Challenger Limited · ASX:CGF
Challenger — Investor Presentation (February 2022)
66 slides from Challenger's investor presentation, Feb 17, 2022
Slide 1: 1H22 Financial results
1H22 Financial results Business momentum driving strong earnings growth 17 February 2022
Slide 2: Overview
Overview Providing customers with financial security for a better retirement Business performance Nick Hamilton – Managing Director and Chief Executive Officer Financial results Rachel Grimes AM – Chief Financial Officer Strategy and financial outlook Nick Hamilton – Managing Director and Chief Exec
Slide 3: Highlights
Highlights Business momentum driving strong earnings growth Strong earnings growth Converting AUM growth into earnings growth On-track to achieve full-year guidance and targets Improving shareholder returns ROE increase and in-line with target Dividend increase from earnings growth Significant busin
Slide 4: Business performance
Business performance Nick Hamilton Managing Director & Chief Executive Officer
Slide 5: 1H22 performance
1H22 performance Strong earnings growth and on-track to achieve full-year guidance Significant business momentum Life sales Record Life and annuity sales driven by successful diversification strategy $4.9bn +44% FM net flows Momentum in domestic and offshore net flows $0.9bn Group AUM Strong AUM gro
Slide 6: Life performance
Life performance No.1 retirement income business Record sales and strong book growth Record Life sales $4.9bn +44% Life sales ($bn) and book growth (%) 1H22 sales $4.9bn +44% Record annuity sales $2.5bn +15% 1H22 book growth +8.4% Benefiting from successful diversification strategy 8.4% 7.9% Life bo
Slide 7: Funds Management performance
Funds Management performance Leading active manager platform Distribution and product initiatives driving growth Net flows ($bn) FUM ($bn) Market leading domestic distribution 1H22 $0.9bn 1H22 $109bn +20% Zenith ‘Distributor of the Year’1 109.3 6.4 #1 Australian active manager for retail flows2 #1 d
Slide 8: Bank integration
Bank integration Extending customer reach and diversifying product offering Initial sales support strategy to attract pre-retiree customers Regulatory approval received Majority of deposit sales to Acquisition completed 30 July 2021 customers >50 years of age Integration well progressed Executive te
Slide 9: Financial results
Financial results Rachel Grimes AM Chief Financial Officer
Slide 10: Group snapshot
Group snapshot Strong earnings performance On-track to achieved full year guidance and targets 1H22 Change Normalised NPBT Normalised ROE Net income $387m +19% $238m +21% 12.1% +60bps Expenses ($147m) +16% EBIT $240m +21% Life $233m +21% In-line with ROE target2 FM $45m +28% Interest & borrowing ($2
Slide 11: EBIT up 21%
EBIT up 21% Earnings growth driven by AUM growth with stable margins Income $387m Expenses $147m EBIT $240m +19% on 1H21 +16% on 1H21 (+13% ex. Bank) +21% on 1H21 +8% on 2H21 -5% on 2H21 (-8% ex. Bank) Cost ratio 38.1% -90 bps 4 147 6 43.3% Average AUM +17% 3 7 Life COE1 $287m +18% 127 39.0% 38.1% 1
Slide 12: Life performance
Life performance Record sales Earnings growth from higher AUM and stable margin Life sales $4.9bn +44% Average AUM +17% Life EBIT Annuity sales $2.5bn +15% COE margin +1 bps $233m up 21% Life book growth +8.4% Average investment assets ($bn) +21% on 1H21 Annuity book growth +4.4% Cash Operating Earn
Slide 13: Life sales and book growth
Life sales and book growth Record sales driving liability and asset growth Record Life and annuity sales ($bn) Life book growth ($bn) 1H22 $4.9bn +44% 1H22 +$1.4bn net flows or +8.4% book growth Japan 4.9 Minimum annual sales Annuity net book volume of $0.6bn1 growth 0.4 $608m or 3.4 3.5 Institution
Slide 14: Life investment assets
Life investment assets Record sales driving book and asset growth Life annuity and other liabilities ($bn)1 Life investment assets ($bn) 18.5 22.3 23% Liabilities $18.5bn +17% 19.4 19.0 18.3 Driven by book growth 18% 19% 16.5 15% 12% 15% 8% 10% Index Plus liabilities +45% 7% 13% Average $22.3bn up 1
Slide 15: Life investment assets
Life investment assets Maintaining stable asset allocation Positive investment experience Life AUM1 Investment Experience (pre-tax) Fixed income 74% down 2% 2 Cash and IG 59%: down 1% Relatively stable spreads Represents 79% of fixed income Fixed income $23m Credit default 2bps3 lower than 5% 9% (ab
Slide 16: Life COE margin
Life COE margin Disciplined approach 1H22 COE margin compared to 2H21 1 COE margin and product spread 1 2 One-off Asset Backed Security fee received in 2H21 Lower interest rates and investment Lower shareholder 2.65% returns from tighter credit spreads returns 2.55% 2.56% Product cash margin +4 bps
Slide 17: Funds Management performance
Funds Management performance Flows and investment performance underpinning growth Average FUM $108bn +26% Average FUM FM EBIT $108bn +26% $45m +28% Net income $98m +21% Fidante $87bn +32% Income +21% CIPAM $21bn +6% Expenses +15% FUM-based margin stable at 17bps 45 108 Income margin 18bps -1bps 99 3
Slide 18: Funds Management
Funds Management Superior investment performance supporting net flows Funds Management investment performance Net flows $0.9bn Fidante Partners Funds Management Fidante Partners retail flows +$2.6bn 1 2 quartile performance relative to benchmark Fidante Partners institutional flows -$1.5bn 3% 5% 9.7
Slide 19: Funds Management
Funds Management FUM-based margin stable Funds Management income margin (bps) Funds Under Management ($bn) 105.8 109.3 20.2 91.2 +0% 82.8 81.4 19.0 18.8 17.9 18.0 16.6 16.6 16.7 +4% 16.2 15.5 1H20 2H20 1H21 2H21 1H22 1H20 2H20 1H21 2H21 1H22 Total income margin FUM-based income margin Fidante Partne
Slide 20: Bank
Bank Extending customer reach and diversifying product offering Profit and loss 1H22 Net interest income $1m Based on five months since completion Expenses ($4m) Investing to support future growth EBIT (ex. significant items) ($3m) Break-even expected to take longer than initially expected Impairmen
Slide 21: Capital management
Capital management Strongly capitalised Dividend up 21% to 11.5cps (fully franked) Strongly Additional financial Dividend (cps) capitalised flexibility Dividend payout ratio (%) 14.00 2 70% Dividend payout ratio 47% Challenger Group S&P credit rating (target 45% to 50%) 65% capital position Challeng
Slide 22: Sensitivity to markets and economic factors
Sensitivity to markets and economic factors Well positioned Life Funds Challenger Management Group Interest rates Diversified model ROE target Policyholder funds – hedged RBA cash rate + 12% margin Shareholder funds – unhedged Broad range of managers Pathway to higher ROE Inflation Diversified asset
Slide 23: Strategy and financial outlook
Strategy and financial outlook Nick Hamilton Managing Director & Chief Executive Officer
Slide 24: Challenger
Challenger Purpose supported by three complementary businesses Purpose to provide customers with financial security for a better retirement Life Funds Management Bank One of Australia’s largest managers 2 No. 1 Australian retirement buisness1 Strategy to develop retirement bank 1H22 – 31 December 20
Slide 25: Market Leading Team
Market Leading Team Focused on delivering for customers, employees, and shareholders Nick Hamilton Chris Plater Angela Murphy Michael Clarke Mark Ellis Managing Director and Deputy Chief Executive Officer Chief Executive Life Acting Chief Executive Chief Executive Bank Chief Executive Officer Funds
Slide 26: Priorities
Priorities Maintain momentum and deliver positive outcomes for stakeholders One Challenger to meet more needs of retirees Maintain business momentum Continue to drive product innovation across business Rebrand and develop retirement bank Strategic opportunities with Apollo, including joint venture 1
Slide 27: FY22 guidance and targets
FY22 guidance and targets On-track to meet full-year guidance and targets 1H22 PROGRESS Normalised net profit before tax guidance range of $430m to $480m1 $430m $480m $238m GUIDANCE Represents 52% of Mid-point of range ($455m) mid-point of (+15% increase on FY21) guidance range Mid-point of guidance
Slide 28: Highlights
Highlights Business momentum driving strong earnings growth Strong earnings growth Converting AUM growth into earnings growth On-track to achieve full-year guidance and targets Improving shareholder returns ROE increase and in-line with target Dividend increase from earnings growth Significant busin
Slide 29: Appendix
Appendix Additional background information
Slide 30: Appendix
Appendix Providing our customers with financial security for a better retirement Challenger business overview 31-33 Life sales and AUM 50 Life asset allocation & portfolio overview 51-55 Superannuation system 34-38 Life normalised profit framework 56 Retirement phase overview 39-42 Life asset and li
Slide 31: Challenger business overview
Challenger business overview Corporate strategy 1H22 – 31 December 2021 31
Slide 32: Challenger overview
Challenger business overview Challenger overview Providing customers with financial security for a better retirement Challenger Limited (ASX:CGF) 1 Life Funds Management Bank Australia’s leading provider of Australia’s 3rd largest4 and one of the Bank to drive annuities and clear retirement leader f
Slide 33: Provide customers with financial security for a better retirement
Challenger business overview Provide customers with financial security for a better retirement Complementary businesses meeting the needs of retirees FUNDS High alpha across all capabilities MANAGEMENT Equities, alternatives, real assets, fixed income Term deposits and future product innovation oppo
Slide 34: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Market growth supported by Australian superannuation growth2,3 ($bn) • Mandatory and increasing contributions 10,000 • Earnings and contributions compounding 8,000 • Population growth and agein
Slide 35: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Projected superannuation assets2 ($bn) Pre-retirement (superannuation savings) phase 10,000 • Funds Management target market • Supported by mandated and increasing contributions 7,500 Post-reti
Slide 36: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Mandatory and increasing contributions – increasing from 10% to 12.0% 1 Superannuation Guarantee contribution rate1 1992 1997 2002 2015 2021 2022 2023 2024 2025 3.0% 6.0% 9.0% 9.5% 10.0% 10.5%
Slide 37: Australian superannuation system
Superannuation system Australian superannuation system High allocation to equities and low allocation to fixed income Australia has low fixed income and high equity allocations1 Fixed income allocation • Australia 28% 27% 31% 15% • OECD average 45% 6% 44% 27% 42% 23% 26% 9% 33% Equities allocation 5
Slide 38: Australian superannuation system
Superannuation system Australian superannuation system World class accumulation system with significant retirement savings World class Significant Not delivering retirees accumulation system retirement savings financial comfort 7 National Seniors Australia survey (January 2020) Contribution rate 1 i
Slide 39: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Combining products provides better outcomes for retirees Discretionary (wants) Funds Management Account Equities, fixed income Based and alternative asset Pension products (ABP) Life Essential Guaranteed Annuity and income stream guarantee
Slide 40: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Superannuation starting to reduce reliance on age pension • Average household wealth at retirement $680,000 1 Portion of retirees reliant on age pension2 (excluding family home) 30% • Age pension subject to assets and income tests 44% 44%
Slide 41: Overview of age pension system
Retirement phase overview Overview of age pension system Social safety net for those unable to support themselves • Qualification age 66.5 Maximum age Per fortnight Per annum (increasing to 67 ) 1 Single $967.50 $25,155 pension rates 2 Couple $1,458.60 $37,924 • Age pension based on lower outcome un
Slide 42: Government enhancing post-retirement phase
Retirement income regulatory reforms Government enhancing post-retirement phase New means test rules for lifetime income products commenced 1 July 2019 Pension assets test Pension income test Example - $100,000 lifetime income stream purchase price at age 65 Example - $100,000 lifetime income stream
Slide 43: Retirement income strategies – combined products
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection Case study Jenny and John • Homeowning couple • $600,000 of super (in addition to family home) • 67 years old • Approaching retirement • Target income $63,799
Slide 44: Retirement income strategies – combined products
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection Case study – Jenny and John Combined product 100% Account Based Pension (ABP) (70% Account Based Pension; 30% Lifetime Annuity) • Provides $63,799 p.a. until
Slide 45: Retirement income strategies – combined products
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection Combined product Combined product (70% Account Based Pension; 30% Lifetime Annuity) (70% Account Based Pension; 30% Lifetime Annuity) Income from combined pro
Slide 46: MS&AD strategic relationship
MS&AD MS Primary MS&AD strategic relationship Diversifying and increasing access to Japanese market Strategic relationship with MS&AD Group • Increases access to Japanese market through MS&AD • Opportunities for both Challenger and MS&AD 1 Japanese general insurer #1 market share • Broadens Challeng
Slide 47: MS Primary annuity relationship
MS&AD MS Primary MS Primary annuity relationship Diversifying and increasing access to Japanese market MS Primary • MS&AD subsidiary Product overview • leading provider of foreign currency life products Term annuities – A$ and US$ • extensive distribution footprint via bancassurance channel • Austra
Slide 48: Life product overview
Life product overview Life product overview Providing customers with guaranteed income Fixed term Long term Other (including lifetime) 36% of total book 41% of total book 23% of total book Provides regular guaranteed Provides income for life Institutional product providing payments for a fixed rate,
Slide 49: Challenger brand and Adviser ratings
Challenger brand and Adviser ratings Clear leader in retirement incomes Strong Challenger reputation for adviser support and quality of service Brand strength: Leaders in Retirement Income 1 Challenger ranked #1 2 100% 95% 95% • BDM Support (10th consecutive year) 93% 93% 92% 89% 90% 80% 85% • Techn
Slide 50: Life sales and AUM
Life sales and AUM Life Diversified distribution driving sales and AUM growth Total Life sales ($m) Life AUM ($m) 12% 5-year CAGR 9% 5-year CAGR 4,943 22,937 19,669 19,634 18,624 17,040 3,324 3,438 3,139 14,607 2,758 2,740 1H17 1H18 1H19 1H20 1H21 1H22 1H17 1H18 1H19 1H20 1H21 1H22 Annuity sales Oth
Slide 51: Asset allocation framework
Life asset allocation and portfolio overview Asset allocation framework Consistently applied with strong risk management • Fundamental principle – assets Risk management and liabilities cash flow matched Asset and • Strong governance framework liability • Managed by dedicated team • Risk management
Slide 52: Life investment portfolio
Life asset allocation and portfolio overview Life investment portfolio High quality portfolio providing reliable income Life investment portfolio1 Life investment portfolio – asset allocation General Insurance 100% Absolute Return Life Insurance Infrastructure 80% Low beta 60% Equity beta 5% Offshor
Slide 53: Fixed income portfolio
Life asset allocation and portfolio overview Fixed income portfolio Represents 74% of portfolio with 79% investment grade 1 Fixed income portfolio by asset class1 Fixed income portfolio by sector1 Fixed income portfolio by geography1 Non-IG Corporate Credit Other New Rest of 14% Liquids Infrastructu
Slide 54: Property portfolio
Life asset allocation and portfolio overview Property portfolio Represents 16% of portfolio Defensive property portfolio with a focus on long-term income streams Property portfolio1 Australian office 60%; industrial 6% Japanese retail • 11 office assets; 3 industrial assets 10% Other • Average cap r
Slide 55: Life investment portfolio
Life asset allocation and portfolio overview Life investment portfolio Equity and infrastructure 5% of portfolio; Alternatives 5% of portfolio Equity and infrastructure portfolio1 Alternatives portfolio1 Other United Kingdom 8% 9% Europe Australia 19% 27% 7% 14% 12% Europe 19% 17% $1.1bn $1.2bn Unit
Slide 56: Normalised profit framework
Life normalised profit framework Normalised profit framework Reflects underlying performance of Life business Investment Experience Cumulative Investment Experience (pre-tax) ($m) Asset and policyholder liability valuation 200 movements plus net new business strain - (200) (400) Asset and policy lia
Slide 57: Asset and liability matching
Life asset and liability matching Asset and liability matching Unwanted risks mitigated with assets and liabilities cash flow matched 1 Asset and liability cash flow matching ($m) • Assets deliver contracted cash flows to match liability flows 10,000 • Risk appetite seeks to minimise 8,000 duration
Slide 58: Funds Management
Funds Management sales and FUM Funds Management Strong FUM growth track record • Fidante Partners Funds Under Management (FUM) ($bn) 10% CAGR • growing multi-boutique platform 109.3 • located in Australia, UK, Japan and Singapore 91.2 20.8 82.8 • asset class diversification 73.4 75.0 19.4 20.2 17.4
Slide 59: Funds Management
Funds Management sales and FUM Funds Management $109bn FUM $4.7bn Property Laying foundations to support future growth $7.0bn Alternatives $43.0bn Equities Markets contribution FUM CAGR growth rates Fixed Income: +19% Equities +21% Alternatives (incl. Property) +6% Net flows contribution $54.6bn Fix
Slide 60: Funds Management – multiple brands and strategies
Funds Management managers Funds Management – multiple brands and strategies Scalable and diversified ~$109bn of FUM Equities $43.0bn1 Multiple brands & strategies Alternatives $11.8bn1 Fixed Income $54.6bn1 1H22 – 31 December 2021 1. Funds Under Management (FUM) as at 31 December 2021. 60
Slide 61: Fidante Partners boutique managers and partnerships
Funds Management managers Fidante Partners boutique managers and partnerships Diversified managers and investment strategies Partnership Partnership Boutique Asset class Boutique Asset class commenced commenced Aug 2010 Boutique – Australian and global equities Oct 2005 Boutique – Australian small c
Slide 62: Fidante Partners
Fidante Partners model & performance Fidante Partners Contemporary model with strong alignment of interests Administration services Distribution services • Investment operations • Asset consultant & research • Client operations Investment • Strategic positioning • Risk and compliance Management • Pr
Slide 63: Fidante Partners investment performance
Fidante Partners model & performance Fidante Partners investment performance Strong performance underpinning FUM growth 1 2 Fidante Partners percentage of funds 1st or 2nd quartile Fidante Partners performance relative to benchmark 11% Since 94% inception 8% 27% 24% 20% 5 Year 95% 22% 72% 3 years 97
Slide 64: Funds Management
Fidante Partners manager capacity Funds Management Growth supported by available capacity Manager capacity ($bn) Half yearly net flows vs peers1 ($bn) 40 10.0 35 8.0 30 6.0 25 20 4.0 15 2.0 10 0.0 5 -2.0 0 -4.0 Equity Fixed Income Alternatives -6.0 Managers Managers Managers -8.0 Available capacity
Slide 65: CIP Asset Management
CIP Asset Management CIP Asset Management Proven long-term investment track record and capability 1 • $21 billion of FUM • Investment manager for Challenger Life and third party institutions • Clients benefit from experience and market insights through breadth and scale of mandates Trusted partner A
Slide 66: Important note
Important note The material in this presentation is general background information about Challenger Limited group’s activities and is This document may contain certain ‘forward-looking statements’. The words ‘forecast’, ‘expect’, ‘guidance’, ‘intend’, current at the date of this presentation. It is