Challenger Limited · ASX:CGF
Challenger — Investor Presentation (February 2023)
65 slides from Challenger's investor presentation, Feb 14, 2023
Slide 1: 1H23 Financial Results
1H23 Financial Results ye challenger £2
Slide 2: Overview
Overview Building a more diversified business and meeting more customer needs Business and strategy update Nick Hamilton – Managing Director and Chief Executive Officer Financial results Alex Bell – Chief Financial Officer Financial outlook and priorities Nick Hamilton – Managing Director and Chief
Slide 3: Business and strategy update
Business and strategy update Nick Hamilton Managing Director & Chief Executive Officer
Slide 4: Key points
Key points Building a more diversified business and meeting more customer needs Strong business with clear purpose Leading brands across savings and retirement income Fixed income origination platform and leading investment capability Exceptional distribution footprint Executing growth strategy Dive
Slide 5: Strong financial performance
Strong financial performance Reflects benefits of diversification and growth Life sales Group ROE Dividend $5.5bn 12.3% 12.0cps Normalised NPBT ▲11% ▲20 bps ▲4% Annuity sales +41% Life ROE 14.8% (+170bps) In-line with payout policy $250m Retail annuity sales +89% ▲5% Statutory NPAT Group AUM CLC PCA
Slide 6: Demand for guaranteed income increasing
Demand for guaranteed income increasing Best customer proposition in last 10 years Opportunity to remix book through retail sales • Leading fixed income Higher interest rates Strong Life sales Improves customer proposition Life sales $5.5bn +11% originator – passing on higher Supports demand for ann
Slide 7: Purpose and strategy
Purpose and strategy Meaningful purpose underpinned by four strategic priorities Competitive advantages supporting growth Our purpose is to provide customers with financial security for a better retirement Broaden customer access Leverage the combined Expand range of financial Strengthen resilience
Slide 8: Diversifying revenue and simplifying the business
Diversifying revenue and simplifying the business Leveraging competitive advantages Challenger Bank exit IMPROVING CUSTOMER EXPERIENCE Embedded new Customer division and leadership Digitising annuity customer experience Passing on higher interest rates to annuitants Implemented new FM registry syste
Slide 9: Financial results
Financial results Alex Bell Chief Financial Officer
Slide 10: Group snapshot
Group snapshot Benefitting from diversification and growth 1H23 Change Normalised NPBT Group normalised ROE Net income $411m 6% $250m +5% 12.3% +20bps Expenses ($158m) 7% Life $263m +13% Life 14.8% +170bps EBIT $252m 5% FM $31m -32% FM 21.1% -1,270bps Interest & borrowing ($2m) 5% Bank ($4m) -30% No
Slide 11: EBIT $252m up 5%
EBIT $252m up 5% Strong growth in Life COE Partly offset by lower FM income and investing for growth Income $411m (+6%) Expenses $158m (+7%) Cost to income 38.5% (+40bps) +5% on 1H22 ex Bank +4% on 1H22 ex Bank -40bps on 1H22 ex Bank $411m 39.3% 38.1% 38.5% $5m $158m $2m $390m $4m $387m $147m - 37.1
Slide 12: ROE
ROE Life ROE benefitting from book growth and higher investment returns Group ROE impacted by Funds Management and investing for growth Normalised ROE +60bps on 2H22 • 1H23 ROE target 14.3%2 up 205bps from Target 14.3%2 significant RBA cash rate increase • 1H23 ROE below target Target 12.3% Life R
Slide 13: Life performance
Life performance Record sales driven by retail demand for guaranteed income Earnings growth from higher AUM and margin expansion 1H23 Change Average AUM +2% Life EBIT +13% COE1 $317m 10% COE margin +20bps ROE +170bps Expenses ($54m) (1%) Average investment assets ($bn) EBIT ($m) EBIT $263m +13% Cash
Slide 14: Life COE margin
Life COE margin Higher investment returns driving margin expansion 1H23 COE margin (%) COE margin (%) 1 1 Higher average interest rates Product cash margin +2bps Higher average 2.76% interest rates 0.82% 2.65% 0.17% 2.63% (0.79%) (0.01%) - (0.06%) 2.76% 2.63% 2.55% 2.56% Higher annuity and instituti
Slide 15: Life sales
Life sales Diversification delivering strong sales growth Very strong retail demand extending tenor Life sales ($m) ANNUITY NEW BUSINESS1 REINVESTMENTS • Annuity sales benefitting from strong domestic • Strong reinvestment rates: 1,468 5,479 retail new business (+168% on 1H22), • Retail 68% particul
Slide 16: Life sales
Life sales Book growth driven by strong retail contribution Net flows by type ($m) 2,000 924 1446 1,500 709 Net flows 985 1,000 • Total Life net flows of $985m 584 500 • Retail and MSP net flows of $881m - • 5.5% of opening book growth driven by retail sales (500) (1,000) 1H19 1H20 1H21 1H22 1H23 Re
Slide 17: Life investment portfolio
Life investment portfolio Repositioned to capture relative value opportunities Life AUM1 $22.9bn $23.1bn • Increase in absolute return funds and general $22.2bn Alternatives 9%, insurance exposures 5% 6% 9% 5% 4% 1% +3pp • Alternatives less correlated to credit and listed equity 16% 15% 14% markets
Slide 18: Investment experience
Investment experience Asset experience (-$83m); Liability experience (+$22m) Valuation gain $37m; normalised growth +$30m Investment experience Corporate Credit – credit spreads narrowed (positive impact) (pre-tax) Fixed income $31m ABS – spreads widened (negative impact) -$61m Allowance for credit
Slide 19: Funds Management performance
Funds Management performance Earnings reflect market conditions 1H23 Change Average FUM FM EBIT FUM based-income $83m (9%) $93bn -14% $31m -32% Performance & transaction fees $5m (23%) Fidante $72bn -17% Net income -11% CIM $21bn unchanged Expenses +8% Net income $88m (11%) Average FUM Includes impa
Slide 20: Funds Management
Funds Management Relative outperformance and well positioned for current environment Funds Under Management ($bn) Quarterly net flows vs peers1 ($bn) 6 7% ASX 200 market growth 4 Fidante Peer average FM net outflows $1.8bn 93.4 3.1 93.4 2 (0.1) (1.3) (0.4) (1.4) 2.60% 0 Institutional net outflows $1
Slide 21: Capital management
Capital management Strongly capitalised Half year dividend up 4% to 12.0cps (fully franked) Strongly Additional financial Interim 2023 dividend (cps) capitalised flexibility Dividend payout ratio (%) S&P credit rating Dividend payout ratio 49% (target 45% to 50%) Challenger Life ‘A’ Challenger Life
Slide 22: Financial outlook and priorities
Financial outlook and priorities Nick Hamilton Managing Director & Chief Executive Officer
Slide 23: FY23 guidance and targets
FY23 guidance and targets On-track to achieve full-year guidance Guidance considerations NORMALISED $485m $535m 1H23 NPBT 49% of FY23 NPBT guidance midpoint NET PROFIT BEFORE TAX Bank: ~$10m EBIT full year loss GUIDANCE Expenses: 5% to 6% full year growth Normalised pre-tax ROE target RBA cash rate
Slide 24: Priorities
Priorities Building a more diversified business and meeting more customer needs Maintain sales momentum and focus on longer duration business Uplift annuity sales digital experience Leverage partnerships to deliver value: MS&AD, Apollo, Artega, Affiliates Maintain expense discipline whilst selective
Slide 25: Key points
Key points Building a more diversified business and meeting more customer needs Strong business with clear purpose Leading brands across savings and retirement income Fixed income origination platform and leading investment capability Exceptional distribution footprint Executing growth strategy Dive
Slide 26: Appendix
Appendix Additional background information
Slide 27: Appendix contents
Appendix Providing our customers with financial security for a better retirement Challenger business overview 28-30 Life sales and AUM 47 Life asset allocation & portfolio overview 48-53 Superannuation system 31-35 Life normalised profit framework 54 Retirement phase overview 36-39 Life asset and li
Slide 28: Corporate purpose and strategy
Challenger business overview Corporate purpose and strategy Building a more diversified business to meet more customer needs 1H23 – 31 December 2022 28
Slide 29: Challenger overview
Challenger business overview Challenger overview Providing customers with financial security for a better retirement Challenger Limited (ASX:CGF) 1 Life Funds Management #1 Australian retirement One of Australia’s largest income business2 active fund managers5 Guaranteed3 retirement income products
Slide 30: Meeting the needs of more customers
Challenger business overview Meeting the needs of more customers Through yield, alpha, solutions and partnerships Saving for Spending for retirement retirement Starting Working Paying Accumulating Starting Travelling Downsizing Aged care out off debt wealth retirement YIELD SOLUTIONS PARTNERSHIPS AL
Slide 31: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Market growth supported by Australian superannuation growth2,3 ($bn) • Mandatory and increasing contributions 10,000 9,000 • Earnings and contributions compounding 8,000 • Population growth and
Slide 32: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Projected superannuation assets2 ($bn) Pre-retirement (superannuation savings) phase 10,000 • Funds Management target market • Supported by mandated and increasing contributions 7,500 Post-reti
Slide 33: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Mandatory and increasing contributions – increasing from 10.5% 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 34: 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 26% • Australia 30% 31% • OECD average 43% 24% 6% 26% 42% 27% 43% 25% 10% 34% Equities allocation
Slide 35: Australian superannuation system
Superannuation system Australian superannuation system World class accumulation system with significant retirement savings World class Significant Not delivering retirees accumulation system retirement savings financial comfort 7 National Seniors Australia survey (January 2020) Contribution rate 1 i
Slide 36: 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 Guaranteed Annuity and Essential income stream guarantee
Slide 37: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Superannuation starting to reduce reliance on age pension 2 • Average household wealth at retirement Portion of retirees reliant on age pension 1 $686,000 (excluding family home) • Age pension subject to assets and income tests • 2.6m Aust
Slide 38: Overview of age pension system
Retirement phase overview Overview of age pension system Social safety net for those unable to support themselves • Qualification age 66.5 Maximum age Per fortnight Per annum (increasing to 67 ) 1 Single $1,027 $26,689 pension rates 2 Couple $1,548 $40,238 • Age pension based on lower outcome under
Slide 39: Government enhancing post-retirement phase
Retirement income regulatory reforms Government enhancing post-retirement phase Means test rules for lifetime income products commenced 1 July 2019 Pension assets test Pension income test Example - $100,000 lifetime income stream purchase price at age 67 (male) Example - $100,000 lifetime income str
Slide 40: 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 • $600,000 of super (in addition to family home) • 67 years old • Approaching retirement • Target income $68,014
Slide 41: 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 Combined product 100% Account Based Pension (ABP) (70% Account Based Pension; 30% Lifetime Annuity) • Provides $68,014 p.a. until
Slide 42: Retirement income strategies – combined products
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection Combined product Combined product (70% Account Based Pension; 30% Lifetime Annuity) (70% Account Based Pension; 30% Lifetime Annuity) Income from combined pro
Slide 43: MS&AD strategic relationship
MS&AD MS Primary MS&AD strategic relationship Diversifying and increasing access to Japanese market Strategic relationship with MS&AD Group • Increases access to Japanese market through MS&AD • Opportunities for both Challenger and MS&AD 1 Japanese general insurer #1 market share • Broadens Challeng
Slide 44: MS Primary annuity relationship
MS&AD MS Primary MS Primary annuity relationship Diversifying and increasing access to Japanese market MS Primary • MS&AD subsidiary Product overview • leading provider of foreign currency life products in Japan Term annuities – A$ and US$ • extensive distribution footprint via bancassurance channel
Slide 45: Clear leader in retirement incomes
Challenger brand and Adviser ratings Clear leader in retirement incomes Strong Challenger reputation within the market Brand strength: Leaders in Retirement Income 1 Market Leader in Australian retirement incomes 100% 96% 95% 95% ‘Annuity Provider of the Year’2 93% 93% 93% 92% 90% 89% 85% 80% Winner
Slide 46: Life product overview
Life product overview Life product overview Providing customers with guaranteed income Fixed term Long term Other (including lifetime) 1 39% of total book1 37% of total book1 24% of total book Provides regular guaranteed Provides income for life Institutional product providing payments for a fixed r
Slide 47: Life sales and AUM
Life sales and AUM Life Diversified distribution driving sales and AUM growth Total Life sales ($m) Life AUM ($m) 11% 5-year CAGR 6% 5-year CAGR 22,937 23,085 5,479 19,669 19,634 4,943 18,624 17,040 3,324 3,438 3,139 2,740 1H18 1H19 1H20 1H21 1H22 1H23 1H18 1H19 1H20 1H21 1H22 1H23 Annuity sales Oth
Slide 48: Asset allocation framework
Life asset allocation and portfolio overview Asset allocation framework Consistently applied with strong risk management • Fundamental principle – assets Risk management and liabilities cash flow matched • Strong governance framework Asset and • Managed by dedicated team liability • Risk management
Slide 49: Life liabilities and investment portfolio
Life asset allocation and portfolio overview Life liabilities and investment portfolio Strong sales driving asset growth Life annuity and other liabilities Life investment portfolio ($bn) ($bn)1 18 19 18 24% 24% Index Plus liabilities 24% 23.1 22.9 12% 12% Japan 12% 25% 22.2 28% 26% Lifetime2 36% 38
Slide 50: 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 General Insurance 100% Absolute Return Life Insurance 80% Infrastructure Low beta 60% Equity beta 9% Offshor
Slide 51: Fixed income portfolio
Life asset allocation and portfolio overview Fixed income portfolio Represents 76% of portfolio with 78% investment grade 1 Fixed income portfolio by asset class1 Fixed income portfolio by sector1 Fixed income portfolio by geography1 Non-IG Corporate Credit Liquids Infrastructure Other New Rest of 1
Slide 52: Property portfolio
Life asset allocation and portfolio overview Property portfolio Represents 14% of portfolio Defensive property portfolio with a focus on long-term income streams Property portfolio1 Australian office 55%; industrial 8% Japanese retail • 10 office assets; 3 industrial assets 11% Other • Average cap r
Slide 53: Life investment portfolio
Life asset allocation and portfolio overview Life investment portfolio Equity and infrastructure 1% of portfolio; Alternatives 9% of portfolio Equity and infrastructure portfolio1 Alternatives portfolio1 Australia Europe United Kingdom 1% 4% 17% United Kingdom 8% 5% 14% 37% Europe 49% $0.3bn 14% $2.
Slide 54: Investment experience
Life normalised profit framework Investment experience Investment Experience Cumulative Investment Experience (pre-tax) ($m) Asset and policy liability valuation movements 200 plus net new business strain - (200) (400) Asset and policy liability experience (600) (800) FY20 ~55% Difference between ex
Slide 55: Asset and liability matching
Life asset and liability matching Asset and liability matching Unwanted risks mitigated with assets and liabilities cash flow matched 1 Asset and liability cash flow matching ($m) • Assets deliver contracted cash flows to match liability flows 10,000 • Risk appetite seeks to minimise 8,000 duration
Slide 56: Funds Management
Funds Management sales and FUM Funds Management Strong FUM growth track record Fidante Funds Under Management (FUM) ($bn) 5% 5-year CAGR • contemporary multiple affiliate platform 109.3 • expanding alternative and private markets 91.2 20.8 93.4 product range 75.0 82.8 19.4 21.0 73.4 • customer and g
Slide 57: Funds Management
Funds Management sales and FUM Funds Management $93.4bn FUM Laying foundations to support future growth $6.6bn Alternatives FUM CAGR growth rates Markets contribution $38.0bn Equities Fixed Income: +17% Equities +18% Alternatives 2 (incl. Property) +1% Net flows contribution $48.8bn Fixed Income Pre
Slide 58: Funds Management – multiple brands and strategies
Funds Management managers Funds Management – multiple brands and strategies Diversified offering generating strong returns for clients Affiliate brands, strategies and asset classes Australian equities Equities1 Global, regional $38.0bn & EM equities Sustainable investments Fixed Income 1 $48.8bn Al
Slide 59: Fidante affiliate managers and partnerships
Funds Management managers Fidante affiliate managers and partnerships Diversified managers and investment strategies Partnership Partnership Affiliate Asset class Affiliate Asset class commenced commenced Aug 2010 Affiliate – Australian and global equities Oct 2005 Affiliate – Australian small cap e
Slide 60: Fidante
Fidante model & performance Fidante Contemporary model with strong alignment of interests Administration services Distribution services • Risk and compliance • Asset consultant & research • IT infrastructure Investment • Strategic positioning • Finance Management • Product development $72bn 1 • Huma
Slide 61: Funds Management
Fidante model & performance Funds Management Margin expansion driven by change in product mix Funds Management income margin (bps) Funds Under Management ($bn) 109.3 105.8 93.4 91.2 93.4 Total FUM in line 18.8 18.7 18.7 with 2H22 17.9 18.0 Fidante unchanged 17.3 17.6 16.6 16.7 CIM unchanged 16.2 1H
Slide 62: Fidante investment performance
Fidante model & performance Fidante investment performance Strong performance underpinning FUM growth 1 2 Fidante percentage of funds 1st or 2nd quartile Fidante performance relative to benchmark 11% Since 85% inception 36% 20% 24% 5 Year 97% 19% 22% 72% 3 years 80% 47% 43% 38% 41% 30% 1 year 42% 1
Slide 63: Fidante manager capacity
Fidante manager capacity Funds Management Growth supported by available capacity Manager capacity ($bn) Quarterly net flows vs peers2 ($bn) 40 6 35 30 4 25 2 20 15 0 10 5 (2) 0 Equity Fixed Income Alternatives Managers Managers Managers (4) Fidante Peer average Available capacity FUM • ~$135bn of av
Slide 64: Challenger Investment Management
Challenger Investment Management Challenger Investment Management Proven long-term investment track record and capability 1 • $21 billion of FUM • Investment manager for Challenger Life and third party institutions • Clients benefit from experience and market insights through breadth and scale of ma
Slide 65: Important note
Important note The material in this presentation is general background information about Challenger Limited group’s activities and is This document may contain certain ‘forward-looking statements’. The words ‘forecast’, ‘expect’, ‘guidance’, ‘intend’, current at the date of this presentation. It is