Ann: Preliminary FY21 results and introduces FY22 guidance, page-24

"And this is relevant to the IAG thread because?"


Had you read, and understood, the thread you would know that the context is the commercial insurance industry, notably in terms of:

1) The outlook for rates

From https://hotcopper.com.au/posts/55322855/single:

"Used to be - two or so decades ago when I first started to research insurance companies for investing purposes - that insurance premium cycles were relatively short-lived affairs.
But the past 6 or 7 years rates have been constantly hardening.
So the key takeaway for me from today's thorough and detailed presentation by SDF (they only got to question time after a full hour had lapsed) was Rob's references to the multitude of input cost pressures facing general insurers - some legacy issues and most structurally permanent.

Consolidation of the global reinsurance industry leading to less competitive reinsurance pricing, claims experiences which are constantly rising, increased regulatory capital requirements, technology catch-up spending, dis-intermediation of the general insurance sector, and increased cost-to-serve have resulted in GI technical margins being too low to generated acceptable returns of capital in the GI industry.

The net result of this is a GI industry which has to keep ratcheting up rates in order to remain viable.

Based on the evidence seen by this casual insurance sector observer, those industry fundamentals are going to be in place for at least the foreseeable future."


and


2) Industry Risk-Adjusted Investment Returns

Against the aforementioned favourable rate outlook, where the best the risk-adjusted investment returns occur on the supply chain - i.e., re-insurance, underwriting, or distribution.

On that note, in terms of risk-adjusted investment returns, the best position on the industry supply chain for commercial lines is to be found in the distribution segment (commercial insurance broking), and not in the manufacturing segment (insurance underwriting).


In the most simple of terms, distributors of insurance products get to enjoy the same favourable rate tailwinds that IAG is enjoying, but without the claims risks, re-insurance risk, market movement risk, etc. that are worn by IAG.


So to answer your question, that's how it is relevant to IAG.


PS. Supportive of the view that the optimal insurance industry positioning is the one occupied by the insurance product distributors (i.e., brokers), as opposed to the insurance product manufacturers (i.e., IAG) is the highly pronounced splay in their respective earnings histories:




Distributor earnings are meaningfully higher than they were 5 years ago, while the manufacturer's earnings has gone backwards over that period.

Needless to say, that wide discrepancy in financial performance has been manifest in significant share price outperformance of the former over the latter, over every meaningful investment time frame:





Conclusion: If one sought to participate in the hardening commercial rate cycle, then investing in IAG is the sub-optimal way to do so.


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