Slide 1: 1H20 Financial results: Resilient and positioned for growth
1H20 Financial results For personal use only Resilient and positioned for growth 11 February 2020
Slide 2: Overview
Overview Resilient and positioned for growth For personal use only Resilient business 1H20 outcomes Richard Howes – Managing Director and Chief Executive Officer Financial results Andrew Tobin – Chief Financial Officer Outlook Richard Howes – Managing Director and Chief Executive Officer 1H20 – 31 D
Slide 3: Highlights
Highlights Resilient and positioned for growth For personal use only Resilient business in challenging operating environment Built through strategy to diversify and strengthen business 1H20 outcomes AUM growth driving earnings Investing for future growth Strong progress on strategic priorities Outlo
Slide 4: Resilient business in challenging environment
Resilient business in challenging environment Built through strategy to diversify and strengthen business For personal use only Life distribution Funds Management ü #1 retirement brand ü Leading active manager platform ü Broad distribution and platform access ü Broad and global distribution ü Highly
Slide 5: 1H20 outcomes: AUM growth driving earnings
1H20 outcomes AUM growth driving earnings For personal use only Investing for future growth 1 Group Assets Under Normalised NPBT ($m) 1 Statutory NPAT ($m) Normalised ROE (%) 5 1 Management ($bn) Normalised NPAT ($m) 220 19.0% 19.0% 86.3 275 270 279 195 18.0% 17.0% 17.0% 78.4 76.5 16.0% 15.2% 16.8%
Slide 6: Strong progress on strategic priorities
1H20 outcomes Strong progress on strategic priorities For personal use only • Progressing DPM growth initiatives to respond to advice and industry disruption 1 • Japanese US$ annuity reinsurance and on-track to achieve ~A$660m minimum 2 • UK Life Risk progress – 67% increase in PV of expected future
Slide 7: Financial results
For personal use only Financial results Andrew Tobin Chief Financial Officer
Slide 8: Group result
Group result AUM growth driving earnings For personal use only Investing for future growth Net income ($m) Expenses ($m) Normalised NPBT ($m) 2 EBIT margin (%) 142 423 409 405 131 132 67.9 67.3 66.5 30 0.0 70 .0 25 0.0 60 .0 50 .0 20 0.0 40 .0 15 0.0 275 270 279 30 .0 10 0.0 20 .0 50 .0 10 .0 0.0 0.
Slide 9: Group result
Group result AUM growth driving earnings For personal use only Investing for future growth Normalised NPBT $279m – up 3% Normalised Normalised Statutory NPBT +3% NPAT -4% NPAT Normalised NPAT $191m – down 4% • NPBT growth offset by higher effective tax rate 15 3 - • 1H20 ~31% and up 5 points (9) 38
Slide 10: Life result
Life result Diversified distribution driving book growth and earnings growth For personal use only Total Life sales ($bn) Life book growth ($bn) Life sales +15% to $3.1bn Life book growth $0.9bn 3.3 3.1 • Annuity sales $2.0bn – down $0.2bn 0.9 0.9 • 6.2% growth in total liabilities 2.7 1.0 1.2 • Dom
Slide 11: Life sales
Life sales Institutional and Japan sales offsetting adviser disruption For personal use only Life sales $3.1bn (+15%) Life sales ($m) 3,500 Annuity sales $2.0bn (-9%) 3,000 • Domestic sales $1.5bn (-24%) • term annuities $1.3bn (-16%) 2,500 – impacted by industry and adviser disruption 2,000 – new i
Slide 12: Life net book growth
Life net book growth Institutional and Japan sales offsetting adviser disruption For personal use only Life book growth ($m) Life net book growth $924m • 6.2% growth in total liabilities 1 1,000 948 924 843 Annuity net book growth $94m 800 • 0.7% growth in annuity liabilities 2 584 • Sales impacted
Slide 13: Life sales and book
Life sales and book New business tenor over 9 years reflecting shift to long-term annuities For personal use only 1 Life annuity sales (%) Life annuity and other liabilities ($bn) 3,500 0.40 16.0 $15.6bn $14.5bn 36% 35% 0.35 14.0 18% 3,000 $13.0bn 31% 15% 29% 0.30 12.0 $11.4bn 14% 2,500 $9.9bn 14% 0
Slide 14: Life margins
Life margins Product margin expansion For personal use only Lower normalised growth and return on shareholder capital COE margin -4 bps on 1H19 Life COE margin (%) COE margin +10 bps COE margin -14 bps COE margin -14 bps on 2H19 • Product cash margin +5 bps 3.57% 0.11% 0.00% 3.67% 3.67% 0.05% 3.53%
Slide 15: Life investment portfolio
Life investment portfolio No significant change to asset class allocations for FY20 For personal use only Fixed income – stable at 66% Life investment portfolio mix (%) • Investment grade +1 point to ~75% 4% 4% 4% 4% 4% • increase in liquids & AAA and reduction 10% 10% 11% 12% 13% in A and BBB 21% 5
Slide 16: Life Investment Experience
Life Investment Experience Positive asset and liability experience of $56m1 For personal use only Fixed • Valuation gain +$58m; normalised growth +$23m; credit default experience -$26m (-20 bps) Income +$55m • Credit spreads contracted by ~16 bps A Property • Valuation gain +$24m; normalised growth
Slide 17: CLC regulatory capital
CLC regulatory capital Strongly capitalised and toward top end of PCA guidance range For personal use only Regulatory capital $4.0bn Movement in CLC’s excess regulatory capital ($m) PCA $2.6bn Regulatory capital +$23m PCA +$6m • Capital intensity down to 13.3% 1 249 141 with increase in fixed income
Slide 18: Funds Management result
Funds Management result Strong net flows and FUM growth providing earnings momentum For personal use only Net flows ($bn) Average FUM ($bn) 3.9 Net flows $1.9bn 77.4 81.1 Average FUM $81.1bn up 5% 71.0 (Q1 $0.4bn; Q2 $1.5bn) Fidante Partners up 4% 1.9 Fidante Partners $1.9bn – strong 1 CIP up 8% fix
Slide 19: Funds Management result
Funds Management result Strong retail and institutional flows For personal use only Fidante Partners net flows ($m) Fidante Partners FUM (%) 3,000 1H20 1H19 2,000 15% 11% 1,000 Equities Retail net flows 0 42% 45% Fixed income Institutional net flows Profit-for-member Alternatives -1,000 44% funds in
Slide 20: Dividend
Dividend Stable dividend reflects strong capital position & confidence in future growth For personal use only 1H20 dividend Dividend (cps) and normalised dividend payout ratio (%) • 17.5 cps and unchanged • 100% franked 55.5% 60.0% 20 52.9% 49.7% • Payout ratio above target range , 1 2 reflecting 40
Slide 21: Outlook
For personal use only Outlook Richard Howes Managing Director and Chief Executive Officer
Slide 22: Priorities to drive long-term growth
Priorities to drive long-term growth Responding to challenges and capturing opportunities For personal use only Operating environment Priorities 1. Ongoing advice and industry disruption Impacting domestic annuity sales Improve adviser experience 2. Public policy changes Engage, educate and deepen c
Slide 23: Outlook: Expect to be around top end of guidance range
Outlook Expect to be around top end of guidance range For personal use only Guidance August 2019 February 2020 update Normalised Net FY20 guidance range Expect to be around top end of guidance range Profit Before Tax $500m to $550m ü (1H20 $279m) Key targets August 2019 February 2020 update Normalis
Slide 24: Highlights
Highlights Resilient and positioned for growth For personal use only Resilient business in challenging operating environment Built through strategy to diversify and strengthen business 1H20 outcomes AUM growth driving earnings Investing for future growth Strong progress on strategic priorities Outlo
Slide 25: Appendix
For personal use only Appendix Additional background information
Slide 26: Appendix contents
Appendix A clear plan for sustainable long-term growth For personal use only Challenger business overview 27-28 Life sales and AUM 54 Our people 29 Life asset allocation & portfolio overview 55-59 Superannuation system 30-34 Life normalised profit framework 60-61 Retirement phase overview 35-39 Life
Slide 27: Vision and strategy
Challenger business overview Vision and strategy A clear plan for sustainable long-term growth For personal use only 1H20 – 31 December 2019 27
Slide 28: Business overview
Challenger business overview Business overview Two core businesses benefiting from superannuation system growth For personal use only Challenger Limited (ASX:CGF) Life Funds Management #1 market share in annuities1 One of Australia’s largest active fund managers2 Leading provider of annuities and gu
Slide 29: Our people
Our people Our people Highly engaged team with strong risk and compliance culture For personal use only Employee engagement 1 Global Australian Global High Financial Category Total favourable score National Performance Services norm norm norm 84% Sustainable engagement 84% Sustainable engagement Div
Slide 30: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers For personal use only Market growth supported by Australian superannuation growth3 ($bn) 8,000 • Mandatory and increasing contributions • Earnings and contributions compounding 6,000 • Populati
Slide 31: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers For personal use only Projected superannuation assets ($bn) 2 Pre-retirement (super savings) phase 7,500 • Funds Management target market • Supported by mandated and increasing contributions 5,
Slide 32: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers For personal use only Mandatory and increasing contributions – increasing from 9.5% to 12.0% 1 Superannuation Guarantee contribution rate 1 1992 1997 2002 2015 2021 2022 2023 2024 2025 3.0% 6.0
Slide 33: Australian superannuation system
Superannuation system Australian superannuation system High allocation to equities and low allocation to fixed income For personal use only Australia has low fixed income and high equity allocations1 Fixed income allocation • Australia 15% 21% 5% 29% 13% • OECD average 39% 44% 29% 38% 25% 8% 31% 9%
Slide 34: Australian superannuation system
Superannuation system Australian superannuation system World class accumulation system with significant retirement savings For personal use only Not delivering retirees financial comfort World class Significant Not delivering retirees accumulation system retirement savings financial comfort 7 Nation
Slide 35: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Combining products provides better outcomes for retirees For personal use only Discretionary (wants) Funds Management Account Equities, fixed income Based and alternative asset Pension products (ABP) Life Essential Guaranteed Annuity and i
Slide 36: Retirement phase of superannuation
Retirement phase overview Retirement phase of superannuation Australians now have meaningful balances in retirement For personal use only • Superannuation guarantee system 10 largest super funds – average retiree member balance ($) 2 not fully mature – established 28 Unisuper years ago 509k Qsuper 4
Slide 37: Superannuation starting to reduce reliance on age pension
Retirement phase overview Retirement phase of superannuation Superannuation starting to reduce reliance on age pension For personal use only • Average household wealth at retirement $680,000 Portion of retirees reliant on age pension2 1 (excluding family home) 30% • Age pension subject to assets and
Slide 38: Overview of age pension system
Retirement phase overview Overview of age pension system Social safety net for those unable to support themselves For personal use only • Qualification age 66 Maximum age Per fortnight Per annum (increasing to 67) pension rates1 Single $933.40 $24,268 Couple $1,407.00 $36,582 • Age pension based on
Slide 39: Post-retirement phase of superannuation
Retirement phase overview Post-retirement phase of superannuation Growth market with structural drivers For personal use only 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-Boomer
Slide 40: Retirement Income Framework
Retirement income regulatory reforms Government enhancing post-retirement phase Retirement Income Framework For personal use only 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
Slide 41: New retirement product rules
Retirement income regulatory reforms Government enhancing post-retirement phase New retirement product rules introduced 1 July 2017 For personal use only • Enables new lifetime products, including Benefits of pooling (illustrative DLA example with 15 year deferral period) Deferred Lifetime Annuities
Slide 42: New means test rules for lifetime income products
Retirement income regulatory reforms Government enhancing post-retirement phase New means test rules for lifetime income products commenced 1 July 2019 For personal use only Pension assets test Pension income test Example - $100,000 lifetime income stream purchase price at age 65 Example - $100,000
Slide 43: CIPR-style strategies already being implemented
Retirement income strategies Government enhancing post-retirement phase CIPR-style strategies already being implemented For personal use only 2,3 • CIPR -style strategies already being 1 Comparing products – Actual ÷ Desired Income implemented by dealer groups and super funds Partial Annuitisation •
Slide 44: Retirement income strategies: Jenny and John
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection For personal use only Case study Jenny and John • Homeowning couple • $600,000 of super (in addition to family home) • 66 years old • Approaching retirement •
Slide 45: Case study – Jenny and John
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection For personal use only Case study – Jenny and John 100% Account Based Pension (ABP) Combined product (70% Account Based Pension; 30% Lifetime Annuity) • Provid
Slide 46: Combined product income enhancement
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection For personal use only Combined product (70% Account Based Pension; 30% Lifetime Annuity) Income from combined product enhanced through 1. mortality credits 2.
Slide 47: Distribution relationships
Challenger distribution Distribution relationships Industry moving ahead of regulation and combining products For personal use only FY16 FY17 FY18 / FY19 ClearView Wealth Solutions Australia’s largest retail Challenger annuities available platform offering platform offering on AMP platforms Challeng
Slide 48: Platforms broadening access to Challenger annuities
Challenger distribution Distribution relationships Platforms broadening access to Challenger annuities For personal use only Platform relationships Platform relationships Provides access to ~1/3rd of super industry FUM1 Provides access to ~70% of financial advisers2 Challenger annuities available vi
Slide 49: MS&AD strategic relationship
MS&AD MS Primary MS&AD strategic relationship Diversifying and increasing access to Japanese market For personal use only Strategic relationship with MS&AD Group • Increases access to Japanese market through MS&AD ~A$28bn market cap Total assets ~A$325bn 41,944 employees 5 business domains • Opportu
Slide 50: MS Primary annuity relationship
MS&AD MS Primary MS Primary annuity relationship Diversifying and increasing access to Japanese market For personal use only MS Primary • MS&AD subsidiary Product overview • leading provider of foreign currency life products 20 year term annuities – A$ and US$ • extensive distribution footprint via
Slide 51: Life product overview
Life product overview Life product overview Providing customers with guaranteed income For personal use only Fixed term Long term Other (including lifetime) 41% of total book 42% of total book 17% of total book Provides regular guaranteed Provides guaranteed regular Institutional product providing p
Slide 52: Challenger brand and adviser ratings
Clear leader in retirement incomes Challenger brand and adviser ratings Challenger rated #1 in overall adviser satisfaction For personal use only Brand strength: Leaders in Retirement Income1 Wealth Insights net promoter score 3 100% Challenger +38% 95% 95% 93% 93% 89% 80% 85% 60% +ve net promotor s
Slide 53: Customer brand journey
Challenger brand and Customer brand journey adviser ratings Evolution of brand and target audience For personal use only 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 familia
Slide 54: Life sales and AUM
Life sales and AUM Life Sales & AUM benefiting from diversity of products and expanded distribution For personal use only Total Life sales ($m) Life AUM ($m) 11% CAGR 11% CAGR 19,669 18,624 3,324 17,040 3,139 2,758 14,607 2,740 13,147 2,051 1H16 1H17 1H18 1H19 1H20 1H16 1H17 1H18 1H19 1H20 Annuity s
Slide 55: Asset allocation framework
Life asset allocation and portfolio overview Asset allocation framework Consistently applied with strong risk management For personal use only • Fundamental principle – assets Risk management and liabilities cash flow matched Asset and • Strong governance framework liability • Managed by dedicated t
Slide 56: Life investment portfolio
Life asset allocation and portfolio overview Life investment portfolio High quality portfolio providing reliable income For personal use only Life investment portfolio Life investment portfolio – asset allocation 1 Listed 100% Alternatives infrastructure Absolute return funds Unlisted 80% infrastruc
Slide 57: Fixed income – 66% of portfolio
Life asset allocation and portfolio overview Life investment portfolio Fixed income – 66% of portfolio For personal use only Fixed income portfolio Fixed income portfolio by industry 1 1 Liquids Non IG 6% Corporate Credit Government 100% 16% Residential Property 93% 25% Non-IG Asset Banks, Financial
Slide 58: Property – 17% of portfolio
Life asset allocation and portfolio overview Life investment portfolio Property – 17% of portfolio For personal use only Property portfolio1 Life’s property portfolio Japanese retail 11% • 52% of tenants investment grade Other 2% • Australian Government is a major tenant • representing ~28% of renta
Slide 59: Equities and other and Infrastructure
Life asset allocation and portfolio overview Life investment portfolio Equities and other and Infrastructure – 17% of portfolio For personal use only Equity portfolio 1 Infrastructure portfolio 1 Offshore alternatives Domestic beta Unlisted other 12% 3% 6% Offshore beta 3% 12% 6% Unlisted renewable
Slide 60: Normalised profit framework
Life normalised profit framework Normalised profit framework Reflects underlying performance of Life business For personal use only Investment Experience Cumulative Investment Experience (pre-tax) ($m) Asset and policyholder liability valuation 200 movements plus net new business strain - Asset and
Slide 61: Fixed income credit default loss history
Life normalised profit framework Normalised profit framework Fixed income credit default loss history For personal use only • Normalised growth assumptions Credit default loss history (bps) includes -35 bps for fixed income 40 40 35 35 • Represents an allowance for 30 30 credit default losses 25 25
Slide 62: Asset and liability matching
Life asset and liability matching Asset and liability matching Unwanted risks mitigated with assets and liabilities cash flow matched For personal use only 1 Asset and liability cash flow matching ($m) • Assets deliver contracted cash flows to match liability flows 10,000 • Risk appetite seeks to mi
Slide 63: Funds Management: strong FUM growth track record
Funds Management sales and FUM Funds Management Strong FUM growth track record For personal use only • Fidante Partners Funds Under Management (FUM) ($bn) 11% CAGR • growing multiple boutique platform 82.8 • located in Australia, UK and Japan 73.4 75.0 20.1 17.4 18.7 • asset class diversification 62
Slide 64: Fidante Partners capability
Funds Management sales and FUM Fidante Partners capability Adding new managers and expanding distribution footprint For personal use only Fidante Partners FUM growth ($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
Slide 65: FM – multiple brands and strategies
Funds Management mangers FM – multiple brands and strategies Scalable and diversified ~$83bn of FUM For personal use only Equities $28.1bn 1 Multiple brands & strategies Alternatives $12.7bn1 Fixed Income $42.1bn1 1H20 – 31 December 2019 1. Funds Under Management (FUM) as at 31 December 2019. 65
Slide 66: Fidante Partners boutique managers
Funds Management mangers Fidante Partners boutique managers Diversified managers and investment strategies For personal use only Boutique Commenced Asset class Boutique Commenced Asset class Aug 2010 Boutique – Australian and global equities Oct 2005 Boutique – Australian small cap equities Nov 2008
Slide 67: Fidante Partners model
Fidante Partners model & performance Fidante Partners Contemporary model with strong alignment of interests For personal use only Administration services Distribution services • Investment operations • Asset consultant & research • Client operations Investment • Strategic positioning • Risk and comp
Slide 68: Fidante Partners performance advantage
Fidante Partners model & performance Fidante Partners performance advantage Model supports superior performance For personal use only • Boutiques Outperformance of Australian boutique managers 1 • enjoy investment autonomy 2% • are high conviction investors • take more active exposures 1.5% 1.4% 1.3
Slide 69: Funds Management investment performance
Fidante Partners model & performance Funds Management investment performance Strong performance underpinning FUM growth For personal use only 1 2 Fidante Partners percentage of funds 1st or 2nd quartile Fidante Partners performance relative to benchmark 17% 5 years 91% 20% 36% 16% 29% 11% 3 years 95
Slide 70: Growth supported by available capacity
Fidante Partners manger capacity Funds Management Growth supported by available capacity For personal use only Manager capacity ($bn) Quarterly net flows vs peers ($bn) 1 50 3.0 Fidante Partners 40 Peer average 2.0 30 1.0 20 10 0.0 0 -1.0 Equity Fixed Income Alternatives Profit-for- Managers Manager
Slide 71: Challenger Investment Partners (CIP)
Challenger Investment Partners model Challenger Investment Partners (CIP) Proven long-term investment track record and capability For personal use only 1 • $20 billion of FUM • Investment manager for Challenger Life and 3rd party institutions • Clients benefit from experience and market insights thr
Slide 72: Important note
Important note For personal use only The material in this presentation is general background information about Challenger Limited This document may contain certain ‘forward-looking statements’. The words ‘forecast’, ‘expect’, activities and is current at the date of this presentation. It is informat