Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — FY2005 Earnings Presentation
57 slides from Challenger's earnings presentation, Aug 29, 2005
Slide 1: aye
aye & i = ie 7 OI pe oo
Slide 2: Full-year results to 30 June 2005
€2 challenger Financial Services Group Challenger Financial Services Group Limited Full-year results to 30 June 2005 Michael Tilley, CEO Tim Foster, CFO 29 August 2005
Slide 3: Full-year highlights
€2 challenger Financial Services Group oric cost net profit after tax and before goodwill up 100% to $94 million » Revenue up 36% > Historic cost EBIT up 107% to $122m > EBIT margin up from 11% to 17% - significant reduction in headcount, controllable costs grew 4% year on year > $1.5 billion reduct
Slide 4: Profit before interest, tax and goodwill amortisation
4 €2 challenger Financial Services Group Profit before interest, tax and goodwill amortisation: Statutory “MoS” basis 207 i160] 29 Historic cost basis 152 91 67 Profit after tax before goodwill: Statutory “MoS” basis 135 97} 39 Historic cost basis 94 47] 100 Profit/(loss) after tax: Statutory “MoS”
Slide 5: Business overview
€2 challenger Financial Services Group Business overview 6 Financial results 9 Challenger Life 13 Challenger Wholesale Finance 15 Challenger Wealth Management 16 Summary 27 Appendix 30
Slide 6: Financial intermediaries and their clients
€2 challenger Financial Services Group financial intermediaries & their clients
Slide 7: Strong growth across all business lines
€2 challenger Financial Services Group Strong growth across all business lines - RONA achieved in 2 divisions Net debt reduced by $1.5b to $601im 5 cent dividend declared Significant improvement in Residential loan book margin Profitable 12 months ahead of pian capital position grew 43% from 23 to 3
Slide 8: Key events of the year
<2 challenger Financial Services Group North of Engiand Gas Distribution Network acquired (5.8%) ~ $85m UK & US property sales settled ~ GBP287m and Challenger Infrastructure Fund (CIFCA) launched Funds under management increase 71% for the _ year (HSBC adds $3b in FUM) _ Residential loans under man
Slide 9: Summary
_ ae €2 challenger Financial Services Group Summary « fear Profit pre-tax & corporate charges 207 160] 29 152 91 67 Corporate charges Interest (17) (11) | 54 (17) (11)] 54 Goodwill (24) (20)! | 20 (24) (20)! | 20 Other (6) (12) | (50) (6) (12) | (50) Profit before tax | 160) Income tax expense (49)
Slide 10: Earnings by segment
€2 challenger Financial Services Group Ea rmings . by seg Challenger Life 155 131] 18 100 62] 61 challenger Wholesale 65 37| 76 65 37| 76 inance Challenger Wealth . . Management 6 (5) 6 (5) Group costs (19) (15) |] 27 (19) (15) | 27 corporate charges Non-core businesses / assets Corporate charges (4
Slide 11: Revenue, expenses and EBIT
€2 challeng er Financial Services AS Revenue Expenses _ Depreciation & amortisation EBIT Net interest Income tax 2004 2005 O Revenue HExpenses BDep & Amort. ii
Slide 12: Key business metrics and funds
‘€3challeng er Financial Services As gement/administration Net Life assets backing annuity ae 2,950 2,651] di obligations Wholesale Finance loans 18,471 16,229| 14 Investment FUM1!2 10,867 6,360] 71 Funds under administration? 1.742 1,668| 4 tration? | ' FUM acquired with HSBC $3b ? Includes Challen
Slide 13: Challenger Life statutory results
Statut fe hallenger L months to 30 June 2005 oS challenger Financial Services Group Margins emerging: « Planned profit margins released « Net experience iterns « Return from rent less interest used to repay annuitant principal « Earnings on excess assets Profit on sale of properties/assets Market re
Slide 14: Challenger Life results
<2 challenger Financial Services Group ae a Life Net rental income (less debt interest) 55 84) (34) Investment income 145 82 77 Profit on disposal of properties/assets Si 29 76 Fee income 8 2 300 Annuitant interest 107 95 13 Commissions 15 14 7 Expenses 37 26 42 Challenger Life returned 20.7% on RON
Slide 15: Challenger Wholesale Finance results
€2 challenger Financial Services Group Challenger Wholesale Finance 2 tax months to 30 June 2005 “Achieves RONA target in line with expectations Commercial Lending 15 15 - Residential Lending 50 22| 127 Challenger Wholesale Finance returned 20% on RONA of $324m i5
Slide 16: Challenger Wealth Management results
& challenger anagement ves profitability 12 months ahead of expectations Funds Management and Administration Financial Planning 16
Slide 17: Net corporate interest payable
| €2 challenger Financial Services Group Net corporate interest payable Long term incentive plan?/Other (6) (4) 50 Goodwill amortisation (24) (20) 20 Non-recurring management fee - (8) - Goodwill write-off - (280) - ! Accrual for cash component 17
Slide 18: Group balance sheet
Group. balance Continues to strengthen oS challenger Financial Services Group Cash 496 Property investments 1,678 2,535 Other Life investments 1,256 1,331 Goodwill / EMVONA 571 480 Other assets Total assets Debt Policy liabilities Other liabilities 18
Slide 19: Group debt
€2 challenger Financial Services Group Within property trusts 349 1,689 Margin lending loans - 139 Group corporate debt facilities 250 235 Other 2 3 t Excludes debt within property trusts and margin lending loans which is non recourse to the Group 19
Slide 20: Cash flow
. €2 challenger Financial Services Group Opening cash balance 626 660 Operating 244 163 Investing activities 1,113 (271) Financing activities (1,487) 52 Prior period reclassification/FX changes - 22 20
Slide 21: RONA targets
€2 challenger Financial Services Group RONA ta argets Challenger Life? 561 483 16 Challenger Wholesale Finance 360 324 11 Challenger Wealth Management 275 207 33 Target return of 18% on 2006 net assets » Life - 2006 « Wholesale Finance - 2006 « Wealth Management - 2007 iHistoric cost basis 21
Slide 22: Dividend and capital
€2 challenger Financial Services Group dend — 5 cent dividend declared — fully franked — After 2004/05 dividend, franking pool of $24m (tax effect) — Dividend re-investment plan initiated - no discount and not underwritten « $1.5 billion in debt reduction in 12 months » New core debt facility entere
Slide 23: Capital manager
Capital manager Exce solvency position Challenger Stat Fund 2 - Annuities 271 Jun-03 Jun-04 23 426 | €2 challenger Financial Services Group Excess Assets over Target Target Surplus
Slide 24: July 2004 opening balance sheet
_ €2 challenger Financial Services Group July 2004 opening balance sheet Reduction in shareholder equity Shareholder equity under AGAAP as at 30 June 2004 1085 LTIP loans and share capital treated as options (118) Internally generated EMVONA written off to retained earnings (25) In addition, consoli
Slide 25: Accounts relative to 2005
€2 challenger Financial Services Group 006 accounts relative to 2005 LTIP amortisation (4) No Goodwill amortisation 24 Investment and Insurance contracts: » Statutory accounting: - Annuity Liabilities ~ Fair Value compared to MoS - Deferred acquisition costs ~ commissions only, compared to broader c
Slide 26: Building on our scaleable model
€2 challenger Financial Services Group > Building on our scaleable model > Challenger Life - increased earnings from structuring, asset management and underwriting activities > Challenger Wholesale Finance ~ positioned for growth » Challenger Wealth Management - increased in-flows across product ran
Slide 27: Summary
€2 challenger Financial Services Group > trong performance across all three businesses -—— Challenger Wholesale Finance returns 20% RONA ~~ Challenger Life returns 20.7% RONA a year ahead of target date -— Challenger Wealth Management profitable 12 months ahead of target date » Productivity gains ac
Slide 28: Key dates
€2 challenger Financial Services Group 2005 16 September Educational briefing for analysts 21 October Dividend payment date 24 November Annual General Meeting 2006 27 February Half-year results to 31 December 2005 released 28
Slide 29: Questions/Discussion
MSS EES SG co cli ee €&2 challenger Financial Services Group Questions/Discussion sitll lll SES
Slide 30: Appendix
€&2 challenger Financial Services Group Vie ES ae i A ppen dix Pr CG ae
Slide 31: Challenger Life
oes a €&2 challenger Financial Services Group ne LG KMMAELA A) LE EO ly ee _ Challenger Life iF 29 August 2005 orn lll SES
Slide 32: Challenger Life delivers 20.7% RONA
32 €2 challenger Financial Services Group ~ Challenger Life delivers 20.7% RONA target exceeding 18% target 12 months ahead of schedule Established infrastructure capability, invested $430 million in infrastructure assets and launched the Challenger Infrastructure Fund (CIFCA) Significantly de-riske
Slide 33: Challenger Life balance sheet
| €2 challenger Financial Services Group hallenger Life Historic iE nce sheet - to 30 June 2005 Cash 424 583 Property investments 1,504 2,523 Other Life investments 1,229 1,340 Goodwill / EMVONA 83 84 Other assets 74 57 Toe eee ee Debt 331 1,783 Policy liabilities 2,230 2,050 Other liabilities 192 2
Slide 34: Challenger Life income and expenses
€2 challenger Financial Services Group Net rental income (less debt interest) 55 84 Investment income 145 82 Profit on disposal of assets 51 29 Fee income Overheads Annuitant interest Expenses: Third party commissions - annuities 15 14 26 34
Slide 35: Solvency position - Statutory Fund No.2
€2 challenger Financlat Services Group sO vency position — Statutory Fund No.2 + Net of external debt 35
Slide 36: Annuity sales - Historical
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Slide 37: Diverse portfolio of assets
37 Challenger Life Diverse portfolio of assets Portfolio is actively managed - aim to turnover every 6 years Investment team looks for opportunities to add value $430m invested in infrastructure in 12 months Targeted asset allocation by 12/06: -— Property 30% - Infrastructure 30% ~~ Fixed interest 3
Slide 38: Challenger Wholesale Finance
Ge ae oan ae ‘ Le as La eee a LLL As . ae oe Challenger Wholesale Finance 29 August 2005 asin lll SCE €2 challenger Financial Services Group Le Oe oe
Slide 39: Challenger Wholesale Finance highlights
39 €2 challenger Financial Services Group le Finance "First full year of Residential Lending (Prime, Non Conforming) and Commercial Lending (real estate, inventory finance) operating as one division Achieved 20% RONA exceeding 18% target for 2005 Residential loan book growth 38% above market Net mar
Slide 40: Wholesale Finance revenue and EBITA
40 €2 challenger Financial Services Group Revenue 244 Operating Expenses before amortisation & (71) (43) interest Overhead (47) (31) EBITA 126 75 Amortisation (61) (38) Closing mortgage portfolio 16,229 Average mortgage portfolio 14,957 - Segment EBIT up 76% year on year
Slide 41: Wholesale Finance revenue and EBITA by division
4i €2 challenger Financial Services Group Revenue 21 244 Operating Expenses before (71) - (71) amortisation & interest Overhead (41) (6) (47) EBITA iii 15 126 Amortisation (61) - (61) Closing mortgage portfolio Average mortgage portfolio
Slide 42: Wholesale Finance prior year results
€2 challenger Financial Services Group Challenger | Financia Revenue 127 22 149 Operating Expenses before (43) - (43) amortisation & interest Overhead (24) (7) (31) EBITA 60 15 75 Amortisation (38) - (38) Closing mortgage portfolio 13,822 2,407 16,229 Average mortgage portfolio 12,749 2,208 14,957 1
Slide 43: Wholesale Finance six months to June 2005
43 hallenger Wh ths to 30 June 2005 olesale Finance €2 challenger Financial Services Group 223 127 Revenue Operating Expenses before amortisation & interest (71) (43) Overhead (41) (24) EBITA 1il 60 Amortisation (61) (38) Closing mortgage portfolio 16,033 13,822 Average mortgage portfolio 14,940 12,
Slide 44: Wholesale Finance six months to 30 June 2005
€2 challenger Financial Services Group hallenger Wholesale Finance mm ths to 30 June 2005 Revenue 21 22 Operating Expenses before amortisation & interest - “ Overhead (6) (7) EBITA 15 15 Amortisation - ~ Closing mortgage portfolio 2,438 2,407 Average mortgage portfolio 2,410 2,208 44
Slide 45: Residential lending net margin
€2 challeng er Financial Services AS le Finance Cc hallenger Who! [ Reside | net Revenue 223 127 % of average mortgage portfolio 1.49% 1.33% Operating expenses before amortisation 71 43 % of average mortgage portfolio 0.47% 0.45% Amortisation expense 61 38 % of average mortgage portfolio 0.41% 0.40%
Slide 46: Overhead
€2 challenger Financial Services Group le Finance Overhead 41 24 % of average mortgage portfolio 0.27% 0.25% « 04/05 is first full period of CSFG infrastructure sharing e« Costs reduced in second half 46
Slide 47: Commercial lending revenue and overhead expenses
47 ee challenger ale Finance se halle nger r W hol — mm ] revenue & overhead expenses Revenue 21 22 % of average mortgage portfolio 0.87% 1.00% Overhead expenses 6 7 % of average mortgage portfolio 0.25% 0.32% « Revenue marginally down due to : - Lower penalty interest with improved arrears manageme
Slide 48: Operating cashflow
| €2 challenger Financial Services Group le Finance Challenger Whol EBIT 65 37 Add back: Depreciation & amortisation Deferred origination & portfolio costs Timing differences accrued income and payables | Operating cashflow before interest & ta « Portfolio reached critical mass during the 03/04 year
Slide 49: Mortgage book growth - Residential
Challenger Who __ Mortgage book growth - Residential 49 Total loan book ($m) 16% residential loan book growth 16,500 ale Finance &2 challenger Financial Services AS 16,000 - 15,500 - 15,000 + 14,500 - 14,000 - 13,500 - 13,000 - 12,500 - 12,000 - Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 in foo} t Cc © pas
Slide 50: Mortgage book growth - Commercial
va cA th = oneal Mortgag book growth 5% after sale of CMBS Total loan book ($m) Jun-04 Aug-04 Sep-04 Nov-04 Dec-04 Jan-05 Total Commercial 2 challenger Financial Services Group e Finance Feb-05 Mar-05 Apr-05 May-05
Slide 51: Challenger Wealth Management
oS sg trem rae Ly) GU) Challenger Wealth Management 29 August 2005 challenger Financial Services Group ee ne
Slide 52: Wealth Management profitable ahead of schedule
52 €2 challenger Financial Services Group Management allenger Wealth Management profitable 12 months ahead of schedule FUM increased 73% in 12 months to June 2005 Legacy in the past - all systems integrated and highly scaleable HSBC a good acquisition — Delivers economies of scale and immediately ac
Slide 53: Wealth Management net revenue and expenses
&2 challenger Financial Services AS ) anagement * Net revenue 72 641 Expenses (70) (64)! 1 Includes re-ciassification on a “like for like” basis for changes to segrnental reporting announced 4 August 2005 and to “gross up” 2004 net revenue and expenses for amounts recovered from trusts « Net revenue
Slide 54: Financial Planning results
54 Challenger Wea Management ‘Financial Planning a ult ~ €2 challenger Financial Services Group Gross revenue 97 27 Net revenue 24 6 Expenses (20) Revenue and cost synergies realised from FY05 13/8/04 Associated Planners acquisition and subsequent merger with Garrisons resulting in: ° 303%4#in net r
Slide 55: Funds under administration
&2 challenger Financial Services AS oo ger r DL |e 14, Ee BO ( C a i i a 20 Oe S [2 10,000 ee se _ _. oC i oC oo S 2 - . _ 8 o _ a. oe oo a : a - i Jun-05 BFUA* Olnstitutional G Retail ZZ, * FUA excludes Corporate Superannuation (solid March 2004 Quarter)
Slide 56: Revenue diversification strategy
56 Challenger Wealt Revenue diversification strategy contributing to profit growth and robustness of FUM Australian equities FUM reflects multiple sources ~~ In-house capabilities ~~ Manage-the-manager — Alliances Management - | ‘mandate at 30 June 2005 €&2 challenger Financial Services Group Austra
Slide 57: Management
€2 challenger Financial Services Group Management 57
Challenger Financial Services Group — FY2005 Earnings Presentation on 6ix