Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — H1 2006 Earnings Presentation
49 slides from Challenger's earnings presentation, Feb 27, 2006
Slide 1: Add image for first slide
Add image for first slide 1
Slide 2: Half-year results to 31 December 2005
Challenger Financial Services Group Limited Half-year results to 31 December 2005 Michael Tilley, CEO Paul Rogan, CFO 27 February 2006
Slide 3: Highlights
Highlights Î Solid first half result – historic net profit after tax of $57m - 33% up on 31 Dec 2004 half Î Challenger Life Î Strong fee revenues from new business Î Challenger Wholesale Finance Î Residential book growth 26% above market Î Maintaining margins Î Challenger Wealth Management Î 26% gro
Slide 4: Summary financials
Summary financials 6 months to 31 December 2005 Restated 31 Dec 2005 31 Dec 2004 % $m $m Profit before interest and tax: • Statutory1 (before significant items2) 115 91 26 • Historic cost 95 70 36 Profit after tax: • Statutory pre significant items2 and minority 72 56 29 interests • Historic cost 57
Slide 5: Contents
Contents Business overview 3 Financial results 9 Challenger Life 13 Challenger Wholesale Finance 16 Challenger Wealth Management 17 Summary 23 Appendix 25 5
Slide 6: Challenger model
Challenger model Innovative, efficient and highly scaleable back office INTEGRATED SYSTEMS Challenger Challenger Challenger Life Wholesale Finance Wealth Management Structures & manages global Provides competitive lending Provides investment products assets generating long term products to branded a
Slide 7: Challenger Financial Services Group: Building for growth & leveraging skill
Challenger Financial Services Group Building for growth & leveraging skill Mike Tilley Chief Executive Officer Dominic Stevens Paul Rogan Lynn Anderson Derek Goh Jennifer EGM, Marketing & EGM, IT & Facilities Wheatley Deputy Managing Chief Financial Director Officer Communications Management EGM, HR
Slide 8: Excellence in execution
Excellence in execution July Launch of Challenger Infrastructure Fund (CIFCA) Sept Acquisition of Inexus (leading independent gas transporter in the UK) Sept Investment in 5 Oceans Asset Management Sept Fitch upgrades Challenger Life to A- Oct Alliance with Bank of Queensland Nov Senior management a
Slide 9: Summary of earnings
Summary of earnings 6 months to 31 December 2005 Consolidated Consolidated Statutory basis1 Historic cost basis $m $m Restated Restated % % Dec 2005 Dec 2004 Dec 2005 Dec 2004 Profit before tax, significant 116 95 22 96 74 30 items & corporate charges Significant items2 (19) - n/a - - - Corporate ch
Slide 10: Earnings by segment
Earnings by segment Historic cost - 6 months to 31 December 2005 Restated 31 Dec 2005 31 Dec 2004 % $m $m Challenger Life 60 60 - Challenger Wholesale Finance 36 27 33 Challenger Wealth Management 12 (3) n/a Operating profit before tax & 108 84 29 corporate charges Group costs (12) (10) 20 Corporate
Slide 11: Group profit & loss account
Group profit & loss account Historic cost - 6 months to 31 December 2005 Restated 31 Dec 31 Dec % 2005 2004 Mi l l i ons $m $m 500 Revenue 413 349 18 400 Expenses (276) (241) 15 EBITDA 137 108 27 300 Depreciation & (42) (38) 11 200 amortisation EBIT 95 70 36 100 Net interest (13) (9) 44 0 Net profit
Slide 12: Assets under management/administration
Assets under management/administration as at 31 December 2005 31 Dec 2005 31 Dec 2004 % $m $m Challenger Life Investments managed by the Life 3,017 3,011 - company1 Specialist funds (CIFCA, CWT) 676 273 148 Challenger Wholesale Finance Residential lending 17,190 15,081 14 Commercial lending 2,516 2,
Slide 13: Challenger Life
Challenger Life Statutory result - 6 months to 31 December 2005 Consolidated CIF Pre-CIF 31 Dec 2005 31 Dec 2005 Consolidation 31 Dec 2005 $m $m $m Investment income 119 16 103 Fee income 11 - 11 Market related movements 30 - 30 Inexus net profit / (loss) (8) (8) - Profit on sale of assets 3 - 3 Tot
Slide 14: Challenger Life: Consolidation of CIF
Challenger Life Consolidation of CIF • Challenger Life has consolidated Challenger Infrastructure Fund (CIF) – 53.9% held at 31 December 2005 • The impacts of the consolidation of CIF are: — Inability to recognise yield on investment in CIF for both statutory and historic cost earnings — Inability t
Slide 15: Challenger Life: Historic cost earnings
Challenger Life Historic cost earnings - 6 months to 31 December 2005 31 Dec 2005 31 Dec 2004 % $m $m Rental income (net of debt interest) 52 28 86 Investment income 47 71 (34) Transaction and management fees 25 1 Large Share of CIF profit/(loss) 5 - Large Profit on disposal of assets 17 36 (53) Tot
Slide 16: Challenger Wholesale Finance
Challenger Wholesale Finance Profit before tax - 6 months to 31 December 2005 Strong growth in residential lending earnings Restated 31 Dec 2005 31 Dec 2004 % $m $m Commercial Lending 7 7 - Residential Lending 29 20 45 Total 36 27 33 EBIT margin 0.35% 0.27% 30% 16
Slide 17: Challenger Wealth Management
Challenger Wealth Management Profit/(loss) before tax - 6 months to 31 December 2005 31 Dec 2005 31 Dec 2004 % $m $m Revenue 132 95 39 Operating expenses (68) (55) 24 Net revenue 64 40 60 Overhead expenses2 (52) (39) 33 PBT before acquisition restructure 12 1 - costs Acquisition restructure costs1 -
Slide 18: Corporate charges
Corporate charges 6 months to 31 December 2005 31 Dec 2005 31 Dec 2004 % $m $m Net corporate interest payable 1 (13) (9) 44 Long term incentive plan / other (1) (4) (75) Total corporate charges (14) (13) 8 1 Includes $4.5m interest on the equity bridge facility consolidated via CIF 18
Slide 19: Group balance sheet
Group balance sheet 6 months to 31 December 2005 Group Excluding CIF Restated 31 Dec 2005 31 Dec 2005 30 June 2005 $m $m $m Cash 533 466 496 Securitised assets 18,197 18,197 16,925 Property investments 1,779 1,779 1,683 Other Life investments 1,369 1,531 1,272 Goodwill 1,533 565 562 Other assets 930
Slide 20: Debt comprises
Debt comprises 6 months to 31 December 2005 31 Dec 2005 30 June 2005 $m $m Non-recourse to Challenger Group Within property trusts 349 349 Within CIF 1,090 - Wholesale Finance NIM facility 180 180 Recourse to Challenger Group Group corporate debt facilities 260 70 Other 2 2 Total debt 1,881 601 Reco
Slide 21: Summary of cash flow
Summary of cash flow 6 months to 31 December 2005 31 Dec 2005 31 Dec 2004 $m $m Opening cash balance 491 626 Operating (58) 280 Investing activities (1,355) 620 Financing activities 1,455 (962) Closing cash balance 533 564 21
Slide 22: IFRS
IFRS Key differences in accounting policies include: • Consolidation of special purpose entities • Share based payments • Goodwill/EMVONA • Insurance contracts • Recognition of derivative financial instruments and hedge accounting IFRS reconciliation available in Appendix 22
Slide 23: Summary
Summary Î Solid first half result – historic net profit after tax of $57m - 33% up on 31 Dec 2004 half Î Challenger Life Î Strong fee revenues from new business Î Challenger Wholesale Finance Î Residential book growth 26% above market Î Maintaining margins Î Challenger Wealth Management Î 26% growth
Slide 24: Questions/Discussion
€2 challenger Financial Services Group Questions/ Discussion
Slide 25: Appendix
ye gp challenger r Appendix
Slide 26: IFRS: Reconciliation of Statutory Profit
IFRS Reconciliation of Statutory Profit 30 June 2005 31 Dec 2004 $m $m Net profit after tax AGAAP 111 64 EMVONA - (10) LTIP amortisation (4) (2) No goodwill amortisation 23 9 Write-off restructure provisions (11) (4) Sale of loans (3) (2) Change in provision discount rate - (1) Tax effect 4 2 Net pr
Slide 27: IFRS: Reconciliation of Total Equity
IFRS Reconciliation of Total Equity 30 June 2005 $m Total equity AGAAP 1,301 EMVONA (25) No goodwill amortisation 23 Write-off restructure provisions (11) Sale of loans (3) No recognition of transaction costs 3 Change in provision discount rate (5) Share based payments (129) SPV cash flow hedge rese
Slide 28: Challenger Life
Challenger Life 27 February 2006
Slide 29: Challenger Life: Historic cost balance sheet
Challenger Life Historic cost balance sheet – as at 31 December 2005 Consolidated Pre- CIF Consolidated 31 Dec 2005 31 Dec 2005 30 Jun 2005 $m $m $m Cash 463 396 424 Property investments 1,570 1,570 1,504 Other Life investments 1,349 1,499 1,229 Goodwill/EMVONA 1,029 88 83 Other assets 507 42 74 Tot
Slide 30: Challenger Life: Annuity sales
Challenger Life Annuity sales $173m 100 90 80 70 Annuity sales $m 60 50 40 30 20 10 - Dec -03 Mar-04 Jun-04 Sep-04 Dec -04 Mar-05 Jun-05 Sep-05 Dec -05 Short Term Long Term On track for $300m sales - 2005/2006 Source: Plan for Life Actuaries & Researchers – Total Immediate annuity sales 30
Slide 31: Challenger Life: Annuities market share
Challenger Life Annuities market share – new sales of immediate annuities Total Annuities Market Share 25% 20% 15% 10% Mar-05 Jun-05 Sep-05 Dec-05 31
Slide 32: Annuities market
Annuities market Pricing of long term annuities 7.0 % 6.5 % 6.0 % 5.5 % 5.0 % 4.5 % 4.0 % 3.5 % Apr 04 Jun 04 Jul 04 Aug 04 Apr 05 Jun 05 Jul 05 Aug 05 Dec 03 Jan 04 Feb 04 Mar 04 May 04 Sep 04 Oct 04 Nov 04 Dec 04 Jan 05 Feb 05 Mar 05 May 05 Sep 05 Oct 05 Nov 05 Dec 05 Jan 06 Source: Plan for Life
Slide 33: Challenger Life: Asset strategy
Challenger Life Asset strategy • $3 billion Life company portfolio – with increasing allocations to infrastructure and fixed interest • Asset allocation optimises diversification, returns, and capital use • $1 billion in net assets of specialist fund portfolio via CIFCA & CWT listed entities by Sept
Slide 34: Capital management
Capital management Life company - excess assets above statutory capital requirements 600 500 487 450 400 Excess 324 Assets 300 over 271 Target 123 288 268 surplus 200 100 201 199 182 Target 53 Surplus 0 Jun-03 Jun-04 Dec-04 Jun-05 Dec-05 2.1b 2.6b 2.88b 2.9b 2.78b Total assets of CL2 34
Slide 35: Challenger Wholesale Finance
Challenger Wholesale Finance 27 February 2006
Slide 36: Challenger Wholesale Finance: PLAN Australia
Challenger Wholesale Finance PLAN Australia Servicing Distribution Market Share Servicing Customer Sales & Aggrega- Funding Manufacturing Broking back end Servicing Distribution tion Banks Ð ÐÐ PLAN Australia Mortgage Aggregators Mortgage Brokers Securitisation White Label Mortgage Ð Funders Manager
Slide 37: Strong residential loan book growth
Challenger Wholesale Finance Strong residential loan book growth 20,000 15,000 $m 10,000 5,000 Dec 03 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Residential 37
Slide 38: Wholesale Finance financials
Challenger Wholesale Finance Financials – 6 months to 31 December 2005 Residential Commercial Total 31 Dec 2005 31 Dec 2005 31 Dec 2005 $m $m $m Revenue 126 12 138 Operating Expenses before 37 1 38 amortisation & interest Overhead 23 4 27 EBITA 66 7 73 Amortisation 37 - 37 EBIT 29 7 36 Closing mortg
Slide 39: Wholesale Finance financials, prior period
Challenger Wholesale Finance Financials – 6 months to 31 December 20041 Residential Commercial Total 31 Dec 2004 31 Dec 2004 31 Dec 2004 $m $m $m Revenue 106 10 116 Operating Expenses before 35 - 35 amortisation & interest Overhead 21 3 24 EBITA 50 7 57 Amortisation 30 - 30 EBIT 20 7 27 Closing mort
Slide 40: Wholesale Finance: Residential
Challenger Wholesale Finance Residential - 6 months to 31 December 2005 Residential Residential 31 Dec 2005 31 Dec 2004 $m $m Revenue 126 106 Operating Expenses before amortisation & interest 37 35 Overhead 23 21 EBITA 66 50 Amortisation 37 30 EBIT 29 20 Closing mortgage portfolio 17,190 15,081 Aver
Slide 41: Wholesale Finance: Commercial
Challenger Wholesale Finance Commercial - 6 months to 31 December 2005 Commercial Commercial 31 Dec 2005 31 Dec 2004 $m $m Revenue 12 10 Operating Expenses before amortisation & interest 1 - Overhead 4 3 EBITA 7 7 Amortisation - - EBIT 7 7 Closing mortgage portfolio 2,516 2,446 Average mortgage port
Slide 42: Wholesale Finance: Residential net margin
Challenger Wholesale Finance Residential net margin 31 Dec 2005 31 Dec 2004 $m $m Revenue 126 106 % of average mortgage portfolio 1.53% 1.47% Operating expenses before amortisation 37 35 % of average mortgage portfolio 0.45% 0.49% Amortisation expense 37 30 % of average mortgage portfolio 0.45% 0.42
Slide 43: Challenger Wealth Management
Challenger Wealth Management 27 February 2006
Slide 44: Wealth Management: Breakdown of result
Challenger Wealth Management Breakdown of result 31 Dec 2005 31 Dec 2004 $m $m Funds Management net revenue 47 29 Financial Planning net revenue 17 11 Net revenue 64 40 Expenses (52) (39) Profit before tax and acquisition 12 1 restructure costs Acquisition restructure costs - (4) Profit before tax 1
Slide 45: Wealth Management: Financial performance
Challenger Wealth Management Financial performance 14 12 10 Pre-tax profit $m 8 6 12 4 2 -4 -1 0 1 2 -3 -2 -2 -4 -6 6 months to 6 months to 6 months to 6 months to 6 months to Dec03 Jun04 Dec04 Jun05 Dec05 1 Includes $4m in acquisition restructure costs (Associated Planners) 2 Includes $7m in acquis
Slide 46: Wealth Management: Growth in FUM
Challenger Wealth Management Growth in FUM 14,000 $11.9b 12,000 $10.6b 10,000 8,000 $6.9b $ $6.1b 6,000 $5.3b $3.9b 4,000 $3.2b 2,000 0 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Institutional Retail 46
Slide 47: FUM for external investors
Challenger Wealth Management FUM for external investors - to 31 December 2005 31 Dec 2005 30 June 2005 31 Dec 2004 $m $m $m Australian equities funds/mandates 3,526 2,794 2,023 Mortgage funds 3,468 3,282 3,304 Real Estate Securities funds/mandates 2,417 2,325 - FI & cash funds/mandates 1,631 1,086 6
Slide 48: Breakdown of FUM
Breakdown of FUM type of fund/mandate - 31 December 2005 International Revenue diversification Equities • 2% Real estate strategy contributing to securities 21% robustness of FUM incl. syndicates Australian Equities 30% • Australian equities FUM reflects multiple sources — Internal expertise — Multi
Slide 49: Movement in FUM in December 2005
Challenger Wealth Management Movement in FUM in 6 months to December 2005 Retail Funds Institutional Total $m $m $m 30 June 05 - Opening balance 7,510 3,069 10,579 Organic net inflows 599 389 988 Property Syndicate terminations (exit (300) - (300) strategy) Retained investment earnings (net 221 455
Challenger Financial Services Group — H1 2006 Earnings Presentation on 6ix