Slide 1: 1H19 financial results
1H19 financial results Resilient and well positioned for the future 12 February 2019 challenger @2
Slide 2: Overview
Overview Resilient and well positioned for the future 1H19 outcomes Operating environment Richard Howes – Managing Director and Chief Executive Officer Financial results Andrew Tobin – Chief Financial Officer Outlook Richard Howes – Managing Director and Chief Executive Officer 1H19 – 31 December 20
Slide 3: Highlights
Highlights Resilient and well positioned for the future 1H19 outcomes Earnings impacted by challenging market environment; strongly capitalised Expanding distribution relationships and products Operating environment insights Providing challenges and opportunities Challenger well positioned Market le
Slide 4: 1H19 outcomes
1H19 outcomes Earnings impacted by challenging market environment Strongly capitalised Group Assets Under Management ($bn) Normalised NPBT and NPAT 1 ($m) 275 270 78.4 Group AUM +2% 254 Normalised NPBT -2% 76.5 Life AUM +9% 208 197 200 Normalised NPAT -4% 64.7 Funds Management FUM +2% Earnings impac
Slide 5: 1H19 outcomes: Expanding distribution relationships and products
1H19 outcomes Expanding distribution relationships and products New annuity relationship with Hub24 & Netwealth – expected to go live 2H19 Launched annuities on BT Panorama platform Launched ActiveX Series – first product an active fixed income ETF New Fidante Partners boutique – FME Asset Managemen
Slide 6: Challenger brand maintains clear leadership in retirement incomes
1H19 outcomes Challenger brand maintains clear leadership in retirement incomes • Challenger brand 36 Recognised by advisers as a leader in retirement incomes 1 percentage points 100% above nearest peer • Strong Challenger 75% reputation with trust in quality of products 50% • Supports new 25% distr
Slide 7: Operating environment insights: Investment markets
Operating environment insights Investment markets Investment Impact for industry Impact for markets and customers Challenger • Increased market • Retiree asset allocations • Product offering continues volatility and uncertainty being challenged to be well positioned in this market • Relative value s
Slide 8: Operating environment insights: Industry evolution and disruption
Operating environment insights Industry evolution and disruption Industry Impact for Impact evolution and industry and for disruption customers Challenger • Industry evolution over • Significant disruption across • Customers and advisers trust many years (e.g. FOFA) financial advice market quality o
Slide 9: Operating environment insights: Public policy
Operating environment insights Public policy Public Impact for industry Impact for policy and customers Challenger • Retirement phase • Improving standard of living • Long term direction of public underdeveloped and risk profile in retirement policy evolution supports greater focus on retirement • L
Slide 10: Challenger well positioned
Challenger well positioned Market leader – long term fundamentals remain strong • Strong systemic tailwinds including super system growth and ageing demographics • Two complementary businesses both with leading market positions • Leading retirement incomes brand and recognised as industry thought le
Slide 11: Financial results
Financial results Andrew Tobin Chief Financial Officer
Slide 12: Group result
Group result Earnings impacted by lower equity distributions and performance fees Net income ($m) Expenses ($m) Net income -1% Expenses +1% 409 405 131 132 Life COE -2% – reflecting 126 Strong cost control across Group 382 lower equity distributions Continuing to invest for growth FM +4% – reflectin
Slide 13: Group result
Group result Earnings impacted by lower equity distributions and performance fees Normalised NPBT $270m (-2%) Normalised NPBT -2% Normalised NPAT -4% Statutory NPAT • Lower Life COE – impacted by lower absolute return fund distributions 3 • Higher FM income – higher average 275 (7) (1) 270 Investmen
Slide 14: Life result
Life result Earnings impacted by lower equity distributions Total Life sales ($bn) Life book growth ($m) Life sales -18% ($0.6bn) to $2.7bn Life book growth $584m Annuity sales $2.1bn – down $0.1bn 843 948 4.2% growth in total liabilities 3.3 2.8 2.7 • Domestic sales +$0.1bn (+4%) Annuity book growt
Slide 15: Life sales
Life sales Increasing domestic sales offset by lower Japan and institutional sales Life sales $2.7bn (-18% or -$0.6bn) Life sales ($m) 3,500 Annuity sales $2.1bn (-7% or -$0.1bn) • Domestic annuity sales $2.0bn +4% 3,000 • Term exc. MSP $1.5bn – up 3% (+$48m) 1 2,500 • Lifetime $0.4bn – up 5% (+$20m
Slide 16: Life book growth
Life book growth Q2 growth impacted by industry disruption 1H19 Life book growth $0.6bn Life book growth ($m) • 4.2% growth in total liabilities 1,000 948 843 1H19 Annuity book growth $0.5bn 800 • 4.2% growth in annuity liabilities 600 584 • Q1 $370m (3.2% growth in liabilities) 438 400 347 • Q2 $12
Slide 17: Life annuity and other book
Life annuity and other book Continuing shift to long-term annuities Book shifting to long-term annuities Life annuity and other liabilities ($m) • Long-term annuities1 account for 38% of 16,000 $14.5bn total book (or 45% of annuity book) – up 14,000 $13.0bn 15% from 21% four years ago 12,000 $11.4bn
Slide 18: Life margins
Life margins Impacted by lower equity distributions and lower property allocation 1H19 Life COE margin -26bps Life COE margin – 2H18 to 1H19 • Product margin -17 bps • lower asset yields -28 bps – including 3.83% 0.05% 0.06% 3.57% 0.02% – lower absolute return fund 0.82% (0.28%) (0.11%) distribution
Slide 19: Life investment portfolio
Life investment portfolio Asset allocation reducing capital intensity • Fixed income – 2% increase in Life investment portfolio investment grade to 77% of portfolio 100% 4% 3% 4% 4% 4% 8% 9% 10% 10% 11% • Property – $0.7bn of sales completed 80% 23% 22% 21% 21% 20% • REIT portfolio sold in August 60
Slide 20: Life Investment Experience
Life Investment Experience Asset experience consistent with market indices Fixed • Valuation loss $68m; normalised growth -$21m income • Credit spreads expanded by ~15 bps -$47m • 1H19 credit default experience -15 bps (5 year average -13 bps p.a.) Equities • Valuation loss $110m; normalised growth
Slide 21: CLC regulatory capital
CLC regulatory capital Strongly capitalised and toward upper end of target range Movement in CLCʼs excess regulatory capital ($m) Regulatory capital • Lower following FY18 Regulatory capital -$163m PCA +$125m final CLC dividend 28 88 • 1H19 CLC earnings impacted 1,342 204 (4) 1,388 1,392 by investme
Slide 22: CLC regulatory capital
CLC regulatory capital Capital intensity reducing • Capital intensity down 1.1% in 1 CLC capital intensity3 1H19 to 13.0% 16% • increased excess regulatory 15.2% 15% capital by ~$200m 14.1% 14% 13.7% 13.7% • Lower capital intensity reflects 13.0% • reduction in property allocation 13% • higher fixed
Slide 23: Funds Management result
Funds Management result Earnings growth impacted by lower performance fees Net flows($bn) Average FUM ($bn) 71.0 77.4 3.9 Net flows -$1.0bn 59.1 Funds Management +9% 3.2 Fidante Partners -$1.0bn Fidante Partners +8% 1 CIP +$0.1bn CIP +11% 1 1H17 1H18 1H19 1H17 1H18 1H19 (1.0) Challenger Investment P
Slide 24: Funds Management FUM
Funds Management FUM Impacted by lower equity markets Fidante Partners – 1H19 FUM and movement Challenger Investment Partners – 1H19 FUM and movement Fidante Partners Europe FUM unchanged Australian equities -$2.5bn 3rd party property FUM +$0.1bn • Net flows -$0.3bn • Net flows -$0.1bn • Net flows +
Slide 25: Dividend
Dividend Supported by strong capital position Dividend (cps) Dividend payout ratio1 20 60% 17.0 17.5 17.5 16.0 52.9% 14.5 50.4% 49.7% 49.1% 48.6% 50% 10 40% 0 30% 1H15 1H16 1H17 1H18 1H19 1H15 1H16 1H17 1H18 1H19 Unfranked dividend Normalised dividend payout ratio Franked dividend Normalised dividen
Slide 26: Outlook
Outlook Richard Howes Managing Director and Chief Executive Officer
Slide 27: Our vision and strategy
Our vision and strategy A clear plan for sustainable long-term growth 1H19 – 31 December 2018 27
Slide 28: Outlook: Progressing initiatives for sustainable growth
Outlook Progressing initiatives for sustainable growth 2H19 focus areas • New consumer brand campaign underway • targeting launch mid-2019 • Continue to build relationships and innovate • including launch on Netwealth and Hub24 • Actively manage Lifeʼs investment portfolio • including continued rewe
Slide 29: Outlook: Resilient business in challenging environment
Outlook Resilient business in challenging environment FY19 Normalised NPBT expectations reduced to $545m to $565m (from $591m to $613m), reflecting factors including: – 1H19 normalised NPBT and flow on into 2H19 (e.g. lower equity distributions and lower annuity book growth) – Life investment portfo
Slide 30: Highlights
Highlights Resilient and well positioned for the future 1H19 outcomes Earnings impacted by challenging market environment; strongly capitalised Expanding distribution relationships and products Operating environment insights Providing challenges and opportunities Challenger well positioned Market le
Slide 31: Appendix
Appendix Additional background information
Slide 32: Appendix contents
Appendix A clear plan for sustainable long-term growth Challenger business overview 33-34 Life sales and AUM 63 Superannuation system 35-38 Life asset allocation & portfolio overview 64-68 Retirement phase overview 39-43 Life normalised profit framework 69-70 Retirement income regulatory reforms 44-
Slide 33: Challenger business overview
Challenger business overview Our vision and strategy A clear plan for sustainable long-term growth 1H19 – 31 December 2018 33
Slide 34: Business overview
Challenger business overview Business overview Two core businesses benefiting from superannuation system growth Challenger Limited (ASX:CGF) Life Funds Management #1 market share in annuities1 One of Australiaʼs largest active fund managers2 Leading provider of annuities and guaranteed Fidante Partn
Slide 35: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Market growth supported by Australian superannuation growth4 ($bn) • Mandatory and increasing contributions 8,000 • Earnings compounding 6,000 • Population growth and ageing demographics 4,000
Slide 36: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Pre-retirement (super savings) phase Projected superannuation assets2 ($bn) • Funds Management target market 7,500 • Supported by mandated and increasing contributions 5,000 Post-retirement (su
Slide 37: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Mandatory and increasing contributions • Increasing from 9.5% 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 38: 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 5% 26% 6% 32% 13% • OECD average 44% 30% 39% 58% 26% 10% 13% 33% Equities allocation 4
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 Australians now have meaningful balances in retirement • Superannuation guarantee system 10 largest super funds – average retiree member balance2 not fully mature – established 26 years ago Unisuper 509k AustralianSuper 387k • Operating fo
Slide 41: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Superannuation starting to reduce reliance on age pension • Average household wealth at retirement $350k Portion of retirees reliant on age pension2 to $500k range (excluding family home) 1 30% • Age pension subject to assets and income te
Slide 42: Overview of age pension system
Retirement phase overview Overview of age pension system Social safety net for those unable to support themselves • Qualification age 65.5 Maximum age Per fortnight Per annum (increasing to 67) Single $916.30 $23,824 pension rates1 Couple $1,381.40 $35,916 • Age pension based on lower outcome under
Slide 43: Post-retirement phase of superannuation
Retirement phase overview Post-retirement phase of superannuation Growth market with structural drivers Super funds partnering with Life companies 700 Australians turning 65 every day Industry moving ahead of regulation Older and healthier 20-year cycle of retiring ʻBaby-Boomersʼ Market Natural mark
Slide 44: Government enhancing post-retirement phase
Retirement income regulatory reforms Government enhancing post-retirement phase Retirement Income Framework The retirement phase of the superannuation system is currently under-developed. There is limited availability and take-up of products that manage the risks people face in retirement, in partic
Slide 45: New retirement product rules introduced 1 July 2017
Retirement income regulatory reforms Government enhancing post-retirement phase New retirement product rules introduced 1 July 2017 • Enables new lifetime products, including Benefits of pooling Deferred Lifetime Annuities (DLAs) (illustrative DLA example with 15 year deferral period) 100% • DLAs ar
Slide 46: New means test rules for lifetime income products
Retirement income regulatory reforms Government enhancing post-retirement phase New means test rules for lifetime income products • Proposed new means test rules expected to commence on 1 July 2019 – subject to These new rules will provide passage by parliament industry with the confidence • existin
Slide 47: Proposed new means test rules for lifetime income products
Retirement income regulatory reforms Government enhancing post-retirement phase Proposed new means test rules for lifetime income products 1 Assets pension test Income pension test Example - $100,000 lifetime income stream purchase price at age 65 Example - $100,000 lifetime income stream paying $7,
Slide 48: CIPR-style strategies already being implemented
Retirement income strategies Government enhancing post-retirement phase CIPR-style strategies already being implemented • CIPR -style strategies already being 2,3 1 Comparing products – Actual ÷ Desired Income implemented by dealer groups and super funds Partial Annuitisation • Retirement income mod
Slide 49: 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 • $500,000 of super (in addition to family home) • 65 years old • Approaching retirement • Target income $58,000
Slide 50: Case study – Jenny and John
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection Case study – Jenny and John 100% Account Based Pension (ABP) Combined product (70% Account Based Pension; 30% Lifetime Annuity) Income Income Age Spouse1 Age
Slide 51: Combined product income enhancement
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection Combined product (70% Account Based Pension; 30% Lifetime Annuity) Income Income from combined product enhanced through 1. mortality credits 2. interaction wi
Slide 52: Distribution
Challenger distribution Distribution Competitive advantage driving long-term growth Influencing Annuities on platform and market Research Technology retirement calculators improving practice retirement outcomes Retirement Adviser Product Meeting goals education and practice support innovation and ma
Slide 53: Distribution – New relationships
Challenger distribution Distribution – New relationships Industry moving ahead of regulation and combining products 2016 2017 2018 / 2019 ClearView Wealth Solutions Challenger annuities available Australiaʼs largest retail platform offering on AMP platforms platform offering Challenger annuities Cha
Slide 54: Distribution – New relationships
Challenger distribution Distribution – New relationships Platforms broadening access to Challenger annuities Platform relationships Platform relationships Provides access to ~1/3rd of super industry FUM1,2 Provides access to ~70% of financial advisers3,4 6% 2% 6% 26% 32% 31% Australian 7% Australian
Slide 55: Colonial First State (CFS) annuity relationship
Challenger distribution Colonial First State (CFS) annuity relationship Annuities on platform case study1 Ernst & Young stochastic model 2 Comparing products – Actual ÷ Desired Income 1,2 • To determine better outcomes for clients • combining lifetime annuity with account-based pension often provide
Slide 56: AMP annuity relationship
Challenger distribution AMP annuity relationship Annuities on platform case study • Annuities available via AMPʼs adviser portal • Supported by Challenger retirement tools and calculators AMP annuities on platform Since launch (September 2017) • ~50% of sales Lifetime annuities 1 • ~35% of writers n
Slide 57: What retirees want
Challenger distribution What retirees want Income that lasts a lifetime − a key CIPR objective 1 National Seniors Social Survey 2018 2 Retirement planning and investments are a major consideration for Australians over 50. The impact of the Global Financial Crisis (GFC) still lingers. Retirees are lo
Slide 58: MS&AD strategic relationship
MS&AD and MS Primary relationship MS&AD strategic relationship Broadening relationship and funding future growth Strategic relationship with MS&AD Group • Increases access to Japanese market through MS&AD ~A$27bn market cap Total assets ~A$280bn 41,733 employees 5 business domains • Opportunities fo
Slide 59: MS Primary annuity relationship
MS&AD and MS Primary relationship MS Primary annuity relationship Partnering with leading provider of AUD annuities in Japan MS Primary Product overview • MS&AD subsidiary 20 year term annuity • leading provider of foreign currency life products • Australian dollar single premium product • extensive
Slide 60: Life product overview
Life product overview Life product overview Providing customers with guaranteed income Fixed term Lifetime Other (long term annuities) 47% of total book 38% of total book 15% of total book Provides regular guaranteed Provides guaranteed regular Institutional product providing payments for a fixed ra
Slide 61: Brand strength
Challenger brand and adviser ratings Brand strength Strong customer and adviser brand Brand Strength1,2,3 2011 100% ʻReal Storiesʼ 95% 93% 95% 89% 80% 85% 60% 66% 62% 55% 53% 40% 20% 2013 ʻOn 13% Paperʼ 2011 2013 2015 2017 2018 Customers Advisers 2016 ʻTotal brand ʻLeaders in ʻLifestyle awarenessʼ r
Slide 62: Clear leader in retirement incomes
Challenger brand and adviser ratings Clear leader in retirement incomes Challenger rated #1 in overall adviser satisfaction Challenger adviser satisfaction1 Wealth Insights net promoter score2 Challenger +54% 10.0 8.0 6.0 +ve net promotor score Peers include 4.0 Australiaʼs top 20 - ve net promotor
Slide 63: Life sales and AUM
Life sales and AUM Life Sales & AUM benefiting from diversity of products and expanded distribution Total Life sales ($m) Life AUM ($m) 9% CAGR over 5 years 9% CAGR over 5 years Annuity sales ($m) 18,624 6% CAGR over 5 years 17,040 1,035 14,607 562 600 13,147 12,393 2,290 549 2,196 2,141 410 1,575 1
Slide 64: Asset allocation framework
Life asset allocation and portfolio overview Asset allocation framework Consistently applied with strong risk management Asset and Liability matching Risk management • Fundamental principle – assets Asset and • Strong governance framework and liabilities cash flow matched liability • Risk management
Slide 65: 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 Listed 100% Alternatives infrastructure Absolute return funds Unlisted 80% infrastructure Low beta Investmen
Slide 66: Life investment portfolio – Fixed income
Life asset allocation and portfolio overview Life investment portfolio Fixed income – 65% of portfolio Fixed income portfolio1 Fixed income portfolio by industry1 Non-IG Liquids Corporate Credit 13% Government 100% 14% Banks, Financials & Insurance 88% 23% Residential Property 90% Non-IG Asset Backe
Slide 67: Life investment portfolio – Property
Life asset allocation and portfolio overview Life investment portfolio Property – 20% of portfolio Property portfolio1 Lifeʼs property portfolio Japanese retail 8% Other offshore 1% • 49% of tenants investment grade Australian other • Australian Government is a major tenant 4% • representing ~30% of
Slide 68: Life investment portfolio – Equities and infrastructure
Life asset allocation and portfolio overview Life investment portfolio Equities and other & infrastructure – 15% of portfolio Equity portfolio1 Infrastructure portfolio1 Domestic beta Unlisted other Offshore alternatives 12% 3% 13% Offshore beta 4% 13% 7% Domestic low Listed core beta 5% Unlisted lo
Slide 69: Normalised profit framework
Life normalised profit framework Normalised profit framework Reflects underlying performance of Life business Investment Experience Cumulative Investment Experience (pre-tax) ($m) Asset and policyholder liability valuation 200 movements plus net new business strain 0 (200) (400) Asset and policy lia
Slide 70: Normalised profit framework – credit default loss history
Life normalised profit framework Normalised profit framework Fixed income credit default loss history • Normalised growth assumptions Credit default loss history (bps) includes -35 bps for fixed income 10 5 • Represents an allowance for credit 0 default losses -5 • 1H19 credit default losses -10 rec
Slide 71: Asset and liability matching
Life asset and liability matching Asset and liability matching Unwanted risks mitigated with assets and liabilities cash flow matched Asset and liability cash flow matching ($m) – December 2018 • Assets deliver contracted cash flows to match contracted liabilities 7,000 • Risk appetite seeks to mini
Slide 72: Funds Management
Funds Management sales and FUM Funds Management Strong FUM growth track record • Fidante Partners Funds Under Management (FUM) ($bn) 1 8% CAGR over 5 years • 17 boutique brands • located in Australia, UK and US 18.7 17.4 • asset class diversification 15.2 56.0 56.3 • replicating model in Europe 12.7
Slide 73: Fidante Partners – expanding capability
Funds Management sales and FUM Fidante Partners – expanding capability Adding new managers, strategies and building geographic footprint Fidante Partners FUM growth ($bn) 60 Boutiques formed pre-Dec 2010 50 1 boutique sale 40 30 20 10 0 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14
Slide 74: FM – multiple brands and strategies
Funds Management mangers FM – multiple brands and strategies Scalable and diversified ~$75bn of FUM Equities $23.8bn1 Multiple brands & strategies Alternatives $14.0bn1 Fixed Income $37.2bn1 1H19 – 31 December 2018 1. Funds Under Management (FUM) as at 31 December 2018. 74
Slide 75: Fidante Partners boutique managers
Funds Management mangers Fidante Partners boutique managers Diversified managers and investment strategies Partnership Partnership Boutique Asset class Boutique Asset class commenced commenced Aug 2010 Australian equities Mar 2018 Event-driven credit specialist Nov 2008 Australian fixed income Mar 2
Slide 76: Fidante Partners
Fidante Partners model & performance Fidante Partners Contemporary model with strong alignment of interests Administration services Distribution services • Investment operations • Asset consultant & research • Client operations Investment • Strategic positioning • Risk and compliance Management • Pr
Slide 77: Fidante Partners performance advantage
Fidante Partners model & performance Fidante Partners performance advantage Model supports superior performance • Outperformance across all periods Outperformance of Australian boutique managers 1 2% • Boutiques: • enjoy investment autonomy • are high conviction investors 1% • take more active expos
Slide 78: Funds Management investment performance
Fidante Partners model & performance Funds Management investment performance Strong performance underpinning superior net flows 1 2 Fidante Partners percentage of funds 1st or 2nd quartile Funds Management performance relative to benchmark 100% 11% 5 years 92% 80% 29% 33% 11% 60% 35% 3 years 79% 86%
Slide 79: Funds Management
Fidante Partners manger capacity Funds Management Growth supported by available capacity and superior flows Manager capacity ($bn) Quarterly net flows vs peers1 ($bn) 30 7.0 25 Fidante Partners 6.0 Peer average 20 5.0 15 4.0 3.0 10 2.0 5 1.0 0 0.0 Equity Fixed Alternatives -1.0 Income Managers Manag
Slide 80: Challenger Investment Partners (CIP)
Challenger Investment Partners model Challenger Investment Partners (CIP) Proven long-term investment track record and capability 1 • $19 billion of FUM • Investment manager for Challenger Life and 3rd party institutions • Clients benefit from experience and market insights through breadth and scale
Slide 81: Important note
Important note The material in this presentation is general background information about Challenger Limited activities and is current This document may contain certain ʻforward-looking statementsʼ. The words ʻforecastʼ, ʻexpectʼ, ʻguidanceʼ, ʻintendʼ, at the date of this presentation. It is informat