UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

The 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 ~~SEPTEMBER 30, 2005~~MARCH 31, 2006

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)~~code)

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

Indicate by check mark whether the ~~registrant:~~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 a large accelerated filer, an accelerated filer, ~~(as defined~~or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the ~~Exchange Act).~~Exchange.

Large accelerated filer

Accelerated filer

Non-accelerated filer

~~Yes~~ o No ý

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

Yes o No ý

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

As of ~~October 31, 2005~~May 8, 2006, the ~~Registrant~~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

September 30, 2005March 31, 2006

		~~Page~~
PART 1.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Statements of Operations for the Three-Month ~~and Nine-Month~~ Periods Ended ~~September 30,~~March 31, 2006 and 2005 ~~and 2004~~ (unaudited)	31

	Condensed Statements of Financial Position as of ~~September 30, 2005~~March 31, 2006 (unaudited) and December 31, ~~2004~~2005	42

	Condensed Statements of Cash Flows for the ~~Nine-Month~~Three-Month Periods Ended ~~September 30,~~March 31, 2006 and 2005 ~~and 2004~~ (unaudited)	53

	Notes to Condensed Financial Statements (unaudited)	64

	Report of Independent Registered Public Accounting Firm	1110

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1211

Item 4.	Controls and Procedures	2622

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	2723

Item 1A.	Risk Factors	23

Item 6.	Exhibits	27
		23

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF OPERATIONS

	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended March 31,
(in thousands)	2005		2004			2005			2004			2006			2005
	(unaudited)					(unaudited)						(unaudited)
Revenues
Premiums	$	16,580	$	24,800		$	52,747		$	61,420		$	14,069		$	19,993
Contract charges	16,781		15,446			48,016			44,134			17,587			15,259
Net investment income	89,853		77,126			264,848			220,197			92,893			86,492
Realized capital gains and losses	4,531		(4,805		)	(3,978		)	(8,344		)	(15,136		)	(5,877		)
	127,745		112,567			361,633			317,407			109,413			115,867

Costs and expenses
Contract benefits	41,904		50,474			131,888			138,314			43,330			47,083
Interest credited to contractholder funds	39,523		34,253			115,187			92,439			41,874			36,226
Amortization of deferred policy acquisition costs	15,878		6,590			27,966			15,298			420			931
Operating costs and expenses	10,014		10,004			32,284			30,262			13,886			9,192
	107,319		101,321			307,325			276,313			99,510			93,432

Gain on disposition of operations	—		—			1			1,058

Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax	20,426		11,246			54,309			42,152
Income from operations before income tax expense												9,903			22,435

Income tax expense	6,863		3,644			19,921			14,738			3,631			8,550

Income before cumulative effect of change in accounting principle, after-tax	13,563		7,602			34,388			27,414

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

Net income	$	13,563	$	7,602		$	34,388		$	19,828		$	6,272		$	13,885

See notes to condensed financial statements.

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF FINANCIAL POSITION

	March 31,		December 31,
(in thousands, except par value data)	2006		2005
	(unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $5,642,946 and $5,535,396)	$	5,924,532	$	5,989,263
Mortgage loans	651,699		633,789
Short-term	196,572		63,057
Policy loans	36,727		36,698
Other	4,585		3,740
Total investments	6,814,115		6,726,547

Cash	6,154		3,818
Deferred policy acquisition costs	365,538		318,551
Accrued investment income	62,462		62,452
Reinsurance recoverables	15,575		12,729
Other assets	41,947		35,760
Separate Accounts	980,399		928,824
Total assets	$	8,286,190	$	8,088,681

Liabilities
Contractholder funds	$	4,426,993	$	4,349,395
Reserve for life-contingent contract benefits	1,838,209		1,869,875
Deferred income taxes	42,529		73,399
Current income taxes payable	8,084		5,412
Other liabilities and accrued expenses	365,272		188,123
Payable to affiliates, net	7,564		5,249
Reinsurance payable to parent	972		971
Separate Accounts	980,399		928,824
Total liabilities	7,670,022		7,421,248

Commitments and Contingent Liabilities (Note 4)

Shareholder’s equity
Common stock, $25 par value, 100 thousand shares authorized and outstanding	2,500		2,500
Additional capital paid-in	140,000		140,000
Retained income	402,237		395,965
Accumulated other comprehensive income:
Unrealized net capital gains and losses	71,431		128,968
Total accumulated other comprehensive income	71,431		128,968
Total shareholder’s equity	616,168		667,433
Total liabilities and shareholder’s equity	$	8,286,190	$	8,088,681

See notes to condensed financial statements.

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
(in thousands)	2006			2005
	(unaudited)
Cash flows from operating activities
Net income	$	6,272		$	13,885
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items	(16,340		)	(14,281		)
Realized capital gains and losses	15,136			5,877
Interest credited to contractholder funds	41,874			36,226
Changes in:
Contract benefits and other insurance reserves	4,693			11,203
Deferred policy acquisition costs	(14,916		)	(19,933		)
Income taxes payable	2,784			7,293
Other operating assets and liabilities	(3,360		)	(4,566		)
Net cash provided by operating activities	36,143			35,704

Cash flows from investing activities
Proceeds from sales of fixed income securities	180,165			109,133
Investment collections
Fixed income securities	37,256			33,124
Mortgage loans	16,718			12,531
Investment purchases
Fixed income securities	(251,851		)	(362,866		)
Mortgage loans	(33,250		)	(51,932		)
Change in short-term investments, net	(33,552		)	27,097
Change in other investments, net	892			2,295
Net cash used in investing activities	(83,622		)	(230,618		)

Cash flows from financing activities
Contractholder fund deposits	185,735			286,595
Contractholder fund withdrawals	(135,920		)	(84,164		)
Net cash provided by financing activities	49,815			202,431

Net increase in cash	2,336			7,517
Cash at beginning of period	3,818			8,624
Cash at end of period	$	6,154		$	16,141

See notes to condensed financial statements.

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

~~CONDENSED STATEMENTS OF FINANCIAL POSITION~~

(in thousands, except par value data)

September 30,
2005

December 31,
2004

(unaudited)

Assets

Investments

Fixed income securities, at fair value (amortized cost $5,515,539 and $5,012,977)

$
6,004,454

$
5,545,647

Mortgage loans

600,038

480,280

Short-term

118,742

111,509

Policy loans

36,330

34,948

Other

3,348

4,638

Total investments

6,762,912

6,177,022

Cash

7,305

8,624

Deferred policy acquisition costs

300,643

238,173

Accrued investment income

61,560

55,821

Reinsurance recoverables

10,987

8,422

Current income taxes receivable

—

367

Other assets

31,801

17,665

Separate Accounts

898,600

792,550

Total assets

$
8,073,808

$
7,298,644

Liabilities

Reserve for life-contingent contract benefits

$
1,859,240

$
1,782,451

Contractholder funds

4,228,371

3,802,846

Deferred income taxes

80,361

90,760

Other liabilities and accrued expenses

344,263

180,904

Payable to affiliates, net

7,417

8,831

Reinsurance payable to parent

—

1,067

Current income taxes payable

1,195

—

Separate Accounts

898,600

792,550

Total liabilities

7,419,447

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

395,832

361,480

Accumulated other comprehensive income:

Unrealized net capital gains and losses

136,029

155,255

Total accumulated other comprehensive income

136,029

155,255

Total shareholder’s equity

654,361

639,235

Total liabilities and shareholder’s equity

$
8,073,808

$
7,298,644

~~See notes to condensed financial statements.~~

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

~~CONDENSED STATEMENTS OF CASH FLOWS~~

Nine Months Ended
September 30,

(in thousands)

2005

2004

(unaudited)

Cash flows from operating activities

Net income

$
34,388

$
19,828

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

Amortization and other non-cash items

(43,805
)
(37,624
)
Realized capital gains and losses

3,978

8,344

Gain on disposition of operations

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

—

7,586

Interest credited to contractholder funds

115,187

92,439

Changes in:

Reserve for life-contingent contract benefits and contractholder funds

23,505

28,950

Deferred policy acquisition costs

(25,464
)
(47,149
)
Income taxes payable

1,535

10,519

Other operating assets and liabilities

(14,564
)
(426
)
Net cash provided by operating activities

94,759

81,409

Cash flows from investing activities

Proceeds from sales of fixed income securities

394,169

342,905

Investment collections

Fixed income securities

125,606

145,165

Mortgage loans

44,886

21,129

Investment purchases

Fixed income securities

(837,268
)
(1,204,327
)
Mortgage loans

(162,189
)
(74,900
)
Change in short-term investments, net

14,201

7,581

Change in other investments, net

365

1,203

Net cash used in investing activities

(420,230
)
(761,244
)

Cash flows from financing activities

Contractholder fund deposits

681,725

895,148

Contractholder fund withdrawals

(357,573
)
(201,040
)
Net cash provided by financing activities

324,152

694,108

Net (decrease) increase in cash

(1,319
)
14,273

Cash at beginning of period

8,624

10,731

Cash at end of period

$
7,305

$
25,004

~~See notes to condensed financial statements.~~

~~ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK~~
NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. General

Basis of Presentationpresentation

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

The condensed financial statements and notes as of ~~September 30, 2005~~March 31, 2006, and for the three-month ~~and nine-month~~ periods ended ~~September 30,~~March 31, 2006 and 2005 ~~and 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 Annual Report on Form 10-K for the year ended December 31, ~~2004.~~2005. 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 ~~2005~~2006 presentation, certain amounts in the prior ~~year’s~~year condensed financial statements and notes have been reclassified.

PendingAdopted accounting standards

Financial Accounting Standards Board Staff Position No. FAS 115-1, ~~"The~~“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain ~~Investments" ("~~Investments” (“FSP FAS ~~115-1"~~115-1”)

~~In November 2005, the~~The Company adopted Financial Accounting Standards Board ~~("FASB"~~(“FASB”) ~~issued~~ FSP FAS 115-1 ~~which~~as of January 1, 2006. FSP 115-1 nullifies the guidance in paragraphs 10-18 of Emerging Issues Task Force Issue No. 03-1 (“EITF Issue ~~03-1, "The~~03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain ~~Investments"~~Investments” and references existing other than temporary impairment guidance. FSP FAS 115-1 clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell the security has not been made, and also provides guidance on the subsequent accounting for income recognition on an impaired debt security. ~~FSP FAS 115-1 is effective for reporting periods beginning after December 15, 2005.~~ The adoption of FSP FAS 115-1 iswas required on a prospective basis and did not ~~expected to~~ have a material ~~impact~~effect on the ~~Company's Condensed Statements~~results of ~~Operations~~operations or ~~Financial Position.~~financial position of the Company.

Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”)
The Company adopted SFAS No. 154 on January 1, 2006. SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless determination of either the period specific effects or the cumulative effect of the change is impracticable or otherwise promulgated. The Company had no accounting changes or error corrections in the current period affected by the new standard.
Pending accounting standards
Statement of Position 05-1, Accounting“Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance ContractsContracts” (“SOP 05-1”)

In October 2005, the ~~American Institute of Certified Public Accountants~~AICPA issued SOP 05-1. SOP 05-1 provides accounting guidance for deferred policy acquisition costs onassociated with internal replacements of insurance and investment contracts other than those ~~specifically~~already described in ~~Statement of Financial Accounting Standards (“SFAS”)~~SFAS No. 97, ~~Accounting~~“Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of ~~Investments.~~Investments”. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. Internal replacement contracts are those that are substantially changed from the replaced contract and are accounted for as an extinguishment of the replaced contract. Nonintegrated contract features are accounted for as separately issued contracts. Modifications resulting from the election of a feature or coverage within a contract or from an integrated contract feature generally do not result in an internal replacement contract subject to SOP 05-1 provided certain conditions are met. The provisions of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The ~~Company’s accounting policy for internal replacements~~Company is ~~generally consistent with~~currently assessing the ~~accounting guidance prescribed in SOP 05–1; therefore,~~impact of the SOP ~~is not expected to have a material impact~~ on ~~the Company’s Condensed Statements~~its results of ~~Operations or Financial Position.~~

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

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, which replaces Accounting Principles Board (“APB”) Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless determination of either the period specific effects or the cumulative effect of the change is impracticable. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005. SFAS No. 154 is not expected to have a material impact on the Company’s Condensed Statements of Operations or Financial Position.position.

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

In February 2006, the FASB issued SFAS No. 155, which, among other things, permits the fair value remeasurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation. At the date of initial adoption, the Company must decide whether or not to remeasure its hybrid financial instruments in accordance with SFAS No. 155 or retain its current accounting under SFAS No. 133. All securities acquired on or after January 1, 2007 must be accounted for in accordance with the new guidance. The Company expects to adopt SFAS No.155 as of January 1, 2007, and has not yet determined if it will utilize the option to remeasure hybrid contracts owned at the date of adoption and subject to SFAS No. 133.

2. Supplemental Cash Flow Information

Liabilities for collateral received in conjunction with securities lending activities are reported in other liabilities and accrued expenses in the Condensed Statements of Financial Position. The accompanying cash flows are included in cash flows from operating activities in the Condensed Statements of Cash Flows along with the related changes in investments, which are as follows:

	Three months ended March 31,
(in thousands)	2006			2005

Net change in fixed income securities	$	(93,008	)	$	(47,892	)
Net change in short-term investments	(76,545		)	(63,083		)
Operating cash flow used	$	(169,553	)	$	(110,975	)

Liabilities for collateral and security repurchase, beginning of year	$	(149,465	)	$	(133,368	)
Liabilities for collateral and security repurchase, end of period	(319,018		)	(244,343		)
Operating cash flow provided	$	169,553		$	110,975

3. Reinsurance

The effects of reinsurance on premiums and contract charges are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,						Three months ended March 31,
(in thousands)	2005			2004			2005			2004			2006			2005
Premiums and contract charges
Direct	$	37,036		$	43,167		$	112,891		$	116,334		$	37,857		$	39,670
Assumed – non-affiliate	200			84			702			386			360			212
Ceded
Affiliate	(1,186		)	8			(3,538		)	(2,175		)	(1,358		)	(1,180		)
Non-affiliate	(2,689		)	(3,013		)	(9,292		)	(8,991		)	(5,203		)	(3,450		)
Premiums and contract charges, net of reinsurance	$	33,361		$	40,246		$	100,763		$	105,554		$	31,656		$	35,252

The effects of reinsurance on contract benefits are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,						Three months ended March 31,
(in thousands)	2005			2004			2005			2004			2006			2005
Contract benefits
Direct	$	43,068		$	52,576		$	137,938		$	143,304		$	47,125		$	49,041
Assumed – non-affiliate	93			57			249			135			97			60
Ceded
Affiliate	(28		)	(283		)	(1,216		)	(266		)	110			(462		)
Non-affiliate	(1,229		)	(1,876		)	(5,083		)	(4,859		)	(4,002		)	(1,556		)
Contract benefits, net of reinsurance	$	41,904		$	50,474		$	131,888		$	138,314		$	43,330		$	47,083

In addition to amounts included in the table above are aggregate reinsurance premiums ceded to ALIC of ~~$738~~$739 thousand and ~~$685~~$701 thousand for the ~~third quarters of~~three months ended March 31, 2006 and 2005, ~~and 2004, respectively, and $2.16 million and $2.04 million for the first nine months of 2005 and 2004,~~ respectively, under the terms of the structured settlement annuity reinsurance agreement. ~~These amounts are reflected as~~

On March 8, 2006, the Company, its parent, ALIC, and the Corporation, entered into a ~~component~~definitive agreement (“Agreement”) with Prudential Financial, Inc. and its subsidiary The Prudential Insurance Company of America (collectively “Prudential”) to dispose, through a combination of coinsurance and modified coinsurance reinsurance, of substantially all of its variable annuity business.

As a result of the modified coinsurance reinsurance, the separate account assets will remain on the Company’s statements of financial position, but the related results of operations will be fully reinsured to Prudential. In contrast, the assets supporting general account liabilities will be transferred to Prudential, net of consideration, under the coinsurance reinsurance provisions.

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

The terms of the Agreement will give Prudential the right to be the exclusive provider of its variable annuity products through the Allstate proprietary agency force for three years and a non-exclusive preferred provider for the following two years. During a transition period, the Company and ALIC will continue to issue new variable annuity contracts, accept additional deposits on existing business from existing contractholders on behalf of Prudential and, for a period of twenty-four months or less, service the reinsured business while Prudential prepares for the migration of the business onto its servicing platform. The Company and ALIC have also agreed to continue to issue variable annuity contracts in the financial institutions channel for a period of at least thirty-three months and cede the results of operations to Prudential. Total consideration is expected to be approximately $50 million.

In the first quarter of 2006, the Company’s variable annuity business generated approximately $4 million in contract charges on separate account balances of $979 million. In 2005, the Company’s variable annuity business generated approximately $17 million in contract charges on separate account balances of $927 million.

The Agreement is subject to regulatory approval and is expected to close in the second quarter of 2006. The disposition is expected to result in an insignificant gain at closing related to the reinsurance agreement. A level of cash or cash equivalents in an amount equal to the fixed (general) account liabilities of approximately $395 million, net of the consideration, will be needed to settle the obligation to Prudential at closing under the coinsurance portion of the Agreement. The source of these funds will primarily be from sales of existing investments, and therefore $14 million of pre-tax realized capital ~~gains and~~ losses onwere recognized in the ~~Condensed Statements~~first quarter of ~~Operations as~~2006 due to a change in intent to hold 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.”~~related fixed income securities.

3.4. 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. 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 ~~September 30, 2005.~~March 31, 2006.

Regulation

The Company is subject to changing social, economic and regulatory conditions. ~~Recent state and federal~~From time to time regulatory ~~initiatives and proceedings have included efforts~~authorities seek to impose additional regulations regarding agent and broker 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 business, if any, are uncertain.

Legal and ~~Regulatory Proceedings~~regulatory proceedings and ~~Inquiries~~inquiries

Background

The Company and certain affiliates are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business. As background to the “Proceedings” sub-section below, please note the following:

• These matters raise difficult 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, heard or investigated; differences in applicable laws and judicial interpretations; the length of time before many of these matters might be resolved by settlement, through litigation or otherwise and, in some cases, the timing of their resolutions relative to other similar matters involving other companies; the fact that some of the lawsuits 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 the lawsuits 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 the lawsuits, 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. Often specific information about the ~~type of~~ relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. In our experience, when specific monetary demands are made in pleadings, they bear little relation to the ultimate loss, if any, to the Company.

• In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution and changes in business practices. The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.

• For the reasons specified above, it is often not possible ~~at this time~~ to make meaningful estimates of the amount or range of loss that could result from the matters described below in the “Proceedings” subsection. The Company reviews these matters on an on-going basis and follows the provisions of ~~Statement of Financial Accounting Standards~~SFAS No. 5, “Accounting for Contingencies” when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.

• Due to the complexity and scope of the matters disclosed in the “Proceedings” subsection below and the many uncertainties that exist, the ultimate outcome of these matters cannot be reasonably predicted. In the ~~opinion~~event of ~~the Company’s management, while~~an unfavorable outcome in one or more of these matters, the ultimate liability ~~in some of the matters described below in the “Proceedings” subsection~~may be in excess of amounts currently reserved and may be material to the Company’s operating results or cash flows for ~~any~~a particular ~~period if an unfavorable~~quarter or annual period. However, based on information currently known to it, management believes that the ultimate outcome ~~results, none will~~of all matters described below as they are resolved over time is not likely to have a material adverse effect on the financial ~~condition~~position 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 in the following paragraph.

AIC is defending certain matters relating to its agency program reorganization announced in 1999. These matters include a lawsuit filed in December 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws, 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, 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 a certified class action 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 late March 2004, in the first EEOC lawsuit and class action 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 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 and all benefits received by the [agent] in exchange for signing the release.” The court also “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, 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 by the trial court, was the subject of further proceedings on appeal, and was 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. They have alleged that the Company failed to meet the requirements of applicable regulations. In relation to this examination the Company accrued $17 million of additional benefits. The ~~ultimate~~ outcome of this examination including potential customer remediation related to replacement sales is currently ~~uncertain.~~under discussion with the New York State Department of Insurance.

Other 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 insurance and financial services products. The Corporation and its subsidiaries have responded and will continue to respond to these ~~inquiries~~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 a number of lawsuits and proceedings, some of which involve claims for substantial or indeterminate amounts. These actions are based on a variety of issues and 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~~One or more of these matters could have an adverse effect on the ~~actions~~Company’s operating results or cash flows for a particular quarter or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described in this “Other Matters” subsection in excess of amounts currently reserved, as they are resolved over time is not ~~expected~~likely to have a material effect on the operating results, ~~of operations, liquidity~~cash flows or financial ~~condition~~position of the Company.

4.5. Other Comprehensive ~~Income~~Loss

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

Three months ended September 30,

(in thousands)

2005

2004

Pretax

Tax

After-
tax

Pretax

Tax

After-
tax

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

$
(52,711
)
$
18,448

$
(34,263
)
$
64,736

$
(22,658
)
$
42,078

Less: reclassification adjustments

1,342

(470
)
872

(4,849
)
1,697

(3,152
)

Other comprehensive (loss) income

$
(54,053
)
$
18,918

(35,135
)
$
69,585

$
(24,355
)
45,230

Net income

13,563

7,602

Comprehensive (loss) income

$
(21,572
)

$
52,832

Nine months ended September 30,

(in thousands)

2005

2004

Pretax

Tax

After-
tax

Pretax

Tax

After-
tax

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

$
(35,327
)
$
12,364

$
(22,963
)
$
14,564

$
(5,098
)
$
9,466

Less: reclassification adjustments

(5,749
)
2,012

(3,737
)
(6,334
)
2,217

(4,117
)

Other comprehensive (loss) income

$
(29,578
)
$
10,352

(19,226
)
$
20,898

$
(7,315
)
13,583

Net income

34,388

19,828

Comprehensive income

$
15,162

$
33,411

	Three months ended March 31,
(in thousands)	2006									2005
	Pretax			Tax			After- tax			Pretax				Tax			After- tax

Unrealized holding losses arising during the period	$	(106,593	)	$		37,307	$	(69,286	)	$		(53,830	)	$	18,840		$	(34,990		)
Less: reclassification adjustment of realized capital gains and losses	(18,075		)	6,326			(11,749		)	(8,826			)	3,089			(5,737			)

Other comprehensive loss	$	(88,518	)	$	30,981		(57,537		)	$	(45,004		)	$		15,751	(29,253			)

Net income							6,272										13,885

Comprehensive loss							$	(51,265	)								$		(15,368	)

109

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”, an affiliate of The Allstate Corporation) as of ~~September 30, 2005,~~March 31, 2006, and the related condensed statements of operations ~~for the three-month~~ and ~~nine-month periods ended September 30, 2005 and 2004, and the condensed statements of~~ cash flows for the ~~nine-month~~three-month periods ended ~~September 30, 2005~~March 31, 2006 and ~~2004.~~2005. These interim financial statements are the responsibility of the 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 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, ~~2004,~~2005, and the related statements of operations and comprehensive income, shareholder’s equity, and cash flows for the year then ended, not presented herein. In our report dated ~~February 24, 2005,~~March 10, 2006, 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, ~~2004~~2005 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~~
~~November 7, 2005~~

11Chicago, Illinois

May 8, 2006

Item 2. ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND~~
~~RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS~~
~~ENDED SEPTEMBER 30, 2005 AND 2004~~

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2006 AND 2005

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”, “our”, “us” or the “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 ~~2004.~~2005. We operate as a single segment entity, based on the manner in which we use financial information ~~is used internally~~ to evaluate business performance and to determine the allocation of resources.

OPERATIONS

We are pursuing the following actions and strategies to improve return on equity: maintaining and developing focused top-tier products, deepening distribution partner relationships, improving our cost structure, advancing our enterprise risk management program and leveraging 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 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.

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

Contract chargesare revenues generated from interest-sensitive life, ~~products and~~ variable annuities and fixed annuities for which deposits are classified as contractholder funds or separate accounts 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. After the close of our reinsurance transaction with Prudential, the reinsured separate account assets and liabilities will remain on the Company’s statements of financial position, but the related contract charges will be fully reinsured to Prudential (see Note 3 to the Condensed Financial Statements).

The following table summarizes premiums and contract charges by product.

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
(in thousands)	2005		2004		2005		2004		2006		2005

Premiums
Traditional life	$	6,387	$	6,838	$	18,492	$	18,039	$	4,609	$	5,860
Immediate annuities with life contingencies	9,115		17,263		31,157		41,304		8,264		13,219
Accident and health and other	1,078		699		3,098		2,077		1,196		914
Total premiums	16,580		24,800		52,747		61,420		14,069		19,993

Contract charges
Interest-sensitive life	10,735		10,611		31,204		30,021		11,230		9,945
Fixed annuities	1,712		1,462		5,139		4,494		1,929		1,793
Variable annuities	4,334		3,373		11,673		9,619		4,428		3,521
Total contract charges	16,781		15,446		48,016		44,134		17,587		15,259

Premiums and contract charges	$	33,361	$	40,246	$	100,763	$	105,554	$	31,656	$	35,252

1211

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

	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
(in thousands)	2005		2004			2005		2004		2006		2005

Premiums
Allstate agencies	$	6,248	$	6,731		$	18,157	$	17,742	$	4,525	$	5,738
Broker dealers	—		—			36		107
Financial institutions										—		36
Specialized brokers	9,116		17,262			31,121		41,196		8,264		13,182
Independent agents	1,216		865			3,433		2,350		1,280		1,037
Direct marketing	—		(58		)	—		25
Total premiums	16,580		24,800			52,747		61,420		14,069		19,993

Contract charges
Allstate agencies	10,324		10,201			30,248		29,757		10,805		9,706
Broker dealers	3,197		2,717			8,785		8,046
Banks	2,597		1,680			6,705		3,297
Financial institutions										6,176		4,543
Specialized brokers	534		782			1,932		2,844		452		911
Independent agents	129		66			346		190		154		99
Total contract charges	16,781		15,446			48,016		44,134		17,587		15,259

Premiums and contract charges	$	33,361	$	40,246		$	100,763	$	105,554	$	31,656	$	35,252

Total premiums ~~declined 33.1% and 14.1%~~decreased 29.6% to $14.1 million in the ~~third~~first quarter ~~and first nine months~~ of ~~2005, respectively,~~2006 compared to the same ~~periods~~period of ~~2004. In both periods the decrease was primarily the result of lower~~2005. Lower premiums on immediate annuities with life ~~contingencies.~~contingencies and traditional life products were partially offset by increased accident and health and other premiums.

Contract charges increased ~~8.6% and 8.8%~~15.3% to $17.6 million in the ~~third~~first quarter ~~and first nine months~~ of ~~2005, respectively,~~2006 compared to the same ~~periods~~period of ~~2004.~~2005. The ~~increases were~~increase was due to higher contract charges on interest-sensitive life and variable annuities ~~interest-sensitive life products~~ and, to a lesser extent, fixed annuities. Higher variable annuity contract charges were the result of increased average account values during 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~~contracts was attributable to in-force business growth resulting from deposits and credited interest more than offsetting surrenders and benefits. Higher variable annuity contract charges were the result of higher account values. Fixed annuity contract charges for the ~~third~~first quarter ~~and first nine months~~ of ~~2005~~2006 reflect higher surrender charges compared with the ~~same periods in the prior year.~~first quarter of 2005.

1312

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

The following table shows the changes in contractholder funds.

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in thousands)	2005			2004			2005			2004			2006			2005
Contractholder funds, beginning balance	$	4,135,238		$	3,084,086		$	3,802,846		$	2,658,325		$	4,349,395		$	3,802,846

Impact of adoption of SOP 03-1(1)	—			—			—			2,031

Deposits:
Fixed annuities (immediate and deferred)	136,486			340,560			567,860			742,959
Fixed annuities													146,827			243,944
Interest-sensitive life	25,216			24,937			74,042			75,969			24,284			22,187
Variable annuity and life deposits allocated to fixed accounts	12,341			19,562			46,322			76,219			9,341			19,111
Total deposits	174,043			385,059			688,224			895,147			180,452			285,242

Interest credited	42,241			34,124			124,861			92,075			44,331			39,664

Benefits, withdrawals and other adjustments
Benefits	(21,260		)	(12,315		)	(55,757		)	(32,209		)	(23,921		)	(16,597		)
Surrenders and partial withdrawals	(81,088		)	(54,485		)	(272,377		)	(138,784		)	(101,208		)	(58,316		)
Contract charges	(10,429		)	(10,756		)	(30,876		)	(31,084		)	(10,784		)	(10,112		)
Net transfers to separate accounts	(10,656		)	(9,388		)	(29,395		)	(30,782		)	(10,791		)	(9,215		)
Other adjustments	282			594			845			2,200			(481		)	284
Total benefits, withdrawals and other adjustments	(123,151		)	(86,350		)	(387,560		)	(230,659		)	(147,185		)	(93,956		)

Contractholder funds, ending balance	$	4,228,371		$	3,416,919		$	4,228,371		$	3,416,919		$	4,426,993		$	4,033,796

~~(1)~~ ~~The increase in~~Average contractholder funds ~~due to the adoption of SOP 03-1 reflects the establishment of reserves for certain liabilities that are primarily related to income benefit guarantees provided under variable annuities~~increased 12.0% and ~~the reclassification of deferred sales inducements (“DSI”) from contractholder funds to other assets.~~

~~Contractholder funds deposits decreased 54.8% and 23.1%~~43.1% in the ~~third quarter~~first quarters of 2006 and ~~first nine months of~~ 2005, respectively, compared to the same periods in ~~2004.~~the prior years. The ~~decline~~reduction in ~~both periods~~the growth rate of contractholder funds during the first quarter of 2006 was ~~primarily~~due to lower contractholder deposits and, to a lesser extent, increased surrenders and partial withdrawals.

Contractholder deposits decreased 36.7% in the ~~result~~first quarter of 2006 compared to the same period of 2005 due mostly to lower deposits on fixed annuities. Fixed annuity deposits declined ~~59.9% and 23.6%~~39.8% in the ~~third~~first quarter ~~and first nine months~~ of ~~2005, respectively, due~~2006 compared to ~~lower~~the same period in the prior year. The decline was attributable to reduced consumer demand for traditional fixed annuities relative to certificates of deposit and other short-term investments driven by increases in short-term interest rates without increases in longer term rates of similar magnitude, and our continued focus on achieving higher returns. In addition, the comparison to the prior year was impacted by our promotional pricing of a new product offering in the third quarter of 2004. Increases in short-term interest rates without corresponding increases in longer term rates have generally reduced the competitiveness ofimproving fixed annuity products relative to shorter-term deposit products such as money market funds and certificates of deposit. A continuation of this environment will impact the level of expected fixed annuity deposits. Average contractholder funds increased 28.7% in the third quarter and 32.2% in the first nine months of 2005 compared to the same periods in 2004.product returns.

Surrenders and partial withdrawals increased ~~48.8% in the third quarter and 96.3%~~73.6% in the first ~~nine months~~quarter of ~~2005~~2006 compared to the same ~~periods~~period of ~~2004~~2005 reflecting an annualized withdrawal rate of ~~7.8% in the third quarter and 9.5% in~~9.3% for the first ~~nine months~~quarter of ~~2005~~2006 based on the beginning of period contractholder funds balance. This compares to an annualized withdrawal rate of ~~7.1%~~6.1% for the first quarter of 2005. The declining and relatively low interest rate environment of the prior three years contributed to favorable withdrawal rates in ~~third quarter~~2005, and ~~7.0%~~also resulted in an increased level of policies with little or no surrender charge protection. The increase in the withdrawal rate in the first ~~nine months~~quarter of ~~2004. These increases were primarily attributable~~2006 is consistent with management’s expectation that in an increasing interest rate environment contractholders whose contracts have relatively low surrender charges may choose to higher surrenders on the fixed account option on certain variable annuity contracts. The 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 withdrewmove 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~~competing investment alternatives. The aging of our in-force ~~business. Surrenders and withdrawals~~business may ~~vary with changes in interest rates and equity market conditions and~~cause this trend to continue. In addition, we have implemented crediting rate strategies for renewal business to improve investment spreads on selected contracts that may also have contributed to the ~~aging of our in-force contracts.~~increased withdrawal rate.

Separate accounts liabilities represent contractholders’ claims to the related 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 September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in thousands)	2005			2004			2005			2004			2006			2005
Separate accounts liabilities, beginning balance	$	851,253		$	710,363		$	792,550		$	665,875		$	928,824		$	792,550

Variable annuity and life deposits	38,562			40,179			144,790			151,411			41,628			56,831
Variable annuity and life deposits allocated to fixed accounts	(12,341		)	(19,562		)	(46,322		)	(76,219		)	(9,341		)	(19,111		)
Net deposits	26,221			20,617			98,468			75,192			32,287			37,720

Investment results	32,821			(5,992		)	39,100			11,611			39,131			(11,802		)
Contract charges	(3,469		)	(2,614		)	(9,689		)	(7,466		)	(3,876		)	(2,986		)
Net transfers from fixed accounts	10,656			9,388			29,395			30,782			10,791			9,215
Surrenders and benefits	(18,882		)	(21,337		)	(51,224		)	(65,569		)	(26,758		)	(15,423		)

Separate accounts liabilities, ending balance	$	898,600		$	710,425		$	898,600		$	710,425		$	980,399		$	809,274

Separate accounts liabilities increased ~~$106.1 million~~5.6% as of ~~September 30, 2005~~March 31, 2006 compared to December 31, ~~2004.~~2005. This is compared to an increase of 2.1% in the first quarter of 2005. The improvement was primarily attributable to favorable investment results in the current period compared to unfavorable investment results in the prior period partially offset by higher surrenders and benefits and lower net deposits. Variable annuity and life deposits ~~in the third quarter~~vary with equity market conditions, product investment allocation decisions and ~~first nine months of 2005 decreased 4.0% and 4.4%, respectively, compared~~consumer preferences related to the same periods in the prior year. However, net deposits increased 27.2% and 31.0% in the third quarter and first nine months of 2005, respectively, as the decline in the variable annuity and life deposits was more than offset by a lower amount of deposits being allocated to fixed accounts. Variable annuity contractholders often allocate a significant portion of their initial variable annuity 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.product features.

Net investment income increased ~~16.5% in the three months ended September 30, 2005 and 20.3%~~7.4% in the first ~~nine months~~quarter of ~~2005~~2006 compared to the same ~~periods~~period in ~~2004. The increases in both periods were~~2005, primarily due to ~~the effect of~~ higher average portfolio balances. Higher average portfolio balances ~~partially offset by declining portfolio yields. Portfolio balances as~~resulted from the investment of ~~September 30, 2005 increased 9.5%~~cash flows from ~~December 31, 2004.~~operating activities and financing activities related primarily to deposits from fixed annuities.

1514

Net income analysis is presented in the following table.

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in thousands)	2005			2004			2005			2004			2006			2005

Premiums	$	16,580		$	24,800		$	52,747		$	61,420		$	14,069		$	19,993
Contract charges(1)	16,776			15,443			48,011			44,121			17,588			15,259
Net investment income	89,853			77,126			264,848			220,197			92,893			86,492
Periodic settlements and accruals on non-hedge derivative instruments (2)	289			141			773			217
Periodic settlements and accruals on non-hedge derivative instruments(2)													424			214
Contract benefits	(41,904		)	(50,474		)	(131,888		)	(138,314		)	(43,330		)	(47,083		)
Interest credited to contractholder funds(3)	(38,780		)	(34,110		)	(113,507		)	(91,912		)	(40,478		)	(35,994		)
Gross margin	42,814			32,926			120,984			95,729			41,166			38,881

Amortization of DAC and DSI	(13,025		)	(7,787		)	(26,918		)	(14,639		)	(13,410		)	(3,503		)
Operating costs and expenses	(10,014		)	(10,004		)	(32,284		)	(30,262		)	(13,886		)	(9,192		)
Income tax expense	(6,580		)	(5,037		)	(22,717		)	(17,922		)	(5,156		)	(9,919		)
Realized capital gains and losses, after-tax	2,795			(3,067		)	(2,490		)	(5,298		)	(9,317		)	(3,735		)
DAC and DSI amortization expense on realized capital gains and losses, after-tax	(2,243		)	661			(1,704		)	(745		)
DAC and DSI amortization expense related to realized capital gains and losses, after-tax													7,136			1,489
Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax	(184		)	(90		)	(484		)	(137		)	(261		)	(136		)
Gain on disposition of operations, after-tax	—			—			1			688
Cumulative effect of change in accounting principle, after-tax	—			—			—			(7,586		)
Net income	$	13,563		$	7,602		$	34,388		$	19,828		$	6,272		$	13,885

(1) Loads charged to contractholders at the inception of interest-sensitive life contracts are deferred and amortized to income in a manner consistent with deferred policy acquisition costs (“DAC”). 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 ~~$5 thousand and $3 thousand in the third quarter of 2005 and 2004, respectively and $5 thousand and $13~~$1 thousand in the first ~~nine months~~quarter of ~~2005~~2006. There was no amortization of deferred loads related to realized capital gains and ~~2004, respectively.~~losses in the first quarter of 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) Amortization of ~~DSI~~deferred sales inducements (“DSI”) is excluded from interest credited to contractholder funds for purposes of calculating gross margin. Amortization of DSI totaled ~~$743~~$1,396 thousand and ~~$143 thousand in the three months ended September 30, 2005 and 2004, respectively, and $1.68 million and $527~~$232 thousand in the first ~~nine months~~quarters of ~~2005~~2006 and ~~2004,~~2005, respectively.

Gross margin, a non-GAAP measure, represents premiums and contract charges, net investment income and periodic settlements and accruals on non-hedge derivative instruments, less contract benefits and interest credited to contractholder 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 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 three components that are utilized to further analyze the business: investment margin, benefit margin, and contract charges and 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.

1615

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

Three Months Ended September 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

$
—

$
—

$
16,580

$
24,800

$
—

$
—

$
16,580

$
24,800

Contract charges(1)

—

—

8,417

7,661

8,359

7,782

16,776

15,443

Net investment income

89,853

77,126

—

—

—

—

89,853

77,126

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

289

141

—

—

—

—

289

141

Contract benefits

(25,466
)
(24,519
)
(16,438
)
(25,955
)
—

—

(41,904
)
(50,474
)
Interest credited to contractholder funds(3)

(38,780
)
(34,110
)
—

—

—

—

(38,780
)
(34,110
)

$
25,896

$
18,638

$
8,559

$
6,506

$
8,359

$
7,782

$
42,814

$
32,926

	Nine Months Ended September 30,																						Three Months Ended March 31,
	Investment Margin						Benefit Margin						Contract Charges and Fees				Gross Margin						Investment Margin						Benefit Margin						Contract Charges and Fees				Gross Margin
(in thousands)	2005			2004 (4)			2005			2004 (4)			2005		2004 (4)		2005			2004

(in thousands																							2006			2005			2006			2005			2006		2005		2006			2005
Premiums	$	—		$	—		$	52,747		$	61,420		$	—	$	—	$	52,747		$	61,420		$	—		$	—		$	14,069		$	19,993		$	—	$	—	$	14,069		$	19,993
Contract charges (1)	—			—			24,447			22,841			23,564		21,280		48,011			44,121			—			—			7,980			7,845			9,608		7,414		17,588			15,259
Net investment income	264,848			220,197			—			—			—		—		264,848			220,197			92,893			86,492			—			—			—		—		92,893			86,492
Periodic settlements and accruals on non-hedge derivative instruments(2)	773			217			—			—			—		—		773			217			424			214			—			—			—		—		424			214
Contract benefits	(75,627		)	(73,100		)	(56,261		)	(65,214		)	—		—		(131,888		)	(138,314		)	(25,520		)	(25,407		)	(17,810		)	(21,676		)	—		—		(43,330		)	(47,083		)
Interest credited to contractholder funds(3)	(113,507		)	(91,912		)	—			—			—		—		(113,507		)	(91,912		)	(40,478		)	(35,994		)	—			—			—		—		(40,478		)	(35,994		)
	$	76,487		$	55,402		$	20,933		$	19,047		$	23,564	$	21,280	$	120,984		$	95,729		$	27,319		$	25,305		$	4,239		$	6,162		$	9,608	$	7,414	$	41,166		$	38,881

(1) Loads charged to customers at the inception of interest-sensitive life contracts are deferred and amortized to income in a manner consistent with DAC. 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 ~~$5 thousand and $3 thousand in the third quarter of 2005 and 2004, respectively, and $5 thousand and $13~~ $1 thousand in the first ~~nine months~~quarter of ~~2005~~2006. There was no amortization of deferred loads related to realized capital gains and ~~2004, respectively.~~

losses in the first quarter of 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) Amortization of DSI is excluded from interest credited to contractholder funds for purposes of calculating gross margin. Amortization of DSI totaled ~~$743~~$1,396 thousand and ~~$143 thousand in the three months ended September 30, 2005 and 2004, respectively, and $1.68 million and $527~~$232 thousand in the first ~~nine months~~quarters of 2006 and 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.

Gross margin increased ~~30.0% in~~5.9% during the ~~third~~first quarter of ~~2005 and 26.4% in the first nine months of 2005~~2006 compared to the same ~~periods~~period of ~~2004. The increases in both periods were mostly~~2005 due to higher investment margin and contract charges and fees, partially offset by lower benefit margin. The anticipated disposition of substantially all of our variable annuity business is expected to result in lower gross margin in the future, which is expected to be mostly offset by lower DAC and DSI amortization and operating expenses.

Investment margin is 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 investment 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”) during the fiscal period.

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
(in thousands)	2005		2004		2005		2004		2006		2005
Annuities	$	23,562	$	16,281	$	69,571	$	47,363	$	24,904	$	23,011
Life insurance	2,334		2,357		6,916		8,039		2,415		2,294
Total investment margin	$	25,896	$	18,638	$	76,487	$	55,402	$	27,319	$	25,305

Investment margin increased ~~38.9% in the third quarter of 2005 and 38.1%~~8.0% in the first ~~nine months~~quarter of ~~2005~~2006 compared to the same ~~periods~~period of ~~2004~~2005 due ~~primarily~~ to ~~higher average~~growth in contractholder funds ~~an improved~~partially offset by lower weighted average investment ~~spread~~spreads. Future investment margin growth will be reduced by the anticipated disposition of substantially all of our variable annuity business until investment margin resulting from new sales of other products replaces the margins on ~~deferred annuities and increased yields on investments supporting capital, traditional life and other products.~~the business subject to the disposition.

The following table summarizes the weighted average investment yield, interest crediting rates and investment spreads for the three months ended ~~September 30.~~ March 31.

Weighted Average
Investment Yield

Weighted Average
Interest Crediting Rate

Weighted Average
Investment Spread

2005

2004

2005

2004

2005

2004

Interest-sensitive life

5.6
%
6.0
%
4.5
%
4.9
%
1.1
%
1.1
%
Fixed annuities – deferred annuities

5.4

5.6

3.2

3.6

2.2

2.0

Fixed annuities – immediate annuities with and without life contingencies

7.4

7.6

6.7

6.8

0.7

0.8

Investments supporting capital, traditional life and other products

6.4

6.2

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 nine months ended September 30.~~

Weighted Average
Investment Yield

Weighted Average
Interest Crediting Rate

Weighted Average
Investment Spread

2005

2004

2005

2004

2005

2004

Interest-sensitive life

5.7
%
6.1
%
4.5
%
5.0
%
1.2
%
1.1
%
Fixed annuities – deferred annuities

5.4

5.6

3.1

3.5

2.3

2.1

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

6.3

6.1

N/A

N/A

N/A

N/A

	Weighted Average Investment Yield				Weighted Average Interest Crediting Rate				Weighted Average Investment Spread
	2006		2005		2006		2005		2006		2005
Interest-sensitive life	5.6	%	5.7	%	4.5	%	4.4	%	1.1	%	1.3	%
Deferred fixed annuities	5.4		5.5		3.1		3.1		2.3		2.4
Immediate fixed annuities with and without life contingencies	7.4		7.5		6.7		6.7		0.7		0.8
Investments supporting capital, traditional life and other products	6.2		6.1		N/A		N/A		N/A		N/A

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

	Nine Months Ended September 30,					Three Months Ended March 31,
(in thousands)	2005			2004		2006		2005
Fixed annuities – immediate annuities with life contingencies	$	1,752,353		$	1,662,072
Immediate fixed annuities with life contingencies						$	1,514,713	$	1,460,845
Other life contingent contracts and other	106,887			98,262		323,496		343,759
Reserve for life-contingent contract benefits	$	1,859,240		$	1,760,334	$	1,838,209	$	1,804,604

Interest-sensitive life	$	412,136		$	356,309	$	439,815	$	381,824
Fixed annuities – deferred annuities	3,289,970			2,531,923
Fixed annuities – immediate annuities without life contingencies	526,603			528,609
Other	(338		)	78
Deferred fixed annuities						3,441,421		3,089,790
Immediate fixed annuities without life contingencies and other						545,757		562,182
Contractholder funds	$	4,228,371		$	3,416,919	$	4,426,993	$	4,033,796

Benefit margin is a component of gross margin, both of which are non-GAAP measures. Benefit margin represents life and life-contingent immediate annuity premiums, 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. 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
September 30,

Nine Months Ended
September 30,

(in thousands)

2005

2004(1)

2005

2004(1)

Life insurance

$
9,958

$
8,351

$
25,482

$
23,420

Annuities

(1,399
)
(1,845
)
(4,549
)
(4,373
)
Total benefit margin

$
8,559

$
6,506

$
20,933

$
19,047

~~(1)~~ ~~The prior period has been restated to conform to the current period presentation.~~

	Three Months Ended March 31,
(in thousands)	2006			2005
Life insurance	$	5,551		$	7,191
Annuities	(1,312		)	(1,029		)
Total benefit margin	$	4,239		$	6,162

Benefit margin ~~increased 31.6% in the third quarter of 2005 and 9.9%~~declined 31.2% in the first ~~nine months of 2005 compared to the same periods of 2004. The increase in the third~~ quarter of ~~2005~~2006 compared to the same period of 2005. The reduction in the ~~prior year~~life insurance benefit margin was ~~mostly due to improved~~primarily the result of unfavorable mortality experience and ~~growth on life insurance products. In addition, mortality experience on immediate annuities with life contingencies was more favorable~~a prospective change in ~~the third quarter of 2005 compared~~our calculation to ~~the same period~~reclassify $701 thousand to contract charges and fees, partially offset by in-force business growth. The unfavorable change in the ~~prior year, but was increasingly unfavorable in the first nine months of 2005 compared to the same period in the prior year.~~

Upon the adoption of Statement of Position No. 03-1, “Accounting and 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 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~~was the ~~timing~~result of ~~annuitant deaths on these life-contingent immediate annuities and the annual evaluation of assumptions used in our valuation models for variable annuity guarantees.~~increasingly unfavorable mortality experience.

1917

Amortization of DAC and DSI, excluding amortization related to realized capital gains and losses, increased ~~67.3% in the three months ended September 30, 2005 and 83.9%~~$9.9 million in the first ~~nine months~~quarter of ~~2005~~2006 compared to the same ~~periods~~period in the prior year primarily due to the recognition of 2004 as a result of higher gross margin primarily from the growth in our annuity investment margin. For the nine-month period, the variance was favorably impacted 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 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~~amortization acceleration (commonly referred to as “DAC and DSI unlocking”) in the first quarter of 2006 of $544 thousand compared to the prior period recognition of amortization deceleration 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.~~million. The ~~amortization deceleration on variable annuities was mostly attributable~~credit to ~~better than anticipated equity market performance and persistency.~~

~~In the prior year, the comparable~~net income resulting from DAC and DSI ~~unlocking was~~amortization related to realized capital gains and losses, after-tax, increased $5.6 million in the first quarter of 2006 compared to the same period in 2005 due to higher net realized capital losses.

DAC and DSI amortization is expected to decline in the future as a ~~net deceleration of amortization of $10.2 million. This deceleration of amortization was the~~ result of ~~favorable projected mortality~~the anticipated disposition of substantially all of our variable annuity business. This decline is expected to be offset by the absence of gross margin on ~~our interest-sensitive life products.~~the business subject to the disposition.

Operating costs and expenses ~~remained consistent~~increased 51.1% in the ~~three months ended September 30, 2005~~first quarter of 2006 compared to the same period ~~in 2004 as lower marketing and compensation costs offset the growth in technology and administrative expenses used to support in-force business growth.~~of 2005. The ~~6.7%~~ increase ~~in the first nine months of 2005 compared to the same periods of 2004 is~~was primarily attributable to higher ~~technology, distribution, marketing and administrative expenses incurred to support growth in in-force business. For the nine-month period, these increases were partially offset by lower~~ guaranty fund assessments and ~~expenses~~restructuring and related ~~to taxes, licenses and fees~~charges in the first quarter of ~~2005 compared~~2006 related to the ~~first quarter of 2004.~~Voluntary Termination Offer accepted by employees located at Allstate’s headquarters. Additionally, operating costs and expenses reflected modestly higher costs to support the continued growth in our in-force business.

INVESTMENTS

An important component of our financial results is the return on our investment portfolio. The composition of the investment portfolio at ~~September 30, 2005~~March 31, 2006 is presented in the table below.

	Carrying		Percent		Carrying		Percent
(in thousands)	value		of total		value		of total

Fixed income securities (1)	$	6,004,454	88.8	%	$	5,924,532	86.9	%
Mortgage loans	600,038		8.9		651,699		9.6
Short-term	118,742		1.8		196,572		2.9
Policy loans	36,330		0.5		36,727		0.5
Other	3,348		—		4,585		0.1
Total	$	6,762,912	100.0	%	$	6,814,115	100.0	%

(1)Fixed income securities are carried at fair value. Amortized cost basis for these securities was ~~$5.52~~$5.64 billion.

Total investments increased to ~~$6.76~~$6.81 billion at ~~September 30, 2005~~March 31, 2006 from ~~$6.18~~$6.73 billion at December 31, ~~2004~~2005 due to positive cash flows from operating and financing activities and increased funds associated with securities lending, ~~transactions,~~ partially offset by ~~lower~~decreased net unrealized ~~capital~~ gains on fixed income securities.

Total investments at amortized cost related to collateral ~~due to~~received in connection with securities lending transactions increased to ~~$302~~$319.0 million at ~~September 30, 2005~~March 31, 2006 from ~~$133~~$149.5 million at December 31, ~~2004.~~2005.

At ~~September 30, 2005, 96.4%~~March 31, 2006, 96.8% 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”) of 1 or 2,2; a rating of Aaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBB from S&P, Fitch or Dominion; or a comparable internal rating if an externally provided rating is not available.

The unrealized net capital gains on fixed income securities at ~~September 30, 2005~~March 31, 2006 were ~~$488.9~~$281.6 million, a decrease of ~~$43.8~~$172.3 million or ~~8.2%~~38.0% since December 31, ~~2004.~~2005. The net unrealized gain was comprised of ~~$517.8~~$372.9 million of unrealized gains and ~~$28.9~~$91.3 million of unrealized losses at ~~September 30, 2005.~~March 31, 2006. This is compared to a net unrealized ~~gain~~gains totaling ~~$532.7~~$453.9 million at December 31, ~~2004,~~2005, comprised of ~~$545.5~~$497.4 million of unrealized gains and ~~$12.8~~$43.5 million of unrealized losses.

Of the gross unrealized losses ~~in the fixed income portfolio~~ at ~~September 30, 2005, $26.6~~March 31, 2006, $88.5 million or ~~92.1%~~96.9% were related to investment grade securities and are believed to be primarily a result of a rising interest rate environment. ~~Of the~~The remaining ~~$2.3~~$2.8 million of losses in the fixed income portfolio ~~$2.2 million or 98.4%~~ were in the corporate fixed income ~~portfolio. The $2.2 million of corporate fixed income gross unrealized losses~~portfolio and were primarily

comprised of securities in the ~~financial services, communications,~~energy and capital ~~and consumer~~ goods sectors. The gross unrealized losses in these sectors were primarily company specific and interest rate related. Approximately $1.3 million of the total gross unrealized losses in the corporate fixed income portfolio were associated with the automobile industry, which includes direct debt issuances of automobile manufacturers, captive automotive financing companies and automobile parts and equipment suppliers, which are reported in the consumer goods and financial services sectors. Values in the automobile industry were primarily depressed due to company specific conditions. We expect eventual recovery of these securities. Every security was included in our portfolio monitoring process.

Our portfolio monitoring process identifies and evaluates, on a case-by-case basis, 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 is below established thresholds for certain time periods, or which are identified through other monitoring criteria such as ratings downgrades or payment defaults. WeAs a result of approved programs involving the disposition of investments such as changes in duration and revisions to strategic asset allocations, and certain dispositions anticipated by portfolio managers, we also conduct a portfolio review to recognize impairment on securities in an unrealized loss position for which we do not have the intent and ability to hold until recovery. All securities in an unrealized loss position at March 31, 2006 were included in our portfolio monitoring process wherein it was determined that the declines in value were not other than temporary.

We also monitor the quality of our fixed income portfolio by categorizing certain investments as “problem”, “restructured” or “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 income securities are current with respect to contractual principal and/or interest, but because of other facts and circumstances, we have concerns regarding the 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.

(in thousands)	September 30, 2005						December 31, 2004						March 31, 2006						December 31, 2005
	Amortized cost		Fair value		Percent of total Fixed Income portfolio		Amortized cost		Fair value		Percent of total Fixed Income portfolio		Amortized cost		Fair value		Percent of total Fixed Income portfolio		Amortized cost		Fair value		Percent of total Fixed Income portfolio
Problem	$	14,535	$	16,313	0.3	%	$	10,637	$	10,813	0.2	%	$	4,032	$	6,197	0.1	%	$	14,373	$	17,762	0.3	%
Restructured	—		—		—		5,396		6,151		0.1		147		147		—		163		163		—
Potential problem	5,793		5,773		0.1		11,231		10,539		0.2		5,616		5,660		0.1		5,609		5,640		0.1
Total net carrying value	$	20,328	$	22,086	0.4	%	$	27,264	$	27,503	0.5	%	$	9,795	$	12,004	0.2	%	$	20,145	$	23,565	0.4	%
Cumulative write-downs recognized	$	5,381					$	4,606					$	5,440					$	5,455

We have experienced a decrease in the amortized cost of fixed income securities categorized as ~~potential~~ problem as of ~~September 30, 2005~~March 31, 2006 compared to December 31, ~~2004.~~2005. The decrease was primarily ~~related~~due to a disposition and the removal of ~~a security due to~~securities upon improving conditions.

We also evaluated each of these securities through our portfolio monitoring process at ~~September 30, 2005~~March 31, 2006 and recorded write-downs when appropriate. We further concluded that any remaining unrealized losses on these securities were temporary in 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, 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 September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in thousands)	2005			2004			2005			2004			2006			2005

Investment write-downs	$	1		$	(2,518	)	$	(1,468	)	$	(3,402	)	$	(258	)	$	(393	)
Dispositions	1,341			739			(1,703		)	(3,300		)	(16,417		)	(8,023		)
Valuation of derivative instruments	457			(3,934		)	(3,021		)	(3,226		)	781			241
Settlement of derivative instruments	2,732			908			2,214			1,584			758			2,298
Realized capital gains and losses, pretax	4,531			(4,805		)	(3,978		)	(8,344		)	(15,136		)	(5,877		)
Income tax (expense) benefit	(1,736		)	1,738			1,488			3,046
Income tax benefit													5,819			2,142
Realized capital gains and losses, after-tax	$	2,795		$	(3,067	)	$	(2,490	)	$	(5,298	)	$	(9,317	)	$	(3,735	)

Dispositions in the above table include sales, losses recognized in anticipation of ~~sales~~dispositions and other transactions such as calls and prepayments. We may sell fixed income securities during the period in which fair value has declined below amortized cost. In certain situations, new factors such as negative developments, subsequent credit deterioration, relative value opportunities, market liquidity concerns and portfolio reallocations can subsequently change our previous intent to continue holding a ~~security.~~

security

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 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.

~~Because~~In the first quarter of ~~changes in existing market conditions and asset return assumptions, certain changes are planned within the investment portfolio impacting approximately $20~~2006, we recognized $15 million of ~~securities at the end of the third quarter of 2005. These changes result from continued asset-liability management strategies, on-going comprehensive reviews of our portfolios, and changes being made~~losses related to ~~our strategic asset allocations. Approximately $14 million of these securities were in an unrealized loss position and, therefore, with the~~a change in our intent to hold ~~these investments, we recognized $0.5~~certain securities with unrealized losses until they recover in value. The change in our intent is primarily related to $442 million of ~~anticipated disposition write-downs during~~securities which had unrealized losses totaling $14 million that may be used to fund net general account liabilities to be transferred at the ~~quarter.~~

~~In the first quarter~~closing of ~~2005, because~~our variable annuity reinsurance agreement with Prudential. Additionally, continued implementation of ~~an anticipated rise in interest rates, as well as changes in existing market conditions~~yield enhancement strategies, strategic asset allocations 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 allocations, including a decision to pursue yield enhancement strategies. At that time, we identified,~~portfolio resulted in ~~total, approximately $216~~the identification of $34 million of securities ~~all~~that had unrealized losses of $1 million which ~~were in an unrealized loss position, which we would consider selling~~may be sold to achieve these objectives. As a result, we recognized $6 million of write-downs due to a change in intent to hold these securities until recovery. Securities totaling $36 million with write-downs of $1 million were sold and we continue to consider selling securities with a carrying value of approximately $0.3 million with write-downs of $0.1 million. The remaining $180 million of securities with write-downs of $4 million have been re-designated as being held to recovery within the available-for-sale category, primarily as a consequence of the lower than expected interest rate environment. The difference between the current carrying value and par value of the re-designated securities will be recognized in 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 Resources consist of shareholder’s equity, representing funds deployed or available to be deployed to support business operations. The following table summarizes our capital resources.

(in thousands)	September 30, 2005		December 31, 2004		March 31, 2006		December 31, 2005

Common stock, retained earnings and other shareholder’s equity items	$	518,332	$	483,980	$	544,737	$	538,465
Accumulated other comprehensive income	136,029		155,255		71,431		128,968
Total shareholder’s equity	$	654,361	$	639,235	$	616,168	$	667,433

Shareholder’s equity ~~increased~~declined in the first ~~nine months~~quarter of ~~2005 when compared~~2006 due to ~~December 31, 2004 primarily as a result of net income, partially offset by~~ lower unrealized net capital ~~gains.~~gains on fixed income securities, partially offset by net income.

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), ~~risk exposures,~~exposure to risks, the current level of operating leverage, ~~Allstate Insurance Company’s (“AIC”) ratings, Allstate Life Insurance Company’s (“ALIC”)~~ALIC’s and AIC’s ratings and other factors. There have been no changes to our insurance financial strength ratings since December 31, ~~2004.~~2005.

In connection with developments at AIC, in October 2005, Standard & Poor’s affirmed the AA insurance financial strength ratings of the Company and ALIC, with a revised rating outlook of ‘Negative’ (from ‘Stable’). Also in October 2005, Moody’s affirmed the Aa2 insurance financial strength ratings of the Company and ALIC. Furthermore, in November 2005, A.M. Best affirmed the A+ ~~insurance financial strength ratings of the Company and ALIC.~~

Liquidity Sources and Uses As reflected in our Condensed Statements of Cash Flows, slightly higher operating cash flows in the first ~~nine months~~quarter of ~~2005 when~~2006, compared to the first ~~nine months~~quarter of ~~2004~~2005, primarily ~~relate~~related to higher ~~net~~ investment income, partially offset by ~~higher income taxes paid.~~ lower premiums.

Cash flows used in investing activities decreased in the first ~~nine months~~quarter of ~~2005 , as~~2006 compared to the ~~increase~~same period in ~~operating~~the prior year due to lower investment purchases resulting from decreased cash ~~flows was more than~~provided by financing activities, partially offset by ~~lower financing~~the investment of higher operating cash flows.

Lower cash flow fromflows provided by financing activities during the first nine monthsquarter of 2005 when compared2006 were primarily attributable to the first nine months of 2004 reflect lower deposits onof fixed annuities and higher fixed annuityincreased surrenders and partial withdrawals. For quantification of the changes in contractholder funds, see the Operations section of the MD&A.

We have entered into an inter-company loan agreement with ~~the Corporation.~~The Allstate 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 ~~September 30, 2005~~March 31, 2006 or December 31, ~~2004.~~2005. The Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings.

~~FORWARD-LOOKING STATEMENTS AND RISK FACTORS~~

This document contains “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” 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 Statements and Risk Factors”.

~~A decrease in our financial strength ratings may have an adverse effect on our competitive position.~~

Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital; a change in a rating agency’s determination of the amount of risk-adjusted capital required to maintain a particular rating; an increase in the perceived risk of an insurer’s investment portfolio; a reduced confidence in management or a host of other considerations that may or may not be under the insurer’s control. The insurance financial strength ratings of both AIC and ALIC are A+, AA and Aa2 from A.M. Best, Standard and Poor’s and Moody’s, respectively. Because all of these ratings are subject to continuous review, the retention of these ratings cannot be assured. A multiple level downgrade in any of these ratings could have a material adverse effect on our sales, our competitiveness, the marketability of our product offerings, and our liquidity, operating results and financial condition.

~~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

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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 or that have been 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rule ~~15d-15(e)~~13a-15(e) and 15(d)-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 conducted an evaluation of the effectiveness 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 providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. During the fiscal quarter ended ~~September 30, 2005,~~March 31, 2006, there 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.

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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” and under the heading “Legal and ~~Regulatory Proceedings~~regulatory proceedings and ~~Inquiries”~~inquiries” in Note 34 of the Company’s Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.

Item 1A. Risk Factors

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” 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. Risk 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, in our public filings with the Securities and Exchange Commission, and those incorporated by reference in Part I, Item 1A of Allstate Life Insurance Company of New York Annual Report on Form 10-K for 2005. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

Item 6. Exhibits

(a) Exhibits

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

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SIGNATURE

Pursuant to 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)

~~November 7, 2005~~May 8, 2006	By	/s/ Samuel H. Pilch
	Samuel H. Pilch
	~~Controller~~
	(chief accounting officer and duly
	authorized officer of the registrant)

2824

Exhibit No.		Description
10.1		Amendment Number One to the Principal Underwriting Agreement between Allstate Life Insurance Company of New York and Allstate Distributors, L.L.C. dated May 1, 2000.

15	��		Acknowledgement of awareness from Deloitte & Touche LLP dated ~~November 7,~~May 6, 2005, concerning unaudited interim financial information.

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

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

32			Section 1350 Certifications

E-1

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

Unrealized holding (losses) gains arising during the period, net of related offsets	$	(52,711	)	$	18,448		$	(34,263	)	$	64,736		$	(22,658	)	$	42,078
Less: reclassification adjustments	1,342			(470		)	872			(4,849		)	1,697			(3,152		)

Other comprehensive (loss) income	$	(54,053	)	$	18,918		(35,135		)	$	69,585		$	(24,355	)	45,230

Net income							13,563									7,602
Comprehensive (loss) income							$	(21,572	)							$	52,832

FORM 10-Q

THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-100029

ALLSTATE LIFE INSURANCE COMPANYOFNEW YORK

New York

36-2608394

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

September 30, 2005March 31, 2006

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

1. General

Basis of Presentationpresentation

PendingAdopted accounting standards

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

2. Supplemental Cash Flow Information

3. Reinsurance

3.4. Guarantees and Contingent Liabilities

OVERVIEW

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

SIGNATURE

ALLSTATE LIFE INSURANCE COMPANY
OF
NEW YORK