Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — H1 2006 Earnings Presentation
49 slides from Challenger's earnings presentation, Feb 27, 2006
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Slide 2: Half-year results to 31 December 2005
€2 challenger Financial Services Group Challenger Financial Services Group Limited Half-year results to 31 December 2005 Michael Tilley, CEO Paul Rogan, CFO 27 February 2006
Slide 3: First half result - historic net profit after tax of $57m
€2 challenger Financial Services Group irst half result — historic net profit after tax of $57m - 33% Up on 31 Dec 2004 half > Challenger Life > Strong fee revenues from new business » Challenger Wholesale Finance =» Residential book growth 26% above market > Maintaining margins » Challenger Wealth
Slide 4: Profit before interest and tax
€2 challenger Financial Services Group Profit before interest and tax: « Statutory! (before significant items?) 115 91 26 « Historic cost 95 70 36 Profit after tax: ° Statutory pre significant items? and minority 72 56 29 interests * Historic cost 57 43 33 Basic EPS: « Statutory epre significant ite
Slide 5: Contents
Contents Business overview Financial results Challenger Life Challenger Wholesale Finance Challenger Wealth Management Summary Appendix €2 challenger Financial Services Group
Slide 6: Business overview
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Slide 7: Financial Services Group
€2 challenger Financial Services Group Services Group
Slide 8: Key developments in the half
€2 challenger Financial Services Group Launch of Challenger Infrastructure Fund (CIFCA) Acquisition of Inexus (leading independent gas transporter in the UK) Investment in 5 Oceans Asset Management _ Fitch upgrades Challenger Life to A- _ Alliance with Bank of Queensland Senior management appointmen
Slide 9: Profit before tax, significant items and corporate charges
€2 challenger Financial Services Group Profit before tax, significant items & corporate charges 116 95 22 96 74 30 Significant items? (19) - n/a - - - Corporate charges Interest (13) (13) (9) 44 Other (1) (1) (4) 75 Profi before tax | 8B oe 82 61 | 34 Income tax expense (30) (25) (18) 39 Minority in
Slide 10: Profit by business before corporate charges
10 & challenger Financial Services Group | corporate charges _ Challenger Life 60 60 - Challenger Wholesale Finance 36 27 33 Challenger Wealth Management 12 (3) n/a Group costs (12) Corporate charges (14)
Slide 11: Group profit & loss account
€2 challenger Financial Services Group Group. profit & loss account istori iths to 31 December 2005 ‘Milkions 500 Revenue 413 349 18 oo _* Expenses (276) (241) | 15 —” 27 we Depreciation & amortisation (42) (38) _ it “= EBT 36 108 _Net interest (13) (9) 44 _ ~— ~~ 34 ° moe unos eos Income tax (25) (
Slide 12: Funds under management by business
12 _ 3 challen: Challenger Life company managed by the Life 3,017 3,011 ~ Specialist funds (CIFCA, CWT) 676 273 148 Challenger Wholesale Finance Residential lending 17,190 15,081 14 Commercial lending 2,516 2,466 2 Challenger Wealth Management Investment FUM 3 11,943 6,916 73 Funds under administrat
Slide 13: Challenger Life earnings
13 €2 challenger Financial Services Group Investment income Fee income Market related movements Inexus net profit / (loss) Profit on sale of assets 119 103 6 Policy liabilities movement net of commissions! Overheads Significant items — Inexus hedging? (19) (19) 1 No comparatives provided due to chan
Slide 14: Challenger Life
€2 challenger Financial Services Group Challenger Life . Challenger Life has consolidated Challenger Infrastructure Fund (CIF) ~— 53.9% held at 31 December 2005 * The impacts of the consolidation of CIF are: -— Inability to recognise yield on investment in CIF for both statutory and historic cost ea
Slide 15: Challenger Life net result
i5 months to 31 December 2005 | €2 challenger Financial Services Group Rental income (net of debt interest) Investment income Transaction and management fees Share of CIF profit/(loss) Profit on disposal of assets Overheads Total net re Annuitant funding costs 61 62 2 25 14] (79)
Slide 16: Challenger Wholesale Finance
& challenger i Fin l nance onths to 31 December 2005 growth in residential lending earnings i ~N ' Commercial Lending Residential Lending 29 20 45 16
Slide 17: Challenger Wealth Management
17 anagement months to 31 December 2005 oS Revenue 132 39 Operating expenses (68) (55) 24 Overhead expenses? (52) (39) 33 | costs. (4) Acquisition restructure costs! 1 Acquisition restructure costs expensed under IFRS 2 Overhead growth reflects acquisitions of HSBC and Associated Planners challenger
Slide 18: Corporate charges
€2 challenger Financial Services Group Net corporate interest payable ! (13) (9) 44 Long term incentive plan / other (1) (4) (75) ‘Includes $4.5m interest on the equity bridge facility consolidated via CIF 18
Slide 19: Group balance sheet
19 Group balance s 6 mont mber 2005 €2 challenger Financial Services Group Cash 533 466 496 Securitised assets 18,197 18,197 16,925 Property investments 1,779 1,779 1,683 Other Life investments 1,369 1,531 1,272 Goodwill 562 Other assets 455 Total assets 21303 Debt 601 Securitised liabilities 18,202
Slide 20: Group debt
20 €2 challenger Financial Services Group amber : 2005 Non-recourse to Challenger Group Within property trusts 349 349 Within CIF 1,090 - Wholesale Finance NIM facility 180 180 Recourse to Challenger Group Group corporate debt facilities 260 70 Other 2 2 1 Excludes debt within property trusts and CI
Slide 21: Group cash flow
21 €2 challenger Financial Services Group 491 Opening cash balance Operating (58) 280 Investing activities (1,355) 620 Financing activities 1,455 (962)
Slide 22: Key differences in accounting policies
€2 challenger Financial Services Group > Key differences in accounting policies include: ¢ Consolidation of special purpose entities * Share based payments ° Goodwill/EMVONA « Insurance contracts * Recognition of derivative financial instruments and hedge accounting IFRS reconciliation available in
Slide 23: Summary
Summary 23 €2 challenger Financial Services Group > So id first half result - historic net profit after tax of $57m - 33% up on 31 Dec 2004 half > Challenger Life > Strong fee revenues from new business » Challenger Wholesale Finance =» Residential book growth 26% above market > Maintaining margins
Slide 24: Questions/Discussion
€&2 challenger Financial Services Group me aun ES ae LAG Les SIS Ln a ae Ls Questions/Discussion
Slide 25: Appendix
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Slide 26: Statutory profit reconciliation
€2 challenger Financial Services Group tory Profit Net profit after tax AGAAP EMVONA - (10) LTIP amortisation (4) (2) No goodwill amortisation 23 9 Write-off restructure provisions (11) (4) Sale of loans (3) (2) Change in provision discount rate - (1) Tax effect 4 2 26
Slide 27: Total equity reconciliation
27 €2 challenger Financial Services Group Total equity AGAAP EMVONA No goodwill amortisation 23 Write-off restructure provisions (11) Sale of loans (3) No recognition of transaction costs 3 Change in provision discount rate (5) Share based payments (129) SPV cash flow hedge reserve (10) Tax effect
Slide 28: Challenger Life February 2006
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Slide 29: Challenger Life balance sheet
<2 challenger Financial Services Group at 31 December 2005 Cash 463 396 424 Property investments 1,570 1,570 1,504 Other Life investments 1,349 1,499 1,229 Goodwill/EMVONA 1,029 88 83 Other assets 507 42 74 Policy liabilities 2,176 2,176 2,230 Other liabilities 244 403 192 29
Slide 30: Annuity sales
€2 challenger Financial Services Group $173m i00 Annuity sales $rn Dec-03 Mar-04 Jun-G4 Sep-64 Dec-04 Mar-0O5 Jun-05 Sep-05 Dec-65 Short Term BLong Term On track for $300m sales - 2005/2006 Source: Plan for Life Actuaries & Researchers - Total Immediate annuity sales 30
Slide 31: Annuities market share
€2 challenger Financial Services Group Annuities market share — new sales of immediate annuities 34 25% 20% 15% 4 10% + Total Annuities Market Share Mar-05 Jun-05 Sep-05 Dec-05
Slide 32: Annuities market rates
| : ae - €8challenger Annuities marke ) Se Sa 7.0 % 6.5 % 6.0 % 5.5 % 5.0% r\ Ann | NL OA RAAT MOSSY 4.0% 3.5% em + + + + + £$ £ = ££ + + $+ 2 HY © BB » B&B 2 ww» © Hn Hw w& 8 $€ € € € § & &€ &€ 8&8 & & & 8 8 & & & & & & 8 & 8 8 FS ¢ &€ 8@ 8 & F § B F & 8 & &® &§ 8 &® B &F § 2B F Be Bg Bs FE a6 8 £2
Slide 33: $3 billion Life company portfolio
33 €2 challenger Financial Services Group $3 billion Life company portfolio ~ with increasing allocations to infrastructure and fixed interest Asset allocation optimises diversification, returns, and capital use $1 billion in net assets of specialist fund portfolio via CIFCA & CWT listed entities by
Slide 34: Capital management
34 600 4 500 4 400 | 300 4 200 4 100 5 Capital manage ife co 271 487 450 ss assets above statutory capital requirements Excess Assets over Target surplus Target Surplus Jun-03 2.1b Jun-04 2.6b Dec-04 2.88b Jun-05 2.9b Dec-05 2.78b Total assets of CL2 <2 challenger Financlat Services Group
Slide 35: Challenger Wholesale Finance February 2006
Se on €2 challenger Financial Services Group ee ae eo ee LLL Se Challenger Wholesale Finance 27 February 2006
Slide 36: Challenger Wholesale Finance 101
€2 challenger Financial Services Group Challenger W 101: e Finance PLAN A Servicing Distribution we Market Share PLAN Australia ——> Securitisation Challenger strategic relationship with PLAN Australia is a step into the rapidly growing mortgage aggregation market 36
Slide 37: Strong residential loan book growth
€2 challenger Financial Services Group _ Challenger Who le Finance Strong residential loan book growth 20,000 15,000 4 - | : 5,000 4 - - Dec 03 Mar 04 Jun 04 Sep04 Dec04 Mar05 Jun 05 Sep05 Dec05 @ Residential $m 37
Slide 38: Challenger Wholesale Finance residential
challep cer Whole 38 e Finance €2 challenger Financial Services Group Revenue 12 138 Operating Expenses before 37 1 38 amortisation & interest Overhead 23 27 EBITA 66 7 73 Amortisation 37 - 37 Closing mortgage portfolio 17,190 19,706 Average mortgage portfolio 16,517 18,963
Slide 39: Challenger Wholesale Finance residential 2004
Challenger Whole 39 e Finance 2004+ €2 challenger Financial Services Group 106 Revenue 10 116 Operating Expenses before 35 - 35 amortisation & interest Overhead 21 3 24 EBITA 50 7 57 Amortisation 30 - 30 Closing mortgage portfolio 15,081 17,547 Average mortgage portfolio 14,382 16,777 Restated for I
Slide 40: Challenger Wholesale Finance December 2005
40 Challenger Whol ale Finance 0 31 December 2005 Revenue 106 Operating Expenses before amortisation & interest 37 35 Overhead 23 21 EBITA 66 50 Amortisation 37 30 Closing mortgage portfolio 17,190 Average mortgage portfolio 16,517 challenger Financial Services Group
Slide 41: Challenger Wholesale Finance commercial
4i nallenger Whole vial ; to 31 December 2005 €2 challenger Financial Services Group Revenue 12 10 Operating Expenses before amortisation & interest 1 “ Overhead 4 3 EBITA 7 7 Amortisation Closing mortgage portfolio 2,516 2,446 Average mortgage portfolio 2,446 2,395
Slide 42: Wholesale Finance margins
Challenger | Who! ( 42 e Finance | €2 challenger Financial Services Group Revenue 126 106 % of average mortgage portfolio 1.53% 1.47% Operating expenses before amortisation 37 35 % of average mortgage portfolio 0.45% 0.49% Amortisation expense 37 30 % of average mortgage portfolio 0.45% 0.42% EBIT 2
Slide 43: Challenger Wealth Management February 06
on We €2 challenger Financial Services Group ee ae ia Challenger Wealth Management 27 February 2006
Slide 44: Challenger Wealth Management
-achalleng er Challenger We Management “=~ Funds Management net revenue Financial Planning net revenue 17 11 Expenses (52) (39) Acquisition restructure costs - (4) 44
Slide 45: Pre-tax profit
45 Pre-tax profit $m Nanagement * =" 6 months to 6 months to 6 months to 6 months to 6 months to Dec03 Jun04 Dec04 junds Dec05 1 Includes $4m in acquisition restructure costs (Associated Planners) 2 Includes $7m in acquisition restructure costs (HSBC) € challenger
Slide 46: Challenger Wealth Management FUM growth
€2 challenger Management “ rowt Challenger Weal 12,000 - oes $10.66 4,000 4 aan Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 institutional @ Retail 46
Slide 47: Fund range
&2 challenger Financial Services AS Australian equities funds/mandates Mortgage funds Real Estate Securities funds/mandates FI & cash funds/mandates International equities funds Alternative investment funds Multi sector funds Direct f property (ex Syndicates) Institutional Retail (including platform
Slide 48: Breakdown of FUM
€2 challenger Financial Services Group Breakdown of FUM c 31 December 2005 4 International -—« Revenue diversification oe . . : Real estate strategy contributing to securities robustness of FUM incl. syndicates Australian Equities * Australian equities FUM reflects multiple sources -- Internal exper
Slide 49: Challenger Wealth Management FUM movement
49 Challenger W: Movemer anagement oS 30 June 05 ~ Opening balance 7,510 3,069 10,579 Organic net inflows 599 389 988 Property Syndicate terminations (exit . strategy) (300) (300) Retained investment earnings (net 224 455 676 distributions paid out) challenger Financial Services Group
Challenger Financial Services Group — H1 2006 Earnings Presentation on 6ix