Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — H1 2005 Earnings Presentation
51 slides from Challenger's earnings presentation, Feb 28, 2005
Slide 1: o ei iit tlh,
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Slide 2: Half-year results to 31 December 2004
€2 challenger Financial Services Group Challenger Financial Services Group Limited Half-year results to 31 December 2004 Michael Tilley, CEO Tim Foster, CFO 28 February 2005
Slide 3: Sound business performance reinforced by margin improvements
€2 challenger Financial Services Group is “> Sound business performance reinforced by margin improvements (up from 15% to 32%) due to cost management and changes in business mix > Reduced gearing - debt down by $985 million » Historic cost (modified) profit before tax, goodwill, and interest up more
Slide 4: Summary financial
€2 challenger Financial Services Group Summary financial months to 31 December 2004 Profit before interest, tax and goodwill amortisation: ® Statutory “MoS” basis 113 69 ® Historic cost basis 81 26 Profit after tax before goodwill: e Statutory “MoS” basis 73 42 e Historic cost basis 50 il Profit/(lo
Slide 5: Business overview
€2 challenger Financial Services Group . Business overview 6 _ Financial results 10 Challenger Life 14 Challenger Wholesale Finance 16 Challenger Wealth Management 17 Summary 24
Slide 6: Common technology
common technology Challenger Life Challenger Wholesale Finance Challenger Wealth Management Risk, Credit, Distribution, Compliance Marketing, Communications, Human Resources, Administration, Finance common technology oS challenger Financial Services AS
Slide 7: Challenger Financial Services Group
€2 challenger Financial Services Group Challenger Financial Services Group Mike Tilley Chief Executive Officer Finance, Legal & Robert Woods Compliance Chief Executive Tim Foster scene Chief Financial Officer Challenger Life co Capital, Risk a | Strateg i Challenger : Dominic Sigvens Wholesale Finan
Slide 8: Historic cost profit before tax up 211%
Historic cost profit before tax up 211% Debt reduced by $985m - to 42% Margins increase from 15% to 32% 19 Sale of underperforming properties Growth in mortgage book on plan despite weaker market conditions Integration of AP and Garrisons on track & Financial Planning in profit Implementation of inf
Slide 9: Key events in the half
€2 challenger Financial Services Group Challenger settles acquisition of Associated Planners for $91m Purchase of Wales & West Gas Distribution Network for $85m Awarded S&P Smaller Companies Fund of 2004 Interstar launches largest net interest bond margin issue _Interstar launches 5% successful RMBS
Slide 10: Profit pre-tax & corporate charges
10 €2 challenger Financial Services Group Profit pre-tax & corporate charges 113 81 Corporate charges Interest (9) (9) Goodwill (9) (9) Other (2) (2) Income tax expense (29) (20)
Slide 11: Profit by business
ii & challenger Financial Services Group Challenger Life 56 Challenger Wholesale Finance 26 13 Challenger Wealth Management Non-core businesses / assets (20) Corporate charges
Slide 12: Revenue and expenses
Revenue 222 Expenses (188) EBIDA Depreciation & amortisation (24) Net interest (3) EBITDA margin 32% 15% 12 Millions 500 400 &3 challenger t& lo: ‘account (Historic cost) cember 2004 Dec-04 Dec-03 Jun-04 —e— Revenue %--~ Expenses —4&— Depreciation and Amortisation
Slide 13: Funds under management and administration
13 "challenger administration Net Life assets backing annuity 3,011 2,351 ° a 128% obligations! Wholesale Finance? 17,547 14,738 719% Investment FUM? 6,964 5,496 427% Funds under administration* 3,263 1,603 7104% 29% 1Total annuity investment assets including cash at Dec 2004:$396 and Dec 2003:$265m
Slide 14: Margins emerging
€2 challenger Financial Services Group Margins emerging: « Planned profit margins released « Net experience items « Return from rent less interest used to repay annuitant principal « Earnings on excess assets aeel Profit on sale of properties Market related movements net of associated movement in po
Slide 15: Challenger Life earnings
€2 challenger Financial Services Group fe 5-6 months to 31 December 2004 Challenger en vcment in profits Net rental income (less debt interest) 28 42 Investment income 72 44 Profit on disposal of assets 36 Annuitant interest 54 47 Expenses 26 24
Slide 16: Challenger Wholesale Finance
€2 challenger Financial Services Group sale Finance s to 31 December 2004 Challenger W. iho Commercial Lending 7 7 Interstar - Prime residential * 19 6 Interstar - Non-Conforming 2 - n/a 1 Acquired on 29 September 2003 2 Launched in April 2004 16
Slide 17: Challenger Wealth Management
€2 challenger Financial Services Group ct anagement months to 31 December 2004 Challenger Wea Moving towards profitability Funds Management and Administration (2) (3) Financial Planning 1 (3) 17
Slide 18: Corporate charges
€2 challenger Financial Services Group Corporate cheer months to ember 2004 Non-recurring (including CPHI management fee) . (7) Net corporate interest payable (9) (3) Long term incentive plan! (2) - Goodwill amortisation (9) (9) ! Accrual for cash component of LTIP 18
Slide 19: Balance sheet strengthened
19 Frere strengthen | €2 challenger Financial Services Group Cash Property investments Other Life investments Goodwil EMVONA Other assets ee mmm Debt Policy liabilities Other liabilities
Slide 20: Debt
€2 challenger Financial Services Group Within property trusts 813 1,689 Margin lending loans - 139 Group corporate debt facilities 265 235 Other 3 2 Net debt/Netdebt&SHF! | 42%1 64% iNet of shareholder cash of $168m (June 2004: $96m) 20
Slide 21: Cash flow
21 €2 challenger Financial Services Group Opening cash balance Operating 280 73 Investing activities 620 (400) Financing activities (962) (2) Prior period reclassification / . 20 FX changes
Slide 22: No dividend
€2 challenger Financial Services Group No dividend « Aim to commence payment of dividends from earnings for the year ending 30 June 2005 22
Slide 23: Key differences in accounting policies
€2 challenger Financial Services Group _ 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 23
Slide 24: Summary
€2 challenger Financial Services Group Summary > We will work on delivering the promise of the CGF - performance opportunity -»» The experience dividend has resulted in improved margins due to cost management and changes in the business mix > Combination of three factors working together in Wealth M
Slide 25: Appendix
€&2 challenger L Financial Services Group ZA Le LO Ly ae a Appendix
Slide 26: Challenger Life
€&2 challenger Financial Services Group ee ae 2 ey SSS ee ~ Challenger Life 28 February 2005 Z 3 oe ie.
Slide 27: Challenger Life overview
27 €2 challenger Financial Services Group ' Provides capital guaranteed income security to Australian retirees while also providing an acceptable return to shareholders Annuities are an efficient source of funds for the assets Challenger invests in and a beneficial investment for many retirees Chall
Slide 28: Annuities market pricing
_ ne - 2. challenger Annuities market => Panos _ Pricing’ of long term annuities a Se Weighted Average (AMP, AXA, Citicorp, CBA) 6.5 % Challenger Life 15 yr Swap Rate e 6.0 % 5.0 % 4.5 % 4.0 % 3.5% HHH HN NANDA ANA R ARN MMMM MMH NNAaANTseeTITaT TTI SSSSESSSSSSSSSSSSESSSSSSSSSSsssssssssesssssgs SOAP
Slide 29: Asset origination infrastructure
€2 challenger Financial Services Group Asset originatio nfra a Asset characteristics — Essential community services / highly regulated — Monopolistic characteristics / strategic competitive advantage — Sustainable and predictable cash flows — Diverse income sources Wales and West UK Gas Distribution
Slide 30: $1.8 billion diversified property portfolio
30 €2 challenger Financial Services Group u $1.8 billion diversified portfolio — significant value adding - opportunities Valued in accordance with annual independent valuations Want to maintain exposure to these income streams Continue to reduce the gearing of the portfolio - CMBS redeems in June A
Slide 31: Statutory balance sheet
€2 challenger Financial Services Group Statutory balance sheet — Assets Property 1,783 2,535 Equities 288 63 Fixed interest 1,342 1,181 Cash & receivables 420 546 Other assets 39 40 Liabilities | Policyholder 2,254 1,948 Senior debt 814 1,689 Other 264 245 Excess of statutory capital above 285 271 s
Slide 32: Net rental and investment income
€2 challenger Financial Services Group Net rental income (less debt interest) 28 42 Investment income 72 44 Profit on disposal of assets 36 - Total net re Annuitant interest 47 Expenses: Third party commissions - annuities 8 7 Challenger - annuities gathering costs flo a ~
Slide 33: Challenger Wholesale Finance
Se on €2 challenger Financial Services Group ee ae eo ee LLL Se Challenger Wholesale Finance 28 February 2005
Slide 34: Challenger Wholesale Finance
Challenger Who 34 | €2 challenger Financial Services Group le Finance ~ Provides wholesale finance capability for prime residential, non-conforming residential and commercial property Loans are originated through a network of 600 preferred lenders, financial planning organisations and mortgage broke
Slide 35: Interstar Non-Conforming & Commercial
€2 challenger Financial Services Group star Non-Conformin g & Commercial 20,000 New Settlements (LHS) 19,000 —@—Total Mortgage Portfolio (RHS) , On trend ve000 1,400 ity, ‘ New Settlements ($m) eo [=] oO Mortgage Portfolio $m Jul-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-
Slide 36: Wholesale Finance results
36 2 challenger Financial Services Group Revenue 101 6 iL 118 Operating Expenses 32 3 “ 35 before amortisation & interest Overhead 20 3 4 27 EBITA 49 - 7 56 Amortisation 30 - - 30 portfolio Closing mortgage 14,931 150 2,466 17,547 portfolio Average mortgage 14,294 88
Slide 37: Interstar revenue
& challenger Challenger Wholesale Finance nters ty revenue Revenue 101 40 % of average mortgage portfolio 1.40% 1.34% 1 Results for the 3 months since acquisition e Improved yield the result of: ~— Lower warehouse and securitisation funding costs — Improved product margins — Offset by higher compres
Slide 38: Operating expenses before amortisation
€2 challenger Financial Services Group Operating expenses before amortisation 32 13 % of average mortgage portfolio 0.44% 0.44% Overhead expenses 20 8 % of average mortgage portfolio 0.28% 0.28% 1 Results for the 3 months since acquisition e Improved expense ratio based on economies of scale and red
Slide 39: Amortisation expense
€2 challenger Financial Services Group Amortisation expense 30 12 % of average mortgage portfolio 0.42% 0.41% + Results for the 3 months since acquisition e Amortisation is based on effective yield e Tracking marginally higher with product mix changes 39
Slide 40: Howard Mortgage Trust revenue & overhead expenses
& challenger hallenger Wholesale Finance mm revenue & overhead expenses Revenue 1i il % of average mortgage portfolio 0.87% 1.03% Overhead expenses 4 4 % of average mortgage portfolio 0.29% 0.39% e Revenue fiat half on half on higher loan book based on: — Lower penalty interest with improved arrears
Slide 41: Operating cashflow
4i €2 challenger Financial Services Group EBIT 26 Add back: Depreciation & amortisation 30 12 Deferred origination & portfolio costs (36) (29) Timing differences accrued income and payables (4) (8) [Operating cashflo Strong cashflow result for the half as a result of : EBIT improvement on $15b loan
Slide 42: Wholesale Finance intangibles and contingent liability
42 €2 challenger Financial Services Group le Finance Interstar! 211 TMA acquisition and seed capital over 3 years 6 Share of CMV of HMT management rights 107 ! A contingent liability exists for deferred acquisition consideration payable of $18m as at 31 December 2004, calculated as: — A one off perf
Slide 43: Challenger Wealth Management
on We €2 challenger Financial Services Group oD ccsneooan, LO ae ia Challenger Wealth Management 28 February 2005
Slide 44: Wealth Management overview
44 €2 challenger Financial Services Group anagement Manufactures and administers investment products for both institutional and retail clients Combination of new systems, cost management and FUM growth kicking in Derives revenue from multiple sources ~ we aim for strength from diversity -- Asset man
Slide 45: Financial planning integration on plan
45 “ Integration on plan €2 challenger Financial Services Group anagement ~ Focused on corporatising Genesys Wealth Advisers so it becomes the dealer of choice for highly productive planners Focused on developing a widely recognised and trusted advice brand — no other industry player has achieved th
Slide 46: Funds under management
€2 challenger Financial Services Group anagement Funds under management for external investors Funds under administration 3,263 1,603 e Excluding HMT, FUM has grown 50% since 31 December 2003 46
Slide 47: Funds under management by asset class
2 2 challenger SR Financiat services Group anagement Australian equities funds/mandates 2,023 1,156] t 75% International equities 85 14 Direct property (via syndicates) 152 174 Mortgage funds 3,304 2,992 | ft 10% Fixed interest funds 666 335] t 99% Cash funds 32 35 Multi sector funds 415 469 Alterna
Slide 48: Financial planning integration
€2 challenger Financial Services Group Ma nagement As per plan, integration largely complete — Centralised head offices — Significant cost synergies realised -— Re-branding (to Genesys Wealth Advisers) underway — Moving under a single Dealers License * No adverse impact during integration period — N
Slide 49: Funds under administration
49 Challenger Balan oe ; €&2 challenger anagement ~ Financial Services Group Howard Mortgage Trust (approx. 1/3, other 2/3 with Wholesale Finance) 68 Synergy/Garrisons 39 Other
Slide 50: Net revenue and expenses
oe €2 challenger anagement - Financial Services Group Net revenue 29 27 Expenses (31) (30) *» Net revenue for December 2003 included $3m upfront fees from the launch of the Park Hyatt syndicate e« 21% increase in net revenue on a like for like basis 50
Slide 51: Financial planning revenue and expenses
Si €2 challenger Financial Services Group anagement Gross revenue 45 13 Net revenue 12 3 Expenses (11) (6) Associated Planners (AP) acquired on 13 August 2004 Financial Planning already profitable following efficient integration of AP and Garrisons which has quickly realised scale economies
Challenger Financial Services Group — H1 2005 Earnings Presentation on 6ix