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TWST: What are the macro factors that you feel will have an impact on these companies over the next 12 to 24 months?

Mr. Thompson: Generally, underwriting strain has been the most important factor, and the impact is different on personal lines compared to commercial. Beyond that, I see forces at work driving the commodity aspect of insurance. Technology as it’s applied to settling claims and managing claims, these colossal systems are leveling claims settlement practices. Distribution, e-based aggregator sites that allow for multiple quotes, serves to level the playing field. The easing of state regulation and licensing requirements under financial services reform will help efficiency in pricing and new product development. Companies more than ever need to distinguish themselves in the marketplace or they will not earn an adequate return. These challenges differ between commercial and personal lines companies. For example, financial strain will probably have a different effect on personal lines insurers. Generally for the industry, we’re seeing pressure on the loss cost components, and that’s eating into redundant reserve positions. Cash flows are still much weaker, and reserve deficiencies are certainly growing. So going forward, as there is more financial pain, I think there is more pressure to raise rates, and in the commercial lines industry it’s usually easier to raise rates than in personal lines. In personal lines we are starting to see signs that severe pricing problems are emerging. But the personal lines group was better reserved at the start of this year, so there is less balance sheet strain. Also, goals of cross - selling are driving the need to advertise and potentially lose money short term in order to control the customer. At the end of the day, the auto industry is setting itself up to need substantial corrective rate action, and as rate requests increase, that will drive regulatory concerns. Previously, we’ve seen regulators delay rate increases, limit them, or deny them altogether, particularly when companies are asking for a second time. It’s a regulator’s job to hear the concerns of consumers, and consumers usually kick up their heels when their auto rates increase. Also, politicians realize every voter owns a car, and if they get on their soapbox and say they’re going to reduce rates next year if they are elected, that can garner support.

TWST: You’re negative on the auto insurers, but tell us more about the companies in the personal lines sector.

Mr. Thompson: Well, we talked about Allstate (NYSE:ALL). That’s one I’m leery of. Progressive (NYSE:PGR) will probably benefit sooner because half of their business is nonstandard auto. Historically it’s been easier to raise rates for nonstandard drivers because if you think about it, politicians care less what the rates are for a drunk driver. They usually want to punish them. That’s a little simplistic, but that’s how the thinking has historically been. So Progressive has the advantage that with at least half of its book, I think they’re going to able to raise the rates more quickly.