LifeInsurance Firms Still Fill the Lending Breach

| Why would life insurers want totemper their real estate exposure?


Stein: A couple of reasons. One has to do with theeconomy in general. It is slowing down and life insurance companiesonly invest from the cash flow they are bringing in the door. Ifinvest-able cash flow is down, so are their investments.

| But specifically about the realestate asset class? Are they still confident about the sector'sstrength?


Davis: I can't give you a yes to that, at least inthe short run. Another reason why I think lending by life insurancecompanies will be down this year is the concern for the potentialfor recession and how real estate assets will perform in arecession. They will not be inclined to add to their assets if theysee real estate weakening.

| Where are life insurance companiesactive now?


Davis: What you are seeing today is life companieslending money but at lower leverage levels – now they are stayingwithin the 60% to 65% LTV range. And that, by the way, is anotherreason why life insurers will put out less money this year: theyare offering financing at lower leverages that won't work for mostborrowers.

| Equity and preferred equity have beenattracting new lenders because it has become more profitable. Doyou think life insurers would ever stretch in that direction?


Davis: No. Life insurance companies' number oneform of lending is commercial mortgage whole loan lending –straight debt. The second is CMBS. Equity is only a small piecebecause it is not capital efficient.

| I guess this means Allstate will notbe investing as much in real estate this year?


Davis: Let's put it this way: last year we closeda record $2.9 billion of commercial mortgage whole loans. Weanticipate that our commercial mortgage lending activity during2008 will be down from that record level.

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