Mr. English: That's a good question. We have found these stocks, over the past eight years, to be highly correlated to the bond market. Lately the stocks have actually outperformed the bond market, especially since the last Fed interest rate move in late March. If inflation remains under control, the bond market will have a reasonably decent experience between now and the end of the year, and the stocks sill continue to do well. In the longer run, the industry is undergoing structural change, driven by consolidation. There is certainly substantial room to improve its returns on equity. To the extent that consolidation and increasing efficiency happen, I think the prospects for the industry longer term are also very positive.
TWST: Would you elaborate on that restructuring, on the changes
occurring in the sector?
The deleveraging process is what suggests strongly to me that the
industry will consolidate, in order to releverage balance sheets and
produce a higher efficiency in the surviving companies. Those two
processes, the fragmentation of the commercial lines business over the
past 10 years and the industry's gradual deleveraging, will probably
drive continuing structural change. The situation is similar to that
faced by the commercial banks 25 years ago. Much of the demand for
commercial loans from very large, highly creditworthy companies migrated
out of the banking system, and the banks were forced to consolidate or
to take other actions to increase efficiency. It's not a dissimilar
process, although it's happening more slowly in the insurance industry.
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