Slide 1: FY20 Financial results
FY20 Financial results Providing our customers with financial security for retirement 11 August 2020
Slide 2: Overview
Overview Providing our customers with financial security for retirement FY20 outcomes, COVID-19 and operating environment 4 Richard Howes – Managing Director and Chief Executive Officer Financial results 9 Andrew Tobin – Chief Financial Officer Distribution, Product and Marketing (DPM) 21 Angela Mur
Slide 3: Highlights
Highlights Providing our customers with financial security for retirement FY20 financial performance affected by COVID-19 pandemic Foundations in place to optimise performance Life benefiting from diversified distribution and revenue base Funds Management performing very well Strong capital levels p
Slide 4: FY20 outcomes
FY20 outcomes COVID-19 Shift in operating environment Richard Howes Managing Director and Chief Executive Officer
Slide 5: FY20 outcomes
FY20 outcomes Normalised profit in line with guidance Statutory profit impacted by COVID-19 market sell-off 1 1 Group Assets Under Normalised NPBT ($m) Statutory NPAT ($m) CLC3 excess capital ($bn) 1 Management ($bn) Normalised NPAT ($m) CLC3 PCA ratio (times) 548 323 1800 1.81x 547 308 85.2 507 1.8
Slide 6: Strong progress on strategic priorities
FY20 outcomes Strong progress on strategic priorities To provide our customers with financial security for retirement Increase the use of Lead the retirement Provide our customers Maintain leading secure retirement incomes market and be with excellent funds operational and income streams the partner
Slide 7: COVID-19 impact
COVID-19 impact Strongly capitalised and well positioned to withstand further volatility • Majority of our people working • ~$3.8bn1 of annuity payments – • -$0.8bn of investment experience2 from home from mid-March no impact from COVID-19 • Responded quickly to reposition • Employees remain highly
Slide 8: Shift in operating environment
Shift in operating environment Responding to challenges and positioning for long-term growth Market shifts Strengthened foundations • Structural change to retail • Diversified business – Funds Management, Institutional & Japan financial advice 1 • Retirement income brand leader • Rapid growth in pro
Slide 9: Financial results
Financial results Andrew Tobin Chief Financial Officer
Slide 10: Group result
Group result Normalised profit before tax and normalised ROE in line with target Net income ($m) Expenses ($m) Normalised NPBT ($m) Normalised ROE3 (%) 2 EBIT margin (%) 19.0% 19.0% 268 284 822 821 267 18.0% 797 67.3 67.4 70.0 17.0% 17.0% 64.3 600.0 16.0% 65.0 16.5% 14.8% 15.0% 15.0% 60.0 547 548 50
Slide 11: Group result
Group result Normalised profit in line with guidance range Statutory profit impacted by COVID-19 market sell-off Normalised Normalised Statutory Normalised NPBT $507m – down 8% NPBT -8% NPAT -13% NPAT • Life – normalised growth and move to defensive portfolio settings in 2H20 $600m 8 • Funds Managem
Slide 12: Life result
Life result Book growth benefitting from diversification Earnings reflect more defensive portfolio settings Total Life sales ($bn) Life book growth ($bn) Life COE1 and Life EBIT ($m) Life normalised ROE3 (%) 5.6 5.2 670 670 1.8 639 18.5% 17.8% 4.6 16.6% 1.6 563 564 525 1.0 2.0 0.5 4.0 3.5 0.3 3.1 FY
Slide 13: Life net book growth
Life net book growth Book growth benefitting from diversification Life net book growth +$316m Life book growth ($m) • 2.1% growth in total Life liabilities1 2,000 1,796 Annuity net book growth -$251m 1,500 1,313 2 • -2.0% growth in annuity liabilities 1,068 • Annuity sales down 12% 1,000 • Maturity
Slide 14: Life liabilities
Life liabilities Reflects focus on long-term sales and growing institutional channel Focus on long-term liabilities Life annuity and other liabilities ($m) • 37% of FY20 annuity sales long-term1 16,000 14,000 • New business tenor2 10 years 15% 13% 16% 12,000 14% Book shifting to long-term annuities
Slide 15: Life margins
Life margins Reflects lower normalised growth and move to defensive portfolio settings 2H20 Life COE margin -43 bps Life COE margin (%) • Product cash margin -3 bps 5.0% 1H20 COE margin -14 bps 2H20 COE margin -43 bps • lower asset yields (-32 bps) including change in asset allocation 4.0% 3.67% 0.0
Slide 16: Life Investment Experience
Life Investment Experience Asset valuations impacted by pandemic market sell-off1 Fixed • Valuation loss $463m; normalised growth +$47m; credit default experience -$66m (-50 bps) income 2 • Valuation loss from increase in credit spreads with approximately two-thirds unrealised -$482m • Valuation los
Slide 17: Challenger Life regulatory capital
Challenger Life regulatory capital Strongly capitalised with flexibility to enhance returns $1.6bn of excess regulatory Movement in Challenger Life Company (CLC) excess regulatory capital ($m) capital – up 15% (+$0.2bn) Regulatory capital -$461m PCA +$669m 1,681 76 1,585 96 • Impacted by FY20 621 (2
Slide 18: Challenger Life regulatory capital
Challenger Life regulatory capital Above top end of target with flexibility to enhance returns PCA ratio 1.81x up from 1.53x CLC excess regulatory capital and PCA ratio 1700 2.00 • Above top end of target range (1.3x to 1.6x) 1.81 1.54 1.70 1.53 • No debt maturities until May 2022 Challenger target
Slide 19: Funds Management result
Funds Management result Strong net flows providing business momentum Performance fees drive uplift in earnings Net flows ($bn) Average FUM ($bn) Net income ($m) EBIT ($m) 5.3 158 58 80.6 151 150 58 73.4 77.5 2.5 51 146 143 132 FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20 (2.4) Fidante
Slide 20: Group position
Group position Additional financial flexibility and significant liquidity Group Group Undrawn net assets cash Group debt S&P Rating $3,250m $146m $350m Challenger Life ‘A’ (stable outlook) • Net assets per • Group cash held • $50m drawn 1 share $4.90 outside of Challenger • $350m undrawn Challenger
Slide 21: Distribution, Product and Marketing
Distribution, Product and Marketing Angela Murphy Chief Executive, Distribution, Product and Marketing
Slide 22: Life sales up 13%
Life sales up 13% Growth supported by diversified distribution Life sales ($m) and long-term annuity sales (%) Other Life sales +101% 6,000 45% • Benefiting from focus on institutional partnerships 40% +13% 40% • New clients and expanded product offering 36% 5,000 35% • Strong demand in low interest
Slide 23: Domestic annuity sales
Domestic annuity sales Impacted by structural change to wealth management market Domestic Term sales ($m) CarePlus sales ($m)1 Liquid Lifetime2 Flexible / Enhanced sales ($m) $2.6bn -19% $2.4bn 5% $330m $336m 8% 8% +21% $2.0bn $254m 12% -57% 14% $210m 42% 64% 72% 41% 30% $163m $143m 87% 82% 66% 45%
Slide 24: Operating environment insights
Operating environment insights Responding to structural change in wealth management market Industry Challenger insight response Structural change to retail financial advice • Increase direct customer engagement • Lower number of financial advisers ‒ Direct customer reinvestment capability ‒ Retireme
Slide 25: Operating environment insights
Operating environment insights Responding to structural change in wealth management market Industry Next insight steps Structural change to retail financial advice • Continue to increase direct customer • Lower number of financial adviser engagement and education • Advisers migrating to IFA networks
Slide 26: Life
Life Chris Plater Chief Executive, Life
Slide 27: Life investment portfolio
Life investment portfolio Portfolio repositioned in 2H20 to more defensive settings Fixed income – increased to 76% Life investment portfolio and capital intensity • Investment grade +11 points to 85% 4% 4% 6% 6% • ~$3bn in cash and liquids to be deployed 12% 13% 18% 18% 17% 13.8% Property – steady
Slide 28: Life investment portfolio
Life investment portfolio Defensive and diversified portfolio Fixed income credit quality Sub-IG Industrials and Consumers ($1.5bn) Property portfolio 6% 3% 3% Japanese 4% retail, 12% 9% Japan $0.4bn 73% of sub- 6% investment grade Other, 3% ‒ 19 grocery anchored 26% centres and 1 logistics 20% Indu
Slide 29: Life Risk
Life Risk Provides business and capital diversification Enhances ROE • Participating in well established risk Life Risk business ($m) transfer market since 2013 900 45 FY17 & FY20 800 Additional ~$10m 40 • Core capability and experienced team client termination 700 transaction fee 35 • Maintaining t
Slide 30: Operating environment insights
Operating environment insights Remain strongly capitalised and maintain defensive portfolio settings Investment Challenger markets insight response • Remain strongly capitalised Ongoing market volatility • Maintain defensive portfolio settings Uncertain macroeconomic outlook • Deploy up to $3bn of c
Slide 31: Funds Management
Funds Management Nick Hamilton Chief Executive, Funds Management
Slide 32: Funds Management operating performance
Funds Management operating performance Strong business momentum and progress on strategic priorities 2 Funds Management FUM ($bn) Fidante Partners 1 • 5th largest Australian active manager investment performance 81.4 • Top 30 Australian pension funds are clients 79.0 78.0 21% • Margin protected thro
Slide 33: Funds Management operating performance
Funds Management operating performance Strong net flows and investment performance underpin future growth Funds Management flows ($bn) FY20 net flows +$2.5bn 25.0 5.3 6.0 • Fidante Partners +$3.8bn 20.0 5.0 15.0 4.0 ‒ 64% increase in inflows ‒ Insto. net flows +$2.3bn 2.5 10.0 3.0 Cash inflows 5.0 2
Slide 34: Operating environment insights
Operating environment insights Right model for evolving funds management market Funds Management Challenger insight response Structural change to retail financial advice • Focus on outstanding specialist investment capability – internal and boutique Profit-for-member fund growth and internalising ma
Slide 35: Outlook
Outlook Richard Howes Managing Director and Chief Executive Officer
Slide 36: Industry leader benefiting from long-term tailwinds
Industry leader benefiting from long-term tailwinds With clear plan for sustainable growth 1 Australian superannuation growth ($bn) 8,000 Long-term tailwinds 6,000 Industry leader Market growth 4,000 • Natural market growth Investment capability • Significant retirement savings 2,000 • Leading inves
Slide 37: Vision and strategy
Vision and strategy A clear plan for sustainable long-term growth FY20 – 30 June 2020 37
Slide 38: FY21 financial outlook
FY21 financial outlook Strongly capitalised with flexibility to enhance returns Guidance Normalised Net FY21 guidance range $390m to $440m and assumes: Profit Before Tax ‒ up to $3bn of Life cash and liquids to be progressively deployed over FY211 ‒ Life defensive portfolio settings retained ‒ Life
Slide 39: Highlights
Highlights Providing our customers with financial security for retirement FY20 financial performance affected by COVID-19 pandemic Foundations in place to optimise performance Life benefiting from diversified distribution and revenue base Funds Management performing very well Strong capital levels p
Slide 40: Appendix
Appendix Additional background information
Slide 41: Appendix
Appendix A clear plan for sustainable long-term growth Challenger business overview 42-43 Life sales and AUM 67 Our people 44 Life asset allocation & portfolio overview 72 Superannuation system 46-49 Life normalised profit framework 73 Retirement phase overview 50-54 Life asset and liability matchin
Slide 42: Challenger business overview
Challenger business overview Vision and strategy A clear plan for sustainable long-term growth FY20 – 30 June 2020 42
Slide 43: Business overview
Challenger business overview Business overview Two core businesses benefiting from superannuation system growth Challenger Limited (ASX:CGF) Life Funds Management #1 market share in annuities1 One of Australia’s largest active fund managers2 Leading provider of annuities and guaranteed Fidante Partn
Slide 44: Our people
Our people Our people Highly engaged team with strong risk and compliance culture Employees remain highly engaged through COVID-19 disruption 1 Employee engagement Global Australian Global High Financial Category Total favourable score National Performance Services norm norm norm 84% Sustainable eng
Slide 45: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Market growth supported by Australian superannuation growth2 ($bn) 8,000 • Mandatory and increasing contributions • Earnings and contributions compounding 6,000 • Population growth and ageing d
Slide 46: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Projected superannuation assets2 ($bn) Pre-retirement (super savings) phase 7,500 • Funds Management target market • Supported by mandated and increasing contributions 5,000 Post-retirement (su
Slide 47: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers 1 Mandatory and increasing contributions – increasing from 9.5% to 12.0% Superannuation Guarantee contribution rate1 1992 1997 2002 2015 2021 2022 2023 2024 2025 3.0% 6.0% 9.0% 9.5% 10.0% 10.5%
Slide 48: Australian superannuation system
Superannuation system Australian superannuation system High allocation to equities and low allocation to fixed income Australia has low fixed income and high equity allocations1 Fixed income allocation • Australia 15% 24% 5% 29% 13% • OECD average 45% 44% 29% 38% 25% 8% 31% 9% Equities allocation 50
Slide 49: Australian superannuation system
Superannuation system Australian superannuation system World class accumulation system with significant retirement savings Not delivering retirees financial comfort World class Significant Not delivering retirees accumulation system retirement savings financial comfort 7 National Seniors Australia s
Slide 50: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Combining products provides better outcomes for retirees Discretionary (wants) Funds Management Account Equities, fixed income Based and alternative asset Pension products (ABP) Life Essential Guaranteed Annuity and income stream guarantee
Slide 51: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Australians now have meaningful balances in retirement • Superannuation guarantee system 10 largest super funds – average retiree member balance ($)2 not fully mature – established 28 Unisuper 509k years ago Qsuper 420k • Operating for onl
Slide 52: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Superannuation starting to reduce reliance on age pension 1 • Average household wealth at retirement $680,000 Portion of retirees reliant on age pension2 (excluding family home) 30% • Age pension subject to assets and income tests 44% 42%
Slide 53: Post-retirement phase of superannuation
Retirement phase overview Post-retirement phase of superannuation Growth market with structural drivers Super funds partnering with Life companies 700 Australians turning 65 every day Industry moving ahead of regulation Older and healthier 20-year cycle of retiring ‘Baby-Boomers’ Market Natural mark
Slide 54: 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 Maximum age Per fortnight Per annum (increasing to 67) Single $944.30 $24,552 pension rates1 Couple $1,423.60 $37,014 • Age pension based on lower outcome under As
Slide 55: Government enhancing post-retirement phase
Retirement income regulatory reforms Government enhancing post-retirement phase Retirement Income Framework The retirement phase of the superannuation system is currently under-developed. There is limited availability and take-up of products that manage the risks people face in retirement, in partic
Slide 56: Government enhancing post-retirement phase
Retirement income regulatory reforms Government enhancing post-retirement phase New 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 65 Example - $100,000 lifetime income stream
Slide 57: 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) • 66 years old • Approaching retirement • Target income $62,000
Slide 58: 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 100% Account Based Pension (ABP) Combined product (70% Account Based Pension; 30% Lifetime Annuity) • Provides $62k p.a. until age
Slide 59: Retirement income strategies – combined products
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection Combined product (70% Account Based Pension; 30% Lifetime Annuity) Income from combined product enhanced through 1. mortality credits 2. interaction with age
Slide 60: Distribution relationships
Challenger distribution Distribution relationships Industry moving ahead of regulation and combining products FY16 FY17 FY18 / FY19 ClearView Wealth Solutions Australia’s largest retail Challenger annuities available platform offering platform offering on AMP platforms Challenger annuities Challenge
Slide 61: Distribution relationships
Challenger distribution Distribution relationships Platforms broadening access to Challenger annuities Platform relationships Platform relationships Provides access to ~1/3rd of super industry FUM1 Provides access to ~70% of financial advisers2 Challenger annuities available via platform 8% 31% 2% 5
Slide 62: 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 ~A$27bn market cap Total assets ~A$350bn 41,582 employees 5 business domains • Opportunities for both Challe
Slide 63: MS Primary annuity relationship
MS&AD MS Primary MS Primary annuity relationship Diversifying and increasing access to Japanese market MS Primary • MS&AD subsidiary Product overview • leading provider of foreign currency life products 20 year term annuities – A$ and US$ • extensive distribution footprint via bancassurance channel
Slide 64: Life product overview
Life product overview Life product overview Providing customers with guaranteed income Fixed term Long term Other (including lifetime) 39% of total book 45% of total book 16% of total book Provides regular guaranteed Provides guaranteed regular Institutional product providing payments for a fixed ra
Slide 65: Clear leader in retirement incomes
Challenger brand and Clear leader in retirement incomes adviser ratings Challenger rated #1 in overall adviser satisfaction Brand strength: Leaders in Retirement Income1 Wealth Insights net promoter score3 100% Challenger +38% 95% 95% 93% 93% 89% 80% 85% 60% +ve net promotor score Peers include 2011
Slide 66: Customer brand journey
Challenger brand and Customer brand journey adviser ratings Evolution of brand and target audience TOTAL BRAND AWARENESS 66% 62% 59% 61% 55% 53% PRE-RETIREES RETIREES 2019 campaign shifted focus 13% (aged 55-64) (aged 65-74) to older audience (65-74) with building brand familiarity and education a p
Slide 67: Life sales and AUM
Life sales and AUM Life Diversified distribution driving sales and AUM growth Total Life sales ($m) Life AUM ($m) 4% CAGR 7% CAGR 19,010 18,085 18,303 5,556 5,151 15,677 4,952 4,550 14,112 4,350 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 Annuity sales Other Life sales FY20 – 30 June 2020 67
Slide 68: 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 Asset and • Strong governance framework liability • Managed by dedicated team • Risk management
Slide 69: 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 Alternatives Unlisted 100% infrastructure 1 July 2020 pro forma – Absolute return funds 80% asset Low beta c
Slide 70: Fixed income portfolio
Life asset allocation and portfolio overview Fixed income portfolio 1 Represents 76% of portfolio with 85% investment grade Fixed income portfolio by asset class Fixed income portfolio by sector Fixed income portfolio by geography Non-IG Corporate Credit Other New Rest of 7% Infrastructure and utili
Slide 71: Property portfolio
Life asset allocation and portfolio overview Property portfolio Represents 18% of portfolio with all properties independently valued in June Property portfolio1 Australian office 58%; industrial 6% Japanese retail, 12% • 11 office assets; 4 industrial assets • Average cap rate 5.5% (office) & 6.0% (
Slide 72: Life investment portfolio
Life asset allocation and portfolio overview Life investment portfolio Equity and infrastructure 2% of portfolio; Alternatives 4% of portfolio Equity portfolio Alternatives portfolio (from 1July 2020)1 (from 1 July 2020)1 Europe 2% Other 3% United Kingdom 14% Australia 6% United Kingdom 4% 17% Europ
Slide 73: Normalised profit framework
Life normalised profit framework Normalised profit framework Reflects underlying performance of Life business Investment Experience Cumulative Investment Experience (pre-tax) ($m) Asset and policyholder liability valuation 200 movements plus net new business strain - ~50% of FY20 (200) investment As
Slide 74: Asset and liability matching
Life asset and liability matching Asset and liability matching Unwanted risks mitigated with assets and liabilities cash flow matched 1 Asset and liability cash flow matching ($m) • Assets deliver contracted cash flows to match liability flows 10,000 • Risk appetite seeks to minimise 8,000 duration
Slide 75: Funds Management
Funds Management sales and FUM Funds Management Strong FUM growth track record • Fidante Partners Funds Under Management (FUM) ($bn) 9% CAGR • growing multiple boutique platform 79.0 81.4 78.0 • located in Australia, UK and Japan 66.9 19.0 18.4 20.1 • asset class diversification 56.7 15.9 13.7 • CIP
Slide 76: Fidante Partners capability
Funds Management sales and FUM Fidante Partners capability Adding new managers and expanding distribution footprint Fidante Partners FUM growth ($bn) 70 1 boutique sale 60 Boutiques formed pre-Dec 2010 50 40 30 20 10 0 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-
Slide 77: FM – multiple brands and strategies
Funds Management mangers FM – multiple brands and strategies Scalable and diversified ~$81bn of FUM Equities $26.3bn1 Multiple brands & strategies Alternatives $11.9bn1 Fixed Income $43.2bn1 FY20 – 30 June 2020 1. Funds Under Management (FUM) as at 30 June 2020. 77
Slide 78: Fidante Partners boutique managers
Funds Management mangers Fidante Partners boutique managers Diversified managers and investment strategies Partnership Partnership Boutique Asset class Boutique Asset class commenced commenced Aug 2010 Boutique – Australian and global equities Oct 2005 Boutique – Australian small cap equities Nov 20
Slide 79: Fidante Partners model & performance
Fidante Partners model & performance Fidante Partners Contemporary model with strong alignment of interests Administration services Distribution services • Investment operations • Asset consultant & research • Client operations Investment • Strategic positioning • Risk and compliance Management • Pr
Slide 80: Fidante Partners performance advantage
Fidante Partners model & performance Fidante Partners performance advantage Model supports superior performance • Boutiques Outperformance of Australian boutique managers 1 • enjoy investment autonomy 3% 2.6% • are high conviction investors 2% • take more active exposures 1% 1.3% 1.2% 1.0% • have ge
Slide 81: Fidante Partners investment performance
Fidante Partners model & performance Fidante Partners investment performance Strong performance underpinning FUM growth 1 2 Fidante Partners percentage of funds 1st or 2nd quartile Fidante Partners performance relative to benchmark 21% 5 years 85% 7% 33% 35% 25% 3 years 81% 63% 53% 50% 33% 30% 31% 1
Slide 82: Funds Management
Fidante Partners manger capacity Funds Management Growth supported by available capacity Manager capacity ($bn) Quarterly net flows vs peers1 ($bn) 35 30 3.0 25 2.0 20 1.0 15 10 - 5 (1.0) 0 (2.0) Equity Fixed Income Alternatives Managers Managers Managers (3.0) Available capacity FUM • ~$140bn of av
Slide 83: CIP Asset Management
CIP Asset Management CIP Asset Management Proven long-term investment track record and capability 1 • $19 billion of FUM • Investment manager for Challenger Life and 3rd party institutions • Clients benefit from experience and market insights through breadth and scale of mandates Trusted partner Ass
Slide 84: Important note
Important note The material in this presentation is general background information about Challenger Limited activities and is current This document may contain certain ‘forward-looking statements’. The words ‘forecast’, ‘expect’, ‘guidance’, ‘intend’, at the date of this presentation. It is informat