costs (“DAC”). Amortization of deferred loads on interest-sensitivelife products related to realized capital gains and losses is excluded fromcontract charges for purposes of calculating gross margin.  Amortization of deferred loads related torealized capital gains and losses totaled $4 thousand in the second quarter of2005 and $5 thousand in the first six months of 2006.  There was no amortization of deferred loadsrelated to realized capital gains and losses in the second quarter and thefirst six months of 2005.

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

(3)                Forpurposes of calculating gross margin, amortization of deferred salesinducements (“DSI”) is excluded from interest credited to contractholder fundsand aggregated with amortization of DAC due to the similarity in the substanceof the two items.  Amortization of DSItotaled $(937) thousand and $(705) thousand in the three months ended June 30,2006 and 2005, respectively, and $(2,333) thousand and $(937) thousand in thefirst six months of 2006 and 2005, respectively.

(4)                Amortization ofDAC and DSI relating to realized capital gains and losses is analyzedseparately because realized capital gains and losses may vary significantlybetween periods and obscure trends in our business.  Amortization of DAC and DSI relating torealized capital gains and losses was $1,754 thousand and $(1,472) thousand inthe second quarter of 2006 and 2005, respectively, and was $13,348 thousand and$868 thousand in the first six months of 2006 and 2005, respectively.

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*Gross margin*, a non-GAAP measure, represents premiums, contractcharges, net investment income and periodic settlements and accruals onnon-hedge derivative instruments, less contract benefits and interest creditedto contractholder funds excluding amortization of DSI.  We reclassify periodic settlements andaccruals on non-hedge derivative instruments into gross margin to report themin a manner consistent with the economically hedged investments, replicatedassets or product attributes (e.g. net investment income or interest creditedto contractholder funds) and by doing so, appropriately reflect trends inproduct performance.  We use gross marginas a component of our evaluation of the profitability of our life insurance andfinancial product portfolio. Additionally, for many of our products, including fixed annuities,variable life and annuities, and interest-sensitive life insurance, theamortization of DAC and DSI is determined based on actual and expected grossmargin.  Gross margin is comprised ofthree components that are utilized to further analyze the business: investmentmargin, benefit margin, and contract charges and fees.  We believe gross margin and its componentsare useful to investors because they allow for the evaluation of incomecomponents separately and in the aggregate when reviewing performance.  Gross margin, investment margin and benefitmargin should not be considered as a substitute for net income and do notreflect the overall profitability of the business.  Net income is the GAAP measure that is mostdirectly comparable to these margins.  Grossmargin is reconciled to GAAP net income in the table above.

 

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The components ofgross margin are reconciled to the corresponding financial statement line itemsin the following table. 
|                                                                            | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **Investment  Margin**                              | ** ** | **Benefit  Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in thousands)**                                                    | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Premiums                                                                   |       | $                                                   | —     |   | $ | — |   | $ | 20,683 |   | $ | 16,174 |   | $ | — |   | $ | — |   | $ | 20,683 |   | $ | 16,174 |   |
| Contract charges (1)                                                       |       | —                                              |       | — |   | 8,469 |   | 8,185 |   | 8,790 |   | 7,791 |   | 17,259 |   | 15,976 |   |
| Net investment income                                                      |       | 93,827                                              |       | 88,503 |   | — |   | — |   | — |   | — |   | 93,827 |   | 88,503 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments (2) |       | 560                                                 |       | 270 |   | — |   | — |   | — |   | — |   | 560 |   | 270 |   |
| Contract benefits                                                          |       | (25,838                                             | )          | (24,754 | ) | (24,388 | ) | (18,147 | ) | — |   | — |   | (50,226 | ) | (42,901 | ) |
| Interest credited to  contractholder funds(3)                              |       | (40,237                                             | )          | (38,733 | ) | — |   | — |   | — |   | — |   | (40,237 | ) | (38,733 | ) |
|                                                                       |       | $                                                   | 28,312     |   | $ | 25,286 |   | $ | 4,764 |   | $ | 6,212 |   | $ | 8,790 |   | $ | 7,791 |   | $ | 41,866 |   | $ | 39,289 |   |

 
|                                                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                 | ** ** | **Investment  Margin**                            | ** ** | **Benefit  Margin** | ** ** | **Contract Charges  and Fees** | ** ** | **Gross  Margin** | ** ** |
| **(in thousands)**                                                    | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Premiums                                                                   |       | $                                                 | —     |   | $ | — |   | $ | 34,752 |   | $ | 36,167 |   | $ | — |   | $ | — |   | $ | 34,752 |   | $ | 36,167 |   |
| Contract charges (1)                                                       |       | —                                            |       | — |   | 16,449 |   | 16,030 |   | 18,398 |   | 15,205 |   | 34,847 |   | 31,235 |   |
| Net investment income                                                      |       | 186,720                                           |       | 174,995 |   | — |   | — |   | — |   | — |   | 186,720 |   | 174,995 |   |
| Periodic settlements  and accruals on non-hedge derivative instruments (2) |       | 984                                               |       | 484 |   | — |   | — |   | — |   | — |   | 984 |   | 484 |   |
| Contract benefits                                                          |       | (51,358                                           | )          | (50,161 | ) | (42,198 | ) | (39,823 | ) | — |   | — |   | (93,556 | ) | (89,984 | ) |
| Interest credited to  contractholder funds(3)                              |       | (80,715                                           | )          | (74,727 | ) | — |   | — |   | — |   | — |   | (80,715 | ) | (74,727 | ) |
|                                                                       |       | $                                                 | 55,631     |   | $ | 50,591 |   | $ | 9,003 |   | $ | 12,374 |   | $ | 18,398 |   | $ | 15,205 |   | $ | 83,032 |   | $ | 78,170 |   |

(1)                Loads charged tocontractholders at the inception of interest-sensitive life contracts aredeferred and amortized to income in a manner consistent with DAC. Amortizationof deferred loads related to realized capital gains and losses is excluded fromcontract charges for purposes of calculating gross margin. Amortization ofdeferred loads related to realized capital gains and losses totaled $4 thousandin the second quarter of 2006 and $5 thousand in the first six month of2006.  There was no amortization ofdeferred loads related to realized capital gains and losses in the secondquarter and the first six months of 2005.

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

(3)                For purposes ofcalculating gross margin, amortization of DSI is excluded from interestcredited to contractholder funds and aggregated with amortization of DAC due tothe similarity in the substance of the two items.  Amortization of DSI totaled $(937) thousandand $(705) thousand in the three months ended June 30, 2006 and 2005,respectively, and $(2,333) thousand and $(937) thousand in the first six monthsof 2006 and 2005, respectively.

----

 

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Gross marginincreased 6.6% in the second quarter of 2006 and 6.2% in the first six monthsof 2006 compared to the same periods of 2005 due to higher investment marginand increased contract charges and fees, partially offset by lower benefitmargin.  The disposition of our variableannuity business will result in lower gross margin in the future, which wouldbe expected to be mostly offset by lower DAC and DSI amortization and operatingexpenses.

*Investmentmargin*****is a componentof gross margin, both of which are non-GAAP measures. Investment marginrepresents the excess of net investment income and periodic settlements andaccruals on non-hedge derivative instruments over interest credited tocontractholder funds and the implied interest on life-contingent immediateannuities included in the reserve for life-contingent contract benefits.  Amortization of DSI is excluded from interestcredited to contractholder funds for purposes of calculating gross margin.  We use investment margin to evaluate ourprofitability related to the difference between investment returns on assetssupporting certain products and amounts credited to customers (“spread”) duringthe fiscal period.

Investment margin byproduct group is shown in the following table.
|                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Annuities               |       | $                                               | 26,089     |                                          | $          | 22,998 |   | $ | 50,993 |   | $ | 46,009 |   |
| Life insurance          |       | 2,223                                           |       | 2,288                                         |       | 4,638 |   | 4,582 |   |
| Total investment margin |       | $                                               | 28,312     |                                          | $          | 25,286 |   | $ | 55,631 |   | $ | 50,591 |   |

 

Investmentmargin increased 12.0% in the second quarter of 2006 and 10.0% in the first sixmonths of 2006 compared to the same periods of 2005. The increase in bothperiods was primarily due to growth in contractholder funds and improved yieldson assets supporting deferred fixed annuities. Additionally, the increase in the first six months of 2006 was impactedby lower average crediting rates on deferred fixed annuities resulting fromcontract surrenders and crediting rate actions. In the future, investment margin will be reduced as a result of the disposalof our variable annuity business until the lost margins are replaced by salesof other products.

The followingtable summarizes the weighted average investment yield, interest creditingrates and investment spreads for the three months ended June 30.  
|                                                                      | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                         | ** ** | **2005**                                                     | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest-sensitive  life                                             |       | 5.6                                              | %          | 5.8                                                          | %          | 4.5                                               | %          | 4.6 | % | 1.1 | % | 1.2 | % |
| Deferred fixed  annuities                                            |       | 5.7                                              |       | 5.5                                                          |       | 3.2                                               |       | 3.2 |   | 2.5 |   | 2.3 |   |
| Immediate fixed  annuities with and without life contingencies       |       | 7.5                                              |       | 7.6                                                          |       | 6.7                                               |       | 6.8 |   | 0.8 |   | 0.8 |   |
| Investments supporting  capital, traditional life and other products |       | 6.0                                              |       | 6.2                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

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The following tablesummarizes the weighted average investment yield, interest crediting rates andinvestment spreads for the six months ended June 30.  
|                                                                     | ** ** | **Weighted Average  Investment Yield** | ** ** | **Weighted Average  Interest Crediting Rate** | ** ** | **Weighted Average  Investment Spread** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                         | ** ** | **2005**                                                     | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest-sensitive life                                             |       | 5.6                                              | %          | 5.7                                                          | %          | 4.5                                               | %          | 4.5 | % | 1.1 | % | 1.2 | % |
| Deferred fixed  annuities                                           |       | 5.5                                              |       | 5.5                                                          |       | 3.1                                               |       | 3.2 |   | 2.4 |   | 2.3 |   |
| Immediate fixed  annuities with and without life contingencies      |       | 7.5                                              |       | 7.5                                                          |       | 6.7                                               |       | 6.7 |   | 0.8 |   | 0.8 |   |
| Investments supporting capital, traditional life and other products |       | 6.1                                              |       | 6.2                                                          |       | N/A                                               |       | N/A |   | N/A |   | N/A |   |

 

The following tablesummarizes the liabilities for these contracts and policies.
|                                                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Immediate fixed  annuities with life contingencies              |       | $                                             | 1,531,801  |   | $ | 1,475,191 |   |
| Other life contingent  contracts and other                      |       | 281,768                                       |       | 435,948 |   |
| Reserve for  life-contingent contract benefits                  |       | $                                             | 1,813,569  |   | $ | 1,911,139 |   |
|                                                            |       |                                          |       |   |   |
| Interest-sensitive life                                         |       | $                                             | 453,122    |   | $ | 397,691 |   |
| Deferred fixed  annuities                                       |       | 3,596,941                                     |       | 3,218,620 |   |
| Immediate fixed  annuities without life contingencies and other |       | 549,613                                       |       | 518,927 |   |
| Contractholder funds                                            |       | $                                             | 4,599,676  |   | $ | 4,135,238 |   |

 

*Benefit margin*is a component of gross margin, both of which are non-GAAPmeasures.  Benefit margin represents lifeand life-contingent immediate annuity premiums, cost of insurance contractcharges and, prior to the disposal of the variable annuity business throughreinsurance, variable annuity contract charges for contract guarantees lesscontract benefits.  Benefit marginexcludes the implied interest on life-contingent immediate annuities, which isincluded in the calculation of investment margin.  We use benefit margin to evaluate ourunderwriting performance, as it reflects the profitability of our products withrespect to mortality or morbidity risk during a fiscal period.

Benefit margin by productgroup is shown in the following table.
|                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Life insurance          |       | $                                               | 5,602      |                                          | $          | 8,333 |   | $ | 11,153 |   | $ | 15,524 |   |
| Annuities               |       | (838                                            | )          | (2,121                                        | )          | (2,150 | ) | (3,150 | ) |
| Total benefit margin    |       | $                                               | 4,764      |                                          | $          | 6,212 |   | $ | 9,003 |   | $ | 12,374 |   |

 

Benefitmargin declined 23.3% in the second quarter of 2006 and 27.2% in the first sixmonths of 2006 compared to the same periods of 2005.  The reduction in the life insurance benefitmargin in both periods was primarily the result of lower premiums ontraditional life products, unfavorable mortality experience and a prospectivereclassification of certain contract charges from benefit margin to contractcharges and fees beginning in 2006.  Thefavorable change in the annuity benefit margin in both periods was the resultof improved mortality experience.

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*Amortization of DAC and DSI*, excludingamortization related to realized capital gains and losses, increased 35.7% inthe three months ended June 30, 2006 and 98.0% in the first six months of 2006compared to the same periods of 2005. The increase in both periods was due to higher gross margin.  Additionally, the increase in the first sixmonths of 2006 was also impacted by the recognition of amortizationacceleration (commonly referred to as DAC and DSI “unlocking”) totaling $544thousand in the current period compared to the prior period recognition ofamortization deceleration of $7.3 million. DAC and DSI amortization related to realized capital gains and losses,after-tax, changed by a favorable $2.1 million and $7.8 million in the secondquarter and first six months of 2006, respectively, compared to the sameperiods in 2005.

DACand DSI were reduced by $79.7 million and $6.2 million, respectively, in thesecond quarter of 2006 as a result of the disposition of our variable annuitybusiness.  This decline will result in areduction to the amortization of DAC and DSI in the future, which is expectedto be offset by the absence of gross margin on the business subject to thedisposition.

*Operating costs and expenses* declined19.9% in the second quarter and increased 9.4% in the first six months of 2006compared to the same periods of 2005. The decline in other operating costs and expenses in the second quarterwas primarily the result of a decline in employee and technology costs.  The increase in the first six months of 2006was attributable to higher guaranty fund assessments and restructuring andrelated charges, which were recorded in the first quarter of 2006 and relatedto the Voluntary Termination Offer accepted by certain employees, partiallyoffset by lower employee and technology expenses.

 

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### **INVESTMENTS**

An importantcomponent of our financial results is the return on our investmentportfolio.  The composition of theinvestment portfolio at June 30, 2006 is presented in the table below.
|                              | ** ** | **Carrying** | ** ** | **Percent**       | ** ** |
|------------------------------|------------|--------------|------------|-------------------|------------|
| **(in thousands)**      | ** ** | **value**    | ** ** | **of total** | ** ** |
| Fixed income securities  (1) |       | $            | 5,586,428  |              | 85.9       | % |
| Mortgage loans               |       | 660,553      |       | 10.1              |       |
| Short-term                   |       | 212,904      |       | 3.3               |       |
| Policy loans                 |       | 36,908       |       | 0.6               |       |
| Other                        |       | 5,194        |       | 0.1               |       |
| Total                        |       | $            | 6,501,987  |              | 100.0      | % |

(1)   Fixedincome securities are carried at fair value. Amortized cost basis for these securities was $5.42 billion.

----

Total investmentsdecreased to $6.50 billion at June 30, 2006 from $6.73 billion at December 31,2005 primarily due to payments totaling approximately $394.9 million related tothe sale of our variable annuity business. Additionally, net unrealized capital gains on fixed income securitiesdeclined due primarily to rising market interest rates.  These declines were partially offset by theinvestment of cash flows from operating and financing activities and increasedfunds associated with securities lending activities.

Total investmentsat amortized cost related to collateral received in connection with securitieslending activities increased to $316.0 million at June 30, 2006 from $149.5million at December 31, 2005.

At June 30, 2006, 96.8% of the fixed incomesecurities portfolio was rated investment grade, which is defined as a securityhaving a rating from the National Association of Insurance Commissioners (“NAIC”)of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, Aor BBB from S&P, Fitch or Dominion; or a comparable internal rating if anexternally provided rating is not available.

The unrealized net capitalgains on fixed income securities at June 30, 2006 were $168.2 million, adecrease of $285.7 million or 62.9% since December 31, 2005.   The net unrealized gain was comprised of$310.4 million of unrealized gains and $142.2 million of unrealized losses atJune 30, 2006.  This is compared to netunrealized gains totaling $453.9 million at December 31, 2005, comprised of$497.4 million of unrealized gains and $43.5 million of unrealized losses.

Of the gross unrealized losses at June 30, 2006,$137.8 million or 96.9% were related to investment grade securities and arebelieved to be primarily a result of a rising interest rate environment.  The remaining $4.4 million of losses in thefixed income portfolio were in the corporate fixed income portfolio and wereprimarily comprised of securities in the energy and capital goods sectors.  The gross unrealized losses in these sectorswere primarily company specific and interest rate related.

Our portfolio monitoring process identifies andevaluates, on a case-by-case basis, fixed income securities whose carryingvalue may be other-than-temporarily impaired. The process includes a quarterly review of all securities using ascreening process to identify those securities whose fair value compared toamortized cost is below established thresholds for certain time periods, orwhich are identified through other monitoring criteria such as ratingsdowngrades or payment defaults.  As aresult of approved programs involving the disposition of investments such aschanges in duration and revisions to strategic asset allocations, and certaindispositions anticipated by portfolio managers, we also conduct a portfolioreview to recognize impairment on securities in an unrealized loss position forwhich we do not have the intent and ability to hold until recovery.  All securities in an unrealized loss positionat June 30, 2006 were included in our portfolio monitoring process fordetermining which declines in value were not other-than- temporary.

We also monitor the quality of our fixed incomeportfolio by categorizing certain investments as “problem”, “restructured” or “potentialproblem.”  Problem fixed incomesecurities are securities in default with respect to principal or interestand/or securities issued by companies that have gone into bankruptcy subsequentto our acquisition of the security. Restructured fixed income securities have rates and terms that are notconsistent with market rates or terms prevailing at the time of therestructuring.  Potential problem fixedincome securities are current with respect to contractual principal and/orinterest, but because of other facts and circumstances, we have concernsregarding the 

23

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borrower’sability to pay future principal and interest, which causes us to believe thesesecurities may be classified as problem or restructured in the future.

The followingtable summarizes problem, restructured and potential problem fixed incomesecurities.
| (in thousands)                     | ** ** | **June 30,  2006**  | ** ** | **December  31, 2005** | ** ** |
|------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                         | ** ** | **Amortized  cost** | ** ** | **Fair  value**        | ** ** | **Percent  of total   Fixed   Income   portfolio** | ** ** | **Amortized  cost** | ** ** | **Fair   value** | ** ** | **Percent  of total   Fixed   Income   portfolio** | ** ** |
| Problem                            |       | $                   | 3,653      |                   | $          | 6,162 |   | 0.1 | % | $ | 14,373 |   | $ | 17,762 |   | 0.3 | % |
| Restructured                       |       | 132                 |       | 132                    |       | — |   | 163 |   | 163 |   | — |   |
| Potential  problem                 |       | 1,371               |       | 1,437                  |       | — |   | 5,609 |   | 5,640 |   | 0.1 |   |
| Total net  carrying value          |       | $                   | 5,156      |                   | $          | 7,731 |   | 0.1 | % | $ | 20,145 |   | $ | 23,565 |   | 0.4 | % |
| Cumulative write-downs  recognized |       | $                   | 4,381      |                   |       |   |   |   | $ | 5,455 |   |   |   |   |   |

 

We have experienced adecrease in the amortized cost of fixed income securities categorized as problemand potential problem as of June 30, 2006 compared to December 31, 2005.  The decrease was primarily due todispositions and the recategorization of securities upon improving conditions. 

We also evaluated each of these securities through ourportfolio monitoring process at June 30, 2006 and recorded write-downs whenappropriate.  We further concluded thatany remaining unrealized losses on these securities were temporary in natureand that we have the intent and ability to hold until recovery.  While these balances may increase in thefuture, particularly if economic conditions are unfavorable, management expectsthat the total amount of securities in these categories will remain lowrelative to the total fixed income securities portfolio.

**NetRealized Capital Gains and Losses**   The following tablepresents the components of realized capital gains and losses and the relatedtax effect.
|                                                   | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **June 30,**            | ** ** | **June 30,**          | ** ** |
| **(in thousands)**                           | ** ** | **2006**                | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Investment write-downs                            |       | $                       | —     |                  | $          | (1,076 | ) | $ | (258 | ) | $ | (1,469 | ) |
| Dispositions                                      |       | (5,950                  | )          | 4,979                 |       | (22,367 | ) | (3,044 | ) |
| Valuation of  derivative instruments              |       | (142                    | )          | (3,719                | )          | 639 |   | (3,478 | ) |
| Settlement of  derivative instruments             |       | 1,876                   |       | (2,816                | )          | 2,634 |   | (518 | ) |
| Realized capital  gains and losses, pretax        |       | (4,216                  | )          | (2,632                | )          | (19,352 | ) | (8,509 | ) |
| Income tax  benefit                               |       | 1,500                   |       | 1,082                 |       | 7,319 |   | 3,224 |   |
| **Realized capital gains and  losses, after-tax** |       | $                       | (2,716     | )                     | $          | (1,550 | ) | $ | (12,033 | ) | $ | (5,285 | ) |

 

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

A changing interest rate environment will also drivechanges in our portfolio duration targets at a tactical level.  A duration target and range is establishedwith an economic view of liabilities relative to a long-term portfolioview.  Tactical duration adjustmentswithin management’s approved ranges are accomplished through both cash markettransactions and derivative activities that generate realized gains and lossesand through new purchases.  As acomponent of our approach to managing portfolio duration, realized gains andlosses on derivative instruments are most appropriately considered inconjunction with the unrealized gains and losses on the fixed incomeportfolio.  This approach mitigates theimpacts of general interest rate changes to the overall financial condition ofthe Company.

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Inthe second quarter of 2006, we recognized $856 thousand of losses related to achange in our intent to hold certain securities with unrealized losses untilthey recover in value.  The change in ourintent is primarily related to comprehensive reviews of our portfolio.  We identified $19.8 million of securitiesthat may be sold.

### **CAPITALRESOURCES AND LIQUIDITY**

**CapitalResources**consist of shareholder’s equity, representing fundsdeployed or available to be deployed to support business operations.  The following table summarizes our capitalresources.
| (in thousands)                                                        | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                                                                       |       |                        |       |                            |       |
| Common stock,  retained earnings and other shareholder’s equity items |       | $                           | 551,473    |                            | $          | 538,465 |   |
| Accumulated  other comprehensive income                                    |       | 40,796                      |       | 128,968                         |       |
| Total shareholder’s  equity                                           |       | $                           | 592,269    |                            | $          | 667,433 |   |

 

*Shareholder’s equity* declined in the first six months of 2006due primarily to lower unrealized net capital gains on fixed income securities,partially offset by net income.

**FinancialRatings and Strength**   Our ratings are influenced by manyfactors including our operating and financial performance, asset quality,liquidity, asset/liability management, overall portfolio mix, financialleverage (i.e., debt), exposure to risks, the current level of operating leverage,Allstate Life Insurance Company’s  andAllstate Insurance Company’s ratings and other factors. There have been nochanges to our insurance financial strength ratings since December 31, 2005.

**Liquidity Sources and Uses  **Asreflected in our Condensed Statements of Cash Flows, higher operating cashflows in the first six months of 2006, compared to the first six months of2005, primarily related to higher investment income.

Cash flows used ininvesting activities decreased in the first six months of 2006 primarily due todecreased net cash provided by financing activities, partially offset by theinvestment of higher operating cash flows. Cash flows used in investingactivities also include the settlement of the disposal of our variable annuitybusiness.

Lower cash flowsfrom financing activities during the first six months of 2006 were due to lowerdeposits of fixed annuities and increased surrenders and partialwithdrawals.  For quantification of thechanges in contractholder funds, see the Operations section of the MD&A.

We have aninter-company loan agreement with The Allstate Corporation (the “Corporation”).  The amount of inter-company loans availableto us is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to allits eligible subsidiaries at any given point in time is limited to $1.00billion.  We had no amounts outstandingunder the inter-company loan agreement at June 30, 2006 or December 31,2005.  The Corporation uses commercialpaper borrowings and bank lines of credit to fund intercompany borrowings.

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### **Item4.   Controls and Procedures**

*Evaluation of Disclosure Controlsand Procedures.  *We maintain disclosure controls and proceduresas defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities ExchangeAct of 1934.  Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report.  Basedupon this evaluation, the principal executive officer and the principalfinancial officer concluded that our disclosure controls and procedures areeffective in providing reasonable assurance that material information requiredto be disclosed in our reports filed with or submitted to the Securities andExchange Commission under the Securities Exchange Act is made known tomanagement, including the principal executive officer and the principalfinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

*Changesin Internal Control over Financial Reporting.  *Duringthe fiscal quarter ended June 30, 2006, there were no changes in our internalcontrol over financial reporting that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.  OTHER INFORMATION**

**Item 1.**                          LegalProceedings

Informationrequired for this Part II, Item 1, is incorporated by reference to thediscussion under the heading “Regulation” and under the heading “Legal andRegulatory Proceedings and Inquiries” in Note 4 of the Company’s CondensedFinancial Statements in Part I, Item 1, of this Form 10-Q.

**Item 1A.Risk Factors**

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

These forward-looking statements do not relatestrictly to historical or current facts and may be identified by their use ofwords like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,”“intends,” “believes,” “likely,” “targets” and other words with similarmeanings. These statements may address, among other things, our strategy forgrowth, product development, regulatory approvals, market position, expenses,financial results, litigation and reserves. We believe that these statementsare based on reasonable estimates, assumptions and plans. However, if theestimates, assumptions or plans underlying the forward-looking statements proveinaccurate or if other risks or uncertainties arise, actual results coulddiffer materially from those communicated in these forward-looking statements.Risk factors which could cause actual results to differ materially from thosesuggested by such forward-looking statements include but are not limited tothose discussed or identified in this document, in our public filings with theSecurities and Exchange Commission, and those in Part I, Item 1A of AllstateLife Insurance Company of New York Annual Report on Form 10-K for 2005, whichare hereby incorporated herein by reference. There have been no material changes from the risk factors previouslydisclosed in our Annual Report on Form 10-K.

**Item 6.**                       Exhibits

(a)   Exhibits

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

 

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                     |   | Allstate Life Insurance  Company of New York                                                           |
|---------------------|--------|--------------------------------------------------------------------------------------------------------|
|                |   | (Registrant)                                                                                           |
|                |   |                                                                                                   |
| August 8, 2006 |   | By /s/ Samuel H. Pilch                                                                                 |
|                |   | Samuel H. Pilch  Controller  (chief accounting officer and duly  authorized officer of the registrant) |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                    |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Amendment Number Two to Automatic Annuity  Reinsurance Agreement between Allstate Life Insurance Company of New York and  Allstate Life Insurance Company effective June 1, 2006, incorporated herein  by reference to Exhibit 10.1 to Allstate Life Insurance Company of New York  current report on Form 8-K filed June 7, 2006. |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 15              |       | Acknowledgement of awareness from Deloitte &  Touche LLP dated August 4, 2006, concerning unaudited interim financial  information.                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 31.1            |       | Rule 15d-14(a) Certification of Principal Executive  Officer                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 31.2            |       | Rule 15d-14(a) Certification of Principal Financial  Officer                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                               |
| 32              |       | Section 1350 Certifications                                                                                                                                                                                                                                                                                                        |

 

 

E-1

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