Allstate Life Insurance Co Of New York 10-Q 2008 Q2 Quarterly report

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.

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-100029

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

(Exact name of registrant as specified in its charter)

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

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

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

Yes x     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o	Accelerated filer o		Non-accelerated filer x	Smaller Reporting company o
		(Do not check if a smaller reporting company)

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

Yes o     No x

As of August 8, 2008, the registrant had 100,000 common shares, $25 par value, outstanding, all of which are held by Allstate Life Insurance Company.

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2008

PART 1.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2008 and 2007 (unaudited)	3
	Condensed Statements of Financial Position as of June 30, 2008 (unaudited) and December 31, 2007	4
	Condensed Statements of Cash Flows for the Six-Month Periods Ended June 30, 2008 and 2007 (unaudited)	5
	Notes to Condensed Financial Statements (unaudited)	6
	Report of Independent Registered Public Accounting Firm	19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4.	Controls and Procedures	45
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 6.	Exhibits	46

PART 1. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2008			2007			2008			2007
	(unaudited)						(unaudited)
Revenues
Premiums	$	15,896		$	18,683		$	25,097		$	36,415
Contract charges	15,465			14,741			30,946			29,139
Net investment income	100,218			96,939			199,964			190,907
Realized capital gains and losses	(60,113		)	(839		)	(58,392		)	(2,744		)
	71,466			129,524			197,615			253,717
Costs and expenses
Contract benefits	46,354			48,705			85,159			91,538
Interest credited to contractholder funds	44,578			43,248			87,879			86,898
Amortization of deferred policy acquisition costs	1,167			11,213			2,618			28,973
Operating costs and expenses	10,981			8,410			20,003			17,554
	103,080			111,576			195,659			224,963
(Loss) gain on disposition of operations	(90		)	253			(358		)	(132		)
(Loss) income from operations before income tax (benefit) expense	(31,704		)	18,201			1,598			28,622
Income tax (benefit) expense	(11,145		)	6,497			580			10,245
Net (loss) income	$	(20,559	)	$	11,704		$	1,018		$	18,377

See notes to condensed financial statements.

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ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF FINANCIAL POSITION

	June 30,		December 31,
($ in thousands, except par value data)	2008		2007
	(unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $5,786,138 and $5,928,899)	$	5,969,202	$	6,271,128
Mortgage loans	710,143		725,301
Short-term	485,919		22,688
Policy loans	38,570		38,509
Other	—		3
Total investments	7,203,834		7,057,629
Cash	11,586		7,356
Deferred policy acquisition costs	344,030		278,664
Accrued investment income	63,351		64,514
Reinsurance recoverables	360,850		381,431
Receivable from affiliates, net	832		—
Current income taxes receivable	5,978		146
Other assets	52,693		47,079
Separate Accounts	804,994		948,358
Total assets	$	8,848,148	$	8,785,177
Liabilities
Contractholder funds	$	5,033,362	$	4,848,461
Reserve for life-contingent contract benefits	1,987,367		2,016,971
Deferred income taxes	9,955		39,737
Other liabilities and accrued expenses	372,215		241,756
Payable to affiliates, net	—		8,035
Reinsurance payable to parent	971		987
Separate Accounts	804,994		948,358
Total liabilities	8,208,864		8,104,305
Commitments and Contingent Liabilities (Note 5)
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	474,202		473,184
Accumulated other comprehensive income:
Unrealized net capital gains and losses	22,582		65,188
Total accumulated other comprehensive income	22,582		65,188
Total shareholder’s equity	639,284		680,872
Total liabilities and shareholder’s equity	$	8,848,148	$	8,785,177

See notes to condensed financial statements.

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ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
($ in thousands)	2008			2007
	(unaudited)
Cash flows from operating activities
Net income	$	1,018		$	18,377
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items	(38,626		)	(38,242		)
Realized capital gains and losses	58,392			2,744
Loss on disposition of operations	358			132
Interest credited to contractholder funds	87,879			86,898
Changes in:
Life-contingent contract benefits and contractholder funds	(7,171		)	4,633
Deferred policy acquisition costs	(26,995		)	8,487
Income taxes payable	(12,673		)	3,366
Other operating assets and liabilities	(17,257		)	(38,986		)
Net cash provided by operating activities	44,925			47,409
Cash flows from investing activities						��
Proceeds from sales of fixed income securities	242,065			250,282
Proceeds from sales of mortgage loans	4,563			—
Investment collections
Fixed income securities	85,616			59,785
Mortgage loans	33,158			34,291
Investment purchases
Fixed income securities	(215,531		)	(363,326		)
Mortgage loans	(23,692		)	(15,969		)
Change in short-term investments, net	(309,163		)	14,674
Change in other investments, net	(4,267		)	(877		)
Net cash used in investing activities	(187,251		)	(21,140		)
Cash flows from financing activities
Contractholder fund deposits	381,813			212,874
Contractholder fund withdrawals	(235,257		)	(235,830		)
Net cash provided by (used in) financing activities	146,556			(22,956		)
Net increase in cash	4,230			3,313
Cash at beginning of period	7,356			7,090
Cash at end of period	$	11,586		$	10,403

See notes to condensed financial statements.

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ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

1.   General

Basis of presentation

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 by Allstate Insurance Company (“AIC”), a wholly owned subsidiary of The Allstate Corporation (the “Corporation”).

The condensed financial statements and notes as of June 30, 2008 and for the three-month and six-month periods ended June 30, 2008 and 2007 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, 2007.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

Premiums and Contract Charges

The following table summarizes premiums and contract charges by product.

	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2008		2007		2008		2007
Premiums
Traditional life insurance	$	7,867	$	5,978	$	12,990	$	12,362
Immediate annuities with life contingencies	6,022		11,188		8,172		20,987
Accident and health and other	2,007		1,517		3,935		3,066
Total premiums	15,896		18,683		25,097		36,415
Contract charges
Interest-sensitive life insurance	13,985		12,585		27,697		24,836
Fixed annuities	1,480		2,156		3,249		4,303
Total contract charges	15,465		14,741		30,946		29,139
Total premiums and contract charges	$	31,361	$	33,424	$	56,043	$	65,554

Adopted 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 American Institute of Certified Public Accountants (“AICPA”) issued SOP 05-1.  SOP 05-1 provides accounting guidance for deferred policy acquisition costs (“DAC”) associated with internal replacements of insurance and investment contracts other than those set forth in Statement of Financial Accounting Standards (“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 through the exchange of an existing contract for a new contract, or by amendment, endorsement or rider to an existing contract, or by the election of a feature or coverage within an existing contract.   The Company adopted the provisions of SOP 05-1 on January 1, 2007 for internal replacements occurring in fiscal years beginning after December 15, 2006.  The adoption resulted in a $1.2 million after-tax reduction to retained income to reflect the impact on estimated future gross profits (“EGP”) from the changes in accounting for certain costs associated with contract continuations that no longer qualify for deferral under SOP 05-1 and a reduction of DAC and deferred sales inducement balances of $1.8 million pre-tax as of January 1, 2007.

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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 Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, which permits the fair value remeasurement at the date of adoption of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under paragraph 12 or 13 of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”(“SFAS No. 133”); clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or hybrid financial instruments that contain embedded derivatives requiring bifurcation; and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. The Company adopted the provisions of SFAS No. 155 on January 1, 2007, which were effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of the first fiscal year beginning after September 15, 2006.  The Company elected not to remeasure existing hybrid financial instruments that contained embedded derivatives requiring bifurcation at the date of adoption pursuant to paragraph 12 or 13 of SFAS No. 133.  The adoption of SFAS No. 155 did not have a material effect on the results of operations or financial position of the Company.

FASB  Interpretation No. 48, Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109  and FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“FIN 48”)

The FASB issued FIN 48 in July 2006 and the related staff position in May 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”.  FIN 48 requires an entity to recognize the tax benefit of uncertain 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.  On January 1, 2007, the Company adopted the provisions of FIN 48, which were effective for fiscal years beginning after December 15, 2006.  No cumulative effect of a change in accounting principle or adjustment to the liability for unrecognized tax benefits was recognized as a result of the adoption of FIN 48.  Accordingly, the adoption of FIN 48 did not have an 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 redefines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“GAAP”), and expands disclosures about fair value measurements.  SFAS No. 157 establishes a three-level hierarchy for fair value measurements based upon the nature of the inputs to the valuation of an asset or liability.  SFAS No. 157 applies where other accounting pronouncements require or permit fair value measurements.  In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which permits the deferral of the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company adopted the provisions of SFAS No. 157 for financial assets and liabilities recognized or disclosed at fair value on a recurring and non-recurring basis as of January 1, 2008.  Consistent with the provisions of FSP 157-2, the Company decided to defer the adoption of SFAS No. 157 for non-financial assets and liabilities measured at fair value on a non-recurring basis until January 1, 2009.  The adoption of SFAS No. 157 did not have a material effect on the Company’s results of operations or financial position (see Note 3).

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

In February 2007, the FASB issued SFAS No. 159 which provides reporting entities, on an ongoing basis, an option to report selected financial assets, including investment securities, and financial liabilities, including most insurance contracts, at fair value through earnings.  SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement alternatives for similar types of financial assets and liabilities.  The standard also requires additional information to aid financial statement users’ understanding of the impacts of a reporting entity’s decision to use fair value on its earnings and

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requires entities to display, on the face of the statement of financial position, the fair value of those assets and liabilities for which the reporting entity has chosen to measure at fair value.  SFAS No. 159 was effective as of the beginning of a reporting entity’s first fiscal year beginning after November 15, 2007.  The Company did not apply the fair value option to any existing financial assets or liabilities as of January 1, 2008.  Consequently, the initial adoption of SFAS No. 159 had no impact on the Company’s results of operations or financial position.

FASB Staff Position No. FIN 39–1, Amendment of FASB Interpretation No. 39 (“FSP FIN 39–1”)

In April 2007, the FASB issued FSP FIN 39–1, which amends FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts”.  FSP FIN 39–1 replaces the terms “conditional contracts” and “exchange contracts” with the term “derivative instruments” and requires a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in the statement of financial position. FSP FIN 39–1 was effective for fiscal years beginning after November 15, 2007, with early adoption permitted.  The adoption of FSP FIN 39–1 did not have a material impact on the Company’s results of operations or financial position.

Pending accounting standard

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”)

In March 2008, the FASB issued SFAS No. 161, which amends and expands the disclosure requirements for derivatives currently accounted for in accordance with SFAS No. 133.  The new disclosures are designed to enhance the understanding of how and why an entity uses derivative instruments and how derivative instruments affect an entity’s financial position, results of operations, and cash flows.  The standard requires, on a quarterly basis, quantitative disclosures about the potential cash outflows associated with the triggering of credit-related contingent features, if any; tabular disclosures about the classification and fair value amounts of derivative instruments reported in the statement of financial position; disclosure of the location and amount of gains and losses on derivative instruments reported in the statement of operations; and qualitative information about how and why an entity uses derivative instruments and how derivative instruments and related hedged items affect the entity’s financial statements.  SFAS No. 161 is effective for fiscal periods beginning after November 15, 2008, and is to be applied on a prospective basis only.  SFAS No. 161 affects disclosures and therefore will not impact the Company’s results of operations or financial position.

2.   Supplemental Cash Flow Information

Liabilities for collateral received in conjunction with the Company’s 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 activities resulting from management of the proceeds, which are as follows:

	Six months ended June 30,
($ in thousands)	2008			2007
Net change in fixed income securities	$	13,114		$	(108,438	)
Net change in short-term investments	(149,818		)	(84,970		)
Operating cash flow used	$	(136,704	)	$	(193,408	)
Liabilities for collateral, beginning of year	$	(198,138	)	$	(199,486	)
Liabilities for collateral, end of period	(334,842		)	(392,894		)
Operating cash flow provided	$	136,704		$	193,408

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3.  Fair Value of Financial Assets and Financial Liabilities

The measurement basis for a significant amount of the Company’s financial assets is fair value. Financial instruments measured at fair value on a recurring basis include:

Financial Assets  Primarily investments including U.S. treasuries, money markets funds, corporates, municipals, U.S. government and agencies, commercial mortgage-backed securities (“CMBS”), preferred stock, mortgage-backed securities (“MBS”), foreign governments, asset-backed securities (“ABS”), commercial paper, derivatives (exchange traded and over-the-counter (“OTC”)), and separate account assets.

Financial Liabilities   Primarily free-standing derivatives (exchange listed and OTC) and derivatives embedded in certain contractholder liabilities.

Financial instruments measured at fair value on a non-recurring basis include:

Financial Assets: Mortgage loans written-down to fair value in connection with recognizing other-than-temporary impairments.

SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company adopted the provisions of SFAS No. 157 as of January 1, 2008 for its financial assets and financial liabilities that are measured at fair value.  SFAS No. 157:

·Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value;

·Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation as of the measurement date;

·Expands disclosures about financial instruments measured at fair value.

In determining fair value, the Company principally uses the market approach which generally utilizes market data for the same or similar instruments.  To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies.  SFAS No. 157 establishes a hierarchy for inputs used in determining fair value that maximize the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Certain financial assets are not carried at fair value on a recurring basis, including investments such as mortgage loans and policy loans, and thus are only categorized in the fair value hierarchy when held at fair value on a non-recurring basis.

 Observable inputs are those used by market participants in valuing financial instruments that are developed based on market data obtained from independent sources.  In the absence of sufficient observable inputs, unobservable inputs reflect the Company’s estimates of the assumptions market participants would use in valuing financial assets and financial liabilities and are developed based on the best information available in the circumstances.

Pursuant to SFAS No. 157, fair value is a market-based measure considered from the perspective of a market participant who owns an asset or owes a liability.  Accordingly, when market observable data is not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date.  The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption.  In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.  This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3.

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Financial assets and financial liabilities recorded on the Condensed Statements of Financial Position at fair value are categorized based on the reliability of inputs to the valuation techniques as follows:

Level 1Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

Level 2Financial assets and financial liabilities whose values are based on the following:

a)  Quoted prices for similar assets or liabilities in active markets;

b)  Quoted prices for identical or similar assets or liabilities in non-active markets; or

c)  Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability

Level 3Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.  These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment.  The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, inputs used to measure fair value fall into different levels of the fair value hierarchy.  In those instances, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Summary of Valuation Techniques for Financial Assets and Financial Liabilities on a Recurring Basis

Level 1 Measurements

Fixed Income Securities: U.S. Treasuries are in Level 1 and valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.

Separate Account Assets:  Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.

Level 2 Measurements

Fixed Income Securities:

Corporate, including privately placed:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.  Also includes privately placed securities totaling $316.3 million that are valued based on market-observable external ratings from independent third party rating agencies.

Municipal:  Externally rated municipals are valued based on inputs including quoted prices for identical or similar assets in markets that are not active.  Included in municipals are $5.0 million of auction rate securities (“ARS”) other than those backed by student loans.  ARS backed by student loans are included in Level 3.

U.S. Government and Agencies:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

CMBS: Valuation is principally based on inputs including quoted prices for identical or similar assets in markets that are not active and are categorized as Level 2.

Preferred Stock; MBS; Foreign Government:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

Short-term: Commercial paper and other short-term are valued based on inputs including amortized cost, which approximates fair value, and quoted prices for identical or similar assets in markets that are not active.

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Level 3 Measurements

Fixed Income Securities:

Corporate Privately Placed Securities:  Valued based on non-binding broker quotes and models that are widely accepted in the financial services industry and use internally assigned credit ratings as inputs and instrument specific inputs.  Instrument specific inputs used in internal fair value determinations include: coupon rate, weighted average life, sector of the issuer and call provisions.  Privately placed securities are categorized as Level 3 as a result of the significance of non-market observable inputs. The $1.2 billion of privately placed fixed income securities included in Level 3 comprise $1.1 billion valued using an internal model and $120.7 million valued using non-binding broker quotes.  The internally modeled securities are valued based on internal ratings, which are not observable in the market.  Multiple internal ratings comprise a National Association of Insurance Commissioners (“NAIC”) rating category and when used in the internal model provide a more refined determination of fair value.  The Company’s internal ratings are primarily consistent with the NAIC ratings which are generally updated annually.

ABS RMBS; Alt-A Residential Mortgage-backed Securities (“Alt-A”):  ABS RMBS and Alt-A are principally valued based on inputs including quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.  Certain ABS RMBS and Alt-A are valued based on non-binding broker quotes.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all ABS RMBS and Alt-A are categorized as Level 3.

Other CDO:  Valued based on non–binding broker quotes received from brokers who are familiar with the investments.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all CLO and other CDO are categorized as Level 3.

CMBS;  Commercial Real Estate Collateralized Debt Obligations (“CRE CDO”): CRE CDO, which are reported as CMBS, and other CMBS, are valued based on non-binding broker quotes and are categorized as Level 3.

Municipals:  Certain distressed municipal securities for which valuation is based on valuation models that are widely accepted in the financial services industry and require projections of future cash flows that are not market—observable are included in Level 3.  Included in this category are $119.2 million of ARS that are backed by student loans.  ARS backed by student loans are valued based on a discounted cash flow model with certain inputs to the valuation model that are significant to the valuation, but are not market observable, including estimates of future coupon rates if auction failures continue, maturity assumptions, and illiquidity premium.

Other Investments:  Certain Free-Standing OTC derivatives, such as caps are valued using valuation models that are widely accepted in the financial services industry.  Inputs include non-market observable inputs such as volatility assumptions that are significant to the valuation of the instruments.

Contractholder Funds:  Derivatives embedded in annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for a block of contractholder liabilities that contain certain embedded derivatives.  The models use stochastically determined cash flows based on the contractual elements of embedded derivatives and other applicable market data.  These are categorized as Level 3 as a result of the significance of non-market observable inputs.

Other Assets:  Includes a structured settlement annuity reinsurance agreement accounted for as a derivative instrument pursuant to the requirements of SFAS No. 133.  Valued internally utilizing a model that uses interest rate and volatility assumptions to generate stochastically determined cash flows. This item is categorized as Level 3 as a result of the significance of non-market observable inputs.

Financial Assets on a Non-Recurring Basis

Mortgage loans written-down to fair value in connection with recognizing changes in intent to hold until they recover in value and other-than-temporary impairments are primarily valued using valuation models that are widely accepted in the financial services industry.  Inputs include non-market observable inputs such as credit spreads.  At June 30, 2008, the fair value of mortgage loans totaled $7.8 million and were categorized as Level 3.

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The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2008:

($ in thousands)	Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs			Other Valuations and			Balance as of
	(Level 1)			(Level 2)			(Level 3)			Netting			June 30, 2008
Financial assets
Fixed income securities	$	147,095		$	4,319,292		$	1,502,815					$	5,969,202
Short-term investments	25,049			460,870			—						485,919
Other investments:
Free-standing derivatives	—			—			485						485
Total recurring basis assets	172,144			4,780,162			1,503,300						6,455,606
Non-recurring basis	—			—			7,816						7,816
Valued at cost or amortized cost										$	740,897		740,897
Counterparty and cash collateral
netting (1)										(485		)	(485			)
Total investments	172,144			4,780,162			1,511,116			740,412			7,203,834
Separate account assets	804,994			—			—						804,994
Other assets	171			—			(2,067		)				(1,896			)
Total financial assets	$	977,309		$	4,780,162		$	1,509,049		$	740,412		$	8,006,932
% of Total financial assets	12.2		%	59.7		%	18.9		%	9.2		%	100.0			%
Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts				$	—		$	(1,896	)				$		(1,896	)
Other liabilities:
Free-standing derivatives				(488		)	(3,234		)				(3,722			)
Counterparty and cash collateral
netting (1)										$	485		485
Total financial liabilities				$	(488	)	$	(5,130	)	$	485		$	(5,133		)
% of Total financial liabilities				9.5		%	99.9		%	(9.4		)%	100.0			%

(1)In accordance with FSP FIN 39-1, the Company nets all fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral executed with the same counterparty under a master netting agreement.

As required by SFAS No. 157, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety.  Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3).  Gains and losses for such assets and liabilities categorized within the Level 3 table may include changes in fair value that are attributable to both observable inputs (Level 1 and Level 2) and unobservable inputs (Level 3). Net transfers in and/or out of Level 3 are reported as having occurred at the beginning of the period; therefore, all realized and unrealized gains and losses on these securities for the period are reflected in the table below. Further, it should be noted that the following table does not take into consideration the effect of offsetting Level 1 and Level 2 financial instruments entered into that economically hedge certain exposures to the Level 3 positions.

12

The following table provides a summary of changes in fair value during the three—month period ended June 30, 2008 of Level 3 financial assets and financial liabilities held at fair value on a recurring basis at June 30, 2008.

				Total realized and unrealized Gains (Losses) included in:															Total Gains (Losses) included in
($ in thousands)	Balance as of March 31, 2008			Net Income(1)			OCI on Statement of Financial Position			Purchases, Sales, Issuances and Settlements, net			Net Transfers In and/or (Out) of Level 3		Balance as of June 30, 2008				Net Income for Instruments Still Held at June 30, 2008(4)
Financial assets
Fixed income securities	$	1,485,610		$	(18,391	)	$	(24,321	)	$	(17,596	)	$	77,513	$	1,502,815			$	(19,677	)
Other investments:
Free-standing derivatives, net	(3,326		)	136			—			441			—		(2,749		)	(2)	1,582
Total investments	1,482,284			(18,255		)	(24,321		)	(17,155		)	77,513		1,500,066		(3)		(18,095		)
Other assets	506			(2,573		)	—			—			—		(2,067		)		(2,573		)
Total recurring Level 3 financial assets	$	1,482,790		$	(20,828	)	$	(24,321	)	$	(17,155	)	$	77,513	$	1,497,999			$	(20,668	)
Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts	$	(1,253	)	$	(675	)	$	—		$	32		$	—	$	(1,896	)		$	(675	)
Total recurring Level 3 financial liabilities	$	(1,253	)	$	(675	)	$	—		$	32		$	—	$	(1,896	)		$	(675	)

(1)The amounts above total $(21.5) million and are reported in the Condensed Statements of Operations as follows: $(22.3) million in Realized capital gains and losses; $1.5 million in Net investment income, and $(676) thousand in Contract benefits.

(2)Comprises $485 thousand of financial assets and $(3.2) million of financial liabilities.

(3)Comprises $1.50 billion of investments and $(3.2) million of free—standing derivatives included in financial liabilities.

(4)The amounts above represent gains and losses included in net income for the period of time that the financial asset or financial liability was determined to be in Level 3. These gains and losses total $(21.4) million and are reported in the Condensed Statements of Operations as follows: $(22.2) million in Realized capital gains and losses; $1.5 million in Net investment income, and $(676) thousand in Contract benefits.

The following table provides a summary of changes in fair value during the six–month period ended June 30, 2008 of Level 3 financial assets and financial liabilities held at fair value on a recurring basis at June 30, 2008.

				Total realized and unrealized Gains (Losses) included in:															Total Gains (Losses) included in
($ in thousands)	Balance as of January 1, 2008			Net Income(1)			OCI on Statement of Financial Position			Purchases, Sales, Issuances and Settlements, net			Net Transfers In and/or (Out) of Level 3		Balance as of June 30, 2008				Net Income for Instruments Still Held at June 30, 2008 (4)
Financial assets
Fixed income securities	$	1,469,898		$	(10,393	)	$	(46,191	)	$	(14,145	)	$	103,646	$	1,502,815			$	(19,289	)
Other investments:
Free-standing derivatives, net	(980		)	(2,336		)	—			567			—		(2,749		)	(2)	1,602
Total investments	1,468,918			(12,729		)	(46,191		)	(13,578		)	103,646		1,500,066		(3)		(17,687		)
Other assets	(1,733		)	(334		)	—			—			—		(2,067		)		(334		)
Total recurring Level 3 financial assets	$	1,467,185		$	(13,063	)	$	(46,191	)	$	(13,578	)	$	103,646	$	1,497,999			$	(18,021	)
Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts	$	174		$	(2,103	)	$	—		$	33		$	—	$	(1,896	)		$	(2,103	)
Total recurring Level 3 financial liabilities	$	174		$	(2,103	)	$	—		$	33		$	—	$	(1,896	)		$	(2,103	)

(1)The amounts above total $(15.2) million and are reported in the Condensed Statements of Operations as follows: $(16.1) million in Realized capital gains and losses; $3.0 million in Net investment income, and $(2.1) million in Contract benefits.

(2)Comprises $485 thousand of financial assets and $(3.2) million of financial liabilities.

(3)Comprises $1.50 billion of investments and $(3.2) million of free—standing derivatives included in financial liabilities.

(4)The amounts above represent gains and losses included in net income for the period of time that the financial asset or financial liability was determined to be in Level 3. These gains and losses total $(20.1) million and are reported in the Condensed Statements of Operations as follows: $(21.0) million in Realized capital gains and losses; $3.0 million in Net investment income, and $(2.1) million in Contract benefits.

13

4.  Reinsurance

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

($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Premiums and contract charges
Direct	$	40,168		$	44,373		$	74,221		$	86,062
Assumed – non-affiliate	227			347			513			685
Ceded
Affiliate	(984		)	(992		)	(1,976		)	(1,984		)
Non-affiliate	(8,050		)	(10,304		)	(16,715		)	(19,209		)
Premiums and contract charges, net of reinsurance	$	31,361		$	33,424		$	56,043		$	65,554

The effects of reinsurance on contract benefits are as follows:

($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Contract benefits
Direct	$	50,085		$	50,301		$	95,931		$	98,393
Assumed – non-affiliate	103			237			379			489
Ceded
Affiliate	(666		)	(97		)	(2,160		)	(1,272		)
Non-affiliate	(3,168		)	(1,736		)	(8,991		)	(6,072		)
Contract benefits, net of reinsurance	$	46,354		$	48,705		$	85,159		$	91,538

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

($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Interest credited to contractholder funds
Direct	$	47,481		$	46,741		$	93,776		$	93,881
Assumed – non-affiliate	5			9			14			15
Ceded– non-affiliate	(2,908		)	(3,502		)	(5,911		)	(6,998		)
Interest credited to contractholder funds, net of reinsurance	$	44,578		$	43,248		$	87,879		$	86,898

In addition to amounts included in the tables above are reinsurance premiums ceded to ALIC of $822 thousand and $797 thousand for the second quarter of June 30, 2008 and 2007, respectively, and $1.64 million and $1.58 million for the first six months of 2008 and 2007, respectively, under the terms of the structured settlement annuity reinsurance agreement.  These amounts are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations as the treaty is recorded as a derivative instrument pursuant to the requirements of SFAS No. 133.

14

5.  Guarantees and Contingent Liabilities

Guaranty funds

Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent insurance companies to policyholders and claimants.  Amounts assessed to each company are typically related to its proportion of business written in each state.

The New York Liquidation Bureau (the “Bureau”) has publicly reported that Executive Life Insurance Company of New York (“Executive Life”), currently under its jurisdiction as part of a 1992 court-ordered rehabilitation plan, may only be able to meet future obligations of its annuity contracts for the next fifteen years.  The shortfall is estimated to be in the range of $650 million to $750 million.  If Executive Life were to be declared insolvent in the future, the Company would likely have exposure to guaranty fund assessments or other costs.

Based on currently available information, the outcome of this situation is uncertain at this time.  The Bureau may eventually take actions to address this situation that may lead to guaranty fund assessments or other costs to the Company.  Under current law, the Company may be allowed to recoup a portion of the amount of any additional guaranty fund assessment in periods subsequent to the recognition of the assessment by offsetting future premium taxes.  The Company’s market share in New York was approximately 5.5% in 2006 based on industry annuity premium.

Guarantees

Related to the disposal through reinsurance of our variable annuity business to Prudential Financial, Inc. and its subsidiary in 2006, the Company and ALIC have agreed to 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 and ALIC will indemnify Prudential for certain post–closing liabilities that may arise from the acts of the Company, ALIC and its agents, including in connection with the Company’s and ALIC’s provision of transition services. The Reinsurance Agreements contain no limitations or indemnifications with regard to insurance risk transfer, and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to benefit guarantees, in accordance with the provisions of SFAS No. 113 “Accounting and Reporting for Reinsurance of Short–Duration and Long–Duration Contracts”. Management does not believe this agreement will have a material adverse effect on results of operations, cash flows or the financial position of the Company.

In the normal course of business, the Company provides standard indemnifications to contractual counterparties 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 are 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 June 30, 2008.

Regulation

The Company is subject to changing social, economic and regulatory conditions.  From time to time regulatory authorities or legislative bodies 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.

15

Legal and regulatory proceedings and 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” subsection below, please note the following:

·These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including 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; 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.

·The outcome on these matters may also be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities.

·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 relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings.  In Allstate’s experience, when specific monetary demands are made in pleadings, they bear little relation to the ultimate loss, if any, to the Company.

·In connection with regulatory 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 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 ongoing 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 quarterly 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.

16

AIC is defending certain matters relating to its agency program reorganization announced in 1999.  These matters are in various stages of development.

·These matters include a lawsuit filed in 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 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act (“ADEA”), breach of contract and ERISA violations (the “Romero I” suit).   In 2004, in the consolidated EEOC I and 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 stated 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 and in January 2007, the judge denied their request.  In June 2007, the court granted AIC’s motions for summary judgment.  Following plaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time.  In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Court along with the merits of the appeal.

·The EEOC also filed another lawsuit in 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 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.  In June 2008, the Eighth Circuit Court of Appeals affirmed summary judgment in the EEOC’s favor.  AIC filed a petition for rehearing en banc.

·AIC is also defending a certified class action filed by former employee agents who terminated their employment prior to the agency program reorganization.  Plaintiffs allege that they were constructively discharged so that Allstate could avoid paying ERISA and other benefits offered under the reorganization.  They claim that the constructive discharge resulted from the implementation of agency standards, including mandatory office hours and a requirement to have licensed staff available during business hours.  The court approved the form of class notice which was sent to approximately 1,800 potential class members in November 2007.  Fifteen individuals opted out.  AIC’s motions for judgment on the pleadings were partially granted.  In May 2008, the Court granted summary judgment in AIC’s favor on all class claims.  Plaintiffs moved for reconsideration and in the alternative to decertify the class.  AIC opposed this motion and filed a motion for summary judgment with respect to the remaining non-class claim.

·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 2005.  In June 2007, the court granted AIC’s motion to dismiss the case.  Following plaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Court along with the merits of the appeal.

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.

17

Other Matters

Various other legal, governmental, and regulatory actions, including state market conduct exams, and other governmental and regulatory inquiries 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 other types of 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 quarterly 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.

6.  Other Comprehensive Income

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

	Three months ended June 30,
	2008								2007
($ in thousands)	Pretax			Tax		After- tax			Pretax			Tax		After- tax
Unrealized holding losses arising during the period	$	(82,523	)	$	28,883	$	(53,640	)	$	(59,053	)	$	20,669	$	(38,384	)
Less: reclassification adjustment of realized capital gains and losses	(52,620		)	18,417		(34,203		)	(311		)	109		(202		)
Unrealized net capital gains and losses	(29,903		)	10,466		(19,437		)	(58,742		)	20,560		(38,182		)
Other comprehensive loss	$	(29,903	)	$	10,466	(19,437		)	$	(58,742	)	$	20,560	(38,182		)
Net (loss) income						(20,559		)						11,704
Comprehensive loss						$	(39,996	)						$	(26,478	)

	Six months ended June 30,
	2008								2007
($ in thousands)	Pretax			Tax		After- tax			Pretax			Tax			After- tax
Unrealized holding losses arising during the period	$	(116,934	)	$	40,926	$	(76,008	)	$	(58,729	)	$	20,555		$	(38,174	)
Less: reclassification adjustment of realized capital gains and losses	(51,387		)	17,985		(33,402		)	942			(330		)	612
Unrealized net capital gains and losses	(65,547		)	22,941		(42,606		)	(59,671		)	20,885			(38,786		)
Other comprehensive loss	$	(65,547	)	$	22,941	(42,606		)	$	(59,671	)	$	20,885		(38,786		)
Net income						1,018									18,377
Comprehensive loss						$	(41,588	)							$	(20,409	)

18

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 June 30, 2008, and the related condensed statements of operations for the three-month and six-month periods ended June 30, 2008 and 2007, and the condensed statements of cash flows for the six-month periods ended June 30, 2008 and 2007.  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, 2007, and the related statements of operations and comprehensive income, shareholder’s equity, and cash flows for the year then ended (not presented herein); and in our report dated March 13, 2008, which report includes an explanatory paragraph relating to a change in the Company’s method of accounting for uncertainty in income taxes and accounting for deferred acquisition costs associated with internal replacements in 2007, 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, 2007 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

August 7, 2008

19

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007

OVERVIEW

The following discussion highlights significant factors influencing the condensed financial position and results of operations of Allstate Life Insurance Company of New York (referred to in this document as “we”, “ALNY”, “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 2007.  We operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and determine the allocation of resources.

OPERATIONS

Summarized financial data is presented in the following table.

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2008			2007			2008			2007
Revenues
Premiums	$	15,896		$	18,683		$	25,097		$	36,415
Contract charges	15,465			14,741			30,946			29,139
Net investment income	100,218			96,939			199,964			190,907
Realized capital gains and losses	(60,113		)	(839		)	(58,392		)	(2,744		)
Total revenues	71,466			129,524			197,615			253,717
Costs and expenses
Contract benefits	(46,354		)	(48,705		)	(85,159		)	(91,538		)
Interest credited to contractholder funds	(44,578		)	(43,248		)	(87,879		)	(86,898		)
Amortization of DAC	(1,167		)	(11,213		)	(2,618		)	(28,973		)
Operating costs and expenses	(10,981		)	(8,410		)	(20,003		)	(17,554		)
Total costs and expenses	(103,080		)	(111,576		)	(195,659		)	(224,963		)
(Loss) gain on disposition of operations	(90		)	253			(358		)	(132		)
Income tax benefit (expense)	11,145			(6,497		)	(580		)	(10,245		)
Net (loss) income	$	(20,559	)	$	11,704		$	1,018		$	18,377
Investments at June 30							$	7,203,834		$	6,913,312

Net loss in the second quarter of 2008 of $20.6 million compared to net income of $11.7 million in the same period of 2007, and net income of $1.0 million in the first six months of 2008 compared to net income of $18.4 million in the first six months of 2007.  The changes were the result of an increase in net realized capital losses in the current year periods compared to the prior year periods.

Analysis of Revenues Total revenues decreased 44.8% or $58.1 million in the second quarter of 2008 and decreased 22.1% or $56.1 million in the first six months of 2008, compared to the same periods of 2007, due mostly to higher  net realized capital losses in the current year periods compared to the prior year periods, and, to a much lesser extent, lower premiums, partially offset by higher net investment income and contract charges in the current year periods compared to the prior year periods.

Premiums represent revenues generated from traditional life insurance, 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 and variable life insurance, 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 are considered in the evaluation of growth and as indicators of future levels of revenues.

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The following table summarizes premiums and contract charges by product.

	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	2008		2007		2008		2007
Premiums
Traditional life insurance	$	7,867	$	5,978	$	12,990	$	12,362
Immediate annuities with life contingencies	6,022		11,188		8,172		20,987
Accident and health and other	2,007		1,517		3,935		3,066
Total premiums	15,896		18,683		25,097		36,415
Contract charges
Interest-sensitive life insurance	13,985		12,585		27,697		24,836
Fixed annuities	1,480		2,156		3,249		4,303
Total contract charges (1)	15,465		14,741		30,946		29,139
Premiums and contract charges	$	31,361	$	33,424	$	56,043	$	65,554

(1)Total contract charges for the second quarter of 2008 and 2007 include contract charges related to the cost of insurance of $9.6 million and $8.4 million, respectively.  Total contract charges for the first six months of 2008 and 2007 include contract charges related to the cost of insurance of $19.2 million and $16.7 million, respectively.

Total premiums decreased 14.9% and 31.1% in the second quarter and first six months of 2008, respectively, compared to the same periods of 2007.  The decline in both periods was primarily the result of lower sales of life contingent immediate annuities due to competitive market conditions, partially offset by higher sales of traditional life and accident and health insurance policies.

Contract charges increased 4.9% and 6.2% in the second quarter and first six months of 2008, respectively, compared to the same periods of 2007 due to higher contract charges on interest-sensitive life insurance policies resulting from increased contract charge rates and growth in business in force, partially offset by decreased contract charges on fixed annuities resulting primarily from lower surrender charges.

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Contractholder funds represent interest-bearing liabilities arising from the sale of fixed annuities, interest-sensitive life insurance policies and variable 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 June 30,						Six Months Ended June 30,
($ in thousands)	2008			2007			2008			2007
Contractholder funds, beginning balance	$	4,866,228		$	4,696,297		$	4,848,461		$	4,708,428
Deposits
Fixed annuities	230,199			89,389			322,324			159,021
Interest-sensitive life insurance	26,853			27,145			52,835			50,274
Variable life deposits allocated to fixed accounts	18			14			29			29
Total deposits	257,070			116,548			375,188			209,324
Interest credited	47,602			44,342			92,718			88,556
Benefits, withdrawals and other adjustments
Benefits	(33,231		)	(37,111		)	(74,444		)	(75,167		)
Surrenders and partial withdrawals	(77,200		)	(80,360		)	(160,807		)	(160,663		)
Contract charges	(13,292		)	(11,902		)	(26,129		)	(23,594		)
Net transfers to separate accounts	(2		)	—			(7		)	—
Other adjustments (1)	(13,813		)	(15,946		)	(21,618		)	(35,016		)
Total benefits, withdrawals and other adjustments	(137,538		)	(145,319		)	(283,005		)	(294,440		)
Contractholder funds, ending balance	$	5,033,362		$	4,711,868		$	5,033,362		$	4,711,868

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

Contractholder funds increased 3.4% in the second quarter of 2008, compared to an increase of 0.3% in the second quarter of 2007, and increased 3.8% in the first six months of 2008, compared to an increase of 0.1% in the same period in the prior year.  Average contractholder funds increased 5.2% and 4.9% in the second quarter and first six months of 2008, respectively, compared to the same periods in 2007.

Contractholder deposits increased 120.6% and 79.2% in the second quarter and first six months of 2008, compared to the same periods of 2007 primarily due to higher deposits on fixed annuities.  Deposits on fixed annuities increased 157.5% and 102.7% in the second quarter and first six months of 2008, respectively, compared to the same periods of 2007, due primarily to an improved sales environment for fixed annuities relative to competing products resulting from a steeper interest rate yield curve.

Surrenders and partial withdrawals decreased 3.9% in the second quarter of 2008 compared to the same period of 2007 and were consistent in the first six months of 2008 compared to the same period in the prior year.  The decrease in the second quarter of 2008 was due to lower surrenders and partial withdrawals on fixed annuities and, to a lesser extent, interest-sensitive life insurance products.  In the first six months of 2008, slightly higher surrenders and partial withdrawals on fixed annuities were mostly offset by slightly lower surrenders and partial withdrawals on interest-sensitive life insurance products.  The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of period contractholder funds, was 8.2% and 8.6% in the first six months of 2008 and 2007, respectively.

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Net investment income increased 3.4% and 4.7% in the second quarter and first six months of 2008, respectively,  compared to the same periods of 2007 due to higher average portfolio balances, partially offset by lower investment yields.

Net realized capital gains and losses reflected net losses of $60.1 million and $839 thousand in the second quarter of 2008 and 2007, respectively, and $58.4 million and $2.7 million in the first six months of 2008 and 2007, respectively.  For further discussion of realized capital gains and losses, see the Investments section of MD&A.

Analysis of Costs and Expenses Total costs and expenses decreased 7.6% and 13.0% in the second quarter and first six months of 2008, respectively, compared with the same periods of 2007, due to lower amortization of deferred policy acquisition costs (“DAC”) and contract benefits, partially offset by higher operating costs and expenses and interest credited to contractholder funds.

Contract benefits decreased 4.8% and 7.0% in the second quarter and first six months of 2008, respectively, compared to the same periods in 2007, mostly resulting from lower contract benefits on annuities due primarily to the impact of lower sales of immediate annuities with life contingencies on reserve changes.

We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies (“benefit spread”).  This implied interest totaled $27.3 million and $26.8 million in the second quarter of 2008 and 2007, respectively, and totaled $54.6 million and $53.4 million in the first six months of 2008 and 2007, respectively.  The benefit spread by product group is disclosed in the following table.

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2008			2007			2008			2007
Life insurance	$	7,801		$	5,210		$	16,047		$	12,363
Annuities	(1,271		)	(37		)	(2,258		)	2,619
Total benefit spread	$	6,530		$	5,173		$	13,789		$	14,982

Interest credited to contractholder funds increased 3.1% and 1.1% in the second quarter and first six months of 2008 compared to the same periods in the prior year due primarily to higher average contractholder funds partially offset by lower amortization of deferred sales inducements.  Amortization of deferred sales inducements (“DSI”) reflected a credit to income of $505 thousand and $1.3 million in the second quarter and first six months of 2008, respectively, compared to a charge to income of $1.3 million and $3.7 million in the second quarter and first six months of 2007, respectively. The changes of $1.8 million and $5.0 million in the second quarter and first six months of 2008, respectively, compared to the same periods in the prior year, were predominantly the result of increased realized capital losses recorded in the current year periods on assets that support fixed annuities.  We expect an increased rate of DSI amortization in future periods as a result of the deceleration of amortization recorded in the second quarter of 2008.

In order to analyze the impact of net investment income and interest credited to policyholders on net income, we review the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies which is included as a component of contract benefits on the Condensed Statements of Operations (“investment spread”).  The investment spread by product group is shown in the following table.

	Three Months Ended June 30,				Six Months Ended June 30,
($ in thousands)	2008		2007		2008		2007
Annuities	$	17,276	$	16,506	$	34,552	$	30,977
Life insurance	759		1,077		1,797		1,458
Net investment income on investments supporting capital	10,263		9,330		21,113		18,189
Total investment spread	$	28,298	$	26,913	$	57,462	$	50,624

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To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates on investment type products and investment spreads on investment type products for the three months ended June 30.

	Weighted Average Investment Yield				Weighted Average Interest Crediting Rate				Weighted Average Investment Spread
	2008		2007		2008		2007		2008		2007
Interest-sensitive life insurance	5.7	%	5.7	%	4.6	%	4.4	%	1.1	%	1.3	%
Deferred fixed annuities	5.6		5.6		3.5		3.4		2.1		2.2
Immediate fixed annuities with and without life contingencies	7.2		7.6		6.5		6.7		0.7		0.9
Investments supporting capital, traditional life and other products	6.0		5.9		N/A		N/A		N/A		N/A

The following table summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates on investment type products and investment spreads on investment type products for the six months ended June 30.

	Weighted Average Investment Yield				Weighted Average Interest Crediting Rate				Weighted Average Investment Spread
	2008		2007		2008		2007		2008		2007
Interest-sensitive life insurance	5.8	%	5.6	%	4.5	%	4.6	%	1.3	%	1.0	%
Deferred fixed annuities	5.6		5.6		3.5		3.3		2.1		2.3
Immediate fixed annuities with and without life contingencies	7.2		7.5		6.5		6.7		0.7		0.8
Investments supporting capital, traditional life and other products	6.1		5.8		N/A		N/A		N/A		N/A

The following table summarizes our product liabilities as of June 30 and indicates the account value of those contracts and policies in which an investment spread is generated.

	As of June  30,
($ in thousands)	2008		2007
Immediate fixed annuities with life contingencies	$	1,635,972	$	1,594,225
Other life contingent contracts and other	351,395		316,367
Reserve for life-contingent contract benefits	$	1,987,367	$	1,910,592
Interest-sensitive life insurance	$	555,746	$	499,786
Deferred fixed annuities	3,886,589		3,643,078
Immediate fixed annuities without life contingencies and other	591,027		569,004
Contractholder funds	$	5,033,362	$	4,711,868

Amortization of DAC decreased 89.6% or $10.0 million in the second quarter of 2008 and 91.0% or $26.4 million in the first six months of 2008, compared to the same periods of 2007.  The decrease in both periods was predominantly the result of reduced actual gross profits for fixed annuities due to realized capital losses recorded in the current year periods.  In addition, for the six-month period, the decrease was also largely impacted by the recognition in the current year period of amortization deceleration (credit to income) of $8.8 million compared to amortization acceleration (charge to income) of $5.8 million in the prior year period due to our annual comprehensive review of DAC assumptions (commonly referred to as “DAC unlocking”).  We expect an increased rate of DAC amortization in future periods as a result of the deceleration recorded in the second quarter of 2008.

Accretion of DAC relating to realized capital gains and losses increased income by $10.0 million and $10.8 million, pretax, in the second quarter and first six months of 2008, respectively, compared to an increase to income of $1.0 million and $300 thousand, pretax, in the second quarter and first six months of 2007, respectively.  The impact of realized capital gains and losses on amortization of DAC is dependent upon the relationship between the assets that give rise to the gain or loss and the product liability supported by the assets.  Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits.

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In accordance with our annual comprehensive review of DAC assumptions, in the first six months of 2008, the Company recognized net amortization deceleration totaling $8.8 million, including $6.5 million for fixed annuities and $2.3 million for interest-sensitive life insurance products.  In the first six months of 2007, net amortization acceleration totaled $5.8 million and included net amortization deceleration of $1.5 million for interest-sensitive life insurance products and net amortization acceleration of $7.3 million for fixed annuities.  The first six months of 2008 net amortization deceleration of $6.5 million on fixed annuities was due primarily to higher than expected investment spreads partially offset by increased expenses and the net amortization deceleration of $2.3 million on interest-sensitive life insurance products was due to higher than expected benefit spreads partially offset by increased expenses.

Operating costs and expenses increased 30.6% and 14.0% in the second quarter and first six months of 2008, respectively, compared to the same period of 2007 due primarily to higher expenses related to growth initiatives.

Loss on disposition of operations for the second quarter of 2008 was $90 thousand compared to a gain of $253 thousand for the second quarter of 2007. For the first six months of 2008 and 2007, loss on disposition of operations totaled $358 thousand and $132 thousand, respectively.  The (loss) gain on disposition of operations in each period was related to adjustments associated with a previous period disposition.

Income tax benefit of $11.1 million was recognized in the second quarter of 2008 compared to income tax expense of $6.5 million in the same period in the prior year.  The change reflects the shift from net pretax income in the prior year to a net pretax loss in the current year.  Income tax expense of $580 thousand and $10.2 million was recognized in the first six months of 2008 and 2007, respectively.  This decline was consistent with the decrease in pretax income.

INVESTMENTS

We developed additional risk mitigation and return optimization programs in the second quarter of 2008 in response to an altered outlook for continued weakness in the U.S. financial markets and economy including continued volatility in the financial markets, continued reduced liquidity in certain asset classes and further unfavorable economic trends.  In addition, the potential for systemic investment supply and demand imbalances has remained above normal due to the deteriorating credit strength of financial institutions.  The risk mitigation and return optimization programs are designed to protect certain portions of our investment portfolio from significant decreases in value. They consist of potential future reductions in certain real estate and financial-related market sectors.  These actions will position us to take advantage of market opportunities and also will help protect our investment portfolio from the continued turmoil in the financial markets.  We will monitor the progress of these programs as market and economic conditions continue to develop and will adapt our decisions as appropriate.

The risk mitigation and return optimization programs were designed to reduce The Allstate Corporation’s exposure to residential and commercial real estate and financial related markets including approximately $276.3 million of amortized cost held by the Company, prior to change in intent write-downs. A comprehensive review identified specific investments that could be significantly impacted by continued deterioration in the economy including certain real estate and financial-related market sectors that may be sold.  This includes a portion of our residential and commercial real estate securities including securities collateralized by residential and commercial mortgage loans, mortgage loans and securities issued by financial institutions.   As a result, we have change in intent write-downs on securities with a fair value of approximately $229.8 million at June 30, 2008. Approximately $47 million of realized capital losses were recognized in the second quarter of 2008 related to our change in intent write-downs, with minimal net impact on shareholder’s equity as these investments were carried at fair value with unrealized losses reflected within accumulated other comprehensive income at March 31, 2008.

At June 30, 2008, our exposure to residential and commercial real estate is approximately $1.9 billion, comprised primarily of mortgage-backed securities (“MBS”), commercial mortgage-backed securities (“CMBS”), asset-backed residential mortgage-backed securities (“ABS RMBS”) and mortgage loans.  Our exposure to financial-related market sectors totaled approximately $820.5 million at June 30, 2008, and includes fixed income holdings in banks, brokerages, finance companies and insurance.

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Any funds raised from the eventual disposition of these securities will be invested in accordance with our asset-liability management strategies.  To the extent markets remain unstable, we will invest in high quality, lower risk investments over the short-term.  Net investment income from potential reinvested funds may be lower as proceeds invested at current yields could be lower than the yields on the investments written-down.

An important component of our financial results is the return on our investment portfolio.  The composition of the investment portfolio at June 30, 2008 is presented in the table below.

			Percent
($ in thousands)	Investments		of total
Fixed income securities (1)	$	5,969,202	82.9	%
Mortgage loans	710,143		9.9
Short-term	485,919		6.7
Policy loans	38,570		0.5
Total	$	7,203,834	100.0	%

(1) Fixed income securities are carried at fair value.  Amortized cost basis for these securities was $5.79 billion.

Total investments increased to $7.20 billion at June 30, 2008, from $7.06 billion at December 31, 2007, due to positive cash flows from operating and financing activities, including increased funds associated with securities lending, partially offset by decreased net unrealized capital gains on fixed income securities.

Total investments at amortized cost related to collateral received in connection with securities lending business activities increased to $334.8 million at June 30, 2008, from $198.1 million at December 31, 2007.

Fixed income securities by type are listed in the table below.

($ in thousands)	June 30, 2008		% to Total Investments		December 31, 2007		% to Total  Investments
U.S. government and agencies	$	806,214	11.2	%	$	797,191	11.3	%
Municipal	435,900		6.1		433,307		6.1
Corporate	3,222,789		44.7		3,378,811		47.9
Foreign government	340,849		4.7		333,540		4.7
Mortgage-backed securities	400,374		5.6		419,617		6.0
Commercial mortgage-backed securities	670,216		9.3		791,941		11.2
Asset-backed securities	84,474		1.2		106,877		1.5
Redeemable preferred stock	8,386		0.1		9,844		0.2
Total fixed income securities	$	5,969,202	82.9	%	$	6,271,128	88.9	%

At June 30, 2008, 96.9% 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, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), Fitch or Dominion or a rating of aaa, aa, a, or bbb from A.M. Best; or a comparable internal rating if an externally provided rating is not available.

During the second quarter of 2008, certain financial markets continued to experience price declines due to market and liquidity disruptions.  We experienced this illiquidity and disruption particularly in our prime residential mortgage-backed securities (“Prime”), Alt-A residential mortgage-backed securities (“Alt-A”), commercial real estate collateralized debt obligations (“CRE CDO”) and ABS RMBS portfolios.  These portfolios totaled $156.2 million, or less than 5.0% of our total investments at June 30, 2008.  Certain other asset-backed and real estate investment markets experienced similar illiquidity, but to a much lesser degree.

We determine the fair values of securities comprising the illiquid portfolios by obtaining information from an independent third-party valuation service provider and brokers. We confirmed the reasonableness of the fair value of these portfolios as of June 30, 2008 by analyzing available market information including, but not limited to,

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collateral quality, anticipated cash flows, credit enhancements, default rates, loss severities, the securities’ relative position within their respective capital structures, and credit ratings from statistical rating agencies.

Investment write-downs during the second quarter of 2008 were recorded on our CRE CDO totaling $6.5 million.  Investment write-downs during the first six months of 2008 were recorded on our CRE CDO and ABS RMBS totaling $6.5 million and $633 thousand, respectively. Change in intent write-downs included losses on our CRE CDO totaling $5.5 million and ABS RMBS totaling $4.1 million for the three months ended June 30, 2008.  We continue to believe that the unrealized losses on these securities are not necessarily predictive of the ultimate performance of the underlying collateral.  In the absence of further deterioration in the collateral relative to our positions in the securities’ respective capital structures, which could be other-than-temporary, the unrealized losses should reverse over the remaining lives of the securities.

The cash flows of the underlying mortgages or collateral for MBS, CRE CDO and ABS are generally applied in a pre-determined order and are designed so that each security issued qualifies for a specific original rating.  The security issue is typically referred to as the “class”.  For example, the “senior” portion or “top” of the capital structure which would originally qualify for a rating of Aaa is referred to as the “Aaa class” and typically has priority in receiving the principal repayments on the underlying mortgages.  In addition, the portion of the capital structure originally rated Aaa may further be divided into multiple sub-classes, “super senior”, “senior” ,”senior support” for Prime and Alt-A issues, and  “first”, “second”, “third” for ABS RMBS issues where the principal repayments are typically paid sequentially (i.e., all of the underlying mortgage principal repayments are received by the first originally rated Aaa class in the structure until it is paid in full, then all of the underlying mortgage principal repayments are received by the second originally rated Aaa class in the structure until it is paid in full).  Although securities within the various Aaa classes are paid sequentially, they typically share any losses on a pro-rata basis after losses are absorbed by classes with lower original ratings or what may be referred to as more “junior” or “subordinate” securities in the capital structure.  The underlying mortgages have fixed interest rates, variable interest rates (such as adjustable rate mortgages (“ARM”)) or are hybrid, meaning that they contain features of both fixed and variable rate mortgages.

MBS totaled $400.4 million and 100.0% were rated investment grade at June 30, 2008.  The MBS portfolio is subject to interest rate risk since price volatility and the ultimate realized yield are affected by the rate of prepayment of the underlying mortgages.  The credit risk associated with our MBS is mitigated due to the fact that 82.4% of the portfolio consists of securities that were issued by, or have underlying collateral that is guaranteed by, U.S. government agencies or U.S. government sponsored entities (“U.S. Agency”).

The following table shows MBS by type and Moody’s equivalent rating.

($ in thousands)	Fair value at  June 30, 2008		% to Total  Investments		Aaa
MBS
U.S. Agency	$	330,087	4.6	%	100.0	%
Prime	44,813		0.6		100.0
Alt-A	25,474		0.4		100.0
Total MBS	$	400,374	5.6	%

Prime are collateralized by residential mortgage loans issued to prime borrowers.  As of June 30, 2008, fair value represents 93.6% of amortized cost of these securities.  We have collected $1.2 million and $2.6 million of principal repayments consistent with the expected cash flows during the second quarter and first six months of 2008, respectively.

All of our Prime MBS positions comprised  fixed rate mortgages, and include securities issued before 2005 that are in the Aaa class of the capital structure. The following table shows our prime portfolio as of June 30, 2008 based upon our participation in the capital structure.

($ in thousands)
Capital structure  classification	Fair  value	Amortized Cost	Unrealized Gain/Loss
Aaa – Fixed rate
Super Senior	$4,705	$4,945	$(240	)
Senior	40,108	42,914	(2,806	)
Total	$44,813	$47,859	$(3,046	)

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Alt-A  can be issued by trusts backed by pools of residential mortgages with either fixed or variable interest rates.  The mortgage pools can include residential mortgage loans issued to borrowers with stronger credit profiles than sub-prime borrowers, but who do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation.  As of June 30, 2008, all of our Alt-A portfolio are in the Aaa class were issued prior to 2005 at fixed rates and had net unrealized losses of $4.1 million.  Fair value represents 86.0% of the amortized cost of these securities.

CMBS totaled $670.2 million all of which were rated investment grade at June 30, 2008.  The CMBS portfolio is subject to credit risk, but unlike other structured securities, is generally not subject to prepayment risk due to protections within the underlying commercial mortgages whereby borrowers are effectively restricted from prepaying their mortgages due to changes in interest rates.  Approximately 93.2% of the CMBS investments are pools of commercial mortgages, broadly diversified across property types and geographical area.  The following table shows CMBS by type and Moody’s equivalent rating.

($ in thousands)	Fair value at June 30, 2008		% to Total  Investments		Aaa		Aa		A		Baa
CMBS	$	643,788	8.9	%	76.6	%	17.1	%	6.0	%	0.3	%
CRE CDO	26,428		0.4		40.7		30.2		24.3		4.8
Total CMBS	$	670,216	9.3	%

        CRE CDO are investments secured primarily by commercial mortgage-backed securities and other commercial mortgage debt obligations.  These securities are generally less liquid and have a higher risk profile than other commercial mortgage-backed securities.  As of June 30, 2008, fair value represents 100.7% of the amortized cost of these securities.  We collected $6 thousand and $14 thousand of principal repayments consistent with the expected cash flows during the second quarter and first six months of 2008, respectively.  Investment write-downs during both the second quarter and first six months of 2008 were recorded on our CRE CDO totaling $6.5 million. In addition, $5.5 million of change in intent write-downs were recorded during the second quarter of 2008.

The following table shows our CRE CDO portfolio at June 30, 2008 by vintage year, based upon our participation in the capital structure.

($ in thousands)	Vintage Year
Capital structure/ Current rating	2006		2005		Pre-2005		Fair Value		Amortized  Cost		Unrealized  Gain/Loss
Aaa	$	—	$	—	$	10,762	$	10,762	$	10,517	$	245
Aa	4,024		—		3,950		7,974		8,027		(53		)
A	—		1,516		4,911		6,427		6,427		—
Baa	—		1,265		—		1,265		1,265		—
Total	$	4,024	$	2,781	$	19,623	$	26,428	$	26,236	$	192

ABS totaled $84.5 million and 99.2% were rated investment grade at June 30, 2008.  ABS by type are listed in the table below.

($ in thousands)	Fair value at June 30, 2008		% to Total Investments		Aaa		Aa		A		Ba or  lower
ABS
ABS RMBS	$	59,454	0.8	%	71.9	%	7.3	%	10.3	%	10.5	%
Other collateralized debt obligations	25,020		0.4		57.1		15.3		27.6		—
Total ABS	$	84,474	1.2	%

ABS RMBS portfolio includes securities that are collateralized by mortgage loans issued to borrowers that cannot qualify for Prime or Alt-A financing terms due in part to weak or limited credit history.  It also includes securities that are collateralized by certain second lien mortgages regardless of the borrower’s credit history.

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The following table presents additional information about our ABS RMBS portfolio including a summary by first and second lien collateral.

($ in thousands)	Fair value at  June 30, 2008		% to Total  Investments
ABS RMBS
First lien:
Fixed rate(1)	$	12,213	0.2	%
Variable rate(1)	31,529		0.4
Total first lien(2)	43,742		0.6
Second lien :
Insured	10,160		0.1
Other	5,552		0.1
Total second lien(3)	15,712		0.2
Total ABS RMBS	$	59,454	0.8	%

(1)Fixed rate and variable rate refer to the primary interest rate characteristics of the underlying mortgages at the time of issuance.

(2)The credit ratings of the first lien ABS RMBS were 89.3% Aaa, 0.8% Aa, 1.7% A, 6.4% Baa and 1.8% Ba or lower at June 30, 2008.

(3)The credit ratings of the second lien ABS RMBS were 23.7% Aaa, 25.2% Aa, 34.1% A, 8.3% Baa and 8.7% Ba or lower at June 30, 2008.

As of June 30, 2008, the ABS RMBS portfolio had net unrealized losses of $11.0 million.  Fair value represents 84.4% of the amortized cost of these securities.  ABS RMBS securities with a fair value less than 70% of amortized cost totaled $8.6 million, with unrealized losses of $8.0 million.  During the second quarter and first six months of 2008, we sold $7 thousand of ABS RMBS.  We also collected $4.1 million and $7.9 million of principal repayments consistent with the expected cash flows during the second quarter and first six months of 2008, respectively.  Investment write-downs during the first six months of 2008 were recorded on our ABS RMBS totaling $633 thousand.  In addition, $4.1 million of change in intent write-downs were recorded during the second quarter of 2008.

When buying ABS RMBS securities from 2006 and 2007 vintages, we concentrated our holdings in securities that were senior or at the top of the structure and that were generally within the first three Aaa sub-classes of the capital structure, as it was expected that, in the unlikely event of losses in the underlying collateral, these sub-classes within the Aaa class would likely either be paid in full or receive substantial principal repayments before underlying mortgage losses would breach that level.  However, when the underlying mortgage product was fixed-rate in nature, which we assessed to have stronger underwriting origination standards than variable rate collateral, we invested somewhat lower in the capital structure, such as securities below the first three Aaa sub-classes.  The vast majority of our investment in either of these vintages was concentrated within originally rated Aaa or Aa securities.

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The following table includes first lien non-insured ABS RMBS by vintage, the interest rate characteristics of the underlying mortgage product and our participation in the capital structure. The information in this table, together with the second lien non-insured, comprise the $48.0 million of non-insured ABS RMBS.

($ in thousands)	2007								2006
Capital structure classification	Variable Rate		Fixed  Rate		Total Fair  Value		Total  Amortized Cost (1)		Variable Rate		Fixed  Rate		Total Fair  Value		Total  Amortized Cost (1)
First or Second Aaa class	$	5,407	$	1,705	$	7,112	$	7,471	$	19,653	$	759	$	20,412	$	21,305
Third Aaa class	—		—		—		—		4,981		1,704		6,685		7,295
Other Aaa (2)	—		8,045		8,045		8,045		—		—		—		—
Total Aaa First Lien  Non-Insured ABS
RMBS	$	5,407	$	9,750	$	15,157	$	15,516	$	24,634	$	2,463	$	27,097	$	28,600

($ in thousands)	2005								Total
Capital structure classification	Variable Rate		Fixed  Rate		Total Fair  Value		Total  Amortized Cost (1)		Variable Rate		Fixed  Rate		Total Fair  Value		Total  Amortized Cost (1)		Unrealized Gain/Loss
First or Second Aaa class	$	158	$	—	$	158	$	159	$	25,218	$	2,464	$	27,682	$	28,935	$	(1,253	)
Third Aaa class	—		—		—		—		4,981		1,704		6,685		7,295		(610		)
Other Aaa (1)	—		—		—		—		—		8,045		8,045		8,045		—
Total Aaa First Lien  Non-Insured ABS
RMBS	$	158	$	—	$	158	$	159	$	30,199	$	12,213	$	42,412	$	44,275	$	(1,863	)

(1)Includes primarily pass-through securities and “NAS” bonds.  NAS bonds are typically locked out from receiving principal prepayments for a specified period of time after which they receive prepayment allocations according to a specified formula.

We also own approximately $5.6 million of second lien ABS RMBS non-insured securities, representing 73.8% of amortized cost.  Approximately $2.7 million or 48.2% of this portfolio are 2006 and 2007 vintage years.

At June 30, 2008, $11.5 million or 19.3% of the total ABS RMBS securities that are insured by 4 bond insurers and 93.0% were rated investment grade. $52.8 million or 88.8% of the portfolio consisted of securities that were issued during 2005, 2006 and 2007.  At June 30, 2008, 75.6% of securities issued during 2005, 2006 and 2007 were rated Aaa, 0.9% rated Aa, 11.6% rated A and 11.9% rated Ba or lower.

The following table shows our insured ABS RMBS portfolio at June 30, 2008 by bond insurer and vintage year for the first lien and second lien collateral.

($ in thousands)	Vintage Year
	2007		2006		2005		Pre-2005		Fair  Value		Amortized Cost		Unrealized Gain/Loss
First Lien:
Financial Guarantee Insurance Company (“FGIC”)	$	799	$	179	$	—	$	—	$	978	$	1,129	$	(151	)
Ambac Financial Group, Inc. (“AMBAC”)	—		352		—		—		352		363		(11		)
Total First Lien	799		531		—		—		1,330		1,492		(162		)
Second Lien:
AMBAC	—		—		129		3,828		3,957		4,837		(880		)
MBIA, Inc (“MBIA”)	5,360		—		—		—		5,360		9,984		(4,624		)
Financial Security Assurance, Inc.(“FSA”)	843		—		—		—		843		2,360		(1,517		)
Total Second Lien	6,203		—		129		3,828		10,160		17,181		(7,021		)
Total Insured ABS RMBS	$	7,002	$	531	$	129	$	3,828	$	11,490	$	18,673	$	(7,183	)

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Other collateralized debt obligations totaled $25.0 million and all were rated investment grade at June 30, 2008.  Other collateralized debt obligations consist primarily of obligations secured by high yield and investment grade corporate credits including $5.6 million of collateralized loan obligations; $8.7 million of primarily bank trust preferred CDOs and $3.8 million of market value CDOs.  As of June 30, 2008, net unrealized losses on the other CDOs were $3.9 million. Other CDOs with a fair value less than 70% of amortized cost totaled $6.9 million, or 27.5% of the total other CDOs at June 30, 2008, with unrealized losses of $3.1 million.

As of June 30, 2008, we hold $236.6 million of fixed income securities that are insured by bond insurers, including approximately $218.8 million or 50.2% of our municipal bond portfolio and $11.5 million of our ABS RMBS.  50.2% of our municipal bond portfolio is insured by five bond insurers and 45.8% have a Moody’s equivalent rating of Aaa or Aa.  Our practices for acquiring and monitoring municipal bonds are primarily based on the quality of the underlying security.  As of June 30, 2008, we believe the valuations already reflected a decline in the value of the insurance, and further such declines, if any, are not expected to be material.  While the valuation of these holdings may be temporarily impacted by negative and rapidly changing market developments, we continue to have the intent and ability to hold the bonds and expect to receive all of the contractual cash flows.  As of June 30, 2008, 46.3% of our insured municipal bond portfolio was insured by MBIA, 21.3% by AMBAC, 10.9% by FSA and 15.6% by FGIC.

Included in our municipal bond portfolio at June 30, 2008 are $124.2 million of auction rate securities (“ARS”) that have long-term stated maturities, with the interest rate reset based on auctions that generally occur every 7, 28 or 35 days depending on the specific security.  This is compared to a balance of ARS at December 31, 2007 of $133.7 million, with the decline representing primarily redemptions during the second quarter of 2008.  Our holdings primarily have a Moody’s equivalent rating of Aaa. We make our investment decisions based on the underlying credit of each security.  Approximately $119.2 million of our holdings are pools of student loans for which at least 85% of the collateral was insured by the U.S. Department of Education at the time we purchased the security.  As of June 30, 2008, $95.4 million of our ARS backed by student loans were 100% insured by the U.S Department of Education and $23.8 million were 90-99% insured. During the second quarter of 2008, all of our ARS holdings experienced failed auctions and we received the failed auction rate or, for those which contain maximum reset rate formulas, we received the contractual maximum rate. We anticipate that failed auctions may persist and most of our holdings will continue to pay the failed auction rate or, for those that contain maximum rate reset formulas, the maximum rate, as described below.  Auctions continue to be conducted as scheduled for each of the securities.

We estimate that approximately one third of our student loan backed ARS include maximum rate reset formulas whereby when the failed auction rate exceeds an annual contractual maximum rate over a preceding stipulated period, the coupon interest rate is temporarily reset to the maximum rate, which can vary between zero and the failed auction rate.  This maximum rate formula causes the reset interest rate on these securities to be lower than the failed auction rate in order to reduce the annual interest rate to not exceed the annual contractual maximum rate.  Generally, the annual contractual maximum rate is higher than the historical rates paid on these securities.  During the second quarter of 2008, $18.4 million of our ARS reset using the maximum rate reset formula.

Fannie Mae direct fixed income exposure investments totaled $24.9 million as of June 30, 2008 and had unrealized net capital gains of $2.1 million.

Unrealized net capital gains totaled $182.6 million as of June 30, 2008, compared to unrealized net capital gains of $341.5 million at December 31, 2007.  The decline was primarily due to investment grade fixed income securities as the yields supporting fair values increased, resulting from widening credit spreads and relatively flat risk free interest rates. This decrease in fixed income unrealized net capital gains more than offset the increase in unrealized net capital gains resulting from the realization of capital losses on write-downs, change in intent to hold to recovery and sales.  We continue to experience volatility in the balance of our unrealized net capital gains and losses as we did between the years 2004/2005 and 2006/2007.

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The following table presents total unrealized gains and losses.

	June 30,			December 31,
($ in thousands)	2008			2007
U.S. government and agencies	$	213,346		$	220,299
Municipal	(11,857		)	11,552
Corporate	(18,919		)	63,866
Foreign government	72,424			73,689
Mortgage-backed securities	(5,907		)	(113		)
Commercial mortgage-backed securities	(50,163		)	(19,250		)
Asset-backed securities	(14,934		)	(8,326		)
Redeemable preferred stock	(926		)	512
Fixed income securities	183,064			342,229
Derivatives	(447		)	(766		)
Unrealized net gains and losses	$	182,617		$	341,463

The net unrealized gain for the fixed income portfolio totaled $183.1 million, comprised of $367.2 million of unrealized gains and $184.1 million of unrealized losses at June 30, 2008.  This is compared to a net unrealized gain for the fixed income portfolio totaling $342.2 million at December 31, 2007, comprised of $437.5 million of unrealized gains and $95.3 million of unrealized losses.  Included in gross unrealized losses at June 30, 2008 were $22.0 million of fixed income securities with a fair value below 70% of amortized cost, or 0.4% of our fixed income portfolio at June 30, 2008.

The percentage of fair value to amortized cost for the remaining fixed income gross unrealized losses at June 30, 2008 are shown in the following table.

($ in thousands)	Unrealized (loss) gain			Fair value		% to Total Fixed Income Investments
> 80% of amortized cost	$	(141,457	)	$	2,693,453	45.1	%
70% to 80% of amortized cost	(28,408		)	96,572		1.6
< 70% of amortized cost	(14,246		)	21,991		0.4
Gross unrealized losses on fixed income securities	(184,111		)	2,812,016		47.1
Gross unrealized gains on fixed income securities	367,176			3,157,186		52.9
Net unrealized gains and losses on fixed income securities	$	183,065		$	5,969,202	100.0	%

70.3% of the fixed income securities with a fair value less than 70% of amortized cost were ABS RMBS and other CDOs with a fair value totaling $15.4 million.  We continue to believe that the unrealized losses on these securities are not necessarily predictive of the ultimate performance.  The unrealized losses should reverse over the remaining lives of the securities, in the absence of further deterioration in the collateral relative to our positions in the securities’ respective capital structures.

Of the gross unrealized losses in the fixed income portfolio at June 30, 2008, $173.4 million or 94.2% were related to investment grade securities and are primarily interest rate related.  Most of the remaining $10.7 million of losses were in the corporate fixed income portfolio and primarily comprised securities in the consumer goods, utilities, capital goods, financial services and communications sectors.  The gross unrealized losses in these sectors were primarily related to changes in interest rates and credit spreads, and company specific conditions.

We have a comprehensive portfolio monitoring process to identify and evaluate, 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 situations where the 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, ratings downgrades or payment defaults.  The securities identified, in addition to other securities for which we may have a concern, are evaluated based on facts and circumstances for inclusion on our watch-list and potential recognition of investment write-downs.  All investments in an unrealized loss position at

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June 30, 2008 were included in our portfolio monitoring process for determining whether declines in value were other-than-temporary.  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 as a result of approved programs involving the disposition of investments for reasons such as changes in economic and market outlooks, duration, revisions to strategic asset allocations, unanticipated liquidity actions,  investment risk mitigation actions, as well as changes in intent to hold certain investments by portfolio managers.

The following table summarizes fixed income securities in a gross unrealized loss position according to significance, aging and investment grade classification.

	June 30, 2008									December 31, 2007
($ in thousands, except number of  issues)	Investment Grade			Below Investment Grade			Total			Investment Grade			Below Investment Grade			Total
Category (I): Unrealized  loss less than 20% of cost (1)
Number of Issues	477			51			528			381			60			441
Fair Value	$	2,592,566		$	99,101		$	2,691,667		$	2,014,259		$	103,660		$		2,117,919
Unrealized	$	(133,982	)	$	(7,029	)	$	(141,011	)	$	(74,751	)	$	(8,180	)	$		(82,931		)
Category (II): Unrealized loss greater than or equal to 20% of cost for a period of less than 6 consecutive months (1)
Number of Issues	25			8			33			9			5			14
Fair Value	$	105,155		$	9,972		$	115,127		$	22,380		$	4,830		$			27,210
Unrealized	$	(36,640	)	$	(3,634	)	$	(40,274	)	$	(9,208	)	$	(3,208	)	$			(12,416	)
Category (III): Unrealized loss greater than or equal to 20% of cost for a period of 6 or more consecutive months, but less than 12 consecutive months(1)
Number of Issues	2			—			2			—			—			—
Fair Value	$	5,222		$	—		$	5,222		$	—		$	—		$			—
Unrealized	$	(2,827	)	$	—		$	(2,827	)	$	—		$	—		$			—
Total Number of Issues	504			59			563			390			65			455
Total Fair Value	$	2,702,943		$	109,073		$	2,812,016		$	2,036,639		$	108,490		$	2,145,129
Total Unrealized Losses	$	(173,449	)	$	(10,663	)	$	(184,112	)	$	(83,959	)	$	(11,388	)	$	(95,347			)

(1)Cost represents amortized cost.

The largest individual unrealized loss was $3.4 million for category (I), $4.6 million for category (II) and $1.6 million for category (III) as of June 30, 2008.

Categories (I) and (II) have generally been adversely affected by overall economic conditions including interest rate increases and the market’s evaluation of certain sectors.  The degree to which and/or length of time that the securities have been in an unrealized loss position does not suggest that these securities pose a high risk of being other-than-temporarily impaired.  Category (III) has primarily been historically adversely affected by industry and issue specific, or issuer specific conditions.  All of the securities in these categories are monitored for other-than-temporary impairment.

We continue to believe that the unrealized losses on these securities are not necessarily predictive of the ultimate performance.  The unrealized losses should reverse over the remaining lives of the securities, including in the absence of further deterioration in the collateral relative to our positions in the securities’ respective capital structures. We have the intent and ability to hold these securities until recovery.

Whenever our initial analysis indicates that a fixed income security’s unrealized loss of 20% or more for at least 36 months is temporary, additional evaluations and management approvals are required to substantiate that a

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write-down is not appropriate.  As of June 30, 2008, no securities met these criteria.

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 in default with respect to principal or interest and/or are investments issued by companies that have gone into bankruptcy subsequent to our acquisition.  Restructured fixed income investments have rates and terms that are not consistent with market rates or terms prevailing at the time of the restructuring.  Potential problem fixed income investments 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 investments may be classified as problem or restructured in the future.

As of June 30, 2008, fixed income securities categorized as potential problem totaled $5.6 million.  The Company recognized cumulative write-downs on these securities of $1.1 million.  The Company had $83 thousand of fixed income securities categorized as problem as of June 30, 2008 and had none categorized as restructured.  Further, as of December 31, 2007, the Company had no fixed income securities categorized as problem, restructured or potential problem.

We also evaluated each of these investments through our portfolio monitoring process at June 30, 2008 and recorded write-downs when appropriate.  We further concluded that any remaining unrealized losses on these investments were temporary in nature and that we have the intent and ability to hold the securities until recovery.  While these balances may increase in the future, particularly if economic conditions are unfavorable, management expects that the total amount of investments in these categories will remain low relative to the total fixed income securities portfolio.

Net Investment Income The following table presents net investment income.

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2008			2007			2008			2007
Fixed income securities	$	90,468		$	89,424		$	182,024		$	176,288
Mortgage loans	10,449			9,914			20,968			20,053
Short-term and other	3,318			4,527			5,931			8,278
Investment income, before expense	104,235			103,865			208,923			204,619
Investment expense	(4,017		)	(6,926		)	(8,959		)	(13,712		)
Net investment income	$	100,218		$	96,939		$	199,964		$	190,907

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

	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2008			2007			2008			2007
Investment write-downs (1)	$	(6,973	)	$	—		$	(7,606	)	$	—
Sales	(191		)	3,535			5,352			6,160
Change in intent write-downs	(47,223		)	(4,297		)	(50,755		)	(5,613		)
Valuation of derivative instruments	(2,831		)	52			(3,071		)	(1,973		)
Settlement of derivative instruments	(2,895		)	(129		)	(2,312		)	(1,318		)
Realized capital gains and losses, pretax	(60,113		)	(839		)	(58,392		)	(2,744		)
Income tax benefit	21,039			301			20,437			1,025
Realized capital gains and losses, after-tax	$	(39,074	)	$	(538	)	$	(37,955	)	$	(1,719	)

(1)Investment write-downs include other-than-temporary impairments except for those related to changes in intent to hold.

The above table includes realized capital gains and losses as a result of sales, change in intent write-downs and other transactions such as calls and prepayments.  We may sell or change our assertion to hold a security until recovery for impaired fixed income securities that were in an unrealized loss position at the previous reporting date, or other investments where the fair value has declined below the carrying value, in situations where new facts and circumstances emerge or increase in significance that are anticipated to adversely impact a security’s future valuation; including negative developments in a holding, subsequent credit deterioration of an issuer or holding, subsequent further deterioration in capital markets (i.e. debt) and of domestic economic conditions to levels previously unanticipated, subsequent further deterioration in the financial services and real estate industries,

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unanticipated liquidity needs, and unanticipated federal income tax situations involving capital gain (loss) carryforwards and carrybacks with specific expiration dates, investment risk mitigation actions, and other new facts and circumstances that would cause a change in our previous intent to hold a security to recovery or maturity.

Investment write-downs from fixed income securities for the three months and six months ended June 30, 2008 totaled $7.0 million and $7.6 million, respectively.  $6.5 million, or 93.1% and $7.1 million, or 93.7% of the fixed income security write-downs for the three months and six months ended June 30, 2008, respectively, relate to impaired securities that were performing in line with anticipated or contractual cash flows, but which were written down primarily because of further expected deterioration in the performance of the underlying collateral.  As of June 30, 2008, for these securities, there have been no defaults or defaults that have occurred in classes lower in the capital structure.  $480 thousand of the fixed income security write-downs for both the three months and six months ended June 30, 2008, respectively, primarily related to securities experiencing a significant departure from anticipated residual cash flows, however, we believe they retain economic value.

Investment write-downs and cash received on these investments were as follows:

($ in thousands)	Three Months Ended June 30, 2008					Six Months Ended June 30, 2008
Performing in accordance with anticipated or contractual cash flows	Investment write-downs			Cash received (3)		Investment write-downs			Cash received
ABS RMBS	$	—		$		$	(633	)	$	99
CMBS/CRE CDO	(6,493		)	186		(6,493		)	418
Subtotal (1)	(6,493		)	186		(7,126		)	517
Departure from anticipated or contractual cash flows
Future cash flows very uncertain - Corporate
Food manufacturer	(480		)	—		(480		)	37
Subtotal	(480		)	—		(480		)	37
Total fixed income securities	$	(6,973	)	$	186	$	(7,606	)	$	554

(1)Written down primarily because of expected deterioration in the performance of the underlying collateral.  As of June 30, 2008, for the securities with direct interest in the lender, there have been no defaults.  For securities supported by collateral, there have been no defaults or defaults have occurred in classes lower in the capital structure.

(2)While these fixed income security write-downs were valued at a significant discount to cost, we believe these securities retain economic value.

(3)Cash received includes both income and principal collected during the period.

Notwithstanding our intent and ability to hold these securities with impairment write-downs, we concluded that we could not reasonably assert that the recovery period would be temporary.

Change in intent write-downs for the three months ended June 30, 2008 totaled $47.2 million and comprised net realized losses on fixed income of $45.5 million and mortgage loans of $1.7 million, compared to realized losses on fixed income of $2.2 million and mortgage loans of $2.1 million for the same period of prior year.  Change in intent write-downs for the six months ended June 30, 2008 totaled $50.8 million and comprised net realized losses on fixed income of $49.0 million and mortgage loans of $1.8 million, compared to net realized losses on fixed income of $3.5 million and net realized losses on mortgage loans of $2.1 million, for the same period of prior year.

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Change in intent write-downs for the three months ended June 30, 2008 are presented in the table below.

($ in thousands)		Financial Accounting Standards Board Statement No. 157, Fair Value			Net realized capital loss
Criteria	Security Type	Measurements(“SFAS No. 157”) Level	Fair value at June 30,2008		Three Months Ended June 30, 2008
Risk Mitigation
Targeted reductions in commercial real estate exposure where it is anticipated that future downside risk remains. Considerations included position held in the capital structure, vintage year, illiquidity and deteriorating fundamentals.	CRE CDO CMBS Mortgage loans	3 2 3 3	$	26,428 38,213 2,083 9,560	$	(5,520 (17,709 (3,819 (1,744	) ) ) )
Targeted reductions in residential real estate where management believes there is a risk of future material declines in price in the event of continued deterioration in the economy. Considerations included position held in the capital structure, projected performance of the collateral, and expected internal rates of return.	ABS RMBS	3	14,921		(4,148		)
Targeted reductions in financial sector exposure included securities issued by certain regional banks and certain large financial institutions.	Financial Sector Other	2 2 3	108,547 19,015 11,056		(11,928 (1,239 (907		) ) )
Total Risk Mitigation			229,823		(47,014		)
Individual Identification			24,730		(209		)
Other			14,252		—
Total change in intent			$	268,805	$	(47,223	)

A changing interest rate environment will 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 management is accomplished through both cash market transactions including new purchases and derivative activities that generate realized gains and losses.  As a component of our approach to managing portfolio duration, realized gains and losses on certain 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.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the financial statements.

In applying policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations.  It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our financial statements.

Our critical accounting estimate for the fair value of financial assets and financial liabilities follows.  For a description of critical accounting estimates not discussed below, see the Application of Critical Accounting Estimates section of the MD&A found under Part II. Item 7. of the Allstate Life Insurance Company of New York Annual Report on Form 10-K for 2007.

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Fair Value of Financial Assets and Financial Liabilities SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We adopted the provisions of SFAS No. 157 as of January 1, 2008 for financial assets and financial liabilities that are measured at fair value. SFAS No. 157:

•Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value;

•Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation as of the measurement date;

•Expands disclosures about financial instruments measured at fair value.

We categorize our financial assets and financial liabilities measured at fair value based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities which we can access (Level 1); the second highest priority for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets, or valuation models whose inputs are observable (Level 2); and the lowest priority to unobservable inputs (Level 3).  If inputs used to measure a financial instrument fall within different levels of the fair value hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the entire instrument.  Certain financial assets are not carried at fair value on a recurring basis, including investments such as mortgage loans and policy loans, and thus are only required to be categorized in the fair value hierarchy when held at fair value on a non-recurring basis.

The availability of market observable information is the principal factor in determining the level that financial instruments are assigned in the three-level hierarchy. Observable inputs are those used by market participants in valuing financial instruments that are developed based on market data obtained from independent sources.  In the absence of sufficient observable inputs, unobservable inputs reflect our estimates of the assumptions market participants would use in valuing financial assets and financial liabilities and are developed based on the best information available in the circumstances.  The degree of management judgment involved in determining fair values is inversely related to the availability of market observable information.

Financial assets and financial liabilities recorded on the Condensed Statements of Financial Position at fair value are categorized based on the reliability of inputs to the valuation techniques as follows:

Level 1:Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.

Level 2: Financial assets and financial liabilities whose values are based on the following:

a)Quoted prices for similar assets or liabilities in active markets;

b)Quoted prices for identical or similar assets or liabilities in non-active markets; or

c)Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability

Level 3:Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect our estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

We utilize a combination of third party valuation service providers, brokers, and internal valuation models to determine fair value.  We gain assurance on the overall reasonableness and consistent application of input assumptions, valuation methodologies, and compliance with accounting standards for fair value determination through the execution of various processes and controls designed to ensure that our financial assets and financial liabilities are appropriately valued and our ongoing monitoring of the fair values received or derived internally.

We are responsible for the determination of the value of the financial assets and financial liabilities carried at fair value and the supporting assumptions and methodologies.  In certain situations, we employ independent third-party valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant assumptions and methodologies for individual instruments.  In situations where our valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote or by employing internal valuation models that are widely accepted in the financial services industry.  Changing

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market conditions in the second quarter of 2008 were incorporated into valuation assumptions and reflected in the fair values which were validated by calibration and other analytical techniques to available market observable data.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary algorithms, produce valuation information in the form of a single fair value for individual securities for which a fair value has been requested under the terms of our agreements.  For certain types of securities, fair values are derived from the valuation service providers’ proprietary valuation models.  The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market-observable information, as applicable. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial instruments.  The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and where applicable, collateral quality and other issue or issuer specific information.  Executing valuation models effectively requires seasoned professional judgment and experience.  In cases where market transactions or other market observable data is limited, the extent to which judgment is applied varies inversely with the availability of market observable information.

For certain of our financial assets carried at fair value, where our valuation service providers cannot provide fair value determinations, we obtain non-binding price quotes from brokers familiar with the security who, similar to our valuation service providers, may consider transactions or activity in similar securities, as applicable, among other information.  The brokers providing price quotes are generally from the brokerage divisions of leading financial institutions with market making, underwriting and distribution expertise.

 The fair value of financial assets and financial liabilities, including privately-placed securities and certain derivatives embedded in certain contractholder liabilities, where our valuation service providers or brokers do not provide fair value determinations, is determined using valuation methods and models widely accepted in the financial services industry.  Internally developed valuation models, which include inputs that may not be market observable and as such involve some degree of judgment, are considered appropriate for each class of security to which they are applied.

Our internal pricing methods are primarily based on models using discounted cash flow methodologies that determine a single best estimate of fair value for individual financial instruments.  In addition, our models use internally assigned credit ratings as inputs (which are generally consistent with any external ratings and those we use to report our holdings by credit rating) and stochastically determined cash flows for certain derivatives embedded in certain contractholder liabilities, both of which are difficult to independently observe and verify.  Instrument specific inputs used in our internal fair value determinations include: coupon rate, weighted average life, sector of the issuer, call provisions, and the contractual elements of derivatives embedded in certain contractholder liabilities.  Market specific inputs used in these fair values, which we believe are representative of inputs other market participants would use to determine fair value of the same instruments include: interest rate yield curves, quoted market prices of comparable securities, credit spreads, estimated liquidity premiums, and other applicable market data including lapse and anticipated market return estimates for derivatives embedded in certain contractholder liabilities.  As a result of the significance of non-market observable inputs, including internally assigned credit ratings and stochastic cash flow estimates as described above, judgment is required in developing these fair values. The fair value of these financial assets and financial liabilities may differ from the amount received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Moreover, the use of different valuation assumptions may have a material effect on the financial assets’ and financial liabilities’ fair values.

Fair value of our investments comprise an aggregation of numerous, single best estimates for each security in the Condensed Statements of Financial Position.  Because of this detailed approach there is no single set of assumptions that determine our fair value estimates.  Moreover, management does not compile a range of estimates for items reported at fair value because we do not believe that a range would provide meaningful information.  Level 1 and Level 2 measurements represent valuations where all significant inputs are market observable. Level 3 measurements have one or more significant inputs that are not market observable and as a result these fair value determinations have greater potential variability as it relates to their significant inputs.  The Level 3 principal components are privately placed securities valued using internal models, broker quoted securities, ABS RMBS, Alt-A, ARS backed by student loans, and other CDO. In general, the greater the reliance on significant inputs that are not market observable, the greater potential variability of the fair value determinations. ABS RMBS and Alt-A reflected the most significant impacts to their respective fair value determinations, due to the continued illiquidity that existed for these classes of securities. For broker quoted securities’ fair value determinations, we believe the

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brokers providing the quotes may consider market observable transactions or activity in similar securities, as applicable, and other information as calibration points.  Privately placed securities’ fair value determinations, which were based on internal ratings that are not market observable are calibrated to market observable information in the form of external NAIC ratings and credit spreads.  We believe our most significant exposure to changes in fair value is due to market risk.  Our exposure to changes in market conditions is discussed fully in the Market Risk section of the MD&A included in our 2007 Form 10-K.

We employ specific control processes to determine the reasonableness of the fair values of our financial assets and financial liabilities.  Our processes are designed to ensure that the values received or internally estimated are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value.  For example, on a continuing basis, we assess the reasonableness of individual security values received from valuation service providers that exceed certain thresholds as compared to previous values received from those valuation service providers. In addition, we may validate the reasonableness of fair values by comparing information obtained from our valuation service providers to other third party valuation sources for selected financial assets. When fair value determinations are expected to be more variable, we validate them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.

The following table identifies investments as of June 30, 2008 by source of value determination:

	Investments
($ in thousands)	Fair Value		Percent to total
Fair value based on internal sources (1)	$	1,545,467	21.5	%
Fair value based on external sources (2)	4,909,654		68.1
Total fixed income securities and certain short-term securities	6,455,121		89.6
Mortgage loans, policy loans, and short-term investments, investments, valued at cost	748,713		10.4
Total	$	7,203,834	100.0	%

(1)Includes short-term, commercial paper and other of $460.9 million reported in Level 2.

(2)Includes $336.6 million that are valued using broker quotes.

For more detailed information on our accounting policy for the fair value of financial assets and financial liabilities and information on the financial assets and financial liabilities included in the Levels promulgated by SFAS No. 157, see Note 3 to the Condensed Financial Statements.

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The following table provides additional detail regarding Level 1, 2 and 3 financial assets and financial liabilities by their classification in the Condensed  Statement of Financial Position at June 30, 2008.

	Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs			Significant Unobservable Inputs			Other Valuations and				Balance as of
($ in thousands)	(Level 1)				(Level 2)			(Level 3)			Netting				June 30, 2008
Financial assets
Fixed income securities:
Corporate					$	1,672,838		$	35,095						$	1,707,933
Corporate privately placed securities					316,328			1,198,528							1,514,856
Municipal					311,676										311,676
Municipal-ARS					4,999			119,225							124,224
U.S. government and agencies	$		147,095		659,119										806,214
ABS RMBS	—							59,454							59,454
Alt-A	—							25,474							25,474
Other CDO	—							25,020							25,020
CRE CDO	—							26,428							26,428
CMBS	—				641,705			2,083							643,788
Preferred stock	—				8,386										8,386
MBS	—				363,392			11,508							374,900
Foreign government	—				340,849										340,849
Total fixed income securities	147,095				4,319,292			1,502,815							5,969,202
Short-term investments:
Commercial paper and other	—				460,870			—							460,870
Money market funds	25,049				—			—							25,049
Total short-term investments	25,049				460,870										485,919
Other investments:
Free-standing derivatives	—				—			485							485
Total other investments	—				—			485							485
Total recurring basis assets	172,144				4,780,162			1,503,300							6,455,606
Non-recurring basis								7,816							7,816
Valued at cost, amortized cost or using the equity method	—				—			—			$	740,897			740,897
Counterparty and cash collateral netting (1)	—				—			—			(485			)	(485		)
Total investments	172,144				4,780,162			1,511,116			740,412				7,203,834
Separate account assets	804,994				—			—							804,994
Other assets	171				—			(2,067		)					(1,896		)
Total financial assets	$	977,309			$	4,780,162		$	1,509,049		$	740,412			$	8,006,932
% of Total financial assets	12.2			%	59.7		%	18.9		%	9.2			%	100.0		%
Financial liabilities
Contractholder funds:
Derivatives embedded annuity contracts					$	—		$	(1,896	)	—				$	(1,896	)
Other liabilities:
Free-standing derivatives					(488		)	(3,234		)	—				(3,722		)
Counterparty and cash collateral netting (1)													485		485
Total Financial liabilities						(488	)	$	(5,130	)	$	485			$	(5,133	)
% of Total financial liabilities					9.5		%	99.9		%	(9.4			)%	100.0		%

(1)In accordance with Financial Accounting Standards Board (“FASB”) Staff Position No. FIN 39–1, Amendment of FASB Interpretation No. 39, we net all fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral executed with the same counterparty under a master netting agreement.

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The following table provides a summary of changes in fair value during the three—month period ended June 30, 2008 of Level 3 financial assets and financial liabilities held at fair value on a recurring basis at June 30, 2008.

				Total realized and unrealized Gains (Losses) included in:															Total Gains (Losses) included in
($ in thousands)	Balance as of March 31, 2008			Net Income (1)			OCI on Statement of Financial Position			Purchases, Sales, Issuances and Settlements, net			Net Transfers In and/or (Out) of Level 3			Balance as of June 30, 2008			Net Income for Instruments Still Held at June 30, 2008 (4)
Financial assets
Fixed income securities:
Corporate	$	35,798		$	(3	)	$	(907	)	$	(89	)	$	296		$	35,095		$	(3	)
Corporate privately placed securities	1,238,956			1,623			(30,827		)	(6,141		)	(5,083		)	1,198,528			337
Municipal	—			—			—			(3,400		)	3,400			—			—
Municipal–ARS	46,350			—			(3,475		)	(2,550		)	78,900			119,225			—
ABS RMBS	67,224			(4,148		)	444			(4,066		)	—			59,454			(4,148		)
Alt–A	26,603			5			(1,134		)	—			—			25,474			5
Other CDO	26,131			—			(972		)	(139		)	—			25,020			—
CRE CDO	29,894			(12,019		)	8,559			(6		)	—			26,428			(12,019		)
CMBS	1,914			(3,815		)	3,984			—			—			2,083			(3,815		)
MBS	12,740			(34		)	7			(1,205		)	—			11,508			(34		)
Total fixed income securities	1,485,610			(18,391		)	(24,321		)	(17,596		)	77,513			1,502,815			(19,677		)
Other investments:
Free–standing derivatives, net	(3,326		)	136			—			441			—			(2,749		)(2)	1,582
Total other investments	(3,326		)	136			—			441			—			(2,749		)	1,582
Total investments	1,482,284			(18,255		)	(24,321		)	(17,155		)	77,513			1,500,066		(3)	(18,095		)
Other assets	506			(2,573		)	—			—			—			(2,067		)	(2,573		)
Total Level 3 Financial assets	$	1,482,790		$	(20,828	)	$	(24,321	)	$	(17,155	)	$	77,513		$	1,497,999		$	(20,668	)
Financial Liabilities
Contractholder funds:
Derivatives embedded in annuity contracts	$	(1,253	)	$	(675	)	$	—		$	32		$	—		$	(1,896	)	$	(675	)
Total Level 3 financial liabilities	$	(1,253	)	$	(675	)	$	—		$	32		$	—		$	(1,896	)	$	(675	)

(1)	The amounts above total $(21.5) million and are reported in the Condensed Statements of Operations as follows: $(22.3) million in Realized capital gains and losses; $1.5 million in Net investment income, and $(676) thousand in Contract benefits.
(2)	Comprises $485 million of financial assets and $(3.2) million of financial liabilities.
(3)	Comprises $1.50 billion of investments and $(3.2) million of Free–Standing Derivatives included in Financial Liabilities.
(4)	The amounts above represent gains and losses included in net income for the period of time that the financial asset or financial liability was determined to be in Level 3. These gains and losses total $(21.4) million and are reported in the Condensed Statements of Operations as follows: $(22.2) million in realized capital gains and losses; $1.5 million in net investment income, and $(676) thousand in Contract benefits.

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The following table provides a summary of changes in fair value during the six—month period ended June 30, 2008 of Level 3 financial assets and financial liabilities held at fair value on a recurring basis at June 30, 2008.

				Total realized and unrealized Gains (Losses) included in:														Total Gains (Losses) included in
($ in thousands)	Balance as of January 1, 2008			Net Income (1)			OCI on Statement of Financial Position			Purchases, Sales, Issuances and Settlements, net			Net Transfers In and/or (Out) of Level 3 (2)		Balance as of June 30, 2008			Net Income for Instruments Still Held at June 30, 2008
Financial assets
Fixed income securities:
Corporate	$	38,270		$	6,792		$	(10,149	)	$	(114	)	$	296	$	35,095		$	(3	)
Corporate privately placed securities	1,211,628			3,223			(29,768		)	7,995			5,450		1,198,528			1,448
Municipal	—			—			—			(3,400		)	3,400		—			—
Municipal–ARS	33,200			—			(3,475		)	(5,000		)	94,500		119,225			—
ABS RMBS	76,110			(4,780		)	(3,938		)	(7,938		)	—		59,454			(4,780		)
ABS CDO	—			—			—			—			—		—			(56		)
Alt–A	28,836			10			(3,372		)	—			—		25,474			9
Other CDO	30,768			269			(2,882		)	(3,135		)	—		25,020			—
CRE CDO	33,067			(12,024		)	5,399			(14		)	—		26,428			(12,024		)
CMBS	3,727			(3,812		)	2,168			—			—		2,083			(3,812		)
MBS	14,292			(71		)	(174		)	(2,539		)	—		11,508			(71		)
Total fixed income securities	1,469,898			(10,393		)	(46,191		)	(14,145		)	103,646		1,502,815			(19,289		)
Other investments:
Free–standing derivatives, net	(980		)	(2,236		)	—			567			—		(2,749		)(2)	1,602
Total other investments	(980		)	(2,236		)	—			567			—		(2,749		)(2)	1,602
Total investments	1,468,918			(12,729		)	(46,191		)	(13,578		)	103,646		1,500,066		(3)	(17,687		)
Other assets	(1,733		)	(334		)	—			—			—		(2,067		)	(334		)
Total recurring Level 3 financial assets	$	1,467,185		$	(13,063	)	$	(46,191	)	$	(13,578	)	$	103,646	$	1,497,999		$	(18,021	)
Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts	$	174		$	(2,103	)	$	—		$	33		$	—	$	(1,896	)	$	(2,103	)
Total recurring Level 3 financial liabilities	$	174		$	(2,103	)	$	—		$	33		$	—	$	(1,896	)	$	(2,103	)

(1)	The amounts above total $(15.2) million and are reported in the Condensed Statements of Operations as follows: $(16.1) million in Realized capital gains and losses; $3.0 million in Net investment income, and $(2.1) million in Contract benefits.
(2)	Comprises $485 thousand of financial assets and $(3.2) million of financial liabilities.
(3)	Comprises $1.50 billion of investments and $(3.2) million of Free–Standing Derivatives included in Financial Liabilities.
(4)	The amounts above represent gains and losses included in net income for the period of time that the financial assets or financial liability was determined to be in Level 3. These gains and losses total $(20.1) million and are reported in the Condensed Statements of Operations as follows: $(21.0) million in Realized capital gains and losses; $3.0 million in Net investment income, and; $(2.1) million in Contract benefits.

Transfers into and out of Level 3 during the six months ended June 30, 2008 are attributable to a change in the availability of market observable information for individual securities within the respective categories.  Due to a further deterioration in liquidity for the segment of the ARS market backed by student loans, certain market observable data utilized for valuation purposes became unavailable during the second quarter of 2008.  As of June 30, 2008, $119.2 million or 96.0% of our total ARS holdings were valued using a discounted cash flow model.  Certain inputs to the valuation model that are significant to the overall valuation and not market observable included: estimates of future coupon rates if auction failures continue, maturity assumptions, and illiquidity premium.  As a result of the reliance on certain non-market observable inputs, the portion of the ARS portfolio backed by student loans have been transferred to Level 3 for the period ended June 30, 2008. These same securities were classified as Level 2 measurements for the period ended March 31, 2008.  Our ARS holdings that are not backed by student loans have a fair value equal to their corresponding par value based on market observable inputs and, therefore, continue to have a Level 2 classification.

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The following table presents fair value as a percent of amortized cost for Level 3 investments at June 30, 2008.

($ in thousands)	Fair value		Fair value as a % of Amortized cost
Fixed income securities:
Corporate	$	35,095	94.0	%
Corporate - privately placed securities	1,198,528		101.0
Municipal - ARS	119,225		97.2
ABS RMBS	59,454		84.4
Alt-A	25,474		86.0
Other CDO	25,020		86.5
CRE CDO	26,428		100.7
CMBS	2,083		100.6
MBS	11,508		97.8
Total fixed income securities	1,502,815		99.1
Other investments:
Free-standing derivatives	485		100.0
Sub-total recurring Level 3 investments	1,503,300		99.1
Non-recurring basis	7,816		100.0
Total Level 3 investments	$	1,511,116	99.1

Non-recurring investments include certain mortgage loans and other investments at fair value due to our change in intent write-downs and credit impairments at June 30, 2008.

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)	June 30, 2008		December 31, 2007
Common stock, additional capital paid-in and retained income	$	616,702	$	615,684
Accumulated other comprehensive income	22,582		65,188
Total shareholder’s equity	$	639,284	$	680,872

Shareholder’s equity decreased in the first six months of 2008, due to decreased unrealized net capital gains on fixed income securities slightly 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), exposure to risks, the current level of operating leverage, Allstate Life Insurance Company’s (“ALIC”) and Allstate Insurance Company’s (“AIC”) ratings and other factors. There have been no changes to our insurance financial strength ratings since December 31, 2007.  S&P affirmed AIC’s and ALIC’s ratings in July 2008.  Moody’s placed ALIC’s and our ratings under review.

Liquidity Sources and Uses  As reflected in our Condensed Statements of Cash Flows, lower operating cash flows in the first six months of 2008, compared to the first six months of 2007, were primarily related to a decrease in premiums and higher income tax payments, partially offset by the settlement of an inter-company obligation in the prior year and higher net investment income.

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Cash flows used in investing activities increased in the first six months of 2008, compared to the first six months of 2007, primarily due to the investment of higher contractholder fund deposits.

Cash flows from financing activities shifted to a source of cash in the first six months of 2008 compared to a use of cash in the first six months of 2007.  The change was the result of increased contractholder fund deposits.  For quantification of the changes in contractholder funds, see the Operations section of the MD&A.

We have an inter-company loan agreement with The Allstate Corporation.  The amount of inter-company loans available to us is at the discretion of The Allstate Corporation.  The maximum amount of loans The Allstate Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion.  We had no amounts outstanding under the inter-company loan agreement at June 30, 2008 or December 31, 2007.  The Allstate Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings.

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Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  We maintain disclosure controls and procedures as defined in Rule 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 June 30, 2008, there have been 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 and inquiries” in Note 5 of the Company’s Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.

Item 1A. 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.  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 (including the risks described below), 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 2007.

The impact of our investment strategies may be adversely affected by developments in the investment markets

The cost and impact of our investment portfolio risk mitigation and return optimization programs may be adversely affected by unexpected developments in the investment markets.

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)
August 8, 2008	By	/s/ Samuel H. Pilch
	Samuel H. Pilch
	Controller
	(chief accounting officer and duly
	authorized officer of Registrant)

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Exhibit No.	Description
15	Acknowledgement of awareness from Deloitte & Touche LLP dated August 7, 2008, 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

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