ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31,
September 30, 2006

PART 1.		FINANCIAL INFORMATION

Item 1.		Financial Statements

	~~Condensed Statements of Operations for the Three-Month Periods Ended March 31, 2006 and 2005 (unaudited)~~	1

		Condensed Statements of ~~Financial Position as of March 31,~~Operations for the Three-Month and Nine-Month Periods Ended September 30, 2006 ~~(unaudited)~~ and ~~December 31,~~ 2005 (unaudited)	2	3

		Condensed Statements of ~~Cash Flows for the Three-Month Periods Ended March~~Financial Position as of September 30, 2006 (unaudited) and December 31, ~~2006 and~~ 2005 ~~(unaudited)~~	3	4

	~~Notes to~~	Condensed ~~Financial~~ Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2006 and 2005 (unaudited)	4	5

		Notes to Condensed Financial Statements (unaudited)		6

		Report of Independent Registered Public Accounting Firm	10	13

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	11	14

Item 4.		Controls and Procedures	22	24

PART II.		OTHER INFORMATION

Item 1.		Legal Proceedings	23	25

Item 1A.		Risk Factors	23	25

Item 6.		Exhibits	23	25

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,						Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2006			2005			2006			2005		2006			2005
	(unaudited)						(unaudited)					(unaudited)
Revenues
Premiums	$	14,069		$	19,993		$	19,211		$	16,580	$	53,963		$	52,747
Contract charges	17,587			15,259			13,740			16,781		48,582			48,016
Net investment income	92,893			86,492			92,536			89,853		279,256			264,848
Realized capital gains and losses	(15,136		)	(5,877		)	(4,741		)	4,531		(24,093		)	(3,978		)
	109,413			115,867			120,746			127,745		357,708			361,633

Costs and expenses
Contract benefits	43,330			47,083			44,348			41,904		137,904			131,888
Interest credited to contractholder funds	41,874			36,226			41,614			39,523		124,662			115,187
Amortization of deferred policy acquisition costs	420			931			8,992			15,878		20,819			27,966
Operating costs and expenses	13,886			9,192			10,526			10,014		34,887			32,284
	99,510			93,432			105,480			107,319		318,272			307,325

(Loss) gain on disposition of operations							(215		)	—		(7,963		)	1

Income from operations before income tax expense	9,903			22,435			15,051			20,426		31,473			54,309

Income tax expense	3,631			8,550			4,844			6,863		10,409			19,921

Net income	$	6,272		$	13,885		$	10,207		$	13,563	$	21,064		$	34,388

See notes to condensed financial statements.

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF FINANCIAL POSITION

	March 31,		December 31,		September 30,		December 31,
(in thousands, except par value data)	2006		2005
($ in thousands, except par value data)					2006		2005
	(unaudited)				(unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $5,642,946 and $5,535,396)	$	5,924,532	$	5,989,263
Fixed income securities, at fair value (amortized cost $5,647,251 and $5,535,396)					$	6,017,069	$	5,989,263
Mortgage loans	651,699		633,789		672,960		633,789
Short-term	196,572		63,057		144,438		63,057
Policy loans	36,727		36,698		37,747		36,698
Other	4,585		3,740		3,525		3,740
Total investments	6,814,115		6,726,547		6,875,739		6,726,547

Cash	6,154		3,818		8,503		3,818
Deferred policy acquisition costs	365,538		318,551		276,533		318,551
Accrued investment income	62,462		62,452		61,920		62,452
Reinsurance recoverables	15,575		12,729		466,358		12,729
Current income taxes receivable					28,748		—
Other assets	41,947		35,760		58,122		35,760
Separate Accounts	980,399		928,824		998,776		928,824
Total assets	$	8,286,190	$	8,088,681	$	8,774,699	$	8,088,681

Liabilities
Contractholder funds	$	4,426,993	$	4,349,395	$	4,742,352	$	4,349,395
Reserve for life-contingent contract benefits	1,838,209		1,869,875		1,905,614		1,869,875
Deferred income taxes	42,529		73,399		51,394		73,399
Current income taxes payable	8,084		5,412		—		5,412
Other liabilities and accrued expenses	365,272		188,123		416,121		188,123
Payable to affiliates, net	7,564		5,249		8,396		5,249
Reinsurance payable to parent	972		971		976		971
Separate Accounts	980,399		928,824		998,776		928,824
Total liabilities	7,670,022		7,421,248		8,123,629		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		2,500		2,500
Additional capital paid-in	140,000		140,000		140,000		140,000
Retained income	402,237		395,965		419,180		395,965
Accumulated other comprehensive income:
Unrealized net capital gains and losses	71,431		128,968		89,390		128,968
Total accumulated other comprehensive income	71,431		128,968		89,390		128,968
Total shareholder’s equity	616,168		667,433		651,070		667,433
Total liabilities and shareholder’s equity	$	8,286,190	$	8,088,681	$	8,774,699	$	8,088,681

See notes to condensed financial statements.

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF CASH FLOWS

							Nine Months Ended September 30,
	Three Months Ended March 31,						2006			2005
(in thousands)	2006			2005			(unaudited)
	(unaudited)
Cash flows from operating activities
Net income	$	6,272		$	13,885		$	21,064		$	34,388
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items	(16,340		)	(14,281		)	(53,843		)	(43,805		)
Realized capital gains and losses	15,136			5,877			24,093			3,978
Loss (gain) on disposition of operations							7,963			(1		)
Interest credited to contractholder funds	41,874			36,226			124,662			115,187
Changes in:
Contract benefits and other insurance reserves	4,693			11,203
Life-contingent contract benefits and contractholder funds							19,131			23,505
Deferred policy acquisition costs	(14,916		)	(19,933		)	(30,364		)	(25,464		)
Income taxes payable	2,784			7,293			(36,012		)	1,535
Other operating assets and liabilities	(3,360		)	(4,566		)	(3,912		)	(14,564		)
Net cash provided by operating activities	36,143			35,704			72,782			94,759

Cash flows from investing activities
Proceeds from sales of fixed income securities	180,165			109,133			710,186			394,169
Investment collections
Fixed income securities	37,256			33,124			97,249			125,606
Mortgage loans	16,718			12,531			57,960			44,886
Investment purchases
Fixed income securities	(251,851		)	(362,866		)	(775,808		)	(837,268		)
Mortgage loans	(33,250		)	(51,932		)	(93,832		)	(162,189		)
Change in short-term investments, net	(33,552		)	27,097			18,952			14,201
Disposition of operations							(394,915		)	—
Change in other investments, net	892			2,295			1,685			365
Net cash used in investing activities	(83,622		)	(230,618		)	(378,523		)	(420,230		)

Cash flows from financing activities
Contractholder fund deposits	185,735			286,595			668,215			681,725
Contractholder fund withdrawals	(135,920		)	(84,164		)	(357,789		)	(357,573		)
Net cash provided by financing activities	49,815			202,431			310,426			324,152

Net increase in cash	2,336			7,517
Net increase (decrease) in cash							4,685			(1,319		)
Cash at beginning of period	3,818			8,624			3,818			8,624
Cash at end of period	$	6,154		$	16,141		$	8,503		$	7,305

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 ~~March 31,~~September 30, 2006 and for the three-month and nine-month periods ended ~~March 31,~~September 30, 2006 and 2005 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, 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 2006 presentation, certain amounts in the prior year condensed financial statements and notes have been reclassified.

Adopted accounting standards

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

The Company adopted Financial Accounting Standards Board (“FASB”) FSP FAS 115-1 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 Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” and references existing ~~other than temporary~~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. The adoption of FSP FAS 115-1 was required on a prospective basis and did not have a material effect on the results of operations or 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 by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”)

In October 2005, the ~~AICPA~~American Institute of Certified Public Accountants (“AICPA”) issued SOP 05-1. SOP 05-1 provides accounting guidance for deferred policy acquisition costs associated with internal replacements of insurance and investment contracts other than those already described in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of 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. The provisions of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company is currently assessing the impact of the SOP on its results of operations and financial position.

4 Based on the issued standard, the Company does not expect the impact of the adoption to have a material effect on its results of operations or financial position; however, the standard is currently under review and clarifications or revisions may be issued by the AICPA and/or the FASB that could affect the Company’s impact assessment.

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;~~133, “Accounting for Derivative Instruments and Hedging Activities”; 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.~~bifurcation and clarifies that concentration of credit risk in the form of subordination are not embedded derivatives. At the date of initial adoption, the Company must decide whether or not to remeasure its then existing 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~~will adopt SFAS No.155 as of January 1, 2007, ~~and~~but 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.

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

In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 requires an entity to recognize the benefit of tax positions only when it is more likely than not, based on the position’s technical merits, that the position would be sustained upon examination by the respective taxing authorities. The tax benefit is measured as the largest benefit that is more than fifty-percent likely of being realized upon final settlement with the respective taxing authorities. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 is not expected to have a material effect on the results of operations or financial position of the Company.

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

In September 2006, the FASB issued SFAS No. 157 which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS No. 157 applies where other accounting pronouncements require or permit fair value measurements; it does not require any new fair value measurements under GAAP. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The effects of adoption will be determined by the types of instruments carried at fair value in the Company’s financial statements at the time of adoption as well as the method utilized to determine their fair values prior to adoption. Based on the Company’s current use of fair value measurements, SFAS No. 157 is not expected to have a material effect on the results of operations or financial position of the Company.

Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”)

In September 2006, the SEC issued SAB 108 in order to eliminate the diversity of practice in the process by which misstatements are quantified for purposes of assessing materiality on the financial statements. SAB 108 establishes a single quantification framework wherein the significance measurement is based on the effects of the misstatements on each of the financial statements as well as the related financial statement disclosures. If a company’s existing methods for assessing the materiality of misstatements are not in compliance with the provisions of SAB 108, the initial application of the provisions may be adopted by restating prior period financial statements under certain circumstances or otherwise by recording the cumulative effect of initially applying the provisions of SAB 108 as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. The provisions of SAB 108 must be applied no later than the annual financial statements issued for the first fiscal year ending after November 15, 2006. The Company’s adoption of SAB 108 in the fourth quarter of 2006 for the fiscal year then ended is not expected to have a material effect on its results of operations or financial position.

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,						Nine months ended September 30,
(in thousands)	2006			2005			2006			2005

Net change in fixed income securities	$	(93,008	)	$	(47,892	)	$	(100,624	)	$	(148,776	)
Net change in short-term investments	(76,545		)	(63,083		)	(91,285		)	(20,038		)
Operating cash flow used	$	(169,553	)	$	(110,975	)	$	(191,909	)	$	(168,814	)

Liabilities for collateral and security repurchase, beginning of year	$	(149,465	)	$	(133,368	)	$	(149,465	)	$	(133,368	)
Liabilities for collateral and security repurchase, end of period	(319,018		)	(244,343		)	(341,374		)	(302,182		)
Operating cash flow provided	$	169,553		$	110,975		$	191,909		$	168,814

3. Reinsurance

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

Three months ended
March 31,

(in thousands)

2006

2005

Premiums and contract charges

Direct

$
37,857

$
39,670

Assumed – non-affiliate

360

212

Ceded

Affiliate

(1,358
)
(1,180
)
Non-affiliate

(5,203
)
(3,450
)
Premiums and contract charges, net of reinsurance

$
31,656

$
35,252

(in thousands)		Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
Premiums and contract charges
Direct		$	42,382		$	37,036		$	124,815		$	112,891
Assumed — non-affiliate		318			200			1,027			702
Ceded	��
Affiliate		(992		)	(1,186		)	(3,620		)	(3,538		)
Non-affiliate		(8,757		)	(2,689		)	(19,677		)	(9,292		)
Premiums and contract charges, net of reinsurance		$	32,951		$	33,361		$	102,545		$	100,763

The effects of reinsurance on contract benefits are as follows:

(in thousands)							Three Months Ended September 30,						Nine Months Ended September 30,
	Three months ended March 31,						2006			2005			2006			2005
(in thousands)	2006			2005
Contract benefits
Direct	$	47,125		$	49,041		$	46,460		$	43,068		$	148,188		$	137,938
Assumed – non-affiliate	97			60
Assumed — non-affiliate							108			93			605			249
Ceded
Affiliate	110			(462		)	(44		)	(28		)	(225		)	(1,216		)
Non-affiliate	(4,002		)	(1,556		)	(2,176		)	(1,229		)	(10,664		)	(5,083		)
Contract benefits, net of reinsurance	$	43,330		$	47,083		$	44,348		$	41,904		$	137,904		$	131,888

In addition to amounts included in the table above are ~~aggregate~~ reinsurance premiums ceded to ALIC of ~~$739~~$771 thousand and ~~$701~~$738 thousand for the ~~three~~third quarter of 2006 and 2005, respectively, and $2.26 million and $2.16 million for the first nine months ~~ended March 31,~~of 2006 and 2005, respectively, under the terms of the structured settlement annuity reinsurance agreement.

On ~~March 8,~~June 1, 2006, the Company, its parent ALIC, and the Corporation, ~~entered into~~completed the disposal of its variable annuity business pursuant to a definitive agreement ~~(“Agreement”~~(the “Agreement”) with Prudential Financial, Inc. and its subsidiary, The Prudential Insurance Company of America (collectively “Prudential”) ~~to dispose,~~, which was entered into on March 8, 2006. The disposal was effected through a combination of coinsurance and modified coinsurance reinsurance ~~of substantially all of its variable annuity business.~~

agreements (the “Reinsurance Agreements”).

As a result of the modified coinsurance reinsurance, the separate account assets ~~will~~ remain on the Company’s ~~statements~~Condensed Statements of ~~financial position,~~Financial Position, but the related results of operations ~~will be~~are fully reinsured to ~~Prudential.~~Prudential beginning on June 1, 2006 and presented net of reinsurance on the Condensed Statements of Operations. In contrast, ~~the~~$445.2 million of assets supporting general account liabilities ~~will be~~have been transferred to Prudential, net of consideration, under the coinsurance reinsurance provisions.

The general account liabilities, however, remain on the Condensed Statements of Financial Position with a corresponding reinsurance recoverable and the results of operations are presented net of reinsurance. For purposes of presentation in the Condensed Statements of Cash Flows, the Company treated the reinsurance of its variable annuity business as a disposition of operations, consistent with the substance of the transaction which was the disposition of a block of business accomplished through reinsurance. Accordingly, the net consideration transferred to Prudential, $393.6 million (computed as $445.2 million of general account insurance liabilities transferred to Prudential on the closing date less consideration of $51.6 million), and the costs of executing the transaction, $1.3 million, pretax, were classified as a disposition of operations in the cash flows from investing activities section of the Condensed Statements of Cash Flows. The Reinsurance Agreements do not extinguish the Company’s primary liability under the variable annuity contracts.

Under the Agreement, the Company, ALIC and the Corporation ~~will each indemnify~~have indemnified 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 and 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.

Pursuant to the Agreement, the consideration was $51.6 million. The ~~Company~~disposal resulted in an initial reinsurance loss of $6.5 million, pretax, which was included as a component of loss on disposition of operations on the Condensed Statements of Operations along with other transactional expenses incurred. During the third quarter of 2006, the total loss for this transaction was increased $215 thousand, pretax, and ~~ALIC have also agreed~~$140 thousand, after-tax. For the nine months ended September 30, 2006, the total loss for this transaction was $8.0 million, pretax, and $5.2 million, after-tax. DAC and DSI were reduced by $79.7 million and $6.2 million, respectively, as of the effective date of the transaction for balances related to ~~continue to issue~~the variable annuity ~~contracts in~~business subject to 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.~~

Reinsurance Agreements.

In the ~~first quarter~~five months of 2006 prior to its disposition, the Company’s variable annuity business generated approximately $4$7.5 million in contract charges. In the three-month and nine-month periods ended September 30, 2006, premiums and contract charges onof $4.8 million and $6.5 million, contract benefits of $1.1 million and $1.3 million, interest credited to contractholder funds of $4.3 million and $5.8 million, and operating costs and expenses of $2.1 million and $2.9 million, respectively, were ceded to Prudential pursuant to the Reinsurance Agreements.

The separate account balances related to the modified coinsurance reinsurance were $996.5 million as of ~~$979 million.~~September 30, 2006. Separate account balances totaling approximately $2.3 million at September 30, 2006 related to the variable life business retained by the Company. In 2005, the Company’s variable annuity business generated approximately $17 million in contract ~~charges on~~charges. The separate account balances were $927 million and general account balances were $501 million as 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 losses were recognized in the first quarter of 2006 due to a change in intent to hold the related fixed income securities.

6December 31, 2005.

•· For the reasons specified above, it is often not possible 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 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 event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently reserved and may be material to the 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 below as they are resolved over time is not likely to have a material adverse effect on the financial 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 (the “EEOC I” suit) and a class action filed in August 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act (“ADEA”), 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.(the “Romero I” suit). In ~~late~~ March 2004, in the ~~first~~consolidated EEOC ~~lawsuit~~I and ~~class action lawsuit,~~Romero I litigation, 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~~stated that, on“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. The EEOC also filed another lawsuit in October 2004 alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization (the “EEOC II” suit). In EEOC II, in October 2006, the court granted partial summary judgment to the EEOC. Although the court did not determine that AIC was liable for age discrimination under the ADEA, it determined that the rehire policy resulted in a disparate impact, reserving for trial the determination on whether AIC had reasonable factors other than age to support the rehire policy. 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. 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 all of these various 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 final outcome of this examination ~~including potential~~is still pending; however, the Company has begun certain customer remediation steps related to replacement ~~sales is currently under discussion with the New York State Department of Insurance.~~

sales.

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.

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.

One or more of these matters could have an adverse effect on the 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 likely to have a material effect on the operating results, cash flows or financial position of the Company.

5. Other Comprehensive ~~Loss~~Income

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

	Three months ended September 30,
	2006									2005
(in thousands)	Pretax			Tax			After- tax			Pretax			Tax			After- tax

Unrealized holding gains (losses) arising during the period, net of related offsets	$	71,794		$	(25,127	)	$	46,667		$	(52,711	)	$	18,448		$	(34,263	)
Less: reclassification adjustment of realized capital gains and losses	(2,965		)	1,038			(1,927		)	1,342			(470		)	872

Other comprehensive income (loss)	$	74,759		$	(26,165	)	48,594			$	(54,053	)	$	18,918		(35,135		)

Net income							10,207									13,563
Comprehensive income (loss)							$	58,801								$	(21,572	)

																					Nine months ended September 30,
	Three months ended March 31,																				2006								2005
(in thousands)	2006									2005											Pretax			Tax		After- tax			Pretax			Tax		After- tax
	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		)
Unrealized holding losses arising during the period, net of related offsets																					$	(86,786	)	$	30,376	$	(56,410	)	$	(35,327	)	$	12,364	$	(22,963	)
Less: reclassification adjustment of realized capital gains and losses	(18,075		)	6,326			(11,749		)	(8,826			)	3,089			(5,737			)	(25,896		)	9,064		(16,832		)	(5,749		)	2,012		(3,737		)

Other comprehensive loss	$	(88,518	)	$	30,981		(57,537		)	$	(45,004		)	$		15,751	(29,253			)	$	(60,890	)	$	21,312	(39,578		)	$	(29,578	)	$	10,352	(19,226		)

Net income							6,272										13,885									21,064								34,388

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

Comprehensive (loss) income																										$	(18,514	)						$	15,162

912

~~Item 2.~~

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

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, 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 2005. We operate as a single segment entity, based on the manner in which we use financial information to evaluate ~~business~~ performance and to determine the allocation of resources.

OPERATIONS

On June 1, 2006, we completed the disposal of our variable annuity business through reinsurance. When comparing the third quarter and first nine months of 2006 to the same period in the prior year, the following impacts to the Condensed Statements of Operations and gross margin resulted from the disposal of the variable annuity business.

(in thousands)	Three months ended September 30, 2006 Compared to the Same Period in the Prior Year			Nine months ended September 30, 2006 Compared to the Same Period in the Prior Year
Favorable/(unfavorable)
Contract charges	$	(4,322	)	$	(3,559	)
Net investment income	(5,793		)	(9,497		)
Periodic settlements and accruals on non-hedge derivative instruments (1)	—			33
Contract benefits	183			(832		)
Interest credited to contractholder funds	4,672			6,967
Amortization of DAC (2)	2,086			(2,430		)
Operating costs and expenses	1,369			1,623
Loss on disposition of operations	(215		)	(7,963		)
Income from operations before income tax expense	$	(2,020	)	$	(15,658	)

Investment margin	$	(1,246	)	$	(2,474	)
Benefit margin	(188		)	(802		)
Contract charges and fees	(3,951		)	(3,589		)

Gross margin (3)	$	(5,385	)	$	(6,865	)

(1) 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.

(2) Amortization deceleration of $4.3 million was recognized in the first nine months of 2005 for variable annuities.

(3) Gross margin and its components are measures that are not based on generally accepted accounting principals (“non-GAAP”). Gross margin, investment margin and benefit margin are defined on pages 17, 19 and 20, respectively.

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 charges are revenues generated from interest-sensitive life, 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~~Subsequent to the close of our reinsurance transaction with Prudential ~~the reinsured separate account assets and liabilities will remain~~on June 1, 2006, variable annuity contract charges on the ~~Company’s statements of financial position, but~~business subject to the ~~related contract charges will be~~transaction are fully reinsured to Prudential and presented net of reinsurance on the Condensed Statements of Operations (see Note 3 to the Condensed Financial Statements).

The following table summarizes premiums and contract charges by product.

Three Months Ended
March 31,

(in thousands)

2006

2005

Premiums

Traditional life

$
4,609

$
5,860

Immediate annuities with life contingencies

8,264

13,219

Accident and health and other

1,196

914

Total premiums

14,069

19,993

Contract charges

Interest-sensitive life

11,230

9,945

Fixed annuities

1,929

1,793

Variable annuities

4,428

3,521

Total contract charges

17,587

15,259

Premiums and contract charges

$
31,656

$
35,252

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

Premiums
Traditional life	$	6,044	$	6,387	$	16,869	$	18,492
Immediate annuities with life contingencies	11,862		9,115		33,354		31,157
Accident and health and other	1,305		1,078		3,740		3,098
Total premiums	19,211		16,580		53,963		52,747

Contract charges
Interest-sensitive life	11,692		10,735		34,292		31,204
Fixed annuities	2,038		1,712		6,177		5,139
Variable annuities	10		4,334		8,113		11,673
Total contract charges	13,740		16,781		48,582		48,016
Premiums and contract charges	$	32,951	$	33,361	$	102,545	$	100,763

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

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

Premiums
Allstate agencies	$	4,525	$	5,738	$	5,935	$	6,248	$	16,521	$	18,157
Financial institutions	—		36		—		—		—		36
Specialized brokers	8,264		13,182		11,861		9,116		33,354		31,121
Independent agents	1,280		1,037		1,415		1,216		4,088		3,433
Total premiums	14,069		19,993		19,211		16,580		53,963		52,747

Contract charges
Allstate agencies	10,805		9,706		10,793		10,324		32,391		30,248
Financial institutions	6,176		4,543		2,230		5,794		14,299		15,490
Specialized brokers	452		911		409		534		1,245		1,932
Independent agents	154		99		308		129		647		346
Total contract charges	17,587		15,259		13,740		16,781		48,582		48,016

Premiums and contract charges	$	31,656	$	35,252	$	32,951	$	33,361	$	102,545	$	100,763

Total premiums ~~decreased 29.6%~~increased 15.9% to ~~$14.1~~$19.2 million in the third quarter of 2006 and 2.3% to $54.0 million in the first ~~quarter~~nine months of 2006 compared to the same ~~period~~periods of 2005. ~~Lower~~The increase in the third quarter and first nine months of 2006 was attributable primarily to increased premiums on immediate annuities sold with life contingencies, ~~and traditional life products were~~ partially offset by ~~increased accident and health and other premiums.~~

lower premiums on traditional life products.

Contract charges ~~increased 15.3%~~declined 18.1% to ~~$17.6~~$13.7 million in the third quarter of 2006 and increased 1.2% to $48.6 million in first ~~quarter~~nine months of 2006 compared to the same ~~period~~periods of 2005. ~~The increase was~~Excluding contract charges on variable annuities, which are reinsured to Prudential effective June 1, 2006, contract charges increased 10.3% and 11.4% in the third quarter and first nine months of 2006, respectively, compared to the same periods of 2005. These increases were due to higher contract charges on interest-sensitive life products and ~~variable annuities and, to a lesser extent,~~ fixed ~~annuities. The increase in the~~annuities. Higher contract charges on interest-sensitive life ~~contracts was~~products were mostly attributable to in-force business growth ~~resulting from deposits~~ and ~~credited interest more than offsetting surrenders and benefits. Higher variable annuity~~increased contract charges on fixed annuities were primarily the result of higher ~~account values. Fixed annuity contract charges for the first quarter of 2006 reflect higher~~ surrender charges ~~compared with the first quarter of 2005.~~.

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 maturities, 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,
(in thousands)	2006			2005 (1)			2006			2005 (1)
Contractholder funds, beginning balance	$	4,599,676		$	4,135,238		$	4,349,395		$	3,802,846

Deposits:
Fixed annuities	204,649			136,486			585,058			567,860
Interest-sensitive life	23,050			25,216			70,889			74,042
Variable annuity and life deposits allocated to fixed accounts	12			12,341			15,505			46,322
Total deposits	227,711			174,043			671,452			688,224

Interest credited	44,869			42,241			133,397			124,861

Benefits, withdrawals and other adjustments
Benefits	(34,114		)	(33,214		)	(105,757		)	(139,447		)
Surrenders and partial withdrawals	(67,359		)	(69,134		)	(233,905		)	(188,687		)
Contract charges	(11,322		)	(10,429		)	(33,129		)	(30,876		)
Net transfers to separate accounts	2			(10,656		)	(18,127		)	(29,395		)
Other adjustments	(17,111		)	282			(20,974		)	845
Total benefits, withdrawals and other adjustments	(129,904		)	(123,151		)	(411,892		)	(387,560		)

Contractholder funds, ending balance	$	4,742,352		$	4,228,371		$	4,742,352		$	4,228,371

Three Months Ended
March 31,

(in thousands)

2006

2005

Contractholder funds, beginning balance

$
4,349,395

$
3,802,846

Deposits:

Fixed annuities

146,827

243,944

Interest-sensitive life

24,284

22,187

Variable annuity and life deposits allocated to fixed accounts

9,341

19,111

Total deposits

180,452

285,242

Interest credited

44,331

39,664

Benefits, withdrawals and other adjustments

Benefits

(23,921
)
(16,597
)
Surrenders and partial withdrawals

(101,208
)
(58,316
)
Contract charges

(10,784
)
(10,112
)
Net transfers to separate accounts

(10,791
)
(9,215
)
Other adjustments

(481
)
284

Total benefits, withdrawals and other adjustments

(147,185
)
(93,956
)

Contractholder funds, ending balance

$
4,426,993

$
4,033,796

(1) To conform to the current presentation, certain prior period balances have been reclassified.

Contractholder funds increased 3.1% and 2.3% in the third quarter of 2006 and 2005, respectively, and increased 9.0% and 11.2% in the first nine months of 2006 and 2005, respectively. Average contractholder funds increased ~~12.0%~~11.7% and ~~43.1%~~13.2% in the third quarter and first ~~quarters~~nine months of 2006, ~~and 2005,~~ respectively, compared to the same periods in ~~the prior years. The reduction~~2005.

Contractholder deposits increased 30.8% in the ~~growth rate of contractholder funds during the first~~third quarter ~~of 2006 was due to lower contractholder deposits~~ and ~~to a lesser extent, increased surrenders and partial withdrawals.~~

~~Contractholder deposits~~ decreased ~~36.7%~~2.4% in the first ~~quarter~~nine months of 2006, compared to the same ~~period~~periods of ~~2005 due mostly to lower~~2005. The increase in the third quarter of 2006 was the result of higher deposits on fixed annuities, mostly driven by increased deposits on traditional deferred annuities. ~~Fixed~~The magnitude of this increase reflects relatively low deposits in the third quarter of 2005. Additionally, deposits on our innovative Allstate® Treasury-Linked Annuity contracts were $23.1 million in the third quarter of 2006, an increase of $16.9 million over the prior period. The crediting rate on this patented product is indexed to the 5-year treasury rate, which increases the crediting rate to the customer in a rising interest rate environment. The increase in fixed annuity deposits ~~declined 39.8%~~in the third quarter was partially offset by the absence of variable annuity deposits allocated to fixed accounts in the third quarter of 2006 due to the disposal of our variable annuity business on June 1, 2006. The decline in contractholder fund deposits in the first nine months of 2006 was attributable to decreased variable annuity and life deposits allocated to fixed accounts, partially offset by higher fixed annuity deposits. Higher fixed annuity deposits in the first nine months of 2006 were mostly the result of a $39.7 million increase in deposits on Allstate® Treasury-Linked Annuity contracts

Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitive life products declined 2.6% in the third quarter of 2006 and increased 24.0% in the first nine months of 2006, compared to the same ~~period in~~periods of 2005. The annualized withdrawal rate on these products was 7.5% for 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 improving fixed annuity product returns.

~~Surrenders and partial withdrawals increased 73.6% in the first~~third quarter of 2006 ~~compared to the same period of 2005 reflecting an annualized withdrawal rate of 9.3%~~and 8.7% for the first ~~quarter~~nine months of 2006 based on the beginning of period contractholder funds balance. This compares to an

annualized withdrawal rate of ~~6.1%~~7.6% for third quarter of 2005 and 7.7% for the first ~~quarter~~nine months of 2005. ~~The declining~~Surrenders and ~~relatively low~~withdrawals may vary with changes in market interest ~~rate environment of~~rates and the prior three years contributed to favorable withdrawal rates in 2005, and also resulted in an increased level of policies with little or no surrender charge protection. The increase in the withdrawal rate in the first quarter of 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 move their funds to competing investment alternatives. The aging of our in-force business may 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 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
March 31,

(in thousands)

2006

2005

Separate accounts liabilities, beginning balance

$
928,824

$
792,550

Variable annuity and life deposits

41,628

56,831

Variable annuity and life deposits allocated to fixed accounts

(9,341
)
(19,111
)
Net deposits

32,287

37,720

Investment results

39,131

(11,802
)
Contract charges

(3,876
)
(2,986
)
Net transfers from fixed accounts

10,791

9,215

Surrenders and benefits

(26,758
)
(15,423
)

Separate accounts liabilities, ending balance

$
980,399

$
809,274

Separate accounts liabilities increased 5.6% as of March 31, 2006 compared to December 31, 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 vary with equity market conditions, product investment allocation decisions and consumer preferences related to product features.

contracts.

Net investment income increased ~~7.4%~~3.0% in the third quarter and 5.4% in the first ~~quarter~~nine months of 2006 compared to the same ~~period~~periods in 2005 due primarily ~~due~~ to higher average portfolio balances. Higher average portfolio balances resulted from the investment of cash flows from operating ~~activities~~ and financing activities related primarily to deposits from fixed ~~annuities.~~

annuities and interest-sensitive life policies.

Net income analysis is presented in the following table.

Three Months Ended
March 31,

(in thousands)

2006

2005

Premiums

$
14,069

$
19,993

Contract charges(1)

17,588

15,259

Net investment income

92,893

86,492

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

424

214

Contract benefits

(43,330
)
(47,083
)
Interest credited to contractholder funds(3)

(40,478
)
(35,994
)
Gross margin

41,166

38,881

Amortization of DAC and DSI

(13,410
)
(3,503
)
Operating costs and expenses

(13,886
)
(9,192
)
Income tax expense

(5,156
)
(9,919
)
Realized capital gains and losses, after-tax

(9,317
)
(3,735
)
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

(261
)
(136
)
Net income

$
6,272

$
13,885

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

Premiums	$	19,211		$	16,580		$	53,963		$	52,747
Contract charges(1)	13,740			16,776			48,587			48,011
Net investment income	92,536			89,853			279,256			264,848
Periodic settlements and accruals on non-hedge derivative instruments (2)	687			289			1,671			773
Contract benefits	(44,348		)	(41,904		)	(137,904		)	(131,888		)
Interest credited to contractholder funds(3)	(40,671		)	(38,780		)	(121,386		)	(113,507		)
Gross margin	41,155			42,814			124,187			120,984

Amortization of DAC and DSI (4)	(12,513		)	(13,025		)	(40,021		)	(26,918		)
Operating costs and expenses	(10,526		)	(10,014		)	(34,887		)	(32,284		)
Income tax expense	(5,975		)	(6,580		)	(16,897		)	(22,717		)
Realized capital gains and losses, after-tax	(3,002		)	2,795			(15,035		)	(2,490		)
DAC and DSI amortization expense on realized capital gains and losses, after-tax (4)	1,639			(2,243		)	9,936			(1,704		)
Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax	(431		)	(184		)	(1,043		)	(484		)
(Loss) gain on disposition of operations, after-tax	(140		)	—			(5,176		)	1
Net income	$	10,207		$	13,563		$	21,064		$	34,388

(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 $1$5 thousand in each of the ~~first quarter of 2006. There~~periods presented in the table above except for the three months ended September 30, 2006 for which there was no amortization of deferred loads related to realized capital gains and ~~losses in the first quarter of 2005.~~losses.

(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~~For purposes of calculating gross margin, amortization of deferred sales inducements (“DSI”) is excluded from interest credited to contractholder funds ~~for purposes~~and aggregated with amortization of ~~calculating gross margin.~~DAC due to the similarity in the substance of the two items. Amortization of DSI totaled ~~$1,396~~$943 thousand and ~~$232~~$743 thousand in the three months ended September 30, 2006 and 2005, respectively, and $3,276 thousand and $1,680 thousand in the first ~~quarters~~nine months of 2006 and 2005, respectively.

(4) Amortization of DAC and DSI relating to realized capital gains and losses is analyzed separately because realized capital gains and losses may vary significantly between periods and obscure trends in our business. Amortization of DAC and DSI relating to realized capital gains and losses was $2,578 thousand and $(3,596) thousand in the third quarter of 2006 and 2005, respectively, and was $15,926 thousand and $(2,728) thousand in the first nine months of 2006 and 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.

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)	2006			2005			2006			2005			2006		2005		2006			2005
Premiums	$	—		$	—		$	19,211		$	16,580		$	—	$	—	$	19,211		$	16,580
Contract charges (1)	—			—			7,914			8,417			5,826		8,359		13,740			16,776
Net investment income	92,536			89,853			—			—			—		—		92,536			89,853
Periodic settlements and accruals on non-hedge derivative instruments (2)	687			289			—			—			—		—		687			289
Contract benefits	(26,169		)	(25,466		)	(18,179		)	(16,438		)	—		—		(44,348		)	(41,904		)
Interest credited to contractholder funds(3)	(40,671		)	(38,780		)	—			—			—		—		(40,671		)	(38,780		)
	$	26,383		$	25,896		$	8,946		$	8,559		$	5,826	$	8,359	$	41,155		$	42,814

Three Months Ended March 31,

Investment
Margin

Benefit
Margin

Contract
Charges and
Fees

Gross
Margin

(in thousands

2006

2005

2006

2005

2006

2005

2006

2005

Premiums

$
—

$
—

$
14,069

$
19,993

$
—

$
—

$
14,069

$
19,993

Contract charges(1)

—

—

7,980

7,845

9,608

7,414

17,588

15,259

Net investment income

92,893

86,492

—

—

—

—

92,893

86,492

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

424

214

—

—

—

—

424

214

Contract benefits

(25,520
)
(25,407
)
(17,810
)
(21,676
)
—

—

(43,330
)
(47,083
)
Interest credited to contractholder funds(3)

(40,478
)
(35,994
)
—

—

—

—

(40,478
)
(35,994
)

$
27,319

$
25,305

$
4,239

$
6,162

$
9,608

$
7,414

$
41,166

$
38,881

	Nine Months Ended September 30,
	Investment Margin						Benefit Margin						Contract Charges and Fees				Gross Margin
(in thousands)	2006			2005			2006			2005			2006		2005		2006			2005
Premiums	$	—		$	—		$	53,963		$	52,747		$	—	$	—	$	53,963		$	52,747
Contract charges (1)	—			—			24,363			24,447			24,224		23,564		48,587			48,011
Net investment income	279,256			264,848			—			—			—		—		279,256			264,848
Periodic settlements and accruals on non-hedge derivative instruments (2)	1,671			773			—			—			—		—		1,671			773
Contract benefits	(77,527		)	(75,627		)	(60,377		)	(56,261		)	—		—		(137,904		)	(131,888		)
Interest credited to contractholder funds(3)	(121,386		)	(113,507		)	—			—			—		—		(121,386		)	(113,507		)
	$	82,014		$	76,487		$	17,949		$	20,933		$	24,224	$	23,564	$	124,187		$	120,984

(1) Loads charged to ~~customers~~contractholders at the inception of interest-sensitive life contracts are deferred and amortized to income in a manner consistent with ~~DAC.~~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 $1$5 thousand in each of the ~~first quarter of 2006. There~~periods presented in the table above except for the three months ended September 30, 2006 for which there was no amortization of deferred loads related to realized capital gains and ~~losses in the first quarter of 2005.~~losses.

(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~~For purposes of calculating gross margin, amortization of DSI is excluded from interest credited to contractholder funds ~~for purposes~~and aggregated with amortization of ~~calculating gross margin.~~DAC due to the similarity in the substance of the two items. Amortization of DSI totaled ~~$1,396~~$943 thousand and ~~$232~~$743 thousand in the three months ended September 30, 2006 and 2005, respectively, and $3,276 thousand and $1,680 thousand in the first ~~quarters~~nine months of 2006 and 2005, respectively.

Gross margin declined 3.9% in the third quarter of 2006 and increased ~~5.9% during~~2.6% in the first nine months of 2006 compared to the same periods of 2005. In the third quarter of 2006, higher investment and benefit margin were more than offset by lower contract charges and fees resulting from a significant reduction in variable annuity contract charges in the current period due to the disposal of our variable annuity business. The increase in gross margin in the first nine months of 2006, compared to the same period ~~of 2005~~in the prior year, was due to ~~higher~~increased investment margin and, to a significantly lesser extent, higher 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,
(in thousands)	2006		2005		2006		2005
Annuities	$	24,252	$	23,562	$	75,245	$	69,571
Life insurance	2,131		2,334		6,769		6,916
Total investment margin	$	26,383	$	25,896	$	82,014	$	76,487

Three Months Ended
March 31,

(in thousands)

2006

2005

Annuities

$
24,904

$
23,011

Life insurance

2,415

2,294

Total investment margin

$
27,319

$
25,305

Investment margin increased ~~8.0%~~1.9% in the third quarter of 2006 and 7.2% in the first ~~quarter~~nine months of 2006 compared to the same ~~period~~periods of ~~2005~~2005. The increase in both periods was primarily due to growth in contractholder ~~funds partially offset~~funds. Additionally, for the first nine months of 2006, the increase was further driven by ~~lower~~a higher weighted average investment 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 marginsyield on ~~the business subject to the disposition.~~

assets supporting deferred fixed annuities.

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

	Weighted Average Investment Yield				Weighted Average Interest Crediting Rate				Weighted Average Investment Spread
	2006		2005		2006		2005		2006		2005
Interest-sensitive life	5.6	%	5.6	%	4.6	%	4.5	%	1.0	%	1.1	%
Deferred fixed annuities	5.6		5.4		3.4		3.2		2.2		2.2
Immediate fixed annuities with and without life contingencies	7.4		7.4		6.6		6.7		0.8		0.7
Investments supporting capital, traditional life and other products	6.1		6.4		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				Weighted Average Investment Yield				Weighted Average Interest Crediting Rate				Weighted Average Investment Spread
	2006		2005		2006		2005		2006		2005		2006		2005		2006		2005		2006		2005
Interest-sensitive life	5.6	%	5.7	%	4.5	%	4.4	%	1.1	%	1.3	%	5.6	%	5.7	%	4.5	%	4.5	%	1.1	%	1.2	%
Deferred fixed annuities	5.4		5.5		3.1		3.1		2.3		2.4		5.6		5.4		3.2		3.1		2.4		2.3
Immediate fixed annuities with and without life contingencies	7.4		7.5		6.7		6.7		0.7		0.8		7.5		7.5		6.7		6.7		0.8		0.8
Investments supporting capital, traditional life and other products	6.2		6.1		N/A		N/A		N/A		N/A		6.2		6.3		N/A		N/A		N/A		N/A

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

	Three Months Ended March 31,				Nine Months Ended September 30,
(in thousands)	2006		2005		2006		2005
Immediate fixed annuities with life contingencies	$	1,514,713	$	1,460,845	$	1,544,636	$	1,488,670
Other life contingent contracts and other	323,496		343,759		360,978		370,570
Reserve for life-contingent contract benefits	$	1,838,209	$	1,804,604	$	1,905,614	$	1,859,240

Interest-sensitive life	$	439,815	$	381,824	$	464,148	$	412,136
Deferred fixed annuities	3,441,421		3,089,790		3,724,117		3,289,970
Immediate fixed annuities without life contingencies and other	545,757		562,182		554,087		526,265
Contractholder funds	$	4,426,993	$	4,033,796	$	4,742,352	$	4,228,371

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, prior to the disposal of our variable annuity business through reinsurance, 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 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 March 31,						Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2006			2005			2006		2005			2006			2005
Life insurance	$	5,551		$	7,191		$	7,767	$	9,958		$	18,920		$	25,482
Annuities	(1,312		)	(1,029		)	1,179		(1,399		)	(971		)	(4,549		)
Total benefit margin	$	4,239		$	6,162		$	8,946	$	8,559		$	17,949		$	20,933

Benefit margin increased 4.5% in the third quarter of 2006 and declined ~~31.2%~~14.3% in the first ~~quarter~~nine months of 2006 compared to the same ~~period~~periods of 2005. ~~The reduction~~Benefit margin for the third quarter and first nine months of 2005 included $815 thousand and $2.3 million, respectively, of amounts that were classified as contract charges and fees beginning in 2006. Excluding this item, benefit margin increased 15.5% in the ~~life insurance benefit margin~~third quarter and decreased 3.9% in the first nine months of 2006. The increase in the third quarter of 2006 was primarily the result of improved mortality experience on life-contingent immediate annuities. In the first nine months of 2006, the improved annuity mortality experience was more than offset by lower premiums and unfavorable mortality experience and a prospective change in our calculation to reclassify $701 thousand to contract charges and fees, partially offset by in-force business growth. The unfavorable change in the annuity benefit margin was the result of increasingly unfavorable mortality experience.

on traditional life products.

Amortization of DAC and DSI, excluding amortization related to realized capital gains and losses, declined 3.9% in the third quarter of 2006 and increased ~~$9.9 million~~48.7% in the first ~~quarter~~nine months of 2006 compared to the same ~~period~~periods of 2005. The decline in the ~~prior year~~third quarter of 2006 was primarily ~~due to~~the result of the absence of amortization on the variable annuity contracts that were disposed of through a reinsurance arrangement effective June 1, 2006. The impact of the disposal of our variable annuity business in the first nine months of 2006 was more than offset by the recognition of amortization acceleration (commonly referred to as ~~“DAC~~DAC and DSI ~~unlocking”~~“unlocking”) totaling $544 thousand in the ~~first quarter of 2006 of $544 thousand~~current period compared to the prior period recognition of amortization deceleration of $7.3 million. ~~The credit~~Additionally, higher gross margin on investment contracts in the first nine months of 2006 also contributed to ~~net income resulting from~~the increase in amortization for that period. DAC and DSI amortization related to realized capital gains and losses, after-tax, ~~increased $5.6~~changed by a favorable $3.9 million and $11.6 million in the third quarter and first ~~quarter~~nine months of 2006, respectively, compared to the same ~~period~~periods in ~~2005 due to higher net realized capital losses.~~

2005.

DAC and DSI ~~amortization is expected to decline~~were reduced by $79.7 million and $6.2 million, respectively, in the ~~future~~first nine months of 2006 as a result of 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 the business subject to the disposition.~~

Operating costs and expenses increased ~~51.1%~~5.1% and 8.1% in the third quarter and first ~~quarter~~nine months of 2006 compared to the same ~~period~~periods of 2005. ~~The increase was primarily attributable to~~For the third quarter and first nine months of 2006, higher guaranty fund assessments, restructuring charges and ~~restructuring and~~employee benefit expenses were partially offset by the absence of variable annuity related ~~charges in the first quarter of 2006 related~~expenses due to the ~~Voluntary Termination Offer accepted by employees located at Allstate’s headquarters. Additionally, operating costs~~disposition of the business through reinsurance effective June 1, 2006 and ~~expenses reflected modestly higher costs to support the continued growth in our in-force business.~~lower technology related expenses.

INVESTMENTS

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

Carrying

Percent

(in thousands)

value

of total

Fixed income securities (1)

$
5,924,532

86.9
%
Mortgage loans

651,699

9.6

Short-term

196,572

2.9

Policy loans

36,727

0.5

Other

4,585

0.1

Total

$
6,814,115

100.0
%

(in thousands)	Carrying value		Percent of total

Fixed income securities (1)	$	6,017,069	87.5	%
Mortgage loans	672,960		9.8
Short-term	144,438		2.1
Policy loans	37,747		0.5
Other	3,525		0.1
Total	$	6,875,739	100.0	%

(1) Fixed income securities are carried at fair value. Amortized cost basis for these securities was ~~$5.64~~$5.65 billion.

Total investments increased to ~~$6.81~~$6.88 billion at ~~March 31,~~September 30, 2006 from $6.73 billion at December 31, 2005 primarily due to positive cash flows from financing and operating ~~and financing~~ activities, ~~and~~including increased funds associated with securities lending, partially offset by decreased net unrealized capital gains on fixed income ~~securities.~~

securities and payments totaling approximately $394.9 million related to the sale of our variable annuity business.

Total investments at amortized cost related to collateral received in connection with securities lending ~~transactions~~activities increased to ~~$319.0~~$341.4 million at ~~March 31,~~September 30, 2006 from $149.5 million at December 31, 2005.

At ~~March 31,~~September 30, 2006, ~~96.8%~~96.6% 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; 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 ~~March 31,~~September 30, 2006 were ~~$281.6~~$369.8 million, a decrease of ~~$172.3~~$84.1 million or ~~38.0%~~18.5% since December 31, 2005. The net unrealized gain was comprised of ~~$372.9~~$424.9 million of unrealized gains and ~~$91.3~~$55.1 million of unrealized losses at ~~March 31,~~September 30, 2006. This is compared to net unrealized gains totaling $453.9 million at December 31, 2005, comprised of $497.4 million of unrealized gains and $43.5 million of unrealized losses.

Of the gross unrealized losses at ~~March 31,~~September 30, 2006, ~~$88.5~~$51.1 million or ~~96.9%~~92.7% were related to investment grade securities and are believed to be primarily a result of a rising interest rate environment. The remaining ~~$2.8~~$4.0 million of losses ~~in the fixed income portfolio~~ were in the corporate fixed income portfolio and were primarily

comprised of securities in the consumer goods, energy and capital goods sectors. The gross unrealized losses in these sectors were primarily company specific and interest rate related.

Our portfolio monitoring process identifies and evaluates, on a case-by-case basis, fixed income securities whose carrying value may be ~~other than temporarily~~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. As 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,~~September 30, 2006 were included in our portfolio monitoring process ~~wherein it was determined that the~~for determining which declines in value were not ~~other than~~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.

													September 30, 2006						December 31, 2005
(in thousands)	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	$	4,032	$	6,197	0.1	%	$	14,373	$	17,762	0.3	%	$	3,653	$	6,055	0.1	%	$	14,373	$	17,762	0.3	%
Restructured	147		147		—		163		163		—		—		—		—		163		163		—
Potential problem	5,616		5,660		0.1		5,609		5,640		0.1		1,405		1,500		—		5,609		5,640		0.1
Total net carrying value	$	9,795	$	12,004	0.2	%	$	20,145	$	23,565	0.4	%	$	5,058	$	7,555	0.1	%	$	20,145	$	23,565	0.4	%
Cumulative write-downs recognized	$	5,440					$	5,455					$	4,024					$	5,455

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

We also evaluated each of these securities through our portfolio monitoring process at ~~March 31,~~September 30, 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 March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2006			2005			2006			2005			2006			2005

Investment write-downs	$	(258	)	$	(393	)	$	—		$	1		$	(258	)	$	(1,468	)
Dispositions	(16,417		)	(8,023		)	(1,716		)	1,341			(24,083		)	(1,703		)
Valuation of derivative instruments	781			241			(3,964		)	457			(3,325		)	(3,021		)
Settlement of derivative instruments	758			2,298			939			2,732			3,573			2,214
Realized capital gains and losses, pretax	(15,136		)	(5,877		)	(4,741		)	4,531			(24,093		)	(3,978		)
Income tax benefit	5,819			2,142
Income tax benefit (expense)							1,739			(1,736		)	9,058			1,488
Realized capital gains and losses, after-tax	$	(9,317	)	$	(3,735	)	$	(3,002	)	$	2,795		$	(15,035	)	$	(2,490	)

Dispositions in the above table include sales, losses recognized in anticipation of 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~~Valuation and ~~range is established with an economic view~~settlement 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~~instruments primarily include gains and losses ~~and through new purchases. As a component of our approach~~related 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.~~

In the first quarter of 2006, we recognized $15 million of losses related to a change in our intent to hold certain securities with unrealized losses until they recover in value. The change in our intent is primarily related to $442 million of securities which had unrealized losses totaling $14 million that may becaps used to ~~fund net general account~~reduce the interest rate risk resulting from mismatches between existing assets and liabilities

and financial futures used to ~~be transferred at~~hedge the ~~closing~~interest rate risk of ~~our variable annuity reinsurance agreement with Prudential. Additionally, continued implementation~~anticipated purchases and sales of ~~yield enhancement strategies, strategic asset allocations~~investments and ~~comprehensive reviews of our portfolio resulted in the identification of $34 million of securities that had unrealized losses of $1 million which may be sold~~product sales to ~~achieve these objectives.~~

customers.

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)	March 31, 2006		December 31, 2005		September 30, 2006		December 31, 2005

Common stock, retained earnings and other shareholder’s equity items	$	544,737	$	538,465
Common stock, additional capital paid-in and retained income					$	561,680	$	538,465
Accumulated other comprehensive income	71,431		128,968		89,390		128,968
Total shareholder’s equity	$	616,168	$	667,433	$	651,070	$	667,433

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

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

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

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

Large accelerated filer	Accelerated filer	Non-accelerated filer
o	o	ýx

	Allstate Life Insurance Company of New York
	(Registrant)

~~May 8,~~November 7, 2006	By	/s/ Samuel H. Pilch

	Samuel H. Pilch
		Controller (chief accounting officer and duly
	authorized officer of ~~the registrant)~~Registrant)

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 ~~May~~November 6, ~~2005,~~2006, concerning unaudited interim financial information.

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

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

32		Section 1350 Certifications

FORM 10-Q

THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-100029

New York

36-2608394

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

March 31,
September 30, 2006

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

1. General

Basis of presentationPresentation

Adopted accounting standards

2. Supplemental Cash Flow Information

3. Reinsurance

4. Guarantees and Contingent Liabilities

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, 2006 AND 2005

OVERVIEW

OPERATIONS

INVESTMENTS

CAPITAL RESOURCES AND LIQUIDITY

Item 4.Controls and Procedures

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Item 6. ExhibitsExhibits

SIGNATURE

	Carrying		Percent
(in thousands)	value		of total

Fixed income securities (1)	$	5,924,532	86.9	%
Mortgage loans	651,699		9.6
Short-term	196,572		2.9
Policy loans	36,727		0.5
Other	4,585		0.1
Total	$	6,814,115	100.0	%

FORM 10-Q

THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-100029

New York

36-2608394

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

March 31,September 30, 2006

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

1. General

Basis of presentationPresentation

Adopted accounting standards

2. Supplemental Cash Flow Information

3. Reinsurance

4. Guarantees and Contingent Liabilities

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, 2006 AND 2005

OVERVIEW

OPERATIONS

INVESTMENTS

CAPITAL RESOURCES AND LIQUIDITY

Item 4.Controls and Procedures

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Item 6. ExhibitsExhibits

SIGNATURE

March 31,
September 30, 2006