Slide 1: 1H18 financial results
1H18 financial results Delivering on strategy for growth 13 February 2018
Slide 2: Overview
Overview Delivering on strategy for growth 1H18 highlights Strategic progress Brian Benari – Managing Director and Chief Executive Officer Financial results Andrew Tobin – Chief Financial Officer Outlook Brian Benari – Managing Director and Chief Executive Officer 1H18 – 31 December 2017 2
Slide 3: Highlights
Highlights Delivering on strategy for growth 1H18 highlights Record normalised profit underpinned by AUM growth Strategic progress A clear plan for sustainable long-term growth Financial results Profit underpinned by record AUM and operating efficiency Outlook Delivering on strategy for growth 1H18
Slide 4: 1H18 highlights
1H18 highlights Record normalised profit underpinned by AUM growth Group Assets Under Management ($bn) Normalised NPBT and NPAT1 ($m) 76.5 275 Group AUM up 18% 254 64.7 Normalised NPBT up 8% 236 57.6 Life AUM up 17% Up 13% excluding 1H17 one-off Life Risk fee 208 Funds Management FUM up 18% 197 182
Slide 5: 1H18 highlights
1H18 highlights Delivering across multiple business dimensions Diversifying products and distribution Prudent capital management • AMP annuities on platform • Equity placement to MS&AD • Diversifying product – GIR, Japan, • Replaced subordinated debt new boutiques and strategies • CLC S&P ‘A’ rated1
Slide 6: Our vision and strategy
Our 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 custom
Slide 7: Strategic progress
Strategic progress A clear plan for sustainable long-term growth Grow allocation to secure and stable retirement incomes Strategic priority 1H18 progress Focus on • Industry submissions submitted to Government MyRetirement reforms • Government committed to establishing new retirement income framewor
Slide 8: Strategic progress
Strategic progress A clear plan for sustainable long-term growth Be the market leader and partner of choice Strategic priority 1H18 progress Leading adviser • Maintained leading retirement income brand – recognised by 93% of advisers 1 and consumer • Retirement income thought leader – recognised by
Slide 9: Strategic progress
Strategic progress A clear plan for sustainable long-term growth Provide relevant and superior investments for customers Strategic priority 1H18 progress Add new • Japanese asset management licencing underway (expected Q418) boutiques and strategies • Four new strategies across four existing boutiqu
Slide 10: Strategic progress
Strategic progress A clear plan for sustainable long-term growth Sustainable business practices to deliver superior outcomes Strategic priority 1H18 progress Employee • Diversity targets achieved and on track to exceed FY20 targets engagement above GHPN 1 • Exceeded target for women in management ro
Slide 11: Financial results
Financial results Andrew Tobin Chief Financial Officer
Slide 12: Group result
Group result Profit underpinned by record AUM and operating efficiency Normalised NPBT $275m – up 8% Normalised NPBT Normalised NPAT Statutory NPAT • Up 13% excluding 1H17 one-off +8% +6% -3% Life Risk fee (~$10m) 7 20 • Underpinned by strong asset (5) (1) 275 254 growth with Group AUM +18% • Margin
Slide 13: Group result
Group result Highly scalable business with significant cost advantage Highly scalable business Normalised cost to income ratio • Cost to income ratio 1 45% • down 13 percentage points over last decade • 1H18 mid-point of new guidance range 40% 1H18 cost to income ratio 32.1% – down 80 bps 1 35% • Li
Slide 14: Life result
Life result Long-term sales driving book growth and earnings Total Life sales ($bn) Life book growth ($bn) Life sales up 21% to $3.3bn 0.9 Life book growth $0.9bn up 12% 3.3 Annuity sales $2.3bn (+4%) 0.8 7.9% growth in total liabilities 2.8 Other Life sales $1.0bn (+84%) Annuity book growth $0.8bn
Slide 15: Life sales
Life sales Enhancing product diversification through long-term and other sales Total Life sales $3.3bn – up 21% Life sales ($m) 3,500 40% Annuity sales $2.3bn – up 4% 3,000 35% 31% • Actively reweighting to long-term annuities 1 2,500 30% • enhances quality and lengthens tenor • reduces maturity rat
Slide 16: Life annuity sales
Life annuity sales Annuity sales up 4% with active reweighting to long-term annuities Long-term annuity sales1 $0.8bn (up 20%) Annuity sales ($m) 40% • 36% of total annuity sales 2,250 36% • Lifetime 19%; MS Primary 17% 2,000 35% 31% 1,750 30% • Lifetime sales $422m 1,500 • $210m to $220m per quarte
Slide 17: Life annuity maturities
Life annuity maturities Realising benefits from focus on long-term annuities Annuity maturity rate reducing Long-term annuity sales and maturity rate1 • 1H18 maturities $0.2bn 40% 36% lower than 1H17 35% 31% 30% • On track to achieve FY18 maturity guidance of ~25% 25% 20% 19% 18% • 1H18 ~15% (actual
Slide 18: Life book growth
Life book growth Up ~$1bn in 1H18 – strong growth across all products Life book growth $948m (up 12%) Life book growth ($m) • 7.9% growth in total liabilities 948 1,000 843 800 Annuity book growth $758m (up 69%) 600 • 7.3% growth in annuity liabilities 400 438 347 • Benefiting from 200 • new distrib
Slide 19: Life margins
Life margins Lower margin driven by change in product mix 1H18 Life COE margin -14 bps Life COE margin – 2H17 to 1H18 • Product margin -15 bps Product margin -15 bps 4.19% • lower asset yields -19 bps 0.07% 0.01% 4.05% • lower interest and distribution 0.71% (0.19%) (0.03%) 0.72% expenses +7 bps 0.9
Slide 20: Life margin
Life margin Impacted by change in product mix • COE margin varies by product due to Life product mix3 • asset backing 100% 10% 10% 12% 14% • funding cost incurred 15% 3% 6% • treatment of distribution costs 75% • 1H18 COE margin impacted by product mix with higher portion of 50% 90% 90% 88% 83% • GI
Slide 21: Life investment portfolio
Life investment portfolio High quality portfolio providing reliable income and meeting 18% ROE Unlisted Fixed income – $11.1bn Equities and other – $1.6bn infrastructure Listed Alternatives and non- • Portfolio provides infrastructure • 77% investment grade beta equities Beta equities Investment gra
Slide 22: Life investment portfolio
Life investment portfolio High quality portfolio providing reliable income and meeting 18% ROE Unlisted Property – $3.7bn Infrastructure – $0.7bn infrastructure Listed Alternatives and non- infrastructure beta equities • Renewing long-term Beta equities Investment • 60% of portfolio listed Governmen
Slide 23: Life Investment Experience
Life Investment Experience Positive asset experience offset by liability valuation experience Asset Investment Experience +$24m Assets experience Liability experience +$24m -$46m • Fixed income +$71m 80 • Equities and other -$43m 60 • Property +$33m 40 • Infrastructure -$37m 20 0 Liability valuation
Slide 24: CLC Regulatory capital
CLC Regulatory capital Strongly capitalised to support growth 1 CLC PCA ratio Movement in CLC’s excess regulatory capital ($m) • PCA ratio 1.49x; CET ratio 1.02x 1 2 Regulatory capital +$481m PCA -$440m Deployment of excess capital 500 11 • Actively deployed excess capital in 198 (18) 122 (254) list
Slide 25: Funds Management result
Funds Management result Strong asset growth and scale benefits driving 31% increase in earnings Net flows1 ($bn) Average FUM ($bn) 3.9 Net flows up 22% 71.0 Funds Management up 20% 3.2 Fidante Partners $2.5bn (up 43%) 59.1 Fidante Partners up 21% 54.8 2 2 CIP $1.4bn (down 3%) CIP up 18% 1.2 1H16 1H1
Slide 26: Funds Management performance
Funds Management performance Long-term investment performance attracting flows Strong investment performance track-record Fidante Partners’ boutiques performance relative to benchmark1 • Over one year – 90% outperforming • Over five years – 97% outperforming 1 year 90% • Fixed income • all managers
Slide 27: Dividends
Dividends Increasing shareholder returns Dividend (cps) Dividend payout ratio1 20 60% 17.0 17.5 16.0 15 14.5 50.4% 49.7% 49.1% 48.6% 12.5 50% 10 39.3% 40% 5 0 30% 1H14 1H15 1H16 1H17 1H18 1H14 1H15 1H16 1H17 1H18 Unfranked dividend Franked dividend Normalised dividend payout ratio Normalised dividen
Slide 28: Outlook
Outlook Brian Benari Managing Director and Chief Executive Officer
Slide 29: A clear plan for long-term growth
A clear plan for long-term growth Delivering on strategy for growth – 2H18 priorities Grow allocation to secure Be the market leader and partner and stable retirement incomes of choice • Focus on superannuation reforms • Leading adviser and consumer ratings • Maintain thought leadership position • A
Slide 30: Outlook
Outlook Delivering on strategy for growth FY18 profit guidance Normalised NPBT between $545m to $565m – growth between 8% to 12% On track to achieve guidance – $275m for 1H18 and FY18 guidance reaffirmed 1 Target 18% ROE over medium term FY18 impacted by higher levels of capital until fully deployed
Slide 31: Highlights
Highlights Delivering on strategy for growth 1H18 highlights Record normalised profit underpinned by AUM growth Strategic progress A clear plan for sustainable long-term growth Financial results Profit underpinned by record AUM and operating efficiency Outlook Delivering on strategy for growth 1H18
Slide 32: Appendix
Appendix Additional background information
Slide 33: Our vision and strategy
Our vision and strategy A clear plan for sustainable long-term growth To provide our customers with financial security for retirement Increase the Australian Be recognised as Provide customers Deliver superior outcomes retirement savings pool the leader and partner with relevant investment to custom
Slide 34: Business overview
Business overview Two core businesses benefiting from superannuation system growth Challenger Limited (ASX:CGF) Life Funds Management #1 market share in annuities1 One of the fastest growing fund managers 2 Life Fidante Partners Leading provider of annuities and guaranteed Co-owned, separately brand
Slide 35: Appendix: Australian superannuation system overview
Appendix Australian superannuation system overview
Slide 36: Strategy targeting Australian superannuation system
Strategy targeting Australian superannuation system Attractive market with long-term structural drivers Superannuation system growth Australian superannuation system forecast3 ($bn) • 4th largest global pension market 1 8,000 • Growing twice speed of global 1 pension markets 6,000 • 8% CAGR over las
Slide 37: Targeting Australian superannuation system
Targeting Australian superannuation system Attractive market with long-term structural drivers Demographics Australians over 65 increasing2 • Supportive demographics from ageing population • Australians have one of world’s longest life expectancies • Medical and mortality improvements increasing lon
Slide 38: Australian superannuation system
Australian superannuation system Attractive market with long-term structural drivers Pre-retirement Projected superannuation assets2 ($bn) Super savings phase 7,500 • Funds management target market • Supported by mandated and increasing contributions 5,000 Post-retirement Super spending phase • Life
Slide 39: Retirement phase market drivers
Retirement phase market drivers Market leader well positioned in high growth market Super funds partnering with Life companies Over 700 Australians turning 65 every day Industry moving ahead of regulation Older and healthier 20-year cycle of retiring ‘Baby-Boomers’ Market Natural market growth retir
Slide 40: Australian superannuation system
Australian superannuation system High allocation to equities and low allocation to fixed income Australia has low fixed income and high equity allocations1 22% 26% 30% 37% 42% 46% 50% 51% 61% 11% 59% 63% Other Equities 12% 16% Cash and deposits 51% 37% Fixed income (bills and bonds) 7% 22% 9% 31% 23
Slide 41: Portfolio construction
Portfolio construction Retiree needs addressed through income layering Discretionary (wants) Funds Management Equities, fixed income Retirement income Account and alternative asset based products pension Guaranteed Life Essential Annuity and income guaranteed income (needs) streams products 1 Full a
Slide 42: Government enhancing retirement phase
Government enhancing retirement phase Reforms setting overall industry direction MyRetirement (CIPR) New retirement • Reform to lift living standards income rules and choices for retirees Objective of superannuation • New framework to enable product innovation, including z • To help guide retirement
Slide 43: Government enhancing retirement phase
Government enhancing retirement phase Reforms setting overall industry direction Objective of New retirement MyRetirement Progress superannuation income rules (CIPRs) Financial System Inquiry (FSI) Dec 2014 Dec 2014 Dec 2014 recommendation Review – Sep 2014 Closed Industry consultation Apr 2016 Soci
Slide 44: Government enhancing retirement phase
Government enhancing retirement phase MyRetirement (CIPRs) overview1 Problems and objectives of proposed framework for CIPRs CIPRs to provide stream of broadly consistent real income for life 1H18 – 31 December 2017 1. Extract from the discussion paper issued by the Australian Government on 15 Decem
Slide 45: Appendix: Life – Distribution, Product and Marketing
Appendix Life – Distribution, Product and Marketing (DPM)
Slide 46: Distribution
Distribution A competitive advantage driving long-term growth Influencing Annuities on platform and market Research Technology retirement calculators improving practice retirement outcomes Retirement Adviser Product Meeting goals education and practice support innovation and managing risks managemen
Slide 47: New relationships
New relationships Industry moving ahead of regulation – using annuities for MyRetirement 2016 2017 2018 ClearView Wealth Solutions Australia’s largest retail platform offering platform offering Challenger annuities Challenger annuities Suncorp branded annuities Challenger annuities via backed by Cha
Slide 48: New relationships
New relationships Platforms broadening access to Challenger annuities Platform relationships Platform relationships Provides access to ~1/3rd of super industry FUM1,2 Provides access to ~2/3rd’s of financial advisers3,4 Launched September 2017 Targeting launch in June 2018 quarter 10% 2% 24% 3% 29%
Slide 49: Colonial First State (CFS) relationship
Colonial First State (CFS) relationship Annuities on platform case study 1 Ernst & Young stochastic model • To determine better outcomes for clients • combining lifetime annuity with account based pension often provides superior outcomes CFS retirement income model • Supported by independent actuari
Slide 50: AMP relationship
AMP relationship Strong start with focus on long-term annuities • Annuities available via AMP’s adviser portal • Supported by Challenger retirement tools and calculators AMP annuities on platform • >80% of sales Lifetime annuities 1 • ~25% of writers new to Challenger 2 • ~40% increase in advisers u
Slide 51: MS&AD strategic relationship
MS&AD strategic relationship Broadening relationship and funding future growth Strategic relationship with MS&AD Group ~A$24bn market cap 41,400 employees Total assets ~A$252bn 5 business domains • Increases access to Japanese market through MS&AD (as at 30 September 2017) • Opportunities for both C
Slide 52: MS Primary annuity relationship
MS Primary annuity relationship Partnering with leading provider of AUD annuities in Japan MS Primary • MS&AD subsidiary Product overview • leading provider of foreign currency life products • Single premium product • Whole-of life product with annuity payment • extensive distribution footprint via
Slide 53: Life Australian product overview
Life Australian product overview Providing guaranteed income and peace of mind Fixed term Lifetime Other (long term annuities) 49% of total book 36% of total book 15% of total book Provides regular guaranteed Provides guaranteed regular Institutional product providing payments for a fixed rate, fixe
Slide 54: Brand strength
Brand strength Strong consumer and adviser brand Brand Strength1,2,3 2011 100% ‘Real Stories’ 80% 60% 40% 20% 2013 ‘On Paper’ 2011 2013 2015 2017 Consumers Advisers 2016 ‘Prompted ‘Leaders in ‘Lifestyle brand retirement Expectancy’ awareness’ income’ 1H18 – 31 December 2017 1. Consumer - Newspoll Co
Slide 55: Highly rated by advisers
Highly rated by advisers Challenger No.1 in overall adviser satisfaction Challenger adviser satisfaction1 Wealth Insights net promoter score3 8.5 Challenger annuities +50% 8.0 7.5 +’ve net promotor score Peers include 7.0 Australia’s top 20 - ’ve net promotor score fund managers 6.5 6.0 Challenger r
Slide 56: Seniors more savvy about retirement income
Seniors more savvy about retirement income Priorities change as we live longer 1 2017 National Seniors Survey Rate the importance of these attributes about your savings and finances • What matters most Regular, constant income that covers my essential needs • 84% − regular, constant Ensuring that my
Slide 57: Appendix: Life — Financials
Appendix Life —- Financials 2 challenger @2
Slide 58: Life
Life Sales and AUM benefiting from diversity of products and distribution Total Life sales ($m) Life AUM ($bn) 11% CAGR over 5 years 11% CAGR over 5 years 17.0 3,324 14.6 13.1 12.4 2,758 10.9 2,124 2,051 1,747 1H14 1H15 1H16 1H17 1H18 1H14 1H15 1H16 1H17 1H18 Annuity sales Other Life sales 1H18 – 31
Slide 59: Life investment portfolio
Life investment portfolio High quality portfolio providing reliable income Life investment portfolio – 31 December 2017 Life investment portfolio – last 10 years Unlisted 100% infrastructure Listed 90% Alternatives and non- infrastructure beta equities 80% Beta equities Investment 70% grade Offshore
Slide 60: Life investment portfolio
Life investment portfolio Fixed income 65% of portfolio Fixed income portfolio1 Fixed income portfolio by industry1 Liquids Non-IG 9% Government 100% Corporate Credit 13% Banks, Financials & Insurance 93% Non-IG Asset 23% Residential Property 90% Backed Securities 10% Infrastrucuture & Utilities 82%
Slide 61: Life investment portfolio
Life investment portfolio Property 21% of portfolio Property portfolio1 Life’s property portfolio Other Japanese retail 6% 3% • 54% of tenants investment grade • Australian unlisted REITs Australian Government is a major tenant 3% • representing 33% of rental income 9% 2 Australian listed REITs $3.7
Slide 62: Equities and infrastructure – 14% of portfolio
Life investment portfolio Equities and infrastructure – 14% of portfolio Equity portfolio1 Infrastructure portfolio1 Domestic beta 6% Unlisted other 16% Offhshore alternatives 35% Offshore beta 48% Unlisted logistics 12% Listed core 46% 44% infrastructure $1.6bn $0.7bn 54% 48% 56% Unlisted renewable
Slide 63: Normalised profit framework
Normalised profit framework Reflects underlying performance of Life business Cumulative Investment Experience ($m) Investment Experience overview Asset and liability valuation movements are 300 generally non-cash movements reported as 200 investment experience 100 Asset experience 0 FY10 FY11 FY12 F
Slide 64: Appendix: Funds Management
Appendix Funds Management challenger 22 %s
Slide 65: Funds Management
Funds Management Strong FUM growth track record • Fidante Partners Funds Under Management (FUM) ($bn) 16% over 5 years • 16 boutique brands • located in Australia, UK and US 73.4 • asset class diversification 62.1 55.2 54.7 • replicating model in Europe 45.0 • Challenger Investment Partners (CIP) •
Slide 66: Funds Management
Funds Management Growth supported by available capacity and superior flows Manager capacity ($bn) Quarterly net flows vs peers1 ($bn) 45 4.0 40 3.0 35 30 2.0 25 20 1.0 15 10 0.0 5 -1.0 Equity Fixed income Alternatives managers managers managers Available capacity Challenger Funds Management FUM Peer
Slide 67: Funds Management – multiple brands and strategies
Funds Management – multiple brands and strategies Scalable and diversified ~$73bn of FUM Equities $24.3bn1 Multiple brands & strategies Alternatives $12.5bn1 Fixed Income $36.6bn1 1H18 – 31 December 2017 1. Funds Under Management (FUM) as at 31 December 2017. 67
Slide 68: Fidante Partners
Fidante Partners Contemporary model with strong alignment of interests Administration services Distribution services (Fidante Partners provided) (Fidante Partners provided) • Investment operations • Asset consultant & research • Client operations Investment • Strategic positioning • Compliance Manag
Slide 69: Fidante Partners boutique managers
Fidante Partners boutique managers Diversified managers and investment strategies Partnership Partnership Boutique Asset class Boutique Asset class commenced commenced Aug 2010 Australian equities May 2010 Australian equities (income focus) Nov 2008 Australian fixed income Aug 2010 Australian small
Slide 70: Challenger Investment Partners (CIP)
Challenger Investment Partners’ (CIP) Proven long-term investment track record and capability • $17 billion of FUM1 • Investment manager for Challenger Life and 3rd party institutions • Clients benefit from experience and market insights through breadth and scale of mandates Trusted partner Asset sp
Slide 71: 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