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TWST: What do you rate AIG (NYSE:AIG)?

Mr. Thompson: AIG is a buy. I think everyone expects, and I certainly do too, that their earnings growth rate is going to pick up in the next couple of years, to 15% or better. China opening up its markets with the WTO agreement is definitely a positive. AIG has the brand name, its origins date back to Shanghai in the 1920s. You put that together with their strength in the domestic property-casualty insurance markets and their historical track record in this kind of environment. Just those two facts alone, I think, lead me to believe that their earnings growth rate is going to pick up over the next three years. The Street is beginning to pay the company, or value the stock, for a higher growth rate. AIG’s earnings growth outlook compared to the S&P 500 is simply superior, as is its p/e multiple.

TWST: Any trends, any cautions, any bumps on the road ahead?

Mr. Thompson: Sure. We know we are seeing signs that inflation might be rearing its head and it is never good for these stocks if interest rates go up. The economic book values tend to decline and the stocks almost always take hits. That is certainly something to watch. I think more and more we are seeing that companies that aren't innovative are really dead. That has always been the case, but it seems in the last five years it has been more pronounced. The changes in technology and in regulation are opening up opportunities and international opportunities. I think if companies and managements are not thinking dynamically and looking three to five years ahead and putting the resources and the efforts into it (SAFECO is a perfect example), they are just not going to make it.

TWST: Is that in the cards?

Mr. Thompson: I have a call into AIG. They have set up something. I am not sure exactly what it is, but I think — the auto dealers just decided to get rid of all these auto dealers online and set up their own Web site. It seems to make sense on a certain level. I just don't know if the industry is going to react fast enough to eliminate what is happening anyway. Companies are seeing opportunities with established online brokers and some of the bank sites online to just partner up and sell their products that way. It seems to make sense to me, but that also screams for consolidation, especially in those segments. I mean, what are you offering? Why do you need 15 to 20 insurance companies selling the same policy on the same platform? It really cries for consolidation. More and more, investing in companies that are not specialty focused or that don't have an established franchise is a waste. Investors need to focus on companies that are product innovators or that offer something different to their client base, that are high-quality, with a strong balance sheet and very strong management. Those are the companies that I think increasingly in this kind of environment are going to outperform.