Challenger Limited · ASX:CGF
Challenger — Investor Presentation (September 2004)
25 slides from Challenger's investor presentation, Sep 6, 2004
Slide 1: Challenger Life: An overview
Challenger Life An overview Robert Woods, Chief Executive, Challenger Life Tony Bofinger, Chief Operating Officer & Appointed Actuary 6 September 2004
Slide 2: Key messages
Key messages Î Challenger Life model is very different to other Life insurance companies Î More akin to Investment Banking model Î Strategy based upon using the long term annuities market to: — Purchase long term predictable income streams — Earn long term predictable profits Î Focus – sourcing low
Slide 3: Strategy
Challenger Life Strategy Equity Invested Creates profits and in and seeds quasi equity quality assets new businesses Shareholder Challenger Life Value creation funds* Balance Sheet Long term, predictable Asset origination team profits Property Structuring, Infrastructure Annuities underwriting & fee
Slide 4: Agenda
Agenda Highlights 05 Managing our business 08 Financials 19 Key earnings drivers 23 4
Slide 5: Highlights: Structural
Highlights Structural • APRA relationship – Strong compliance culture now exists • Implemented strong credit, market and operational risk management processes • Merger of Challenger Life Ltd with Challenger Life No. 2 Ltd 5
Slide 6: Highlights: Strategic
Highlights Strategic • Disposal of 12 Australian non-core properties for $160m, realising a historical cost accrual profit of $27.3m • Well progressed on disposal of UK and US properties — Signed contracts for $A828m • Highly skilled team — Structured finance (Macquarie, BT, Merrill, PwC, ZCM) — Ris
Slide 7: Highlights: Financial
Highlights Financial • Historical cost accounting profit for year ended 30 June 04 $55m • Statutory accounting profit for year ended 30 June 04 $124m • $351m of long term annuity sales, #1 market share • $193m of short term sales • Well capitalised balance sheet — Excess capital over solvency requir
Slide 8: Historical cost of current annuity book
Historical cost of current annuity book 6.5%_ 5.7%_ 0.8% Challenger’s expenses* 5.4%_ 0.3% Trailer to Planner 5.0%_ 0.4% Upfront to Planner, amortised 5.0% Annuitant rate** * Challenger expenses in relation to annuity issuance and maintenance function ** Blended long term and short term annuity rate
Slide 9: Annuities market: pricing of long term annuities
Annuities market Pricing of long term annuities 7.0 % Weighted Average (AMP, AXA, Citicorp, CBA) Challenger Life 6.5 % 15 yr Swap Rate 6.0 % 5.5 % 5.0 % 4.5 % 4.0 % 3.5 % Jun 2003 Jun 2004 Aug 2001 Sep 2001 Jan 2002 Jun 2002 Oct 2001 Nov 2001 Dec 2001 Feb 2002 Mar 2002 Apr 2002 May 2002 Aug 2002 Sep
Slide 10: Annuities market: market share of long term annuity providers
Annuities market Market share - long term annuity providers 40.0% AMP Group AXA Australia Group BT / Westpac Group 35.0% C hallenger Financial Services Group C iticorp Group C ommonwealth / C olonial Group 30.0% 25.0% Market Share 20.0% 15.0% 10.0% 5.0% 0.0% Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01
Slide 11: Asset origination
Asset origination • Infrastructure — Equity — Mezzanine debt • Commercial property — Equity — Mezzanine debt • Mortgages — Warehouse facilities for Challenger Wholesale Finance • Corporate mezzanine debt • Asset backed securities 11
Slide 12: Asset origination: Infrastructure
Asset origination Infrastructure Wales and the West Gas distribution network • GBP20m investment • Mature asset • Operating in a regulated environment • Significant long term stable cashflows • Potential for capital growth • Pricing reset every 5 years (2008 next reset date) • Exceeds our 18% RONA h
Slide 13: Property
Property • We like the significant long term contracted cashflows our properties provide us • Sale of properties (both domestic and foreign) — Opportunistic, upgrading the quality of our portfolio • Remaining portfolio — Conservatively valued, given corporate activity in LPT sector — Want to maintai
Slide 14: Annuity cash flow
Annuity cash flow 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Annuity Principal Annuity Interest 14
Slide 15: Property model: gross cash flow
Property model Gross cash flow 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Property Cash Flow s Annuity Cash Flow s 15
Slide 16: Property model: net cash flow
Property model Net cash flow 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Net Cash Flows 16
Slide 17: Diversified model: investment cash flow
Diversified model Investment cash flow 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Principal Investment Yield Capital Realisation Other Income 17
Slide 18: Diversified model: net cash flow after annuity payments
Diversified model Net cash flow after annuity payments 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Net Cash Flow 18
Slide 19: Financials
Challenger Life Financials Tony Bofinger, Chief Operating Officer & Appointed Actuary
Slide 20: Statutory balance sheet
Statutory balance sheet Annuity products June 2003 June 2004 Policy liability basis $m $m Assets Property 2,614 2,535 FX hedging 67 40 Equities 21 63 Fixed interest 811 1,181 Cash receivables 473* 546 3,986 4,365 Liabilities Policyholder 1,705 1,948 Senior debt 1,725 1,689 Swaps 141 31 Other 12 214
Slide 21: Statutory capital
Statutory capital Annuity products – excess above solvency June 2003 June 2004 Solvency basis $m $m Assets Property 2,614 2,535 FX hedging 67 40 Equities 21 63 Fixed interest 811 1,181 Cash, receivables & other 473 546 3,986 4,365 Liabilities Solvency requirement 2,054 2,160 Senior debt 1,725 1,689
Slide 22: 'Historic Cost' accrual earnings
‘Historic Cost’ accrual earnings 6 months 6 months 12 months to Dec 2003 to June 2004 to June 2004 $m $m $m Net rental income 108 107 215 Investment income 39 45 84 Profit on disposal of assets 5 24 29 Total net revenue 152 176 328 Annuitant interest 47 48 95 Debt interest 66 65 131 Expenses: Third
Slide 23: Key earnings drivers
Key earnings drivers • Historical cost accrual accounting improves stability and predictability of profits • Future growth is a function of: — Transition from cash and short term assets into – Long term – Higher yielding – Capital growth assets — Continue to grow our annuities book — Relentless on c
Slide 24: Summary
Summary Our strategy Î Will require no increase in capital Î Will produce long term stable income streams Î Will grow earnings substantially Î Is cashflow positive Î Complements Wholesale Finance and Wealth Management businesses Î Will seed new business opportunities 24
Slide 25: Discussion / Questions
€2 challenger Financial Services Group Discussion / Questions