Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — Debt Investor Presentation (June 2006)
38 slides from Challenger's debt investor presentation, June 2006
Slide 1: Add image for first slide
Add image for first slide 1
Slide 2: Challenger Life No. 2 Ltd - Approved Subordinated Debt Issuance
Challenger Financial Services Group Challenger Life No. 2 Ltd - Approved Subordinated Debt Issuance Investor Presentation Dominic Stevens, Deputy Managing Director Richard Willis, General Manager - Capital, Risk & Treasury June 2006
Slide 3: Agenda
Agenda Executive summary 4 Challenger Financial Services Group 6 Challenger Life 9 Approved subordinated debt issuance 29 Appendix 34 3
Slide 4: Executive summary
Executive summary • A$100-150m approved subordinated debt raising for Challenger Life No. 2 Ltd (‘CL2’) — Issue rating ‘BBB+’ • Wholly owned subsidiary of Challenger Financial Services Group Ltd (‘CFSG’) - ASX 100 listed entity • CL2 regulated by APRA — Insurer Financial Strength Rating ‘A’ (S&P), ‘
Slide 5: Agenda
Agenda Executive summary 4 Challenger Financial Services Group 6 Challenger Life 9 Approved subordinated debt issuance 29 Appendix 34 5
Slide 6: Group organisational structure
Group organisational structure Challenger Financial Services Group Limited Challenger Life Challenger Challenger Wholesale Finance Wealth Management CL2 Asset Residential Commercial Funds Financial Management Mortgages Mortgages Management Planning 6
Slide 7: Group business lines
Group business lines INTEGRATED SYSTEMS Challenger Life Challenger Challenger Wholesale Finance Wealth Management Structures & manages global assets generating long term Provides competitive lending Provides investment products predictable income streams for products to branded distributors and faci
Slide 8: Agenda
Agenda Executive summary 4 Challenger Financial Services Group 6 Challenger Life 9 Approved subordinated debt issuance 29 Appendix 34 8
Slide 9: Life corporate structure
Life corporate structure Life business unit Challenger Life Holdings Pty Limited* Regulated Life Company Asset Management Challenger Life Challenger Challenger No.2 Limited* Listed Management Investments Services Limited* Limited* • Statutory Fund 2 writes fixed-rate fixed-term Shareholder Stat Fund
Slide 10: Life business unit
Life business unit • CL2 — Currently writes fixed-rate fixed-term annuities* — Liabilities are a fixed set of future cashflows — Does not write life risk insurance policies — Liabilities have no actuarial risk — Asset strategy is an important differentiation from competitors • Asset Management busin
Slide 11: Simple Life business model
Simple Life business model Support of Strong & Diversified Parent Challenger Group Strong Governance & Control Framework Challenger Life Capital Earnings Adequacy Adequacy Exacting Risk Management Culture Simple Simple Cashflow Liability Matching Asset Profile Strategy Liquidity Adequacy 11
Slide 12: Life asset strategy
Life asset strategy Overview CL2 Asset Allocation • CL2 has a deliberate approach to its asset strategy 100% 8 7 10 17 18 – Sourcing strong long-term cashflow 23 18 18 80% assets 0 9 12 30 – Cashflows closely match liability 60% 46 25 29 30 45 profile 30 40% – Diversification by asset class and 45 4
Slide 13: Life asset strategy: cashflow matching
Life asset strategy Overview (Cont.) Cash Flow Matching - Annuity Servicing Cashflow Annuities Time • CL2 uses the following assets to match its liability portfolio – Fixed income and cash – Contractual lease flows from property assets – Regulated or monopoly like infrastructure returns – Equity / o
Slide 14: Life asset strategy: fixed income, cash and hedges
Life asset strategy Fixed income, cash & hedges Cash Flow Matching - Annuity Servicing • Fixed income and cash – Target 30% of portfolio – High quality – Highly diverse cashflow -Investment Grade Cash and Bonds Deficit Surplus – Provides liquidity – Tends to be short term in nature Time Fixed Income
Slide 15: Life asset strategy: property
Life asset strategy Property Cash Flow Matching - Annuity Servicing • Contractual lease flows from property assets – Target 30% of portfolio – High quality flows – High proportion of Investment grade Cashflow -Investment Grade Cash and Bonds Deficit Surplus -Investment Grade property flows – Long te
Slide 16: Life asset strategy: infrastructure
Life asset strategy Infrastructure Cash Flow Matching - Annuity Servicing • Regulated or monopolistic infrastructure returns – Target 30% of portfolio • Targeted Challenger assets Cashflow -Investment Grade Cash and Bonds Deficit Surplus – Very similar in nature to property flows -Investment Grade p
Slide 17: Life asset strategy: equity
Life asset strategy Equity • Flows from equity style assets – Target up to 10% of portfolio – Opportunistic, and subject to rigorous analysis – Aligned with overall strategy – Diversification benefit – Leveraging off Asset Management team skills • Example – Challenger analysis of UK private vs. publ
Slide 18: Life asset strategy: cashflow matching profile
Life asset strategy Cashflow matching profile Cash Flow Matching - Annuity Servicing -Investment Grade Cash and Bonds Deficit Surplus -Investment Grade property flows -Regulated infrastructure asset flows -Non investment grade flows -Terminal property and infrastructure values Cashflow Time • This r
Slide 19: Life capital adequacy
Life capital adequacy • CL2 runs three tier approach to quantify capital needs – Statutory capital requirements plus a board mandated target surplus – Economic capital analysis (V.A.R. style analysis) – Rating Agency analysis (Rating Agency capital model) • Risk and Quantitative Analysis team conduc
Slide 20: Life company excess assets above statutory capital requirement
Life capital adequacy Life company - excess assets above statutory capital requirements 600 487 Excess above statutory capital 500 450 requirement ($m) 400 Excess Assets 324 over 300 Target 271 Surplus 123 288 268 200 Target 100 201 199 182 Surplus 53 APRA’s statutory capital requirement 0 Jun-03 Ju
Slide 21: Life capital adequacy
Life capital adequacy • CL2 has/is running high levels of capital • Why? – Management wants to maintain a conservative approach, especially whilst bedding down asset allocation changes – Dec 2005 – uncertainty around new capital standards – Did not materially effect CL2 – Significant asset opportuni
Slide 22: Life liquidity adequacy
Life liquidity adequacy • CL2 has a strong liquidity position – Limited volatility in its liquidity position in both short and medium term • Minimal calls, on cash, that are unknown – Significant economic disincentive to commute policies – Management has eliminated all LVR covenants on property rela
Slide 23: Life interest coverage
Life interest coverage • Challenger manages the CL2 business using historical cost accounting as it more closely reflects operating cash PBT and Interest Coverage earnings 95 94 Sub-Debt Coupon • Margin on Service accounting earnings (pre 2005) does not provide 62 this clarity • Post 2005, AIFRS pro
Slide 24: Growth in quality income streams
Growth in quality income streams Life annuities based income vs asset management based income 63% annualised compound growth Dec 03 – Dec 05 134% annualised compound growth Dec 03 – Dec 05 24
Slide 25: Life liability strategy
Life liability strategy • Strong market position — CL2 consistently the market leading annuities business (Plan for Life ‘Annuity Provider of the Year’ for 2005) — Distribution via 3rd party financial planners with strong CFSG technical and sales support — Complying and non-complying annuities • Eff
Slide 26: Life liability strategy
Life liability strategy • Post Sept 2007 — Expect continued demand for long term guaranteed fixed rate products – Defensive products have a place in an uncertain market environment – Recent market environment has favoured growth assets, this will inevitably change — CL2 is currently seeing and expec
Slide 27: CL2 consolidated accounts
CL2 consolidated accounts • Since change in Management in June 2003 — CL2 has been managed via historical cost accounting — This better reflects the performance of a balance sheet spread business — Particularly as there is no actuarial liability risk • Consolidated CL2 accounts are difficult to inte
Slide 28: Agenda
Agenda Executive summary 4 Challenger Financial Services Group 6 Challenger Life 9 Approved subordinated debt issuance 29 Appendix 34 28
Slide 29: Capital raising rationale
Capital raising rationale • To execute asset allocation strategy whilst remaining prudently capitalised • Number of identified opportunities in pipeline • To provide flexibility to take advantage of further opportunities as they arise • To improve balance sheet efficiency 29
Slide 30: Key terms
Key terms Issuer Challenger Life No.2 Limited (Statutory Fund No. 2) Security Unsecured, cumulative, deferred approved subordinated debt instruments Offer A$100-150m with capacity to take oversubscriptions Interest Fixed (semi annual) and/or floating (quarterly) Maturity 20 non-call 10 year Issue ra
Slide 31: Participants & timing
Participants & timing • Lead Managers — ANZ, Macquarie • Proposed timing — Road show 5 – 7 June — Investor feedback Week of 12th June — Book build & pricing Week of 19th June — Settlement Prior to 30 June 31
Slide 32: Contacts
Contacts Macquarie Angus Cameron Division Director – Debt Markets Division (+61 2) 8232 9992 ANZ ANZ Julie Hunter Mark Sherwood Head of Debt Capital Markets Senior Manager - Securities Origination (+61 2) 9227 1924 (+61 2) 9227 1080 Challenger Richard Willis General Manager - Capital, Risk & Treasur
Slide 33: Agenda
Agenda Executive summary 4 Challenger Financial Services Group 6 Challenger Life 9 Approved subordinated debt issuance 29 Appendix 34 33
Slide 34: CL2 financials: Balance Sheet - Historic Cost Accounts
CL2 financials Balance Sheet - Historic Cost Accounts CL2 - Consolidated CL2 - Consolidated CL2 - Consolidated CL2 - Consolidated (Including the (Excluding the As at As at consolidation of CIF*) consolidation of CIF*) 30 June 05 30 June 04 As at 31 Dec 05 As at 31 Dec 05 $m $m $m $m Assets Cash 449
Slide 35: CL2 financials: Balance Sheet - Statutory Accounts
CL2 financials Balance Sheet - Statutory Accounts CL2 - Parent CL2 - Consolidated CL2 - Parent CL2 - Consolidated As at As at As at As at 30 June 05 30 June 05 30 June 04 30 June 04 $m $m $m $m Assets Cash 212 417 466 596 Property investments 916 1,678 900 2,541 Debt securities 1,151 1,269 1,225 1,7
Slide 36: CL2 financials: Profit & Loss - Historic Cost Accounts
CL2 financials Profit & Loss - Historic Cost Accounts CL2 - Consolidated CL2 - Consolidated CL2 - Consolidated Half year ended Full year ended Full year ended 31 Dec 05 30 June 05 30 June 04 $m $m $m Rental income 49 55 84 Investment income 45 137 82 Transaction & management fees - - 2 Share of CIF*
Slide 37: CL2 financials: Profit & Loss - Statutory Accounts
CL2 financials Profit & Loss - Statutory Accounts CL2 - Parent CL2 - Consolidated CL2 - Parent CL2 - Consolidated Year ended Year ended Year ended Year ended 30 June 05 30 June 05 30 June 04 30 June 04 $m $m $m $m Investment income 191 339 170 383 Market value movements 158 157 137 144 Other income
Slide 38: Disclaimer
Disclaimer The material in this presentation is provided by Challenger Life No 2 Limited (ABN 44 072 486 938, AFSL 234 670) (‘CL2’) and is current at the date of this presentation, unless otherwise specified. It is not intended to be relied upon as advice to investors or potential investors and does
Challenger Financial Services Group — Debt Investor Presentation (June 2006) on 6ix