Challenger Limited · ASX:CGF
Challenger — Challenger Financial Services Group — FY2003 Earnings Presentation
37 slides from Challenger's earnings presentation, Sep 9, 2003
Slide 1: Add image for first slide
Add image for first slide
Slide 2: Challenger Financial Services Group Market Briefing
Challenger Financial Services Group Market Briefing Chris Cuffe, Chief Executive Officer Tim Foster, Chief Financial Officer 9 September 2003
Slide 3: Contents
Contents Overview 4 Potential restructure and corporatisation 9 Product review 13 Annuities model update 20 Property update 26 Financial matters 28 Summary 37 3
Slide 4: Overview
Overview • Highlights • Business changes since 10 April • Acquisition announced • Our strategy 4
Slide 5: Highlights
Highlights • 23 January Merger announced • 10 April Change of CEO • 27 June Merger complete • 1 July Name change to Challenger Financial Services Group (CFG) • 23 July New Board confirmed • 26 August Inclusion into the S&P/ASX100 • 1 September Acquisition - Interstar • 9 September Potential restruct
Slide 6: Business changes since April
Business changes since 10 April • Changed management structure • Significant staff changes • Redundancies, new staff • Activities reorganization • Sydney, Melbourne, Hobart • Exiting of non core businesses • Garrisons Accounting • UK; New Zealand • Corporate Finance • Howard Finance (no relation to
Slide 7: Acquisition announced
Acquisition announced • Challenger acquires assets of Zurich Capital Markets Australian Principal Finance business: • Interstar Securities – one of Australia’s largest independent wholesale mortgage financiers • High-yield fixed interest and loan portfolio – to be incorporated into existing fixed in
Slide 8: Our strategy
Our strategy • Broad focus on financial services (multi-faceted) • Seeking growth opportunities via: • Government policy (superannuation) • Scarce products (mortgage funds, property syndicates) • Use of balance sheet (annuities promises) • Secular change (home lending) • Attractive risk/return arbit
Slide 9: Potential restructure and corporatisation
Potential restructure and corporatisation • Corporatisation • Potential costs to Challenger • Potential benefits for Challenger 9
Slide 10: Corporatisation
Corporatisation • Challenger is giving consideration to the feasibility of corporatising • UBS and Gilbert & Tobin have been appointed to advise Challenger • Corporatisation would result in the Responsible Entity function being internalised • This proposal would require concurrence with CPH Manageme
Slide 11: Potential costs to Challenger
Potential costs to Challenger • Compensation to CPH Management for foregoing Management and Performance Fees • Challenger would assume liability for all Challenger operating costs including CEO compensation and directors’ fees • New long term employee incentive plan would form part of restructure 11
Slide 12: Potential benefits for Challenger
Potential benefits for Challenger • No ongoing Management Fees • Current cost approximately $17 million p.a.* • No sharing in upside through Performance Fee obligations • Currently CPH Management entitled to 20% of outperformance in excess of 10% p.a. • Simpler corporate structure – enhances investm
Slide 13: Product review
Product review • All existing products thoroughly reviewed • Revised product set now finalised • Progressive launch/relaunch over coming 12 months • Investment, superannuation & retirement products • Expansion into International Equities and Property Securities • Orion Alliance • PH Sydney Hotel Gro
Slide 14: Orion Alliance
Orion Alliance • Boutique tie-up with Orion Asset Management • Led by Tim Ryan & ex Credit Suisse AM Australian Equities portfolio managers • 4 year retail market exclusivity with renewal rights • Challenger Orion Australian Share Fund to be launched in November 2003 14
Slide 15: PH Sydney Hotel Group
PH Sydney Hotel Group • Single asset trust offers investment in Australian ‘5 star’ hotel • Acquired in June for $137m for property syndicate • PH Sydney Hotel Group launched 8 August 2003 • Offer size $69.3m • Offer fully underwritten • Offer closes 14 November 2003 • Forecast yield of 9% p.a. in y
Slide 16: Growth of Howard Mortgage Trust
Growth of Howard Mortgage Trust • Australia’s largest Commercial Mortgage Trust • $2.8 billion at 31 August 2003 • 47% growth over 12 months to 31 August 2003 • Invests in commercial mortgage loans and short-term securities • Majority of borrowers are individuals and small to medium sized companies
Slide 17: Growth of Annuities
Growth of Annuities • Challenger annuity sales have totalled $810m during year ended 30 June 2003 • Increased by approx $200m from 2002 • Short term annuities sales totalled $393m • Long term annuities sales totalled $417m • Ranked ‘1’ in inflows in the Annuity Market over year ended 30 June 2003 (P
Slide 18: Momentum in institutional markets - funds management
Momentum in institutional markets - funds management • 9 new institutional mandates in funds management since start of July 2003 totalling approx $300m • Key wins • Mainstream Australian equities • Smaller companies 18
Slide 19: FUM/FUA analysis at June 2003
FUM/FUA analysis at 30 June 2003 Funds under management (internal) $m Direct property 2,614 Fixed interest and cash 1,347 Australian equities (listed and unlisted) 204 4,165 Funds under management (external clients) Fixed interest and cash 805 Australian equities 625 Property securities 26 Direct pr
Slide 20: Annuities model update
Annuities model update • Pricing annuities • Investments and constraints • Property appetite • Life company balance sheet at 30 June 2003 20
Slide 21: Pricing annuities
Pricing annuities ! Benchmark rate for corresponding term x.x% ! Less commissions x.x% ! Less cost of operations • Acquisition x.x% • Maintenance x.x% x.x% • Less profit margin (akin to MER) x.x% ! Indicative rate to be paid to investor x.x% The above pricing model is based on the proposition that t
Slide 22: Possible investments
Possible investments • Cash • Fixed interest • Equities • Property securities • Direct property • Infrastructure • Other structured investments 22
Slide 23: Investment constraints
Investment constraints • Cash flows • Regulatory capital requirements • Investment risk • Investment supply 23
Slide 24: Property appetite
Property appetite • Acquisitions over last 12 months • Milk Street, Boston ($161m 15/10/02) • Globe, Melbourne ($18m 13/11/02) • Invesco, Denver ($87m 2/1/03) • Not pressed to purchase property • Upfront profits on purchase no longer recognised, hence no time pressure to purchase • Less aggressive p
Slide 25: Life company balance sheet at June 2003
Life company balance sheet at 30 June 2003 (annuities portion only) Assets $b Property 2.61 Fixed interest/cash 1.32 3.93 Liabilities Policyholder liabilities* 1.72 Borrowings 1.80 3.52 Excess 0.41 * calculated on Margin on Services basis which requires discount rates based on expected earnings of u
Slide 26: Property update
Property update • Life company property portfolio value at 30 June 2003 is $2.6b • 52 properties (average property value $50m) • Average lease expiry 11.3 years • Average yield 7.92% on current valuations and 8.35% on cost base • Occupancy rate 99.2% by income and 99.6% by area 26
Slide 27: Property update
Property update Property portfolio by region Property portfolio by sector 1.9 7% UK 1.9 9 % 1.6 3 % VIC 6% 1% 2 .3 8 % 2 5.12 % NSW 12% 8 .3 7% USA Commercial 13 .18 % ACT Entertainment/Retail QLD Industrial SA Retail 2 3 .6 7% TAS 2 1.6 9 % WA 81% 27
Slide 28: Financial matters
Financial matters • Challenger Group results to 30 June 2003 • Challenger International results – pre acquisition • Consolidated Group Balance Sheet • Analysis of goodwill • Improvements to financial reporting • Business segments and drivers • Distribution policy and tax update 28
Slide 29: Challenger Group results June 2003
Challenger Group results 30 June 2003 • Profit of former CPH Investment Corp trust 2003 2002 $m $m Profit before tax 28 8 Profit after tax 21 9 • Main drivers: • Disposal of investment in Zurich Capital Markets • Net interest benefit • Following 1 cent interim distribution; no final distribution is
Slide 30: Challenger International results – pre acquisition
Challenger International results – pre acquisition Year ended 30 June 2003 $m $m Loss excluding valuation changes and one-off items (14) Overall impact of changes in Income/Capital units valuation methodology (244) One-off items: - revaluation of Life company subsidiaries and management rights (32)
Slide 31: Consolidated Group Balance Sheet
Consolidated Group Balance Sheet 30/6/03 $m Life companies 501 Cash 660 (includes $235m merger injection) Receivables and non Life investments 421 Non-Life companies 159 Other assets 52 Property Investments 2,614 Other Life investments 965 Life 2 136 EMVONA 376 Management Rights 240 Goodwill on acqu
Slide 32: Analysis of goodwill
Analysis of goodwill $m Goodwill per Scheme pro forma accounts (12 May 2003) 201 Additional write-down in management rights 29 Year end valuation of property, swaps and policyholder liabilities (22) Additional provisions 25 Deferred tax adjustments 31 Other 14 Goodwill per accounts 278 32
Slide 33: Improvements to financial reporting
Improvements to financial reporting • Enhancements incorporated in 30 June 2003 accounts • Valuation of interests in properties • Fair value approach rigorously applied • Balance Sheet disclosures • Liquidity presentation • Details of investment properties • Analysis of EMVONA components 33
Slide 34: Improvements to financial reporting cont.
Improvements to financial reporting cont. Further planned changes • Annual independent property valuations • Proposed actions to remove revaluations of Challenger Life subsidiaries • Non-Life (management rights) • Challenger Life No.2 • Analysis of component parts of investment income 34
Slide 35: Business segments and drivers
Business segments and drivers Life (annuities) " Promises off our balance sheet " Tax & social security favoured " Ongoing profit margin (equivalent to an MER) " Investment returns in excess of bond rate " Returns on excess assets held for regulatory purposes Funds Management & " Risk borne by inves
Slide 36: Distribution policy and tax update
Distribution policy and tax update • Present expectation is no distributions over coming 12 months due to restructure, acquisition & further development of the business streams • CGT rollover relief legislation pending 36
Slide 37: Summary
Summary • Building multi-faceted financial services group • Changes establish foundations for growth • Skilled people • Exited non core business • Growth through organic development, acquisition & alliances • Major business streams • Ongoing margin from writing annuities business • Principal investi
Challenger Financial Services Group — FY2003 Earnings Presentation on 6ix