UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

ý	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~
~~FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004~~
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 registrant as specified in its charter)

New York		36-2608394
(State of Incorporation)		(I.R.S. Employer Identification No.)

100 Motor Parkway, Suite 132
Hauppauge, New York		11788
(Address of principal executive offices)		(Zip Code)

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

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

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

As of July ~~31, 2004~~29, 2005 the Registrant had 100,000 common shares, $25 par value, outstanding, all of which are held by Allstate Life Insurance Company.

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, ~~2004~~2005

PART I.1.
FINANCIAL INFORMATION
Page

~~Item 1.~~

~~Financial Statements~~

Item 1.

Financial Statements
Condensed Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2005
and 2004 ~~and 2003~~ (unaudited)

3

Condensed Statements of Financial Position as of June 30, ~~2004~~2005 (unaudited) and December 31, ~~2003~~2004

4

Condensed Statements of Cash Flows for the Six-Month Periods Ended June 30, 2005 and 2004 ~~and 2003~~ (unaudited)

5

Notes to Condensed Financial Statements (unaudited)

6

Report of Independent Registered Public Accounting Firm

14
10

Item 2.

~~Management's~~
Management’s Discussion and Analysis of Financial Condition and Results of Operations

15
11

Item 4.

Controls and Procedures

27
24

PART II.

OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings~~

27

Item 1.
Legal Proceedings
24
Item 6.

Exhibits ~~and Reports on Form 8-K~~

27
24
2

PART I.1. FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF OPERATIONS

Three Months Ended
June 30,
Six Months Ended
June 30,

(in thousands)
2004
2003
2004
2003

(unaudited)

Revenues
Premiums $ 19,969 $ 13,934 $ 36,620 $ 30,262
Contract charges 14,576 13,682 28,688 26,673
Net investment income 72,676 65,356 143,071 128,654
Realized capital gains and losses (2,886 ) 208 (3,539 ) (4,483 )

104,335 93,180 204,840 181,106

Costs and expenses
Contract benefits 44,916 43,046 87,840 81,434
Interest credited to contractholder funds 30,535 27,277 58,186 51,792
Amortization of deferred policy acquisition costs 8,817 9,453 8,708 16,122
�� Operating costs and expenses 10,300 5,610 20,258 15,336

94,568 85,386 174,992 164,684

Gain on disposition of operations — — 1,058 —

Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax

9,767

7,794

30,906

16,422

Income tax expense

3,592

2,706

11,094

5,667

Income before cumulative effect of change in accounting principle, after-tax 6,175 5,088 19,812 10,755

Cumulative effect of change in accounting principle, after-tax

—

—

(7,586
)

—

Net income $ 6,175 $ 5,088 $ 12,226 $ 10,755

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

(unaudited)

(unaudited)

Revenues

Premiums

$
16,174

$
19,969

$
36,167

$
36,620

Contract charges

15,976

14,576

31,235

28,688

Net investment income

88,503

72,676

174,995

143,071

Realized capital gains and losses

(2,632
)
(2,886
)
(8,509
)
(3,539
)

118,021

104,335

233,888

204,840

Costs and expenses

Contract benefits

42,901

44,916

89,984

87,840

Interest credited to contractholder funds

39,438

30,535

75,664

58,186

Amortization of deferred policy acquisition costs

11,157

8,817

12,088

8,708

Operating costs and expenses

13,078

10,300

22,270

20,258

106,574

94,568

200,006

174,992

Gain on disposition of operations

1

—

1

1,058

Income from operations before income tax expense and cumulative effect of change in accounting principle,
after-tax

11,448

9,767

33,883

30,906

Income tax expense

4,508

3,592

13,058

11,094

Income before cumulative effect of change in accounting principle, after-tax

6,940

6,175

20,825

19,812

Cumulative effect of change in accounting principle, after-tax

—

—

—

(7,586
)

Net income

$
6,940

$
6,175

$
20,825

$
12,226

See notes to condensed financial statements.
3

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF FINANCIAL POSITION
(in thousands, except par value data)
June 30,
2004
December 31,
2003

(unaudited)

Assets
Investments
Fixed income securities, at fair value (amortized cost $4,365,670 and $3,935,447) $ 4,694,455 $ 4,415,327
Mortgage loans 403,725 385,643
Short-term 76,104 22,756
Policy loans 34,336 34,107
Other 7,285 —

Total investments 5,215,905 4,857,833

Cash

14,148

10,731
Deferred policy acquisition costs 243,019 187,437
Accrued investment income 51,291 47,818
Reinsurance recoverables 5,228 4,584
Current income taxes receivable 8,624 8,170
Other assets 51,580 15,004
Separate Accounts 710,363 665,875

Total assets $ 6,300,158 $ 5,797,452

Liabilities
Reserve for life-contingent contract benefits $ 1,659,453 $ 1,683,771
Contractholder funds 3,084,086 2,658,325
Deferred income taxes 64,924 81,657
Other liabilities and accrued expenses 259,257 168,081
Payable to affiliates, net 6,839 5,061
Reinsurance payable to parent 1,082 1,108
Separate Accounts 710,363 665,875

Total liabilities 5,786,004 5,263,878

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 55,787 55,787
Retained income 348,789 336,563
Accumulated other comprehensive income:
Unrealized net capital gains and losses and net gains and losses on derivative financial instruments 107,078 138,724

Total accumulated other comprehensive income 107,078 138,724

Total shareholder's equity 514,154 533,574

Total liabilities and shareholder's equity $ 6,300,158 $ 5,797,452

June 30,

December 31,

(in thousands, except par value data)

2005

2004

(unaudited)

Assets

Investments

Fixed income securities, at fair value (amortized cost $5,451,437 and $5,012,977)

$
6,111,363

$
5,545,647

Mortgage loans

536,908

480,280

Short-term

66,059

111,509

Policy loans

35,806

34,948

Other

2,399

4,638

Total investments

6,752,535

6,177,022

Cash

2,841

8,624

Deferred policy acquisition costs

254,462

238,173

Accrued investment income

59,460

55,821

Reinsurance recoverables

10,930

8,422

Current income taxes receivable

2,684

367

Other assets

22,647

17,665

Separate Accounts

851,253

792,550

Total assets

$
7,956,812

$
7,298,644

Liabilities

Reserve for life-contingent contract benefits

$
1,911,139

$
1,782,451

Contractholder funds

4,135,238

3,802,846

Deferred income taxes

94,191

90,760

Other liabilities and accrued expenses

277,354

180,904

Payable to affiliates, net

10,741

8,831

Reinsurance payable to parent

963

1,067

Separate Accounts

851,253

792,550

Total liabilities

7,280,879

6,659,409

Commitments and Contingent Liabilities (Note 3)

Shareholder’s equity

Common stock, $25 par value, 100 thousand shares authorized and outstanding

2,500

2,500

Additional capital paid-in

120,000

120,000

Retained income

382,269

361,480

Accumulated other comprehensive income:

Unrealized net capital gains and losses

171,164

155,255

Total accumulated other comprehensive income

171,164

155,255

Total shareholder’s equity

675,933

639,235

Total liabilities and shareholder’s equity

$
7,956,812

$
7,298,644

See notes to condensed financial statements.
4

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF CASH FLOWS

Six Months Ended
June 30,

(in thousands)
2004
2003

(unaudited)

Cash flows from operating activities
Net income $ 12,226 $ 10,755
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items (24,511 ) (24,699 )
Realized capital gains and losses 3,539 4,483
Gain on disposition of operations (1,058 ) —
Cumulative effect of change in accounting principle 7,586 —
Interest credited to contractholder funds 58,186 51,792
Changes in:
Life-contingent contract benefits and contractholder funds 15,929 8,347
Deferred policy acquisition costs (28,212 ) (15,679 )
Income taxes payable 3,938 (4,151 )
Other operating assets and liabilities 11,026 (4,215 )

Net cash provided by operating activities 58,649 26,633

Cash flows from investing activities
Proceeds from sales of fixed income securities 233,910 97,988
Investment collections
Fixed income securities 102,448 136,319
Mortgage loans 6,403 4,287
Investment purchases
Fixed income securities (763,912 ) (578,200 )
Mortgage loans (24,474 ) (44,596 )
Change in short-term investments, net 4,884 19,149
Change in other investments, net 379 1,137

Net cash used in investing activities (440,362 ) (363,916 )

Cash flows from financing activities
Contractholder fund deposits 510,088 405,411
Contractholder fund withdrawals (124,958 ) (80,199 )

Net cash provided by financing activities 385,130 325,212

Net increase (decrease) in cash

3,417

(12,071
)
Cash at beginning of period 10,731 21,686

Cash at end of period $ 14,148 $ 9,615

Six Months Ended June 30,

(in thousands)

2005

2004

(unaudited)

Cash flows from operating activities

Net income

$
20,825

$
12,226

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization and other non-cash items

(28,457
)
(24,511
)
Realized capital gains and losses

8,509

3,539

Gain on disposition of operations

(1
)
(1,058
)
Cumulative effect of change in accounting principle

—

7,586

Interest credited to contractholder funds

75,664

58,186

Changes in:

Life-contingent contract benefits and contractholder funds

17,867

15,929

Deferred policy acquisition costs

(25,822
)
(28,212
)
Income taxes payable

(7,434
)
3,938

Other operating assets and liabilities

(4,438
)
11,026

Net cash provided by operating activities

56,713

58,649

Cash flows from investing activities

Proceeds from sales of fixed income securities

303,080

233,910

Investment collections

Fixed income securities

84,532

102,448

Mortgage loans

38,902

6,403

Investment purchases

Fixed income securities

(687,867
)
(763,912
)
Mortgage loans

(93,054
)
(24,474
)
Change in short-term investments, net

37,382

4,884

Change in other investments, net

(969
)
379

Net cash used in investing activities

(317,994
)
(440,362
)

Cash flows from financing activities

Contractholder fund deposits

500,093

510,088

Contractholder fund withdrawals

(244,595
)
(124,958
)
Net cash provided by financing activities

255,498

385,130

Net (decrease) increase in cash

(5,783
)
3,417

Cash at beginning of period

8,624

10,731

Cash at end of period

$
2,841

$
14,148

See notes to condensed financial statements.
5

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONDENSED FINANCIAL STATEMENTS
~~(Unaudited)~~
(unaudited)
1.   Basis of Presentation
The accompanying condensed financial statements include the accounts of Allstate Life Insurance Company of New York (the ~~"Company"~~“Company”), a wholly owned subsidiary of Allstate Life Insurance Company ~~("ALIC"~~(“ALIC”), which is ~~wholly-owned~~wholly owned by Allstate Insurance Company ~~("AIC"~~(“AIC”), a ~~wholly-owned~~wholly owned subsidiary of The Allstate Corporation (the ~~"Corporation"~~“Corporation”).

The condensed financial statements and notes as of June 30, ~~2004,~~2005 and for the three-month and six-month periods ended June 30, ~~2004~~2005 and ~~2003~~2004 are unaudited. The condensed financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2003.~~2004. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

To conform to the ~~2004 and year-end 2003 presentations,~~2005 presentation, certain amounts in the prior ~~year's~~year’s condensed financial statements and notes have been reclassified.
~~Adopted accounting standard~~
~~Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration~~
    ~~Contracts and for Separate Accounts" ("SOP 03-1")~~
        ~~On January 1, 2004, the Company adopted SOP 03-1. The major provisions of the SOP affecting the Company require:~~
•
~~Establishment of reserves primarily related to death benefit and income benefit guarantees provided under variable annuity contracts;~~

•
~~Deferral of sales inducements that meet certain criteria, and amortization using the same method used for deferred policy acquisition costs ("DAC").~~
~~Effects of adoption~~
        The cumulative effect of the change in accounting principle from implementing SOP 03-1 was a loss of $7.6 million, after-tax ($11.7 million, pre-tax). It was comprised of an increase in contractholder funds and benefits reserves (primarily for variable annuity contracts) of $942 thousand, pre-tax, and a reduction in DAC and deferred sales inducements ("DSI") of $10.7 million, pre-tax.
        The SOP requires consideration of a range of potential results to estimate the cost of variable annuity death benefits and income benefits, which generally necessitates the use of stochastic modeling techniques. To maintain consistency with the assumptions used in the establishment of reserves for variable annuity guarantees, the Company utilized the results of this stochastic modeling to estimate expected gross profits, which form the basis for determining the amortization of DAC and DSI. This new modeling approach resulted in a lower estimate of expected gross profits, and therefore resulted in a write-down of DAC and DSI.
        In 2004, DSI and related amortization is classified within the Condensed Statements of Financial Position and Operations as other assets and interest credited to contractholder funds, respectively. The amounts are provided below.
~~Liabilities for contract guarantees~~
        The Company offers various guarantees to variable contractholders including a return of no less than (a) total deposits made on the contract less any customer withdrawals, (b) total deposits made on the contract less any customer withdrawals plus a minimum return or (c) the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death (death benefits), upon annuitization (income benefits), or at specified dates during the accumulation period (accumulation benefits). The Company hedges accumulation benefits for all contracts issued.

        The table below presents information regarding the Company's variable contracts with guarantees. The Company's variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts' separate accounts with guarantees.
($ in millions)
June 30, 2004
In the event of death
Account value $ 709
Net amount at risk(1) $ 107
Average attained age of contractholders 63 years
At annuitization
Account value $ 37
Net amount at risk(2) $ —
Weighted average waiting period until annuitization options available 9 years
Accumulation at specified dates
Account value $ 12
Net amount at risk(3) $ —
Weighted average waiting period until guarantee date 11 years
~~(1)~~
~~Defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.~~

~~(2)~~
~~Defined as the present value of the minimum guaranteed annuity payments determined in accordance with the terms of the contract in excess of the current account balance.~~

~~(3)~~
~~Defined as the present value of the guaranteed minimum accumulation balance in excess of the current account balance.~~
        ~~Account balances of variable contracts' separate accounts with guarantees were invested as follows:~~
(in millions)
June 30, 2004
Equity securities (including mutual funds) $ 679
Cash and cash equivalents 30

Total variable contracts' separate account assets with guarantees $ 709

        ~~The following summarizes the liabilities for guarantees:~~
(in thousands)
Liability for
guarantees
related to
death benefits
Liability for
guarantees
related to
income benefits
Total

Balance, January 1, 2004 $ 868 $ 74 $ 942
Incurred guaranteed benefits 910 3 913
Paid guarantee benefits (969 ) — (969 )

Balance, June 30, 2004(1) $ 809 $ 77 $ 886

~~(1)~~
~~Included in the total reserve balance are reserves for variable annuity death benefits of $809 thousand, variable annuity income benefits of $14 thousand and other guarantees of $63 thousand.~~
        The liability for death and income benefit guarantees is established equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract benefits divided by the present value of all expected contract charges. For guarantees in the event of death, benefits represent the current guaranteed minimum death payments in excess of the current account balance. For guarantees at annuitization, benefits represent the present value of the minimum guaranteed annuity benefits in excess of the current account balance.

        Projected benefits and contract charges used in determining the liability for guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant's attained age.
        ~~The liability for guarantees will be re-evaluated periodically, and adjustments will be made to the liability balance through a charge or credit to contract benefits.~~
~~Deferred sales inducements~~
        Costs related to sales inducements offered on sales to new customers, principally on investment contracts and primarily in the form of additional credits to the customer's account value or enhancements to interest credited for a specified period, which are beyond amounts currently being credited to existing contracts, are deferred and recorded as other assets. All other sales inducements are expensed as incurred and included in interest credited to contractholder funds on the Condensed Statements of Operations. DSI is amortized to income using the same methodology and assumptions as DAC, and included in interest credited to contractholder funds. DSI is periodically reviewed for recoverability and written down when necessary.
        ~~DSI activity for the six months ended June 30, 2004 was as follows:~~
(in thousands)

Balance, January 1, 2004 $ 2,369
Sales inducements deferred 867
Amortization charged to income (384 )
Effects of unrealized gains and losses 465

Balance, June 30, 2004 $ 3,317

~~Pending accounting standard~~
~~Emerging Issues Task Force Topic No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to~~
    ~~Certain Investments" ("EITF No. 03-1")~~
        In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF No. 03-1, which is effective for fiscal periods beginning after June 15, 2004. EITF No. 03-1 requires that when the fair value of an investment security is less than its carrying value an impairment exists for which a determination must be made as to whether the impairment is other-than-temporary. An impairment loss should be recognized equal to the difference between the investment's carrying value and its fair value when an impairment is other-than-temporary. Subsequent to an other-than temporary impairment loss, a debt security should be accounted for in accordance with Statement of Position No. 03-3, "Accounting for Loans and Certain Debt Securities Acquired in a Transfer", which allows the accretion of the discount between the carrying value and expected value of a security if the amount and timing of the recognition of that difference in cash is reasonably estimable. EITF 03-1 also indicates that although not presumptive a pattern of selling investments prior to the forecasted recovery may call into question an investor's intent to hold the security until it recovers in value.
        The EITF 03-1 impairment model applies to all investment securities accounted for under Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and to investment securities accounted for under the cost method to the extent an impairment indicator exists or the reporting entity has estimated the fair value of the investment security in connection with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments".
        The final consensus on EITF 03-1 included additional disclosure requirements incremental to those adopted by the Company effective December 31, 2003 that are effective for fiscal years ending after June 15, 2004.
        The Company is currently evaluating the impact of EITF 03-1 on its process for determining other-than-temporary impairment for the affected securities. More specifically, the Company is analyzing whether subsequent to adoption its portfolio management practices for certain securities classified as

available-for-sale pursuant to SFAS No. 115 could be interpreted as a pattern of selling thereby affecting its designated intent to hold such investments for the period necessary to allow for the forecasted recovery of fair value pursuant to the requirements of EITF 03-1. As a result of this analysis, the Company may potentially reclassify to realized capital gains and losses the unrealized net capital gains and losses associated with certain securities classified as available-for-sale.
        ~~Adoption of this standard may:~~
•
~~Accelerate the timing of recognition of certain impairment losses or otherwise result in impairment losses being recognized when they previously may not have been;~~

•
~~Result in the designation of certain investment securities as trading;~~

•
~~Increase the volatility of net income due to:~~

•
The potential recognition of unrealized losses in situations where the Company anticipates a full recovery of certain unrealized losses but does not desire to elect a permanent intent to hold the affected securities, regardless of internal and external facts and circumstances, until such time as they fully recover or mature; and

•
~~Changes in the timing of the recognition of the difference between carrying value and expected settlement value of those debt securities for which an other-than-temporary impairment is taken.~~
        ~~Adoption of this standard is not expected to have a material impact on shareholder's equity since fluctuations in fair value are already recorded in accumulated other comprehensive income.~~
2.   ~~Other Investments~~Reinsurance
        In 2004, the Company entered into interest rate cap agreements, financial futures contracts and foreign currency swap agreements that are used to reduce exposure to rising or falling interest rates relative to certain annuity contracts or to change the interest rate characteristics of existing assets or liabilities. All are used for asset-liability management.
        In exchange for a premium, interest rate cap agreements provide the holder with the right to receive at a future date, the amount, if any, by which a specified market interest rate exceeds the fixed cap rate applied to a notional amount. Hedge accounting is not applied to these derivative contracts. The fair values of the instruments are reported as other investments and the related gains and losses from the changes in fair value and the accrued periodic settlements are recognized in realized capital gains and losses.
        Financial futures contracts are commitments to purchase or sell designated financial instruments at a future date for a specified price or yield. Hedge accounting is not applied to these derivative contracts. The fair values of the instruments are reported as other investments and the related gains and losses from the changes in fair value, some of which are recognized through daily cash settlements, are classified consistent with the risks being economically hedged and are reported as realized capital gains and losses or contract benefits.
        Under cash flow hedge accounting, the Company designates its foreign currency swap agreements as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. The Company's cash flow exposure is associated with an existing asset. The fair value of the instruments is reported as other liabilities and accrued expenses and the changes in fair value of the instruments are reported in accumulated other comprehensive income on the Condensed Statements of Financial Position. Amounts are reclassified to net investment income or realized capital gains and losses as the hedge transaction affects net income. Accrued periodic settlements on instruments used in cash flow hedges are reported in net investment income.

June 30, 2004
(in thousands)
Notional
amount
Fair value
Realized
capital
gain (loss)
Interest rate cap agreements $ 129,200 $ 7,198 $ 1,755
Financial futures contracts 26,500 248 600
Foreign currency swap agreements 7,500 (240 ) —

~~3.     Reinsurance~~
The effects of reinsurance on premiums and contract charges are as follows:

Three Months Ended
June 30,
Six Months Ended
June 30,

(in thousands)
2004
2003
2004
2003

Premiums and contract charges
Direct $ 38,677 $ 29,565 $ 73,167 $ 60,540
Assumed—non-affiliate 117 64 302 107
Ceded
Affiliate (1,086 ) (1,142 ) (2,183 ) (2,290 )
Non-affiliate (3,163 ) (871 ) (5,978 ) (1,422 )

Premiums and contract charges, net of reinsurance $ 34,545 $ 27,616 $ 65,308 $ 56,935

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Premiums and contract charges

Direct

$
36,185

$
38,677

$
75,855

$
73,167

Assumed – non-affiliate

290

117

502

302

Ceded

Affiliate

(1,172
)
(1,086
)
(2,352
)
(2,183
)
Non-affiliate

(3,153
)
(3,163
)
(6,603
)
(5,978
)
Premiums and contract charges, net of reinsurance

$
32,150

$
34,545

$
67,402

$
65,308

The effects of reinsurance on contract benefits are as follows:

Three Months Ended
June 30,
Six Months Ended
June 30,

(in thousands)
2004
2003
2004
2003

Contract benefits
Direct $ 46,370 $ 44,189 $ 90,728 $ 83,233
Assumed—non-affiliate 45 28 78 35
Ceded
Affiliate (1,034 ) (45 ) 17 (113 )
Non-affiliate (465 ) (1,126 ) (2,983 ) (1,721 )

Contract benefits, net of reinsurance $ 44,916 $ 43,046 $ 87,840 $ 81,434

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Contract benefits

Direct

$
45,829

$
46,370

$
94,870

$
90,728

Assumed – non-affiliate

96

45

156

78

Ceded

Affiliate

(726
)
(1,034
)
(1,188
)
17

Non-affiliate

(2,298
)
(465
)
(3,854
)
(2,983
)
Contract benefits, net of reinsurance

$
42,901

$
44,916

$
89,984

$
87,840

In addition to amounts included in the table above are reinsurance premiums ceded to ALIC of $722 thousand and $682 thousand for second quarter of 2005 and 2004, respectively and $1.42 million and $1.35 million for the first six months of 2005 and 2004, respectively, under the terms of the structured settlement annuity reinsurance agreement. These amounts are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations as the treaty is recorded as a derivative instrument pursuant to the requirements of Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
6

4.3.   Guarantees and Contingent Liabilities
Guarantees

In the normal course of business, the Company provides standard indemnifications to counterparties in contracts in connection with numerous transactions, including acquisitions and divestures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and were entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. ~~Because the obligated amounts of the indemnifications are not explicitly stated in many cases,~~Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.

The aggregate liability balance related to all guarantees was not material as of June 30, ~~2004.~~2005.
Regulation

The Company is subject to changing social, economic and regulatory conditions. Recent state and federal regulatory initiatives and proceedings have included efforts to ~~remove barriers preventing banks from engaging in the securities~~impose additional regulations regarding agent and insurance businesses, change tax laws affecting the taxation of insurance companies and the tax treatment of insurance products or competing non-insurance products that may impact the relative desirability of various personal investment productsbroker compensation and otherwise expand overall regulation of insurance products and the insurance industry. The ultimate changes and eventual effects of these initiatives on the ~~Company's~~Company’s business, if any, are uncertain.

Regulatory bodies have contacted the parent of the Company and have requested information relating to variable insurance products, including such areas as market timing and late trading and sales practices. The Company believes that these inquiries are similar to those made to many financial services companies as part of an industry-wide investigation by various regulatory agencies into the practices, policies and procedures relating to variable insurance products sales and subaccount trading practices. The Company's parent has and will continue to respond to these information requests and investigations. The Company at the present time is not aware of any systemic problems with respect to such matters that may have a material adverse effect on the Company's financial position.
Legal and Regulatory Proceedings and Inquiries
Background

The Company and certain of its affiliates are named as defendants in a number of lawsuits and other legal proceedings arising out of various aspects of its business. In addition, from time to time regulatory examinations or inquiries are pending involving the Company. As background to the ~~"Proceedings" described~~“Proceedings” sub-section below, please note the following:
•
These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including but not limited to, the underlying facts of each matter, novel legal issues, variations between jurisdictions in which matters are being litigated, differences in applicable laws and judicial interpretations, the length of time before many of these matters might be resolved by settlement or through litigation and, in some cases, the timing of their resolutions relative to other similar cases brought against other companies, the fact that some of these matters are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined, the fact that some of these matters involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear, and the current challenging legal environment faced by large corporations and insurance companies.

•
In these matters, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought include punitive damages or are not specified. Often more specific information beyond the type of relief sought is not available because plaintiffs have not requested more specific relief in their court pleadings. In our experience, monetary demands in ~~plaintiffs'~~plaintiffs’ court pleadings bear little relation to the ultimate loss, if any, to the Company.

•
For the reasons specified above, it is not possible to make meaningful estimates of the amount or range of loss that could result from these matters at this time. The Company reviews these matters on an on-going basis and follows the provisions of ~~SFAS~~Statement of Financial Accounting Standard No. 5, ~~"Accounting~~“Accounting for ~~Contingencies",~~Contingencies” when making accrual and disclosure decisions. When assessing
7

reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.

•
In the opinion of the ~~Company's~~Company’s management, while the ultimate liability in some of these matters in excess of amounts currently reserved may be material to the ~~Company's~~Company’s operating results for any particular period if an unfavorable outcome results, none will have a material adverse effect on the financial condition of the Company.
Proceedings

Legal proceedings involving Allstate agencies and AIC may impact the Company, even when the Company is not directly involved, because the Company sells its products through a variety of distribution channels including Allstate agencies. Consequently, information about the more significant of these proceedings is provided ~~below.~~in the following paragraph.

AIC is defending various lawsuits involving worker classification issues. A putative nationwide class action filed by former employee agents includes a worker classification issue; these agents are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. AIC has been vigorously defending this and various other worker classification lawsuits. The outcome of these disputes is currently uncertain.
        ~~AIC is also~~ defending certain matters relating to its agency program reorganization announced in 1999. These matters include ~~an investigation by the U.S. Department of Labor,~~ a lawsuit filed in December 2001

by the U.S. Equal Employment Opportunity Commission ~~("EEOC"~~(“EEOC”) alleging retaliation under federal civil rights laws, ~~and~~ a class action filed in August 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act, breach of contract and ERISA ~~violations.~~violations, and a lawsuit filed in October 2004 by the EEOC alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization. AIC is also defending another action, in which a class was certified, filed by former employee agents who terminated their employment prior to the agency program reorganization. These plaintiffs have asserted breach of contract and ERISA claims and are seeking actual damages including benefits under Allstate employee benefit plans and payments provided in connection with the reorganization, as well as punitive damages. In ~~April 2004, the U.S. Department of Labor notified AIC that it has closed its investigation and contemplates no further action on this matter at this time. In~~late March 2004, in the first EEOC lawsuit and class action ~~lawsuits,~~lawsuit, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the ~~court's~~court’s declaratory judgment that the release is voidable at the option of the release signer. The court also ordered that an agent who voids the release must return to AIC ~~"any~~“any and all benefits received by the [agent] in exchange for signing the release."” The court also ~~"concluded~~“concluded that, on the undisputed facts of record, there is no basis for claims of age discrimination."” The EEOC and plaintiffs have asked the court to clarify and/or reconsider its memorandum and order. The case otherwise remains pending. A putative nationwide class action has also been filed by former employee agents alleging various violations of ~~ERISA.~~ERISA, including a worker classification issue. These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. This matter was dismissed with prejudice ~~in March 2004~~ by the trial court, ~~but may still be~~was the subject toof further proceedings on ~~appeal.~~appeal, and has been reversed and remanded to the trial court in April 2005. In these matters, plaintiffs seek compensatory and punitive damages, and equitable relief. AIC has been vigorously defending these lawsuits and other matters related to its agency program reorganization. The outcome of these disputes is currently uncertain.
The Company is currently undergoing a periodic market conduct examination by state insurance regulators. Regulators are focusing, as they have with other insurers, on the Company’s compliance with the state’s replacement sales and record-keeping processes with regard to life insurance and annuities among other issues. The ultimate outcome of this examination is currently uncertain.
Other ~~actions~~Matters

The Corporation and some of its subsidiaries, including the Company, have received interrogatories and demands for information from regulatory and enforcement authorities relating to various insurance products and practices. The areas of inquiry include variable annuity market timing and late trading. The Corporation and some of its subsidiaries, including the Company, have also received interrogatories and demands for information from authorities seeking information relevant to on-going investigations into the possible violation of antitrust or insurance laws by unnamed parties and, in particular, seeking information as to whether any person engaged in activities for the purpose of price fixing, market allocation, or bid rigging. The Company believes that these inquiries are similar to those made to many financial services companies as part of industry-wide investigations by various authorities into the practices, policies and procedures relating to
8

insurance and financial services products. The Corporation and its subsidiaries have responded and will continue to respond to these inquiries
Various other legal and regulatory actions are currently pending that involve the Company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of ~~an increasing~~a number of lawsuits and proceedings, some of which involve claims for substantial ~~and/~~or indeterminate amounts. ~~This litigation is~~These actions are based on a variety of issues ~~including insurance~~ and ~~claim settlement~~target a range of the Company’s practices. The outcome of these disputes is currently unpredictable.
However, at this time, based on their present status, it is the opinion of management that the ultimate liability, if any, in one or more of ~~these other~~the actions described in this “Other Matters” subsection in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial ~~position~~condition of the Company.
5.4.   Other Comprehensive Income

The components of other comprehensive income on a pretax and after-tax basis are as follows:

Three Months Ended June 30,

2004
2003
(in thousands)
Pretax
Tax
After-tax
Pretax
Tax
After-tax
Unrealized capital gains and losses
Unrealized holding gains (losses) arising during the period $ (87,752 ) $ 30,712 $ (57,040 ) $ 40,691 $ (14,244 ) $ 26,447
Less: reclassification adjustments (2,427 ) 848 (1,579 ) 216 (76 ) 140

Unrealized net capital gains (losses) (85,325 ) 29,864 (55,461 ) 40,475 (14,168 ) 26,307
Net gains (losses) on derivative financial instruments arising during the period — — — — — —
Less: reclassification adjustments (204 ) 71 (133 ) — — —

Unrealized net gains (losses) on derivative financial instruments 204 (71 ) 133 — — —

Other comprehensive income (loss) $ (85,121 ) $ 29,793 (55,328 ) $ 40,475 $ (14,168 ) 26,307

Net income

6,175

5,088

Comprehensive income (loss)

$
(49,153
)

$
31,395

Three months ended June 30,

(in thousands)

2005

2004

Pretax

Tax

After-
tax

Pretax

Tax

After-
tax

Unrealized holding gains (losses) arising during the period, net of related offsets

$
71,377

$
(24,982
)
$
46,395

$
(87,752
)
$
30,712

$
(57,040
)
Less: reclassification adjustments

1,898

(665
)
1,233

(2,631
)
919

(1,712
)

Other comprehensive income (loss)

$
69,479

$
(24,317
)
45,162

$
(85,121
)
$
29,793

(55,328
)

Net income

6,940

6,175

Comprehensive income (loss)

$
52,102

$
(49,153
)

Six months ended June 30,

(in thousands)

2005

2004

Pretax

Tax

After-
tax

Pretax

Tax

After-
tax

Unrealized holding gains (losses) arising during the period, net of related offsets

$
17,361

$
(6,076
)
$
11,285

$
(51,087
)
$
17,881

$
(33,206
)
Less: reclassification adjustments

(7,114
)
2,490

(4,624
)
(2,400
)
840

(1,560
)

Other comprehensive income (loss)

$
24,475

$
(8,566
)
15,909

$
(48,687
)
$
17,041

(31,646
)

Net income

20,825

12,226

Comprehensive income (loss)

$
36,734

$
(19,420
)
9

Six Months Ended June 30,

2004
2003

(in thousands)
Pretax
Tax
After-tax
Pretax
Tax
After-tax

Unrealized capital gains and losses
Unrealized holding gains (losses) arising during the period $ (51,087 ) $ 17,881 $ (33,206 ) $ 45,806 $ (16,032 ) $ 29,774
Less: reclassification adjustments (2,160 ) 756 (1,404 ) (4,610 ) 1,614 (2,996 )

Unrealized net capital gains (losses) (48,927 ) 17,125 (31,802 ) 50,416 (17,646 ) 32,770
Net gains (losses) on derivative financial instruments arising during the period — — — — — —
Less: reclassification adjustments (240 ) 84 (156 ) — — —

Unrealized net gains (losses) on derivative financial instruments 240 (84 ) 156 — — —

Other comprehensive income (loss) $ (48,687 ) $ 17,041 (31,646 ) $ 50,416 $ (17,646 ) 32,770

Net income

12,226

10,755

Comprehensive income (loss)

$
(19,420
)

$
43,525

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Allstate Life Insurance Company of New York:

We have reviewed the accompanying condensed statement of financial position of Allstate Life Insurance Company of New York (the ~~"Company"~~“Company”, an affiliate of The Allstate Corporation) as of June 30, ~~2004,~~2005, and the related condensed statements of operations for the three-month and six-month periods ended June 30, ~~2004~~2005 and ~~2003,~~2004, and the condensed statements of cash flows for the six-month periods ended June 30, ~~2004~~2005 and ~~2003.~~2004. These interim financial statements are the responsibility of the ~~Company's~~Company’s management.

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

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

We have previously audited, in accordance with ~~auditing~~the standards of the Public Company Accounting Oversight Board (United States), the statement of financial position of Allstate Life Insurance Company of New York as of December 31, ~~2003,~~2004, and the related statements of operations and comprehensive income, ~~shareholder's~~shareholder’s equity, and cash flows for the year then ended, not presented herein. In our report dated February 4,24, 2005, which report includes an explanatory paragraph relating to a change in the Company’s method of accounting for certain nontraditional long-duration contracts and for separate accounts in 2004, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed statement of financial position as of December 31, ~~2003~~2004 is fairly stated, in all material respects, in relation to the statement of financial position from which it has been derived.
~~/s/ Deloitte & Touche LLP~~
~~Chicago, Illinois~~
/s/ Deloitte & Touche LLP
Chicago, Illinois
August 8, 2005
10 ~~2004~~

Item 2. ~~MANAGEMENT'S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, ~~2004~~2005 AND ~~2003~~2004
OVERVIEW
The following discussion highlights significant factors influencing the financial position and results of operations of Allstate Life Insurance Company of New York (referred to in this document as ~~"we"~~“we”, ~~"our"~~“our”, ~~"us"~~“us” or the ~~"Company"~~“Company”). It should be read in conjunction with the condensed financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the Allstate Life Insurance Company of New York Annual Report on Form 10-K for ~~2003.~~2004. We operate as a single segment entity, ~~consistent with~~based on the ~~way~~manner in which ~~we use~~ financial information is used internally to evaluate ~~business~~ performance and to determine the allocation of resources.
~~RESULTS OF~~ OPERATIONS
We will pursue the following to improve return on equity: maintain and develop focused top-tier products, deepen distribution partner relationships, improve our cost structure, advance our enterprise risk management program and leverage the strength of the Allstate brand name across products and distribution channels. The execution of our business strategies has and may continue to involve simplifying our business model by changing the number and selection of products being marketed, for example, the sale of substantially all of our direct response distribution business in 2004; terminating underperforming distribution relationships; reducing policy administration software systems; and other actions that we may determine are appropriate to successfully execute our business strategies.

Premiumsrepresent revenues generated from traditional life, immediate annuities with life contingencies and other insurance products that have significant mortality or morbidity risk.

Contract charges are revenues generated from interest-sensitive life products and variable ~~annuities,~~and fixed annuities ~~and other investment products~~ for which deposits are classified as contractholder funds or separate accounts ~~liabilities on the Condensed Statements of Financial Position.~~liabilities. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to the contractually specified dates. As a result, changes in contractholder funds and separate accounts liabilities are considered in the evaluation of growth and as indicators of future levels of revenues.

The following table summarizes premiums and contract charges by product.

Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)
2004
2003
2004
2003
Premiums
Traditional life $ 5,746 $ 5,630 $ 11,201 $ 11,074
Immediate annuities with life contingencies 13,597 6,230 24,041 14,820
Other 626 2,074 1,378 4,368

Total premiums 19,969 13,934 36,620 30,262

Contract charges

Interest-sensitive life 9,982 9,957 19,410 19,446
Fixed annuities 1,495 1,390 3,032 2,601
Variable annuities 3,099 2,335 6,246 4,626

Total contract charges 14,576 13,682 28,688 26,673

Premiums and contract charges $ 34,545 $ 27,616 $ 65,308 $ 56,935

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Premiums

Traditional life

$
6,245

$
5,746

$
12,105

$
11,201

Immediate annuities with life contingencies

8,823

13,597

22,042

24,041

Accident and health and other

1,106

626

2,020

1,378

Total premiums

16,174

19,969

36,167

36,620

Contract charges

Interest-sensitive life

10,524

9,982

20,469

19,410

Fixed annuities

1,634

1,495

3,427

3,032

Variable annuities

3,818

3,099

7,339

6,246

Total contract charges

15,976

14,576

31,235

28,688

Premiums and contract charges

$
32,150

$
34,545

$
67,402

$
65,308

11

The following table summarizes premiums and contract charges by distribution channel.

Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)
2004
2003
2004
2003
Premiums
Allstate agencies $ 5,654 $ 5,545 $ 11,011 $ 10,909
Financial institutions and broker/dealers — 34 107 34
Specialized brokers 13,597 6,230 23,934 14,820
Independent agents 786 380 1,485 623
Direct response (68 ) 1,745 83 3,876

Total Premiums 19,969 13,934 36,620 30,262

Contract charges

Allstate agencies 10,073 10,152 19,556 19,726
Financial institutions and broker/dealers 3,513 2,577 6,946 5,122
Specialized brokers 934 916 2,062 1,761
Independent agents 56 37 124 64

Total contract charges 14,576 13,682 28,688 26,673

Premiums and contract charges $ 34,545 $ 27,616 $ 65,308 $ 56,935

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Premiums

Allstate agencies

$
6,171

$
5,654

$
11,909

$
11,011

Broker dealers

—

—

36

107

Specialized brokers

8,823

13,597

22,005

23,934

Independent agents

1,180

786

2,217

1,485

Direct marketing

—

(68
)
—

83

Total premiums

16,174

19,969

36,167

36,620

Contract charges

Allstate agencies

10,218

10,073

19,924

19,556

Broker dealers

2,845

2,611

5,588

5,329

Banks

2,308

902

4,108

1,617

Specialized brokers

487

934

1,398

2,062

Independent agents

118

56

217

124

Total contract charges

15,976

14,576

31,235

28,688

Premiums and contract charges

$
32,150

$
34,545

$
67,402

$
65,308

Total premiums ~~increased 43.3% to $20.0 million~~declined 19.0% and 1.2% in the second quarter ~~of 2004~~ and ~~21.0% to $36.6 million in the~~ first six months of ~~2004~~2005, respectively, compared to the same periods of ~~2003. The increases in~~2004. In both periods, increased traditional life and accident and health premiums were ~~the result of increased~~more than offset by lower premiums on immediate annuities with life contingencies ~~partially offset by decreased premiums resulting from the disposal of the majority of our direct response distribution business.~~sold through specialized brokers.

Contract charges increased ~~6.5% to $14.6 million~~9.6% and 8.9% in the second quarter ~~of 2004~~ and ~~7.6% to $28.7 million in the~~ first six months of ~~2004~~2005, respectively, compared to the same periods of ~~2003.~~2004. The increases ~~in both periods~~ were primarily ~~attributable~~due to higher contract charges on variable annuities asand interest-sensitive life products and, to a lesser extent, fixed annuities. Higher variable annuity contract charges were the result of increased average ~~higher~~ account values induring the current periods of 2005 compared to the same periods of 2004, reflecting positive investment results and net deposits on variable annuity and life contracts. The increase in the interest-sensitive life contract charges were attributable to in-force business growth resulting from ~~new business~~deposits and ~~investment returns.~~credited interest more than offsetting surrenders and benefits. Fixed annuity contract charges for the second quarter and first six months of 2005 reflect higher surrender charges compared with the same periods in the prior year.

12

Contractholder funds represent interest-bearing liabilities arising from the sale of ~~individual products, such as~~fixed annuities, interest-sensitive life and variable annuity and life deposits allocated to fixed ~~annuities.~~accounts. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract maturities, benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses.

The following table shows the changes in contractholder funds.

Three Months Ended
June 30,
Six Months Ended
June 30,

(in thousands)
2004
2003
2004
2003

Contractholder funds, beginning balance $ 2,814,594 $ 2,189,330 $ 2,658,325 $ 2,051,429
Impact of adoption of SOP 03-1(1) — — 2,031 —

Deposits:

Fixed annuities (immediate and deferred) 257,012 195,439 402,399 302,725
Interest-sensitive life 26,210 13,803 51,032 27,782
Variable annuity and life deposits allocated to fixed accounts 31,098 37,420 56,657 74,904

Total deposits 314,320 246,662 510,088 405,411

Interest credited

30,235

27,277

57,951

51,792

Benefits, withdrawals and other adjustments

Benefits and withdrawals (56,205 ) (40,884 ) (104,193 ) (78,548 )
Contract charges (10,446 ) (10,073 ) (20,328 ) (19,593 )
Net transfers to separate accounts (9,927 ) (4,652 ) (21,394 ) (3,784 )
Other adjustments 1,515 (634 ) 1,606 319

Total benefits, withdrawals and other adjustments (75,063 ) (56,243 ) (144,309 ) (101,606 )

Contractholder funds, ending balance

$
3,084,086

$
2,407,026

$
3,084,086

$
2,407,026

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Contractholder funds, beginning balance

$
4,033,796

$
2,814,594

$
3,802,846

$
2,658,325

Impact of adoption of SOP 03-1(1)

—

—

—

2,031

Deposits:

Fixed annuities (immediate and deferred)

187,430

257,012

431,374

402,399

Interest-sensitive life

26,639

26,210

48,826

51,032

Variable annuity and life deposits allocated to fixed accounts

14,870

31,098

33,981

56,657

Total deposits

228,939

314,320

514,181

510,088

Interest credited

42,956

30,235

82,620

57,951

Benefits, withdrawals and other adjustments

Benefits

(17,900
)
(11,149
)
(34,497
)
(19,894
)
Surrenders and partial withdrawals

(132,973
)
(45,056
)
(191,289
)
(84,299
)
Contract charges

(10,335
)
(10,446
)
(20,447
)
(20,328
)
Net transfers to separate accounts

(9,524
)
(9,927
)
(18,739
)
(21,394
)
Other adjustments

279

1,515

563

1,606

Total benefits, withdrawals and other adjustments

(170,453
)
(75,063
)
(264,409
)
(144,309
)

Contractholder funds, ending balance

$
4,135,238

$
3,084,086

$
4,135,238

$
3,084,086

(1)
The increase in contractholder funds due to the adoption of ~~AICPA Statement of Position~~SOP 03-1 ~~"Accounting and Reporting by Insurance Enterprises for Certain Traditional Long-Duration Contracts and for Separate Accounts" (SOP 03-1) primarily~~ reflects the establishment of reserves for certain liabilities that are primarily related to ~~death benefit and~~ income benefit guarantees provided under variable ~~annuity contracts~~annuities and the reclassification of deferred sales inducements (“DSI”) from contractholder funds to other assets.

Contractholder funds deposits ~~increased 27.4%~~decreased 27.2% in the second quarter and ~~25.8%~~increased slightly in the first six months of ~~2004~~2005 compared to the same periods in ~~2003,~~2004. The decline in the second quarter was due primarily to lower deposits on fixed annuities as a result of increased competition from certificates of deposit. The slight increase in the first six months was due primarily to higher deposits on deferred fixed annuities resulting from strong competitive position, almost entirely offset by lower variable annuity and ~~average~~life deposits allocated to fixed accounts and, to a lesser extent, decreased deposits on interest-sensitive life products. Average contractholder funds, excluding the impact of adopting SOP 03-1, increased ~~28.3%~~38.5% in the second quarter and ~~28.8%~~38.2% in the first six months of ~~2004~~2005 compared to the same periods in ~~2003 due to significant increases in fixed annuity deposits.~~2004. Fixed annuity deposits ~~increased 31.5% and 32.9%~~declined 27.1% in the second quarter and increased 7.2% in the first six months of ~~2004, respectively,~~2005 compared to the same periods in ~~2003. The~~the prior year. Increases in short-term interest rates without corresponding increases ~~were attributable~~in longer term rates has generally reduced the competitiveness of fixed annuity products relative to ~~higher consumer demand resulting from increasing interest rates.~~shorter term deposit products such as money market funds and certificates of deposit. A continuation of this environment could reduce the level of expected fixed annuity deposits.
~~Benefits~~
Surrenders and partial withdrawals increased ~~37.5%~~195.1% in the second quarter and ~~32.7%~~126.9% in the first six months of ~~2004~~2005 compared to the same periods ~~in 2003. Benefits and withdrawals for the second quarter and first six months~~ of 2004 ~~represent~~reflecting an annualized withdrawal rate of ~~8.0%~~13.2% in the second quarter and ~~7.8%, respectively,~~10.1% in the first six months of 2005 based on the beginning of period contractholder funds ~~balance compared~~balance. This compares to ~~7.5% and 7.7% for the~~an annualized withdrawal rate of 6.4% in second quarter and 6.3% in the first six months of ~~2003, respectively.~~2004. The increases in the annualized withdrawal rates were primarily attributable to higher surrenders on the fixed account option on certain variable annuity contracts. The
13

funds subject to these surrenders were invested in prior years when the crediting rate on our fixed investment option was attractive relative to short-term market interest rates. Contractholders withdrew their funds at an increased rate due to the rise in short-term market interest rates, which were not accompanied by a structural rise in crediting rates. Fixed annuity surrenders and withdrawals are also contributing to the increase due to the growth and aging of our in-force business. Surrenders and withdrawals ~~have been comparable to~~may vary with changes in interest rates and equity market conditions and the aging of our ~~pricing assumptions.~~in-force contracts.

Separate accounts liabilities represent ~~contractholders'~~contractholders’ claims to the related ~~legally segregated~~ separate accounts assets. Separate accounts liabilities primarily arise from the sale of variable annuity contracts and variable life insurance policies.
The following table shows the changes in separate accounts liabilities.

Three Months Ended
June 30,
Six Months Ended
June 30,

(in thousands)
2004
2003
2004
2003

Separate accounts liabilities, beginning balance $ 686,639 $ 515,422 $ 665,875 $ 537,204

Variable annuity and life deposits

59,943

49,840

111,232

101,972

Variable annuity and life deposits allocated to fixed accounts (31,098 ) (37,420 ) (56,657 ) (74,904 )

Net deposits 28,845 12,420 54,575 27,068

Investment results

2,223

59,888

17,603

47,256

Contract charges (2,466 ) (1,891 ) (4,852 ) (3,658 )
Net transfers from fixed accounts 9,927 4,652 21,394 3,784
Surrenders and benefits (14,805 ) (14,807 ) (44,232 ) (35,970 )

Separate accounts liabilities, ending balance $ 710,363 $ 575,684 $ 710,363 $ 575,684

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Separate accounts liabilities, beginning balance

$
809,274

$
686,639

$
792,550

$
665,875

Variable annuity and life deposits

49,397

59,943

106,228

111,232

Variable annuity and life deposits allocated to fixed accounts

(14,870
)
(31,098
)
(33,981
)
(56,657
)
Net deposits

34,527

28,845

72,247

54,575

Investment results

18,081

2,223

6,279

17,603

Contract charges

(3,234
)
(2,466
)
(6,220
)
(4,852
)
Net transfers from fixed accounts

9,524

9,927

18,739

21,394

Surrenders and benefits

(16,919
)
(14,805
)
(32,342
)
(44,232
)

Separate accounts liabilities, ending balance

$
851,253

$
710,363

$
851,253

$
710,363

Separate accounts liabilities increased ~~$23.7~~$58.7 million as of June 30, 2005 compared to December 31, 2004. Variable annuity and ~~$44.5 million during~~life deposits in the second quarter and first six months of ~~2004,~~2005 decreased 17.6% and 4.5%, respectively, compared to ~~$60.3 million~~the same periods in the prior year. However, net deposits increased 19.7% and ~~$38.5 million during~~32.4% in the second quarter and first six months of ~~2003,~~2005, respectively, as ~~a result of net~~the decline in the variable and life deposits ~~transfers from fixed accounts and positive investment results, partially~~was more than offset by ~~surrenders, benefits paid~~a lower percentage of deposits being allocated to ~~contractholders and contract charges.~~fixed accounts. Variable annuity contractholders often allocate a significant portion of their initial variable annuity ~~deposits~~contract deposit into a fixed rate investment option. The level of this activity is reflected above in the deposits allocated to the fixed accounts, while all other transfer activity between the fixed and separate accounts investments options is reflected in net transfers from fixed accounts. The liability for the fixed portion of variable annuity contracts is reflected in contractholder funds.

Net investment income increased ~~11.2%~~21.8% in ~~both~~ the ~~second quarter~~three months ended June 30, 2005 and 22.3% in the first six months of ~~2004~~2005 compared to the same periods in ~~2003,~~2004. The increases in both periods were primarily due to the effect of higher portfolio balances, partially offset by lower portfolio yields. Higher portfolio balances resulted from the investment of cash flows from operating and financing ~~activities. Total investments~~activities related primarily to deposits from fixed annuities and interest-sensitive life policies. Investments as of June 30, ~~2004~~2005 increased ~~8.9%~~9.3% from ~~June 30, 2003~~December 31, 2004. The lower portfolio yields were primarily due ~~primarily~~ to ~~contractholder deposits, partially offset by a decline in unrealized capital gains on~~purchases, including reinvestments, of fixed income ~~securities.~~securities with yields lower than the current portfolio average.
14

Net income analysis is presented in the following table.

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Premiums

$
16,174

$
19,969

$
36,167

$
36,620

Contract charges(1)

15,976

14,573

31,235

28,678

Net investment income

88,503

72,676

174,995

143,071

Periodic settlements and accruals on non-hedge derivative instruments (2)

270

69

484

76

Contract benefits

(42,901
)
(44,916
)
(89,984
)
(87,840
)
Interest credited to contractholder funds(3)

(38,733
)
(30,155
)
(74,727
)
(57,802
)
Gross margin

39,289

32,216

78,170

62,803

Amortization of DAC and DSI

(10,390
)
(8,401
)
(13,893
)
(6,852
)
Operating costs and expenses

(13,078
)
(10,300
)
(22,270
)
(20,258
)
Income tax expense

(6,218
)
(5,046
)
(16,137
)
(12,885
)
Realized capital gains and losses, after-tax

(1,550
)
(1,797
)
(5,285
)
(2,231
)
DAC and DSI amortization expense on realized capital gains and losses, after-tax

(950
)
(454
)
539

(1,406
)
Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax

(164
)
(43
)
(300
)
(47
)
Gain on disposition of operations, after-tax

1

—

1

688

Cumulative effect of change in accounting principle, after-tax

—

—

—

(7,586
)
Net income

$
6,940

$
6,175

$
20,825

$
12,226

(1)

Three Months Ended
June 30,
Six Months Ended
June 30,

(in thousands)
2004
2003
2004
2003

Premiums $ 19,969 $ 13,934 $ 36,620 $ 30,262
Contract charges(1) 14,570 13,682 28,678 26,673
Net investment income 72,676 65,356 143,071 128,654
Periodic settlements and accruals on non-hedge derivative instruments 69 — 76 —
Contract benefits (44,916 ) (43,046 ) (87,840 ) (81,434 )
Interest credited to contractholder funds(2) (30,152 ) (27,277 ) (57,802 ) (51,792 )

Gross margin 32,216 22,649 62,803 52,363

Amortization of DAC and DSI

(8,401
)

(8,246
)

(6,852
)

(14,568
)
Operating costs and expenses (10,300 ) (5,610 ) (20,258 ) (15,336 )
Income tax expense (5,046 ) (3,069 ) (12,885 ) (7,871 )
Realized capital gains and losses, after-tax (1,797 ) 130 (2,231 ) (2,847 )
DAC and DSI amortization expense on realized capital gains and losses, after-tax (454 ) (766 ) (1,406 ) (986 )
Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax (43 ) — (47 ) —
Gain on disposition of operations, after-tax — — 688 —
Cumulative effect of change in accounting principle, after-tax — — (7,586 ) —

Net income $ 6,175 $ 5,088 $ 12,226 $ 10,755

~~(1)~~
~~Beginning in 2004, amortization~~Amortization of deferred loads on interest-sensitive life products related to realized capital gains and losses is excluded from contract charges for purposes of calculating gross margin. Amortization of deferred loads related to realized capital gains and losses totaled $6$3 thousand in the second quarter of 2004 and $10 thousand ~~for~~in the first six months of 2004. There was no amortization of deferred loads related to realized capital gains and losses in the second quarter and the first six months of ~~2004.~~

2005.
(2)
~~Beginning in 2004, amortization~~Periodic settlements and accruals on non-hedge derivative instruments are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations.
(3)Amortization of DSI is excluded from interest credited to contractholder funds for purposes of calculating gross margin. Amortization of DSI totaled ~~$383~~$705 thousand and $380 thousand in the ~~second quarter of~~three months ended June 30, 2005 and 2004, respectively, and $937 thousand and $384 thousand ~~for~~in the first six months of ~~2004. The prior period has not been restated.~~
2005 and 2004, respectively.

Gross margin, a non-GAAP measure, represents premiums, contract charges, ~~and~~ net investment income and periodic settlements and accruals on non-hedge derivative instruments, less contract benefits and interest credited to contractholder ~~funds.~~funds excluding amortization of DSI. We reclassify periodic settlements and accruals on non-hedge derivative instruments into gross margin to report them in a manner consistent with the economically hedged investments, replicated assets or product attributes (e.g. net investment income or interest credited to contractholder funds) and by doing so, appropriately reflect trends in product performance. We use gross margin as a component of our evaluation of the profitability of our life insurance and financial product portfolio. Additionally, for many of our products, including fixed annuities, variable ~~contracts,~~life and annuities, and interest-sensitive life insurance, the amortization of DAC and DSI is determined based on actual and expected gross margin. Gross margin is comprised of ~~four~~three components that are utilized to further analyze the business: investment margin, benefit margin, ~~maintenance~~and contract charges and ~~surrender charges.~~fees. We believe gross margin and its components are useful to investors because they allow for the evaluation of income components separately and in the aggregate when reviewing performance. Gross margin, investment margin and benefit margin should not be considered as a substitute for net income and do not reflect the overall profitability of the business. Net income is the GAAP measure that is most directly comparable to these margins. Gross margin is reconciled to GAAP net income in the table above.
15

The components of gross margin are reconciled to the corresponding financial statement line items in the following table.

Three Months Ended June 30,

Investment
Margin

Benefit
Margin

Contract Charges and
Fees

Gross
Margin

(in thousands)

2005

2004 (4)

2005

2004(4)

2005

2004 (4)

2005

2004

Premiums

$
—

$
—

$
16,174

$
19,969

$
—

$
—

$
16,174

$
19,969

Contract charges(1)

—

—

8,185

7,701

7,791

6,872

15,976

14,573

Net investment income

88,503

72,676

—

—

—

—

88,503

72,676

Periodic settlements and accruals on non-hedge derivative
instruments(2)

270

69

—

—

—

—

270

69

Contract benefits

(24,754
)
(23,905
)
(18,147
)
(21,011
)
—

—

(42,901
)
(44,916
)
Interest credited to

contractholder funds(3)

(38,733
)
(30,155
)
—

—

—

—

(38,733
)
(30,155
)

$
25,286

$
18,685

$
6,212

$
6,659

$
7,791

$
6,872

$
39,289

$
32,216

Six Months Ended June 30,

Investment
Margin

Benefit
Margin

Contract Charges and
Fees

Gross
Margin

(in thousands)

2005

2004(4)

2005

2004(4)

2005

2004(4)

2005

2004

Premiums

$
—

$
—

$
36,167

$
36,620

$
—

$
—

$
36,167

$
36,620

Contract charges(1)

—

—

16,030

15,180

15,205

13,498

31,235

28,678

Net investment income

174,995

143,071

—

—

—

—

174,995

143,071

Periodic settlements and accruals on non-hedge derivative instruments(2)

484

76

—

—

—

—

484

76

Contract benefits

(50,161
)
(48,581
)
(39,823
)
(39,259
)
—

—

(89,984
)
(87,840
)
Interest credited to

contractholder funds(3)

(74,727
)
(57,802
)
—

—

—

—

(74,727
)
(57,802
)

$
50,591

$
36,764

$
12,374

$
12,541

$
15,205

$
13,498

$
78,170

$
62,803

Three Months Ended June 30,

Investment
Margin
Benefit Margin
Maintenance
Charges
Surrender
Charges
Gross
Margin

(in thousands)
2004
2003
2004
2003
2004
2003
2004
2003
2004
2003

Premiums $ — $ — $ 19,969 $ 13,934 $ — $ — $ — $ — $ 19,969 $ 13,934
Contract charges(1) — — 7,463 7,338 6,022 5,170 1,085 1,174 14,570 13,682
Net investment income 72,676 65,356 — — — — — — 72,676 65,356
Periodic settlements and accruals on non-hedge derivative instruments(2) 69 — — — — — — — 69 —
Contract benefits (23,908 ) (22,053 ) (21,008 ) (20,993 ) — — — — (44,916 ) (43,046 )
Interest credited to contractholder funds(3) (30,152 ) (27,277 ) — — — — — — (30,152 ) (27,277 )

$ 18,685 $ 16,026 $ 6,424 $ 279 $ 6,022 $ 5,170 $ 1,085 $ 1,174 $ 32,216 $ 22,649

Six Months Ended June 30,

Investment
Margin
Benefit Margin
Maintenance
Charges
Surrender
Charges
Gross
Margin

(in thousands)
2004
2003
2004
2003
2004
2003
2004
2003
2004
2003

Premiums $ — $ — $ 36,620 $ 30,262 $ — $ — $ — — $ 36,620 $ 30,262
Contract charges(1) — — 14,729 14,080 11,588 10,239 2,361 2,354 28,678 26,673
Net investment income 143,071 128,654 — — — — — — 143,071 128,654
Periodic settlements and accruals on non-hedge derivative instruments(2) 76 — — — — — — — 76 —
Contract benefits (48,581 ) (45,677 ) (39,259 ) (35,757 ) — — — — (87,840 ) (81,434 )
Interest credited to contractholder funds(3) (57,802 ) (51,792 ) — — — — — — (57,802 ) (51,792 )

$ 36,764 $ 31,185 $ 12,090 $ 8,585 $ 11,588 $ 10,239 $ 2,361 $ 2,354 $ 62,803 $ 52,363

(1)
~~Beginning in 2004, amortization~~Amortization of deferred loads on interest-sensitive life products related to realized capital gains and losses is excluded from contract charges for purposes of calculating gross margin. Amortization of deferred loads related to realized capital gains and losses totaled $6$3 thousand in the second quarter of 2004 and $10 thousand ~~for~~in the first six month of 2004. There was no amortization of deferred loads related to realized capital gains and losses in the second quarter and the first six months of ~~2004.~~

2005.
(2)
Periodic settlements and accruals on non-hedge derivative instruments are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations.

(3)
~~Beginning in 2004, amortization~~Amortization of DSI is excluded from interest credited to contractholder funds for purposes of calculating gross margin. Amortization of DSI totaled ~~$383~~$705 thousand and $380 thousand in the ~~second quarter of~~three months ended June 30, 2005 and 2004, respectively, and $937 thousand and $384 thousand ~~for the first six months of 2004. The prior period has not been restated.~~

        ~~Gross margin increased 42.2% in the second quarter and 19.9%~~ in the first six months of 2005 and 2004, respectively.
(4)The prior period has been restated to conform to the current period presentation. In connection therewith, contract charges related to guaranteed minimum death, income, accumulation and withdrawal benefits on variable annuities have been reclassified to benefit margin from maintenance charges. Additionally, amounts previously presented as maintenance charges and surrender charges are now presented in the aggregate as contract charges and fees. These reclassifications did not result in a change in gross margin.
16

Gross margin increased 22.0% in the second quarter of 2005 and 24.5% in the first six months of 2005 compared to the same period of 2004. The increases in both periods ~~of 2003~~were mostly due to ~~increased benefit margin,~~higher investment ~~margin, and higher maintenance charges.~~margin.

Investment marginis a component of gross margin, both of which are non-GAAP measures. Investment margin represents the excess of net investment income and periodic settlements and accruals on non-hedge derivative instruments over interest credited to contractholder funds and the implied interest on life-contingent immediate annuities included in the reserve for life-contingent contract benefits. Amortization of DSI is excluded from interest credited to contractholder funds for purposes of calculating gross margin. We use investment margin to evaluate our profitability related to the difference between investment returns on assets supporting certain products and amounts credited to customers ~~("spread"~~(“spread”) during the fiscal period.

Investment margin by product group is shown in the following table.

Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands)
2004
2003
2004
2003
Life insurance $ 2,782 $ 2,226 $ 5,682 $ 4,714
Annuities 15,903 13,800 31,082 26,471

Total investment margin $ 18,685 $ 16,026 $ 36,764 $ 31,185

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Annuities

$
22,998

$
15,903

$
46,009

$
31,082

Life insurance

2,288

2,782

4,582

5,682

Total investment margin

$
25,286

$
18,685

$
50,591

$
36,764

Investment margin increased ~~16.6%~~35.3% in the second quarter of 2005 and ~~17.9%~~37.6% in the first six months of ~~2004~~2005 compared to the same periods of ~~2003~~2004 due to ~~an increase in~~increased average contractholder funds, slightly higher investment spreads on investments supporting deferred fixed annuities and ~~improved~~increased yields on investments supporting capital, traditional life and other products. ~~The increases in both periods were partially offset by a decline in the interest-sensitive life investment spread, as investment yield declines were not fully offset by crediting rate reductions.~~

The following table summarizes the weighted average investment yield, interest crediting rates and investment spreads for the three months ended June 30.

Weighted Average
Investment Yield
Weighted Average
Interest Crediting Rate
Weighted Average
Investment Spread

2004
2003
2004
2003
2004
2003

Interest-sensitive life 6.1 % 6.5 % 4.8 % 5.0 % 1.3 % 1.5 %
Fixed annuities—deferred 5.6 6.1 3.4 3.9 2.2 2.2
Fixed annuities—immediate 7.6 7.8 6.8 6.9 0.8 0.9
Investments supporting capital, traditional life and other products 5.9 4.8 n/a n/a n/a n/a

Weighted Average
Investment Yield

Weighted Average
Interest Crediting Rate

Weighted Average
Investment Spread

2005

2004

2005

2004

2005

2004

Interest-sensitive life

5.8
%
6.1
%
4.6
%
4.8
%
1.2
%
1.3
%
Fixed annuities – deferred annuities

5.5

5.6

3.2

3.4

2.3

2.2

Fixed annuities – immediate annuities with and without life contingencies

7.6

7.6

6.8

6.8

0.8

0.8

Investments supporting capital, traditional life and other products

6.2

5.9

N/A

N/A

N/A

N/A

The following table summarizes the weighted average investment yield, interest crediting rates and investment spreads for the six months ended June 30.

Weighted Average
Investment Yield
Weighted Average
Interest Crediting Rate
Weighted Average
Investment Spread

2004
2003
2004
2003
2004
2003

Interest-sensitive life 6.2 % 6.7 % 4.8 % 5.0 % 1.4 % 1.7 %
Fixed annuities—deferred 5.6 6.2 3.4 4.0 2.2 2.2
Fixed annuities—immediate 7.6 7.8 6.8 6.9 0.8 0.9
Investments supporting capital, traditional life and other products 6.0 4.7 n/a n/a n/a n/a

Weighted Average
Investment Yield

Weighted Average
Interest Crediting Rate

Weighted Average
Investment Spread

2005

2004

2005

2004

2005

2004

Interest-sensitive life

5.7
%
6.2
%
4.5
%
4.8
%
1.2
%
1.4
%
Fixed annuities – deferred annuities

5.5

5.6

3.2

3.4

2.3

2.2

Fixed annuities – immediate annuities with and without life contingencies

7.5

7.6

6.7

6.8

0.8

0.8

Investments supporting capital, traditional life and other products

6.2

6.0

N/A

N/A

N/A

N/A

17

The following table summarizes the liabilities for these contracts and policies.

June 30,
(in thousands)
2004
2003
Interest-sensitive life $ 342,433 $ 284,778
Fixed annuities—deferred 2,228,769 1,651,308
Fixed annuities—immediate 1,913,051 1,808,396

4,484,253 3,744,482

FAS 115/133 market value adjustment

154,940

250,610
Life-contingent contracts and other 104,346 99,415

Total contractholder funds and reserve for life-contingent contract benefits $ 4,743,539 $ 4,094,507

Six Months Ended
June 30,

(in thousands)

2005

2004

Fixed annuities – immediate annuities with life contingencies

$
1,806,477

$
1,564,347

Other life contingent contracts and other

104,662

95,106

Reserve for life-contingent contract benefits

$
1,911,139

$
1,659,453

Interest-sensitive life

$
397,691

$
342,817

Fixed annuities – deferred annuities

3,218,620

2,227,589

Fixed annuities – immediate annuities without life contingencies

518,584

513,609

Other

343

71

Contractholder funds

$
4,135,238

$
3,084,086

Benefit marginis a component of gross margin, both of which are non-GAAP measures. Benefit margin represents life and life-contingent immediate annuity premiums, ~~and~~ cost of insurance contract charges and variable annuity contract charges for contract guarantees less contract benefits. Benefit margin excludes the implied interest on life-contingent immediate annuities, which is included in the calculation of investment ~~margin, and mortality charges on variable annuities, which are included as a component of maintenance charges.~~margin. We use the benefit margin to evaluate our underwriting performance, as it reflects the profitability of our products with respect to mortality or morbidity risk during a fiscal period.

Benefit margin by product group is shown in the following table.

Three Months Ended
June 30,
Six Months Ended
June 30,

(in thousands)
2004
2003
2004
2003

Life insurance $ 7,851 $ 1,743 $ 15,069 $ 10,154
Annuities (1,427 ) (1,464 ) (2,979 ) (1,569 )

Total benefit margin $ 6,424 $ 279 $ 12,090 $ 8,585

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004(1)

2005

2004(1)

Life insurance

$
8,333

$
7,851

$
15,524

$
15,069

Annuities

(2,121
)
(1,192
)
(3,150
)
(2,528
)
Total benefit margin

$
6,212

$
6,659

$
12,374

$
12,541

(1) The prior period has been restated to conform to the current period presentation.
Benefit margin ~~increased $6.1 million~~declined 6.7% in the second quarter of 2004 compared to the same period in 2003 due to strengthening of reserves for certain traditional life insurance policies in the second quarter of 2003. For the first six months of 2004, the benefit margin increased $3.5 million or 40.8% from the first six months of 2003 due to the disposal of the majority of our direct response distribution business2005 and ~~fewer deaths on our life-contingent immediate annuities as well as the effects of reserve strengthening in the second quarter of 2003.~~
        As required by SOP 03-1, as of January 1, 2004, a reserve was established for guaranteed minimum death benefits ("GMDBs") and guaranteed minimum income benefits ("GMIBs"), which in previous periods, in the case of GMDBs, were expensed as paid. Under the SOP, we anticipate that the benefit margin will be less volatile in the future, as contract benefit expense pertaining to GMDBs and GMIBs will be proportionate to the related revenue rather than cash payments made during the period. Included in the benefit margin for the second quarter and first six months of 2004 is an addition to the reserve for guarantees of $0.5 million and $0.9 million, respectively. Included in the benefit margin for the second quarter and first six months of 2003 are GMDB payments of $0.8 million and $2.0 million, respectively. For further explanation of the impacts of the adoption of this accounting guidance, see Note 1 to the Condensed Financial Statements.
~~Amortization of DAC and DSI~~ increased 1.9% in the second quarter of 2004 compared to the same period of 2003 as higher gross margin on fixed annuities and variable products resulted in increased amortization, which was partially offset by the elimination of DAC amortization on the direct response distribution business that was sold in January of 2004. Amortization of DAC and DSI decreased 53.0%1.3% in the first six months of ~~2004 compared to the first six months of 2003 due to a deceleration of amortization (commonly called "DAC unlocking") on interest-sensitive life and fixed annuities of $10.2 million in the~~

~~first quarter of 2004 compared to an acceleration of amortization of $325 thousand in the same period of 2003.~~
        The adoption of SOP 03-1 required a new modeling approach for estimating expected future gross profits that are used when determining the amortization of DAC. Because of this new modeling approach, effective January 1, 2004, the variable annuity DAC and DSI assets were reduced by $10.7 million. This reduction was recognized as a cumulative effect of a change in accounting principle.
~~Operating costs and expenses~~ ~~increased 83.6% in the second quarter and 32.1% for the first six months of 2004~~2005 compared to the same periods of ~~2003.~~2004. The ~~increase~~decline in ~~total operating costs~~both periods was mostly due to unfavorable mortality experience on immediate annuities with life contingencies, partially offset by growth of our in-force life business.
Upon the adoption of Statement of Position No. 03-1, “Accounting and ~~expenses reflects higher non-deferrable sales expenses~~Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”, on January 1, 2004, reserves were established for death and income benefits provided under variable annuities and other secondary guarantees. Annuity benefit margin will continue to be adversely impacted by certain closed blocks of life-contingent immediate annuities whose benefit payments are anticipated to extend beyond their original pricing expectations. The annuity benefit margin in future periods will fluctuate based on the timing of annuitant deaths on these life-contingent immediate annuities and the annual evaluation of assumptions used in our valuation models for variable annuity guarantees.
18

Amortization of DAC and DSI, excluding amortization related to realized capital gains and losses, increased 23.7% or $1.99 million in the ~~second quarter of 2004~~three months ended June 30, 2005 and ~~reinsurance expense credits~~102.8% or $7.04 million in ~~the second quarter of 2003. For~~ the first six months of ~~2004~~2005 compared to ~~2003,~~the same periods of 2004. The increases in both periods were primarily the result of higher ~~trail commissions~~gross margins on deferred fixed annuities. For the six-month period, this impact was partially offset by adjustments recorded in connection with our annual comprehensive evaluation of the assumptions used in our valuation models for all investment products, including variable and ~~employee~~fixed annuities and interest-sensitive and variable life products.
In the first quarter of 2005, as a result of our annual evaluation of assumptions, we recorded DAC and DSI deceleration (commonly referred to as “DAC and DSI unlocking”) of $7.3 million, which included deceleration of $2.8 million on interest-sensitive and variable life products and deceleration of $4.5 million for variable annuities. The amortization deceleration on variable annuities was mostly attributable to better than anticipated equity market performance and persistency.
In the prior year, the comparable DAC and DSI unlocking was a net deceleration of amortization of $10.2 million. This deceleration of amortization was the result of favorable projected mortality on our interest-sensitive life products and resulted in the total DAC and DSI amortization being favorable relative to net income.
Operating costs and expenses increased 27.0% in the three months ended June 30, 2005 and 9.9% in the first six months of 2005 compared to the same periods of 2004. The increases were primarily attributable to higher technology, distribution and administrative expenses, which were incurred to support growth in the Company’s in-force business. For the six-month period, these increases were partially offset by lower guaranty fund assessments and expenses related to taxes, licenses and fees in the ~~disposal~~first quarter of 2005 compared to the ~~majority~~first quarter of ~~our direct response distribution business.~~2004.
19

INVESTMENTS
An important component of our financial results is the return on our investment portfolio. The ~~investment portfolio is managed based upon the business and its corresponding liability structure. The~~ composition of the investment portfolio at June 30, ~~2004~~2005 is presented in the table below.
(in thousands)
Carrying
value
Percent
of total

Fixed income securities(1) $ 4,694,455 90.0 %
Mortgage loans 403,725 7.7
Short-term 76,104 1.5
Policy loans 34,336 0.7
Other 7,285 0.1

Total $ 5,215,905 100.0 %

Carrying

Percent

(in thousands)

value

of total

Fixed income securities (1)

$
6,111,363

90.5
%
Mortgage loans

536,908

8.0

Short-term

66,059

1.0

Policy loans

35,806

0.5

Other

2,399

—

Total

$
6,752,535

100.0
%
(1)
Fixed income securities are carried at fair value. Amortized cost basis for these securities was ~~$4.37~~$5.5 billion.

Total investments increased to ~~$5.22~~$6.75 billion at June 30, ~~2004~~2005 from ~~$4.86~~$6.18 billion at December 31, ~~2003~~2004 due to positive cash flows from operating and financing activities, higher unrealized capital gains on fixed income securities and increased funds associated with securities lending ~~partially offset by decreased unrealized gains on fixed income securities.~~transactions.

Total investments at amortized ~~costs~~cost related to collateral, ~~associated with~~due to securities lending transactions, increased to ~~$176.0~~$246 million at June 30, ~~2004~~2005 from ~~$134.5~~$133 million at December 31, ~~2003.~~2004.

At June 30, ~~2004, 96.1%~~2005, 96.3% of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating from the National Association of Insurance Commissioners ~~("NAIC"~~(“NAIC”) of 1 or 2, a ~~Moody's equivalent~~ rating of Aaa, Aa, A or ~~Baa; an S&P equivalent~~Baa from Moody’s or a rating of AAA, AA, A or ~~BBB;~~BBB from S&P, Fitch or Dominion; or a comparable internal rating ~~when~~if an ~~external~~externally provided rating is not available.

The unrealized net capital gains on fixed income securities at June 30, ~~2004~~2005 were ~~$328.8~~$659.9 million, ~~a decrease~~an increase of ~~$151.1~~$127.3 million or ~~31.5%~~23.9% since December 31, ~~2003.~~2004. The net unrealized gain was comprised of ~~$389.3~~$668.1 million of unrealized gains and ~~$60.5~~$8.2 million of unrealized losses at June 30, ~~2004.~~2005. This is compared to a net unrealized gain ~~for the fixed income portfolio~~ totaling ~~$479.9~~$532.7 million at December 31, ~~2003,~~2004, comprised of ~~$498.8~~$545.5 million of unrealized gains and ~~$18.9~~$12.8 million of unrealized losses. The total decrease in net unrealized gains for the fixed income portfolio was $151.1 million, of which $142.6 million or 94.4% was related to investment grade securities. The total increase in gross unrealized losses for the fixed income portfolio was $41.5 million, of which $35.7 million or 86.1% was related to investment grade securities.

Of the gross unrealized losses in the fixed income portfolio at June 30, ~~2004, $51.9~~2005, $6.0 million or ~~85.8%~~73.5% were related to investment grade securities and are believed to be primarily a result of ~~the~~a rising interest rate environment. Of the remaining ~~$8.6~~$2.2 million of losses in the fixed income portfolio, ~~$6.5~~$2.0 million or ~~75.6% was~~

~~concentrated~~94.5% were in the corporate fixed income ~~portfolio and was~~portfolio. The $2.0 million of corporate fixed income gross unrealized losses were primarily comprised of securities in the ~~transportation, consumer goods~~communications, utilities, financial services and ~~energy~~transportation sectors. The gross unrealized losses in these sectors were primarily company specific and interest rate related. Approximately ~~$4.4 million~~$919 thousand of the total gross unrealized losses in the corporate fixed income portfolio were associated with the ~~airline~~automobile industry, ~~for~~ which ~~values~~includes direct debt issuances of automobile manufacturers, captive automotive financing companies and automobile parts and equipment sellers. Values in the automobile industry were primarily depressed due to company specific ~~issues and economic issues related to fuel costs.~~conditions. We expect eventual recovery of these ~~securities and the related sectors.~~securities. Every security was included in our portfolio monitoring process.

Our portfolio monitoring process identifies and evaluates fixed income securities whose carrying value may be other than temporarily impaired. The process includes a quarterly review of all securities using a screening process to identify those securities whose fair value compared to amortized cost ~~for fixed income securities~~ is below established thresholds for certain time periods, or which are identified through other monitoring criteria such as ratings downgrades or payment defaults. We also recognize impairment on securities in an unrealized loss position for which we do not have the intent and ability to hold until recovery.

We also monitor the quality of our fixed income portfolio by categorizing certain investments as ~~"problem"~~“problem”, ~~"restructured"~~“restructured” or ~~"potential~~“potential problem."” Problem fixed income securities are securities in default with respect to principal or interest and/or securities issued by companies that have gone into bankruptcy subsequent to our acquisition of the security. Restructured fixed income securities have rates and terms that are not consistent with market rates or terms prevailing at the time of the restructuring. Potential problem fixed
20

income securities are current with respect to contractual principal and/or interest, but because of other facts and circumstances, we have ~~serious~~ concerns regarding the ~~borrower's~~borrower’s ability to pay future principal and interest, which causes us to believe these securities may be classified as problem or restructured in the future.
The following table summarizes problem, restructured and potential problem fixed income securities.

June 30, 2004
December 31, 2003

(in thousands)
Amortized
cost
Fair
value
Percent
of total
Fixed
Income
portfolio
Amortized
cost
Fair
value
Percent
of total
Fixed
Income
portfolio

Problem $ 12,948 $ 12,308 0.3 % $ 13,186 $ 12,533 0.3 %
Restructured 5,399 5,893 0.1 5,701 6,303 0.1
Potential problem 15,709 14,698 0.3 17,899 17,843 0.4

Total net carrying value $ 34,056 $ 32,899 0.7 % $ 36,786 $ 36,679 0.8 %

Cumulative write-downs recognized $ 5,061 $ 4,817

We have experienced a decrease in the amortized cost of fixed income securities categorized as problem, restructured and potential problem as of June 30, 2004 compared to December 31, 2003. The decrease was primarily related to the sale of holdings in these categories due to specific developments causing a change in our outlook and intent to hold those securities.
(in thousands)

June 30, 2005

December 31, 2004

Amortized
cost

Fair
value

Percent
of total
Fixed
Income
portfolio

Amortized
cost

Fair
value

Percent
of total
Fixed
Income
portfolio

Problem

$
10,609

11,538

0.2
%
$
10,637

$
10,813

0.2
%
Restructured

—

—

—

5,396

6,151

0.1

Potential problem

15,192

15,428

0.2

11,231

10,539

0.2

Total net carrying value

$
25,801

26,966

0.4
%
$
27,264

$
27,503

0.5
%
Cumulative write-downs recognized

$
5,682

$
4,606

We ~~also~~ evaluated each of these securities through our portfolio monitoring process at June 30, 2005 and recorded write-downs when appropriate. We further concluded that any remaining unrealized losses on these securities were temporary in ~~nature.~~nature and that we have the intent and ability to hold until recovery. While these balances may increase in the future, particularly if economic conditions are unfavorable, ~~we expect~~management expects that the total amount of securities in these categories will remain low relative to the total fixed income securities portfolio.

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

Three Months Ended
June 30,
Six Months Ended
June 30,

(in thousands)
2004
2003
2004
2003

Investment write-downs $ (245 ) $ (1,672 ) $ (884 ) $ (7,252 )
Dispositions (5,866 ) 1,527 (4,039 ) 1,626
Valuation of derivative instruments 2,563 (1,029 ) 708 (1,023 )
Settlement of derivative instruments 662 1,382 676 2,166

Realized capital gains and losses, pretax (2,886 ) 208 (3,539 ) (4,483 )
Income tax benefit (expense) 1,089 (78 ) 1,308 1,636

Realized capital gains and losses, after-tax $ (1,797 ) $ 130 $ (2,231 ) $ (2,847 )

Three Months Ended
June 30,

Six Months Ended
June 30,

(in thousands)

2005

2004

2005

2004

Investment write-downs

$
(1,076
)
$
(245
)
$
(1,469
)
$
(884
)
Dispositions

4,979

(5,866
)
(3,044
)
(4,039
)
Valuation of derivative instruments

(3,719
)
2,563

(3,478
)
708

Settlement of derivative instruments

(2,816
)
662

(518
)
676

Realized capital gains and losses, pretax

(2,632
)
(2,886
)
(8,509
)
(3,539
)
Income tax benefit

1,082

1,089

3,224

1,308

Realized capital gains and losses, after-tax

$
(1,550
)
$
(1,797
)
$
(5,285
)
$
(2,231
)
Dispositions in the above table ~~also~~ include sales, losses recognized in anticipation of sales and other transactions such as calls and prepayments. We may sell securities during the period in which fair value has declined below amortized cost. ~~Recognizing in~~In certain situations new factors such as negative developments, subsequent credit deterioration, relative value opportunities, market liquidity concerns and portfolio reallocations we can subsequently change our previous intent to continue holding a security.
~~The~~
A changing interest rate environment will also drive changes in our portfolio duration targets at a tactical level. A duration target and range is established with an economic view of liabilities relative to a long-term portfolio view. Tactical duration adjustments within management’s approved ranges are accomplished through both cash market transactions and derivative activities that generate realized gains and losses and through new purchases. As a component of our approach to managing portfolio duration, realized gains and losses on ~~dispositions~~derivative instruments are most appropriately considered in conjunction with the unrealized gains and losses on the fixed income portfolio. This approach mitigates the impacts of general interest rate changes to the overall financial condition of the Company.
21

In the first quarter of 2005, because of an anticipated rise in interest rates as well as changes in existing market conditions and long-term asset return assumptions, certain changes were planned within various portfolios. They included continued asset-liability management strategies; on-going comprehensive reviews of our portfolios; and changes being made to our strategic asset allocation, including a decision to pursue yield enhancement strategies. At that time we identified, in total, approximately $216 million of securities, all of which were in an unrealized loss position, which we would consider selling to achieve these objectives. As a result, we recognized $5.6 million of write-downs due to a change in intent to hold these securities until recovery. Securities related to $1.2 million of the write-downs were sold during the second quarter, and we continue to consider selling securities with a carrying value of ~~2004 were related~~approximately $0.3 million having write-downs of $0.1 million. The remaining securities with $4.3 million of write-downs recognized in the first quarter have been re-designated as being held to ~~sales~~recovery within the available-for-sale category, primarily as a consequence of the lower than expected interest rate environment. Of this amount, $3.7 million of write-downs relates to $158 million of affected securities that were ~~sold~~identified in ~~recognition~~connection with yield enhancement strategies. The difference between the current carrying value and par value of ~~relative value opportunities. The proceeds from these sales were reinvested~~the re-designated securities will be recognized in ~~higher yielding securities.~~net investment income over the remaining life of the securities, pursuant to the guidance in Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resourcesconsist of ~~shareholder's equity.~~shareholder’s equity, representing funds deployed or available to be deployed to support business operations. The following table summarizes our capital resources.
(in thousands)
June 30, 2004
December 31, 2003
Common stock, retained earnings and other shareholder's equity items $ 407,076 $ 394,850
Accumulated other comprehensive income 107,078 138,724

Total shareholder's equity $ 514,154 $ 533,574

(in thousands)

June 30, 2005

December 31, 2004

Common stock, retained earnings and other shareholder’s equity items

$
504,769

$
483,980

Accumulated other comprehensive income

171,164

155,255

Total shareholder’s equity

$
675,933

$
639,235

~~Shareholder's~~Shareholder’s equity ~~decreased~~ increased in the first six months of ~~2004~~2005 when compared to December 31, ~~2003 due to decreased~~2004 as a result of net income and higher unrealized ~~gains on fixed income securities partially offset by~~ net ~~income.~~capital gains.
Financial Ratings and Strength Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks and the current level of operating leverage. There have been no changes to our insurance financial strength ratings since December 31, 2003. However, in February 2004, A.M. Best revised the outlook to stable from positive for the insurance financial strength ratings of ALIC and certain rated ALIC subsidiaries and affiliates, including the Company.2004.
Liquidity Sources and Uses
        ~~Increased~~As reflected in our Condensed Statements of Cash Flows, lower operating cash flows in the first six months of ~~2004~~2005 when compared to the first six months of ~~2003~~2004 primarily relate to ~~increases in~~higher policy benefits and acquisition costs paid and lower premiums, ~~and~~partially offset by increased investment income. Cash flows used in investing activities ~~increased~~decreased in the first six months of ~~2004 as a result of~~2005 due to the investment of ~~higher~~lower financing ~~cash flow~~ and ~~higher~~ operating cash flows.
~~Higher~~
Lower cash flow from financing activities during the first six months of ~~2004~~2005 when compared to the ~~same period~~first six months of ~~2003 reflects an increase in~~2004 reflect lower variable annuity and life deposits ~~received from contractholders,~~allocated to fixed accounts and higher fixed annuity withdrawals, partially offset by

~~benefits and withdrawals from contractholders' accounts.~~ higher deposits on fixed annuities. For quantification of the changes in contractholder funds, see the ~~Results of~~ Operations section of the MD&A.

We have entered into an inter-company loan agreement with ~~The Allstate Corporation (the "Corporation").~~the Corporation. The amount of inter-company loans available to us is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. We had no amounts outstanding under the inter-company loan agreement at June 30, ~~2004~~2005 or December 31, ~~2003.~~2004. The Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings.
22

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

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

These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like ~~"plans," "seeks," "expects," "will," "should," "anticipates," "estimates," "intends," "believes," "likely," "targets"~~“plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings. These statements may address, among other things, our strategy for growth, product development, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Factors which could cause actual results to differ materially from those suggested by such forward-looking statements include but are not limited to those discussed or identified in this document (including the risks described below) and are incorporated in this Part I, Item 2 by reference to the information set forth in our Annual Report on Form 10-K, Part II, Item 7, under the caption ~~"Forward-Looking~~“Forward-Looking Statements and Risk ~~Factors."~~Factors”.
Actions taken to simplify our business model and improve profitability may not be successful and may result in losses and costs
We are pursuing strategies intended to improve our return on equity. Actions that we have taken and may continue to take include changing the number and selection of products being marketed, terminating underperforming distribution relationships, reducing policy administration software systems, and other actions that we may determine are appropriate to successfully execute our business strategies. The actions that we have taken and may take in the future may not achieve their intended outcome and could result in lower premiums and contract charges, restructuring costs, losses on disposition or losses related to the discontinuance of individual products or distribution relationships.
Changes in market interest rates may lead to a significant decrease in the sales and profitability of spread-based products
Our ability to manage the investment margin for spread-based products is dependent upon maintaining profitable spreads between investment yields and interest crediting rates. As interest rates decrease or remain at low levels, proceeds from investments that have matured, prepaid or sold may be reinvested at lower yields, reducing investment margin. Lowering interest-crediting rates can offset decreases in investment margin on some products. However, these changes could be limited by market conditions, regulatory or contractual minimum rate guarantees on many contracts and may not match the timing or magnitude of changes in asset yields. Decreases in the rates offered on products could make those products less attractive, leading to lower sales and/or changes in the level of surrenders and withdrawals for these products. Non-parallel shifts in interest rates, such as increases in short-term rates without accompanying increases in medium- and long-term rates, can influence customer demand for fixed annuities, which could impact the level and profitability of new customer deposits. Increases in market interest rates can also have negative effects, for example by increasing the attractiveness of other investments, which can lead to higher surrenders at a time when the investment asset values are lower as a result of the increase in interest rates. For certain products, principally fixed annuity and interest-sensitive life products, the earned rate on assets could lag behind market yields. We may react to market conditions by increasing crediting rates, which could narrow spreads. Unanticipated surrenders could result in DAC unlocking or affect the recoverability of DAC and thereby increase expenses and reduce profitability.
23

Item 4. Controls and Procedures
        ~~With~~Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we ~~carried out~~conducted an evaluation of the effectiveness ~~of the design and operation~~ of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in ~~timely alerting them to~~providing reasonable assurance that material information required to be ~~included~~disclosed in our ~~periodic~~ reports filed with or submitted to the Securities and Exchange ~~Commission. However,~~Commission under the ~~design of any system of controls~~Securities Exchange Act is made known to management, including the principal executive officer and ~~procedures is based~~the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in part upon assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and are effective at the "reasonable assurance" level.
Internal Control over Financial Reporting. During the fiscal quarter ended June 30, ~~2004,~~2005, there ~~have been~~were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.  Legal Proceedings
Information required for this Part II, Item 1, is incorporated by reference to the discussion under the heading ~~"Regulation"~~“Regulation” and under the heading ~~"Legal proceedings"~~“Legal and Regulatory Proceedings and Inquiries” in Note 43 of the ~~Company's~~Company’s Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.
Item 6.   Exhibits ~~and Reports on Form 8-K~~
(a)
Exhibits
An Exhibit Index has been filed as part of this report on page E-1.
~~(b)~~
~~Reports on Form 8-K~~
~~None.~~
24

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

Allstate Life Insurance Company of New York
~~(Registrant)~~

~~August 10, 2004~~

By
~~/s/~~  ~~SAMUEL H. PILCH~~
(Registrant)
August 8, 2005
By
/s/ Samuel H. Pilch
~~Group Vice President and~~
Samuel H. Pilch
Controller
(chief accounting officer and duly
authorized officer of the ~~Registrant)~~registrant)
25

Exhibit No.
Description
10.1
Amended and Restated Service and Expense Agreement ~~among~~between Allstate Insurance ~~Company.~~Company, The Allstate Corporation and ~~Certain Affiliates,~~certain affiliates, effective January 1, ~~2004. (As~~2004, and effective March 5, 2005 with respect to Allstate Life Insurance Company of ~~August 9, 2004, some regulatory approvals and board approval are pending.)~~New York. Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance ~~Company's~~Company’s Quarterly Report on Form 10-Q for ~~the~~ quarter ended June 30, ~~2004.~~2005.

~~10.2~~

~~Automatic Annuity Reinsurance~~
10.2
New York Insurer Supplement to Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation, Allstate Life Insurance Company of New York and ~~Allstate~~Intramerica Life Insurance Company, effective ~~January 2, 2004.~~March 5, 2005. Incorporated herein by reference to Exhibit 10.2 to Allstate Life Insurance Company’s Quarterly Report on Form 10-Q for quarter ended June 30, 2005.

15

15
Acknowledgement of awareness from Deloitte & Touche LLP dated August ~~10, 2004,~~8, 2005, concerning unaudited interim financial information.

~~31.1~~

31.1
Rule 15d-14(a) Certification of Principal Executive Officer

~~31.2~~

31.2
Rule 15d-14(a) Certification of Principal Financial Officer

32

32
Section 1350 Certifications
E-1

OR

ALLSTATE LIFE INSURANCE COMPANY
OF
NEW YORK

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

June 30, 20042005

PART I.1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

1. Basis of Presentation

2. Other InvestmentsReinsurance

4.3. Guarantees and Contingent Liabilities

OVERVIEW

RESULTS OF OPERATIONS

INVESTMENTS

CAPITAL RESOURCES AND LIQUIDITY

Changes in market interest rates may lead to a significant decrease in the sales and profitability of spread-based products

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

SIGNATURE


PART I.1.	FINANCIAL INFORMATION		Page
~~Item 1.~~	~~Financial Statements~~
Item 1.	Financial Statements

	Condensed Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2005 and 2004 ~~and 2003~~ (unaudited)		3

	Condensed Statements of Financial Position as of June 30, ~~2004~~2005 (unaudited) and December 31, ~~2003~~2004		4

	Condensed Statements of Cash Flows for the Six-Month Periods Ended June 30, 2005 and 2004 ~~and 2003~~ (unaudited)		5

	Notes to Condensed Financial Statements (unaudited)		6

	Report of Independent Registered Public Accounting Firm		14 10

Item 2.	~~Management's~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations		15 11

Item 4.	Controls and Procedures		27 24

PART II.	OTHER INFORMATION
~~Item 1.~~	~~Legal Proceedings~~		27
Item 1.	Legal Proceedings	24

Item 6.	Exhibits ~~and Reports on Form 8-K~~		27 24

		Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)		2004			2003		2004			2003
		(unaudited)
Revenues
	Premiums	$	19,969		$	13,934	$	36,620		$	30,262
	Contract charges		14,576			13,682		28,688			26,673
	Net investment income		72,676			65,356		143,071			128,654
	Realized capital gains and losses		(2,886	)		208		(3,539	)		(4,483	)

			104,335			93,180		204,840			181,106

Costs and expenses
	Contract benefits		44,916			43,046		87,840			81,434
	Interest credited to contractholder funds		30,535			27,277		58,186			51,792
	Amortization of deferred policy acquisition costs		8,817			9,453		8,708			16,122
��	Operating costs and expenses		10,300			5,610		20,258			15,336

			94,568			85,386		174,992			164,684

Gain on disposition of operations			—			—		1,058			—
Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax			9,767			7,794		30,906			16,422
Income tax expense			3,592			2,706		11,094			5,667

Income before cumulative effect of change in accounting principle, after-tax			6,175			5,088		19,812			10,755
Cumulative effect of change in accounting principle, after-tax			—			—		(7,586	)		—

Net income		$	6,175		$	5,088	$	12,226		$	10,755

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2005			2004			2005			2004
	(unaudited)						(unaudited)
Revenues
Premiums	$	16,174		$	19,969		$	36,167		$	36,620
Contract charges	15,976			14,576			31,235			28,688
Net investment income	88,503			72,676			174,995			143,071
Realized capital gains and losses	(2,632		)	(2,886		)	(8,509		)	(3,539		)
	118,021			104,335			233,888			204,840

Costs and expenses
Contract benefits	42,901			44,916			89,984			87,840
Interest credited to contractholder funds	39,438			30,535			75,664			58,186
Amortization of deferred policy acquisition costs	11,157			8,817			12,088			8,708
Operating costs and expenses	13,078			10,300			22,270			20,258
	106,574			94,568			200,006			174,992

Gain on disposition of operations	1			—			1			1,058

Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax	11,448			9,767			33,883			30,906

Income tax expense	4,508			3,592			13,058			11,094

Income before cumulative effect of change in accounting principle, after-tax	6,940			6,175			20,825			19,812

Cumulative effect of change in accounting principle, after-tax	—			—			—			(7,586		)

Net income	$	6,940		$	6,175		$	20,825		$	12,226

(in thousands, except par value data)				June 30, 2004		December 31, 2003
				(unaudited)
Assets
Investments
	Fixed income securities, at fair value (amortized cost $4,365,670 and $3,935,447)			$	4,694,455	$	4,415,327
	Mortgage loans				403,725		385,643
	Short-term				76,104		22,756
	Policy loans				34,336		34,107
	Other				7,285		—

		Total investments			5,215,905		4,857,833
Cash					14,148		10,731
Deferred policy acquisition costs					243,019		187,437
Accrued investment income					51,291		47,818
Reinsurance recoverables					5,228		4,584
Current income taxes receivable					8,624		8,170
Other assets					51,580		15,004
Separate Accounts					710,363		665,875

			Total assets	$	6,300,158	$	5,797,452

Liabilities
Reserve for life-contingent contract benefits				$	1,659,453	$	1,683,771
Contractholder funds					3,084,086		2,658,325
Deferred income taxes					64,924		81,657
Other liabilities and accrued expenses					259,257		168,081
Payable to affiliates, net					6,839		5,061
Reinsurance payable to parent					1,082		1,108
Separate Accounts					710,363		665,875

			Total liabilities		5,786,004		5,263,878

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					55,787		55,787
Retained income					348,789		336,563
Accumulated other comprehensive income:
	Unrealized net capital gains and losses and net gains and losses on derivative financial instruments				107,078		138,724

			Total accumulated other comprehensive income		107,078		138,724

			Total shareholder's equity		514,154		533,574

			Total liabilities and shareholder's equity	$	6,300,158	$	5,797,452

	June 30,		December 31,
(in thousands, except par value data)	2005		2004
	(unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $5,451,437 and $5,012,977)	$	6,111,363	$	5,545,647
Mortgage loans	536,908		480,280
Short-term	66,059		111,509
Policy loans	35,806		34,948
Other	2,399		4,638
Total investments	6,752,535		6,177,022

Cash	2,841		8,624
Deferred policy acquisition costs	254,462		238,173
Accrued investment income	59,460		55,821
Reinsurance recoverables	10,930		8,422
Current income taxes receivable	2,684		367
Other assets	22,647		17,665
Separate Accounts	851,253		792,550
Total assets	$	7,956,812	$	7,298,644

Liabilities
Reserve for life-contingent contract benefits	$	1,911,139	$	1,782,451
Contractholder funds	4,135,238		3,802,846
Deferred income taxes	94,191		90,760
Other liabilities and accrued expenses	277,354		180,904
Payable to affiliates, net	10,741		8,831
Reinsurance payable to parent	963		1,067
Separate Accounts	851,253		792,550
Total liabilities	7,280,879		6,659,409
Commitments and Contingent Liabilities (Note 3)

Shareholder’s equity
Common stock, $25 par value, 100 thousand shares authorized and outstanding	2,500		2,500
Additional capital paid-in	120,000		120,000
Retained income	382,269		361,480
Accumulated other comprehensive income:
Unrealized net capital gains and losses	171,164		155,255
Total accumulated other comprehensive income	171,164		155,255
Total shareholder’s equity	675,933		639,235
Total liabilities and shareholder’s equity	$	7,956,812	$	7,298,644

	Six Months Ended June 30,
(in thousands)	2005			2004
	(unaudited)
Cash flows from operating activities
Net income	$	20,825		$	12,226
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items	(28,457		)	(24,511		)
Realized capital gains and losses	8,509			3,539
Gain on disposition of operations	(1		)	(1,058		)
Cumulative effect of change in accounting principle	—			7,586
Interest credited to contractholder funds	75,664			58,186
Changes in:
Life-contingent contract benefits and contractholder funds	17,867			15,929
Deferred policy acquisition costs	(25,822		)	(28,212		)
Income taxes payable	(7,434		)	3,938
Other operating assets and liabilities	(4,438		)	11,026
Net cash provided by operating activities	56,713			58,649

Cash flows from investing activities
Proceeds from sales of fixed income securities	303,080			233,910
Investment collections
Fixed income securities	84,532			102,448
Mortgage loans	38,902			6,403
Investment purchases
Fixed income securities	(687,867		)	(763,912		)
Mortgage loans	(93,054		)	(24,474		)
Change in short-term investments, net	37,382			4,884
Change in other investments, net	(969		)	379
Net cash used in investing activities	(317,994		)	(440,362		)

Cash flows from financing activities
Contractholder fund deposits	500,093			510,088
Contractholder fund withdrawals	(244,595		)	(124,958		)
Net cash provided by financing activities	255,498			385,130

Net (decrease) increase in cash	(5,783		)	3,417
Cash at beginning of period	8,624			10,731
Cash at end of period	$	2,841		$	14,148

($ in millions)		June 30, 2004
In the event of death
	Account value	$	709
	Net amount at risk(1)	$	107
	Average attained age of contractholders		63 years
At annuitization
	Account value	$	37
	Net amount at risk(2)	$	—
	Weighted average waiting period until annuitization options available		9 years
Accumulation at specified dates
	Account value	$	12
	Net amount at risk(3)	$	—
	Weighted average waiting period until guarantee date		11 years

(in millions)	June 30, 2004
Equity securities (including mutual funds)	$	679
Cash and cash equivalents		30

Total variable contracts' separate account assets with guarantees	$	709

(in thousands)	Liability for guarantees related to death benefits			Liability for guarantees related to income benefits		Total
Balance, January 1, 2004	$	868		$	74	$	942
Incurred guaranteed benefits		910			3		913
Paid guarantee benefits		(969	)		—		(969	)

Balance, June 30, 2004(1)	$	809		$	77	$	886

(in thousands)
Balance, January 1, 2004	$	2,369
Sales inducements deferred		867
Amortization charged to income		(384	)
Effects of unrealized gains and losses		465

Balance, June 30, 2004	$	3,317

	June 30, 2004
(in thousands)	Notional amount		Fair value			Realized capital gain (loss)
Interest rate cap agreements	$	129,200	$	7,198		$	1,755
Financial futures contracts		26,500		248			600
Foreign currency swap agreements		7,500		(240	)		—

	Three months ended June 30,
(in thousands)	2005							2004
	Pretax		Tax			After- tax		Pretax			Tax		After- tax

Unrealized holding gains (losses) arising during the period, net of related offsets	$	71,377	$	(24,982	)	$	46,395	$	(87,752	)	$	30,712	$	(57,040	)
Less: reclassification adjustments	1,898		(665		)	1,233		(2,631		)	919		(1,712		)

Other comprehensive income (loss)	$	69,479	$	(24,317	)	45,162		$	(85,121	)	$	29,793	(55,328		)

Net income						6,940							6,175
Comprehensive income (loss)						$	52,102						$	(49,153	)

	Three Months Ended June 30,
	Investment Margin						Benefit Margin						Contract Charges and Fees				Gross Margin
(in thousands)	2005			2004 (4)			2005			2004(4)			2005		2004 (4)		2005			2004
Premiums	$	—		$	—		$	16,174		$	19,969		$	—	$	—	$	16,174		$	19,969
Contract charges(1)	—			—			8,185			7,701			7,791		6,872		15,976			14,573
Net investment income	88,503			72,676			—			—			—		—		88,503			72,676
Periodic settlements and accruals on non-hedge derivative instruments(2)	270			69			—			—			—		—		270			69
Contract benefits	(24,754		)	(23,905		)	(18,147		)	(21,011		)	—		—		(42,901		)	(44,916		)
Interest credited to
contractholder funds(3)	(38,733		)	(30,155		)	—			—			—		—		(38,733		)	(30,155		)
	$	25,286		$	18,685		$	6,212		$	6,659		$	7,791	$	6,872	$	39,289		$	32,216

	Three Months Ended June 30,
	Investment Margin						Benefit Margin						Maintenance Charges				Surrender Charges				Gross Margin
(in thousands)	2004			2003			2004			2003			2004		2003		2004		2003		2004			2003
Premiums	$	—		$	—		$	19,969		$	13,934		$	—	$	—	$	—	$	—	$	19,969		$	13,934
Contract charges(1)		—			—			7,463			7,338			6,022		5,170		1,085		1,174		14,570			13,682
Net investment income		72,676			65,356			—			—			—		—		—		—		72,676			65,356
Periodic settlements and accruals on non-hedge derivative instruments(2)		69			—			—			—			—		—		—		—		69			—
Contract benefits		(23,908	)		(22,053	)		(21,008	)		(20,993	)		—		—		—		—		(44,916	)		(43,046	)
Interest credited to contractholder funds(3)		(30,152	)		(27,277	)		—			—			—		—		—		—		(30,152	)		(27,277	)

	$	18,685		$	16,026		$	6,424		$	279		$	6,022	$	5,170	$	1,085	$	1,174	$	32,216		$	22,649

	Weighted Average Investment Yield				Weighted Average Interest Crediting Rate				Weighted Average Investment Spread
	2005		2004		2005		2004		2005		2004
Interest-sensitive life	5.8	%	6.1	%	4.6	%	4.8	%	1.2	%	1.3	%
Fixed annuities – deferred annuities	5.5		5.6		3.2		3.4		2.3		2.2
Fixed annuities – immediate annuities with and without life contingencies	7.6		7.6		6.8		6.8		0.8		0.8
Investments supporting capital, traditional life and other products	6.2		5.9		N/A		N/A		N/A		N/A

(in thousands)		Carrying value		Percent of total
Fixed income securities(1)		$	4,694,455	90.0	%
Mortgage loans			403,725	7.7
Short-term			76,104	1.5
Policy loans			34,336	0.7
Other			7,285	0.1

	Total	$	5,215,905	100.0	%

	Carrying		Percent
(in thousands)	value		of total

Fixed income securities (1)	$	6,111,363	90.5	%
Mortgage loans	536,908		8.0
Short-term	66,059		1.0
Policy loans	35,806		0.5
Other	2,399		—
Total	$	6,752,535	100.0	%

	June 30, 2004						December 31, 2003
(in thousands)	Amortized cost		Fair value		Percent of total Fixed Income portfolio		Amortized cost		Fair value		Percent of total Fixed Income portfolio
Problem	$	12,948	$	12,308	0.3	%	$	13,186	$	12,533	0.3	%
Restructured		5,399		5,893	0.1			5,701		6,303	0.1
Potential problem		15,709		14,698	0.3			17,899		17,843	0.4

Total net carrying value	$	34,056	$	32,899	0.7	%	$	36,786	$	36,679	0.8	%

Cumulative write-downs recognized	$	5,061					$	4,817

(in thousands)	June 30, 2005					December 31, 2004
	Amortized cost		Fair value	Percent of total Fixed Income portfolio		Amortized cost		Fair value		Percent of total Fixed Income portfolio
Problem	$	10,609	11,538	0.2	%	$	10,637	$	10,813	0.2	%
Restructured	—		—	—		5,396		6,151		0.1
Potential problem	15,192		15,428	0.2		11,231		10,539		0.2
Total net carrying value	$	25,801	26,966	0.4	%	$	27,264	$	27,503	0.5	%
Cumulative write-downs recognized	$	5,682				$	4,606

(in thousands)		June 30, 2004		December 31, 2003
Common stock, retained earnings and other shareholder's equity items		$	407,076	$	394,850
Accumulated other comprehensive income			107,078		138,724

	Total shareholder's equity	$	514,154	$	533,574

OR

ALLSTATE LIFE INSURANCE COMPANYOFNEW YORK

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

June 30, 20042005

PART I.1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

1. Basis of Presentation

2. Other InvestmentsReinsurance

4.3. Guarantees and Contingent Liabilities

OVERVIEW

RESULTS OF OPERATIONS

INVESTMENTS

CAPITAL RESOURCES AND LIQUIDITY

Changes in market interest rates may lead to a significant decrease in the sales and profitability of spread-based products

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

SIGNATURE

ALLSTATE LIFE INSURANCE COMPANY
OF
NEW YORK

	Allstate Life Insurance Company of New York ~~(Registrant)~~
~~August 10, 2004~~	By		~~/s/~~ ~~SAMUEL H. PILCH~~ (Registrant)

August 8, 2005	By	/s/ Samuel H. Pilch ~~Group Vice President and~~
	Samuel H. Pilch
	Controller
	(chief accounting officer and duly
	authorized officer of the ~~Registrant)~~registrant)

	Exhibit No.			Description
10.1			Amended and Restated Service and Expense Agreement ~~among~~between Allstate Insurance ~~Company.~~Company, The Allstate Corporation and ~~Certain Affiliates,~~certain affiliates, effective January 1, ~~2004. (As~~2004, and effective March 5, 2005 with respect to Allstate Life Insurance Company of ~~August 9, 2004, some regulatory approvals and board approval are pending.)~~New York. Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance ~~Company's~~Company’s Quarterly Report on Form 10-Q for ~~the~~ quarter ended June 30, ~~2004.~~2005.
~~10.2~~		~~Automatic Annuity Reinsurance~~
10.2			New York Insurer Supplement to Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation, Allstate Life Insurance Company of New York and ~~Allstate~~Intramerica Life Insurance Company, effective ~~January 2, 2004.~~March 5, 2005. Incorporated herein by reference to Exhibit 10.2 to Allstate Life Insurance Company’s Quarterly Report on Form 10-Q for quarter ended June 30, 2005.
15
15			Acknowledgement of awareness from Deloitte & Touche LLP dated August ~~10, 2004,~~8, 2005, concerning unaudited interim financial information.
~~31.1~~
31.1			Rule 15d-14(a) Certification of Principal Executive Officer
~~31.2~~
31.2			Rule 15d-14(a) Certification of Principal Financial Officer
32
32			Section 1350 Certifications