Slide 1: 1H17 financial results
1H17 financial results Driving growth by expanding product and distribution 14 February 2017
Slide 2: Overview
Overview Driving growth by expanding product and distribution Operating performance Brian Benari – Managing Director and Chief Executive Officer Financial results Andrew Tobin – Chief Financial Officer Strategy and outlook Brian Benari – Managing Director and Chief Executive Officer 1H17 – Half year
Slide 3: Highlights
Highlights Driving growth by expanding product and distribution Financial performance Group – Strong AUM growth supporting earnings and shareholder returns Life – Sales and book growth benefiting from new distribution initiatives Funds Management – Strong net flows and rebound in UK revenue Operatin
Slide 4: Group financial performance
Group financial performance Strong AUM growth supporting earnings & shareholder returns 1 Normalised NPAT ($m) and EPS (cps) Statutory profit after tax ($m) 30 0 35.0 40 234 32.6 Normalised NPAT up 8% 22 Statutory NPAT down 14% 28.8 202 197 30 20 0 182 Higher AUM (+12%) Includes asset and 155 offset
Slide 5: Life performance
Life performance Sales & book growth benefiting from new distribution initiatives Annuity sales ($m) Total Life book growth2 (%) 2,196 7.8% Up 34% to $2.2bn +7.8% or +$0.8bn Annuity sales growth Annuity net flows 4.9% benefiting from new ($0.4bn) – benefiting 1,641 1,575 distribution initiatives fro
Slide 6: Funds Management performance
Funds Management performance Strong net flows and rebound in UK revenue Net flows1 ($bn) FUM ($bn) 3.2 $3.2bn in 1H17 62.1 Up 14% to $62.1bn Strong net flows in both 55.2 54.7 FUM through $60bn – 2.1 Fidante Partners and benefiting from strong CIP2 net flows $2.3bn in Q217 Strong 1H17 close – 0.5 Fi
Slide 7: Retirement income opportunity
Retirement income opportunity Challenger strengthening market leadership RETIREMENT MARKET CAPTURING OPPORTUNITY EVOLVING OPPORTUNITY High Moving from wealth creation Clear retirement income growth market to retirement income market leader Ageing demographics – Regulation Product older and healthier
Slide 8: Regulation
Regulation Reforms well underway … setting overall industry direction Regulatory Retirement Income Objective of CIPRs reform Streams Review Superannuation (MyRetirement) Remove regulatory barriers Enshrine objective of To help guide restricting income stream superannuation in retirement income produ
Slide 9: Portfolio construction
Portfolio construction Retiree needs addressed through income layering Discretionary (wants) Account Retirement income based pension Guaranteed Essential income (needs) streams Age pension Active phase Passive phase Aged care (65-75) (+75) (+85) Retirement phases 1H17 – Half year 31 December 2016 9
Slide 10: Diversifying products
Diversifying products Broadening range to meet income layering needs Existing products New products Fidante - equities Fidante global equities (Avenir Capital) Fidante - alternatives Challenger ARGBS Fund 2 Fidante - infrastructure (partnering with Standard Life Investments) Account Fidante - fixed
Slide 11: Highly rated distribution
Highly rated distribution Attracting new relationships Brand Product Capability • Challenger – Retirement Broadening range • Entrenched leadership position to meet income ‒ largest Australian annuity provider 4 incomes leader layering needs ‒ rated by 96% of advisers 1 ‒ 7th largest Australian fund
Slide 12: New relationships strengthening leadership
New relationships strengthening leadership Expanding distribution and product footprint July 2016 2016 financial year JULY 2016 NOVEMBER 2016 NOVEMBER 2016 Challenger annuities Suncorp branded available on annuities backed by Annuity relationship with ClearView platform Challenger leading Japanese E
Slide 13: New relationships strengthening leadership
New relationships strengthening leadership Platforms broadening access to Challenger annuities New platform relationships New platform relationships Provides access to ~1/3rd 1,2 Provides access to ~2/3rd’s 3,4 of superannuation industry FUM of Australian financial advisers Q118 10% Q118 2% 24% 29%
Slide 14: MS Primary
MS Primary Partnering with leading provider of AUD annuities in Japan Demand for Japanese 2 annuities driven by • Large and established Japanese AUD annuities market ageing population (10,000 – growth driven by ageing population and low domestic people) Actual Forecast interest rates 14,000 45% – AU
Slide 15: MS Primary
MS Primary High quality sales and strong start • Challenger issuing 20 year AUD fixed rate annuity – to support reinsurance agreement with MS Primary – similar to Challenger’s existing fixed rate annuity product Product overview – commenced 1 November 2016 ► Single premium product ► Whole-of life pr
Slide 16: Focusing on long term business
Focusing on long term business Embedding value for shareholders • Strong growth in long term annuity business Long term business (Lifetime and MS Primary) sales mix – Lifetime and MS Primary 31% of 1H17 sales 2,500 35% – 1H17 new business tenor 8.7 years (1H16 5.6 years) 30% • Further opportunities
Slide 17: Highlights
Highlights Driving growth by expanding product and distribution Financial performance Group – Strong AUM growth supporting earnings and shareholder returns Life – Sales and book growth benefiting from new distribution initiatives Funds Management – Strong net flows and rebound in UK revenue Operatin
Slide 18: 1H17 Financial results
1H17 Financial results Andrew Tobin Chief Financial Officer 14 February 2017 1H17 – Half year 31 December 2016
Slide 19: Group financial performance
Group financial performance Strong growth track record and capturing scale benefits Financial performance ($m) 1H17 1H16 Change Movement in normalised NPAT ($m) Life 267 249 7% 18 1 Funds Management 21 22 (5%) (1) (2) Corporate (31) (32) 3% Normalised EBIT 256 239 7% 197 182 Interest expense (2) (2)
Slide 20: Life financial performance
Life financial performance Sales and net book growth driving earnings and ROE Financial performance ($m) 1H17 1H16 Change Movement in Life EBIT ($m) Normalised COE 316 293 8% 23 (5) Expenses (49) (44) 11% Life EBIT 267 249 7% 249 267 Investment experience (post-tax) 5 30 n/a 1H16 Higher Higher 1H17
Slide 21: Life margins
Life margins Product margin up 10 bps ... offset by lower return on capital 1H17 Life COE margin Life COE margin – 2H16 to 1H17 • Product cash margin (+10 bps) Product margin +10 bps – lower asset yields (-18 bps) 4.51% 0.15% – partially offset by lower annuity 0.14% 4.39% (0.08%) funding costs (+14
Slide 22: Life sales
Life sales Strong sales growth with shift to long term business Life annuity sales $2.2bn – up 34% Annuity sales and new business tenor • Term sales $1.6bn – up 16% 2,500 9 – MS Primary sales $125m (from 1 November 2016) 8 • Lifetime sales $0.6bn – up 142% 2,000 7 – CarePlus ~$90m (up 100% on 2H16)
Slide 23: Life net book growth
Life net book growth Maturities benefiting from reweight to long term business Life net book growth Annuity maturities as % of opening annuity liability $800m 20.0% $400m 17.5% 15.0% ($400m) 12.5% ($800m) 10.0% 1H14 2H14 1H15 2H15 1H16 2H16 1H17 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 F Annuity net
Slide 24: Life investment portfolio
Life investment portfolio High quality fixed income portfolio meeting 18% ROE target Fixed • Investment grade – 79% Fixed income credit quality income 100% ‒ down from 81% in 2H16 8% 6% 6% 13% 13% 15% $9.5bn ‒ liquids down from 21% in 2H16 to 12% 75% (FY16 $9.3bn) 50% • ‘B and below’ – 6% 81% 65% of
Slide 25: Life investment portfolio
Life investment portfolio Property portfolio continues to meet 18% ROE target Property • Property portfolio overview Life property portfolio overview $3.3bn ‒ Australian direct portfolio average (FY16 $3.2bn) cap rate 6.8% (FY16 7.0%) 7% 4% Australian office 3% ‒ occupancy rate 95% 5% Australian ret
Slide 26: Life investment experience
Life investment experience Positive asset offset by liability experience Asset investment experience (+$36m) Investment experience (pre-tax) +$8m Asset +$36m Liability -$28m • Fixed income +$70m – refer page 24 $80m $60m • Property +$16m – refer page 25 $40m • Equities and other -$9m $20m – higher d
Slide 27: Regulatory capital
Regulatory capital Strongly capitalised to support growth CLC excess capital • $0.8bn of excess regulatory capital Movement in CLC’s excess regulatory capital and PCA ratio ($m) with additional Group cash of $0.1bn CLC PCA ratio1 222 One-off impacts $183m • CET1 ratio 1.02x (170) • PCA ratio 1.39x,
Slide 28: Regulatory capital
Regulatory capital Further strengthening capital position 1 Intention to launch Challenger Capital Notes 2 New Additional Tier 1 capital • Issued by Challenger Limited and proceeds used ► Issued by Challenger Limited ► Proceeds used for CLC Additional Tier 1 capital to fund Additional Tier 1 capital
Slide 29: Funds Management financial performance
Funds Management financial performance Rebound in UK revenue offset by lower performance fees Financial performance ($m) 1H17 1H16 Change Movement in Funds Management net income ($m) Fidante Partners net income 41 41 - 3 2 (3) (3) CIP1 net income 25 26 (4%) Total net income 65 67 (1%) 67 65 Expenses
Slide 30: Funds Management
Funds Management Market leading net flows Movement in Fidante Partners FUM ($bn) Movement in CIP FUM ($bn) 47.0 1.3 0.2 - 15.2 50 43.0 2.3 15 13.7 0.9 0.9 14% 40 9% (0.1) 32% 34% 10 30 42% 52% 10% 20 5 68% 13% 66% 10 39% 44% 42% FY16 Net equity Net fixed Net Market 1H17 FY16 Life 3rd party Market 1H
Slide 31: Dividends
Dividends Increasing shareholder returns with dividend up 6% Dividend (cps) Dividend payout ratio (%) 17.0 16.0 10.2 50% 49% 49% 12.5 39% 9.5 34% 4.3 1H13 1H14 1H15 1H16 0 1H17 0 1H13 1H14 1H15 1H16 1H17 Franked dividend Normalised dividend payout ratio Unfranked dividend Normalised divided payout g
Slide 32: Strategy and outlook
Strategy and outlook Brian Benari Chief Executive Officer 14 February 2017 1H17 – Half year 31 December 2016
Slide 33: Strengthening market leadership
Strengthening market leadership Pipeline of growth opportunities Strategic partnership - white labelling New Fidante Challenger Partners’ boutiques annuities Mid Sep 2018 Jul 2017 Apr 2017 Expanding 2017 distribution Feb through new 2017 platform Nov Challenger 2016 initiatives Launching new annuiti
Slide 34: Outlook
Outlook On-track to achieve guidance Life COE guidance range (FY17 $620m - $640m) On-track with $316m in 1H17 1 2H17 Life COE margin expected to be stable on 1H17 Maintain 18% ROE target 1H17 achieved 18.7% Maintain normalised divided payout ratio 2 1H17 49% dividend payout ratio and guidance range
Slide 35: Highlights
Highlights Driving growth by expanding product and distribution Financial performance Group – Strong AUM growth supporting earnings and shareholder returns Life – Sales and book growth benefiting from new distribution initiatives Funds Management – Strong net flows and rebound in UK revenue Operatin
Slide 36: Appendix
Appendix additional background information 1H17 – Half year 31 December 2016
Slide 37: Vision and strategy
Vision and strategy To provide our customers with financial security for retirement Vision Strategy To provide Increase the Be recognised as Provide clients customers Australian the leader and with relevant with retirement partner of choice in investment strategies financial savings pool retirement
Slide 38: Business overview
Business overview Two core businesses benefiting from super system growth Challenger Limited (ASX:CGF) Life Funds Management 1 2 #1 market share in annuities Australia’s 7th largest fund manager Life Fidante Partners Leading provider of annuities and guaranteed Co-owned, separately branded, active f
Slide 39: Investor proposition
Investor proposition Market leader with competitive advantage TO PROVIDE OUR CUSTOMERS WITH FINANCIAL SECURITY FOR RETIREMENT FOCUSED TALENTED RECOGNISED MARKET STRATEGY PEOPLE CAPABILITY LEADER FM – boutique and Highly engaged staff with Recognised consumer FM growing twice speed 1 co-inves
Slide 40: Australian superannuation system overview
Australian superannuation system overview 1H17 – Half year 31 December 2016
Slide 41: Australia's superannuation system
Australia’s superannuation system Attractive market with long term structural growth drivers Superannuation system growth 3 Australian super system forecast ($bn) 10,000 • 4th largest global pension market1 • Australian super system growing twice 8,000 speed of global pension market1 – 10% CAGR over
Slide 42: Australia's superannuation system
Australia’s superannuation system Attractive market with long term structural growth drivers Contribution rate 1 • Increasing from 9.5% to 12% (of wages) • $104bn of super contributions in 2015 1 Superannuation Guarantee (SG) contribution rate 1992 1997 2002 2015 2025 3% 6% 9% 9.5% 12% Demographics
Slide 43: Australia's superannuation system
Australia’s superannuation system Attractive market with long term structural growth drivers Two phases of superannuation Projected superannuation assets 2017 – 2035 ($bn) 2 10,000 Accumulation phase Retirement phase Super ‘savings’ Super ‘spending’ Funds Management Life 8,000 Annual transfer to ret
Slide 44: Retirement phase market drivers
Retirement phase market drivers Market leader well positioned in high growth market Super funds partnering with Life companies Over 700 Australians turning 65 every day Industry moving ahead of regulation Older and 20-year cycle of retiring ‘Baby-Boomers’ Market healthier retirees Natural market gro
Slide 45: Australia's superannuation system
Australia’s superannuation system High allocation to equities … low allocation to fixed income 1 2, Australia has low fixed income and high equity allocations Australia’s usage of annuities is low Equities: 80% Australia – 51% 75% 70% OCED – 23% Fixed 50% income 30% (inc. cash): Australia – 13% OCED
Slide 46: Portfolio construction
Portfolio construction Retiree needs addressed through income layering Existing products New products Discretionary Fidante - equities Fidante global equities (Avenir Capital) (wants) Fidante - alternatives 2 Challenger ARGBS Fund Fidante - infrastructure (partnering with Standard Life Investments)
Slide 47: Government enhancing retirement phase
Government enhancing retirement phase Responding to retiree needs Government response 1. Defining objective of superannuation ‘The retirement phase of ‒ to provide retirement income superannuation is 2. New retirement income rules underdeveloped and does not ‒ enabling product innovation including m
Slide 48: Government enhancing retirement phase
Government enhancing retirement phase Reforms well underway … setting overall industry direction CIPR (MyRetirement) New retirement income rules • Reform to lift living z standards and choices for Objective of retirees superannuation • New framework to enable • To help guide retirement income decisi
Slide 49: Government enhancing retirement phase
Government enhancing retirement phase 1 CIPR (MyRetirement) overview Problems and objectives of proposed framework for CIPRs CIPRs to provide stream of broadly consistent real income for life 1H17 – Half year 31 December 2016 1. Extract from the discussion paper issued by the Australian Government o
Slide 50: Life – Distribution, Product and Marketing (DPM)
Life – Distribution, Product and Marketing (DPM) 1H17 – Half year 31 December 2016
Slide 51: Distribution
Distribution A competitive advantage driving long term growth Influencing Improving retirement market Research Technology outcomes - including practice annuities on platform and retirement calculators Retirement specific Meeting the goals and Adviser Product education and managing the risks of pract
Slide 52: New relationships
New relationships Industry moving ahead of regulation – using annuities to build CIPRs 2016 financial year 2016 financial year 2017 financial year ClearView Wealth Solutions platform offering Challenger annuities via Australia’s largest retail Challenger annuities investment and platform offering ad
Slide 53: New relationships strengthening leadership
New relationships strengthening leadership Platforms broadening access to Challenger annuities New platform relationships New platform relationships Provides access to ~1/3rd 1,2 Provides access to ~2/3rd’s 3,4 of super industry FUM of financial advisers Q118 10% Q118 2% 24% 29% 3% 33% 5% Australian
Slide 54: Platform relationships
Platform relationships Colonial First State (CFS) case study 1 • Based on Ernst & Young stochastic model • Annuities on platform - very positive adviser feedback – to determine product combinations delivering better – more likely to use annuities; simple to use client outcomes – easy origination pro
Slide 55: Life product overview
Life product overview Providing guaranteed income and peace of mind % of Product category total Key features book Fixed term annuities Available on leading platforms Guaranteed Annuity Guaranteed rate for a fixed term Guaranteed Income Plan Payment frequency options 59% Guaranteed Income Fund
Slide 56: Brand strength
Brand strength 1 2 Brand strengthening with consumers , leading with advisers Brand strength 2011 100% ‘Real Stories’ 80% 60% 40% 2013 20% ‘On Paper’ 2010 2011 2013 2016 2016 Consumers Advisers ‘Lifestyle ‘Prompted ‘Leaders in Expectancy’ brand retirement awareness’ income’ 1H17 – Half year 31 Decem
Slide 57: Advisor support
Advisor support Challenger No.1 in overall adviser satisfaction 1 Challenger annuities service analysis conducted by Wealth Insights Challenger annuities service analysis 8.5 conducted by Wealth Insights and compared to the 8.0 1 broader market 7.5 7.0 6.5 High profile industry survey 6.0 – over 850
Slide 58: Life - financials
Life - financials 1H17 – Half year 31 December 2016
Slide 59: Life
Life Sales and AUM benefiting from structural tailwinds Total Life sales ($m) – 17% CAGR over 5 years Life AUM ($bn) – 11% CAGR over 5 years 14.6 Other Life sales 2,758 13.1 Annuity sales 12.4 2,124 10.9 2,051 10.2 1,977 1,747 8.7 1,272 1H12 1H13 1H14 1H15 1H16 1H17 1H12 1H13 1H14 1H15 1H16 1H17 Ave
Slide 60: Life
Life Investment portfolio overview Equity and other (8%) Infrastructure (4%) ‒ 74% offshore equities ‒ 69% unlisted investments 4% ‒ 26% domestic equities 8% ‒ 31% listed investments ‒ 56% beta equities ‒ 50% domestic assets ‒ 44% alternatives and other ‒ 50% offshore assets Total 23% investment ass
Slide 61: Normalised profit framework
Normalised profit framework Reflects underlying performance of Life business Investment experience – cumulative since FY10 ($m) 250 Investment experience overview Asset and liability valuation movements are reported as investment experience. These 150 movements are generally non-cash, and by separat
Slide 62: Regulatory capital
Regulatory capital Strongly capitalised to support future growth CLC excess capital and PCA ratio Challenger Life Company (CLC) regulatory capital 1H17 • $0.8bn of excess regulatory capital pro ($m) 1H17 forma • Additional Group cash of $0.1bn Common Equity Tier 1 (CET1) regulatory capital 2,046 2,0
Slide 63: Funds Management
Funds Management 1H17 – Half year 31 December 2016
Slide 64: Funds Management
Funds Management Strong FUM growth track record FUM ($bn) – 18% CAGR over 5 years • Funds Management FUM 62 $62bn, up from $28bn 55 55 5 years ago ‒ annual growth 18% p.a. ‒ 1 45 market growth 9% p.a 35 • Fidante Partners ‒ 15 boutique brands 28 ‒ geographic and asset class diversification ‒ replica
Slide 65: Funds Management
Funds Management Growth supported by available capacity and superior flows Manager capacity ($bn) Quarterly net flows vs peers1 ($bn) 35 Available capacity 2.5 30 FUM 2.0 25 1.5 20 1.0 15 0.5 10 5 0.0 Jun-13 Sep-13 Dec-13 Mar-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 (
Slide 66: FM - multiple brands and strategies
FM - multiple brands and strategies 1 Scalable and diversified ~$62bn of FUM Equities A$20.8bn Multiple brands & strategies Challenger Investment Partners Alternatives A$11.2bn Fixed Income A$30.1bn 1H17 – Half year 31 December 2016 1. Funds Under Management (FUM) as at 31 December 2016. 66
Slide 67: FM - Fidante Partners
FM - Fidante Partners Contemporary model with strong alignment of interests Administration services Distribution services • Investment operations • Asset consultant & researcher • Client operations relationships Administration Distribution • Strategic positioning • Compliance (Fidante Partners (Fida
Slide 68: FM - Fidante Partners boutique managers
FM - Fidante Partners boutique managers Diversified managers and investment strategies Fidante Partners Fidante Partners Investment Investment Boutique Asset class Boutique Asset class date date Aug 2010 Australian equities May 2010 Australian equities (income focus) Nov 2008 Australian fixed income
Slide 69: FM - Challenger Investment Partners (CIP)
FM - Challenger Investment Partners (CIP) Proven long-term investment track record and capability 1 • $15 billion of FUM • Investment manager for Challenger Life and 3rd party institutions • Clients benefit from experience and market insights CIP gains through breadth and scale of mandates • Key rel
Slide 70: Important note
Important note The material in this presentation is general background information about Challenger Limited activities and is current at the date of this presentation. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as advice to inves