Challenger Limited · ASX:CGF
Challenger — Investor Day (June 2018)
50 slides from Challenger's investor day presentation, Jun 13, 2018
Slide 1: Investor Day 2018
Challenger Limited 13 June 2018 Investor Day 2018 Challenger Limited (ASX:CGF) attaches a copy of the presentation that will be provided at Challenger’s 2018 Investor Day. The Investor Day commences today at 10:00am and can be accessed via webcast at www.challenger.com.au ENDS About Challenger Chall
Slide 2: Challenger Limited Investor Day June 2018
Challenger Limited Investor Day 13 June 2018
Slide 3: Overview
Overview Providing our customers with financial security for retirement 10:00 – 10:10 Vision and strategy Operating environment Brian Benari – Managing Director and Chief Executive Officer 10:10 – 10:40 Retirement income policy update Distribution, Product and Marketing Richard Howes – Chief Executi
Slide 4: Vision and strategy; Operating environment
Vision and strategy Operating environment Brian Benari Managing Director and Chief Executive Officer
Slide 5: Vision and strategy
Vision and strategy A clear plan for sustainable long-term growth To provide our customers with financial security for retirement Increase the Australian Be recognised as Provide customers Deliver superior outcomes retirement savings pool the leader and partner with relevant investment to customers
Slide 6: Operating environment
Operating environment Industry change providing challenges and opportunities ● Life expectancies rising ● Global broad-based regulatory reforms ● Self sufficiency in retirement Customer ● Financial Services Royal Commission ● Disruption in financial advice ● Retirement Income Framework 1 (means test
Slide 7: Retirement income policy update
Retirement income policy update Distribution, Product and Marketing Richard Howes Chief Executive, Distribution, Product and Marketing
Slide 8: Key points
Key points Means testing rules & Retirement Income Covenant support lifetime products Government enhancing retirement phase New means testing for lifetime income products and Retirement Income Covenant Retirement strategies Combined products enhance income and provide longevity and inflation protect
Slide 9: Government enhancing retirement phase
Government enhancing retirement phase Budget 2018 – 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 particular the risk of outliving t
Slide 10: Government enhancing retirement phase
Government enhancing retirement phase Budget 2018 – New means testing for lifetime income products • New rules take effect 1 July 2019 These new rules will • existing rules to apply until then provide industry with the • lifetime income products purchased prior to be grandfathered confidence and sta
Slide 11: New rules encourage the use of pooled retirement products
Government enhancing retirement phase New rules encourage the use of pooled retirement products Asset pension test Income pension test Example - $100,000 lifetime income stream purchase price at aged 65 Example - $100,000 lifetime income stream paying $7,000 per year 100,000 7,500 7,000 Annual payme
Slide 12: Retirement Income Covenant Position Paper
Government enhancing retirement phase Retirement Income Covenant Position Paper 1 • Proposed Retirement Income Covenant for SIS Act • Trustee required to develop member retirement income strategy • maximise income for life • manage risks that affect stability of income • provide access to capital 2
Slide 13: Retirement strategies
Retirement strategies Retiree needs addressed through income layering Discretionary (wants) Account Based Pension (ABP) Essential Guaranteed (needs) income stream Age pension Time 2018 Investor Day 12
Slide 14: Retirement strategies – combined products
Retirement strategies – combined products Enhances income and provides longevity and inflation protection Jenny and John • Homeowning couple • $500,000 of super (in addition to family home) • 65 years old • Approaching retirement • Target income $58,000 p.a. 1 • Status quo 100% ABP • Combined produc
Slide 15: Retirement strategies – combined products
Retirement strategies – combined products Enhances income and provides longevity and inflation protection 100% Account Based Pension (ABP) Combined product (70% Account Based Pension; 30% Lifetime Annuity) Income Income Age Spouse1 Age Spouse1 Age Spouse 2 Age Spouse 2 Age Pension Lifetime Annuity A
Slide 16: Retirement strategies – combined products
Retirement strategies – combined products Enhances income and provides longevity and inflation protection Combined product (70% Account Based Pension; 30% Lifetime Annuity) Income • Combined product income enhanced through 1. mortality credits 2. interaction with age pension 3. growth assets left to
Slide 17: Retirement strategies – combined products
Retirement strategies – combined products Enhances income and provides longevity and inflation protection Income Elizabeth • Single homeowner • $350,000 of super (in addition to home) • 65 years old • Approaching retirement • Target income $39,000 p.a. • Status quo 100% ABP • Combined product • 75%
Slide 18: New rules enable product innovation
New rules enable product innovation Deferred Lifetime Annuities deliver pure longevity insurance Benefits of pooling 1 (illustrative DLA example with 15 year deferral period) Means testing of DLAs (from 1 July 2019) 100% Asset test 80% Deferral period • set on day one 60% Principal and interest • 60
Slide 19: CIPR style strategies already being implemented
CIPR style strategies already being implemented Model portfolios and retirement tools already support CIPRs 2 1 Comparing products – Actual ÷ Desired Income • CIPRs already being implemented by dealer groups and super funds • Retirement income models emerging Partial Annuitisation improves • typical
Slide 20: Industry moving ahead
Industry moving ahead Strong growth in lifetime annuity sales Australian lifetime annuity sales1 ($m) 800 600 400 200 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Challenger Other 2018 Investor Day 1. Strategic Insights lifetime annuity sales. 19 19
Slide 21: Challenger competitive advantage through integrated model
Challenger Competitive advantage through integrated model ‒ Dedicated retirement income focus ‒ Australia's #1 retirement income brand1 ‒ Significant market position CONSUMER AND ADVISER BRAND Advice RESEARCH HOUSES / SUPER PRODUCT ADVISER SALES ASSETCONSULTANTS TRUSTEES ‒ Recognised product innovat
Slide 22: Key points
Key points Means testing rules & Retirement Income Covenant support lifetime products Government enhancing retirement phase New means testing for lifetime income products and Retirement Income Covenant Retirement strategies Combined products enhance income and provide longevity and inflation protect
Slide 23: Life
Life Chris Plater Chief Executive, Life
Slide 24: Key points
Key points Asset allocation optimising ROE Life product mix Sales mix drives book profile Asset allocation framework Consistently applied with strong risk management Relative value Favouring fixed income over property Asset and liability matching Remain cash flow matched Capital and ROE Capital inte
Slide 25: Life product mix
Life product mix Sales mix drives book profile • Continuing to diversify product range Life product mix2 and customer base 100% 10% 10% 12% 14% 15% 16% • Guaranteed Index Return – 3% 6% 7% institutional clients, shorter dated, 75% index linked • Japan – new market, long dated 50% 90% 90% 88% • Domes
Slide 26: Asset allocation framework
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 entrenched matching • Liability maturity prof
Slide 27: Relative value
Relative value Asset risk premiums provide useful allocation signals 1 Fixed income (65% of portfolio ) Asset risk premium – fixed income and property2 12% • Liquid market asset risk Average premiums similar to last year 10% Historical • Illiquidity premiums remain 8% range attractive 6% +/- SD 1 Pr
Slide 28: Relative value and investment portfolio
Relative value and investment portfolio Mix varies over time and driven by asset allocation framework Asset risk premium trends Life investment portfolio 12% 100% 10% 80% 8% 60% 6% 40% 4% 20% 2% 0% 0% Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 FY08 FY09 FY10 FY11 FY
Slide 29: Relative value and investment portfolio
Relative value and investment portfolio Decreasing property allocation to optimise ROE Property allocation and asset risk premiums2 • Strong demand from offshore capital compressing cap rates 25% 4.0% 3.5% • Relative value has shifted towards fixed income 20% 3.0% • Over last year property has moved
Slide 30: Relative value and investment portfolio
Relative value and investment portfolio Favouring fixed income over property to optimise ROE Fixed income Property Infrastructure, equities & other increasing allocation decreasing allocation no change to allocation • Deep global markets and source • Provides diversification and • Provide asset dive
Slide 31: Asset and liability matching
Asset and liability matching Remain cash flow matched Asset and liability cash flow matching ($m) – May 2018 • Decreasing property allocation to optimise ROE 7,000 6,000 • replacing property lease profile with fixed income of similar tenor 5,000 4,000 • reduces non-debt realisations 3,000 • Continue
Slide 32: Capital
Capital Intensity to reduce further with change in asset allocation 1 • 1H18 CLC capital intensity increased to CLC PCA2 to investment assets 15.2% (of investment assets) following 16% MS&AD capital injection 15.2% 15% ~14.5% • 2H18 capital intensity to reduce with 14.3% 14.3% annuity book growth ba
Slide 33: ROE
ROE Optimising ROE and committed to 18% target1 • Changes in risk Life normalised ROE (pre-tax)1 premiums impact ROE 30% August 2014 August 2017 equity placement and MS&AD LAGIC implementation equity placement • Asset allocation 25% optimises ROE 20% • Long term track record 15% of achieving 18% tar
Slide 34: Key points
Key points Asset allocation optimising ROE Life product mix Sales mix drives book profile Asset allocation framework Consistently applied with strong risk management Relative value Favouring fixed income over property Asset and liability matching Remain cash flow matched Capital and ROE Capital inte
Slide 35: Funds Management
Funds Management Ian Saines Chief Executive, Funds Management
Slide 36: Key points
Key points Contemporary model provides ongoing growth options Funds Management industry trends Active management is alive and well Challenger competes in the high-active space Boutique performance advantage Driving superior returns for investors and FUM growth for high-active managers Contemporary m
Slide 37: Funds Management industry trends
Funds Management industry trends Active and passive strategies play different roles Passive growing 1 • Most popular in the US (22% of equities), much less in Australia (11%) 1 • ETFs dominate passive flows (~60% of passive flows) • Benefits from periods of low market volatility 2 • Represents about
Slide 38: Funds Management industry trends
Funds Management industry trends Challenger competes in high-active space Successful Passive Stuck in the Successful Active Managers Middle Managers High scale High skill Consistent alpha generation Large scale Characteristics “Active core” High-active share Huge technology investment Index huggers
Slide 39: Boutique performance advantage
Boutique performance advantage Model supports outperformance • Outperformance across all periods Outperformance of Australian boutique managers1 3% • Our boutiques • enjoy investment autonomy 2% • are high conviction investors • take more active risk • have generated consistent alpha 1% • Our busine
Slide 40: Fidante Partners
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 • Product development • IT infrastructure
Slide 41: Funds Management investment performance
Funds Management investment performance Strong performance underpinning superior net flows Fidante Partners percentage of funds 1st or 2nd quartile1 Funds Management performance relative to benchmark2 14% 23% 1 year 93% 15% 6% 25% 18% 3 years 83% 86% 69% 69% 71% 50% 47% 5 years 96% 1 year 3 years 5
Slide 42: Net flows consistently outperforming peers
Contemporary model with strong alignment of interests Net flows consistently outperforming peers 1 Rolling 12 month organic net flows vs peers ($bn) 11.0 Challenger Funds Management Peer average 9.0 7.0 5.0 3.0 1.0 -1.0 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec
Slide 43: Expanding our capability
Expanding our capability Adding new managers, strategies and building geographic footprint Fidante Partners FUM growth ($bn) 60 Boutiques formed pre-Sep 2010 50 1 Boutique sale 40 30 20 10 0 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-
Slide 44: Expanding our capability: active ETF market
Expanding our capability Extending into active ETF market • Strong investor demand for simple, easy to access, liquid products • ETFs have to date been mainly passive or factor-specific • 40% of Australians have a broker account • Opportunity to expand ETF use • 31% CAGR in exchange traded products
Slide 45: Key points
Key points Contemporary model provides ongoing growth options Funds Management industry trends Active management is alive and well Challenger competes in the high-active space Boutique performance advantage Driving superior returns for investors and FUM growth for high-active managers Contemporary m
Slide 46: Wrap up and Q&A session
Wrap up and Q&A session Brian Benari Managing Director and Chief Executive Officer
Slide 47: Wrap up
Wrap up Providing customers with financial security for retirement Operating environment • Industry change providing challenges and opportunities Positioned for continued long-term returns • Changing product mix and asset allocation reducing COE margin and optimising ROE • Increased capacity to orga
Slide 48: Appendix
Appendix challenger {3
Slide 49: Overview of age pension system
Overview of age pension system Social safety net for those unable to support themselves • Qualification age 65.5 Maximum age Per fortnight Per annum (increasing to age 67) Single $907.60 $23,597 pension rates Couple $1,368.20 $35,573 • Age pension based on lower outcome under Assets test Income test
Slide 50: Important note
Important note This presentation was prepared for the purpose of a briefing to equity analysts and certain wholesale investors on 13 June 2018. The material in this presentation is general background information about Challenger Limited activities and is current at the date of this presentation. It