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Life insurance companies have been one of the capital sources that have stepped into the breach caused by the debt markets’ seizure. The conventional wisdom is that insurers are filling their real estate allocations by seeking out the best deals in this environment. In many instances this is the case [see this week's related article Life Insurance Firms Still Fill the Lending Breach]. However an alternative point of view is provided by Sam Davis, senior managing director and head of real estate for Allstate’s commercial real estate investment activities – a $20 billion real estate portfolio that consists of commercial mortgages, commercial mortgage backed securities and equity real estate fund investments.While Davis is not projecting a wholesale pull-back by life insurers from real estate; he does believe life insurance companies will be re-evaluating the real estate asset class’ role in their portfolios. For developers who are counting on this lending, the news is not good. “It’s my prediction that life insurers will scale back their investments in real estate this year,” Davis says.

GlobeSt.com: Why would life insurers want to temper their real estate exposure?

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

GlobeSt.com: But specifically about the real estate asset class? Are they still confident about the sector’s strength?

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

GlobeSt.com: Where are life insurance companies active now?

Davis: What you are seeing today is life companies lending money but at lower leverage levels – now they are staying within the 60% to 65% LTV range. And that, by the way, is another reason why life insurers will put out less money this year: they are offering financing at lower leverages that won’t work for most borrowers.

GlobeSt.com: Equity and preferred equity have been attracting new lenders because it has become more profitable. Do you think life insurers would ever stretch in that direction?

Davis: No. Life insurance companies’ number one form of lending is commercial mortgage whole loan lending – straight debt. The second is CMBS. Equity is only a small piece because it is not capital efficient.

GlobeSt.com: I guess this means Allstate will not be investing as much in real estate this year?

Davis: Let’s put it this way: last year we closed a record $2.9 billion of commercial mortgage whole loans. We anticipate that our commercial mortgage lending activity during 2008 will be down from that record level.

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