Challenger Limited · ASX:CGF
Challenger — Investor Presentation (February 2021)
69 slides from Challenger's investor presentation, Feb 9, 2021
Slide 1: 1H21 Financial results
1H21 Financial results Providing our customers with financial security for retirement 9 February 2021
Slide 2: Overview
Overview Providing our customers with financial security for retirement 1H21 business outcomes Diversification delivering strong growth Bank acquisition to accelerate medium-term growth Richard Howes – Managing Director and Chief Executive Officer Financial results Andrew Tobin – Chief Financial Off
Slide 3: Highlights
Highlights Providing our customers with financial security for retirement Performance in line with expectations and on-track for profit guidance Diversification delivering strong growth and business momentum Bank acquisition to drive medium-term growth Prudent deployment of Life’s cash and liquid in
Slide 4: 1H21 business outcomes
1H21 business outcomes Diversification delivering strong growth Bank acquisition to drive medium-term growth Richard Howes Managing Director and Chief Executive Officer
Slide 5: 1H21 business outcomes
1H21 business outcomes Performance in line with expectations and on-track for profit guidance Normalised Statutory Normalised Strongly NPBT $196m 1 NPAT $223m 1 ROE 11.5% 2 capitalised On-track for FY21 profit Includes partial reversal Prudent capital CLC3 above top end of guidance of pandemic relat
Slide 6: Strategic progress
1H21 business outcomes Strategic progress 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 of choice m
Slide 7: Provide customers with financial security for retirement
Provide customers with financial security for retirement Diverse product range helping customers fund their retirement FUNDS High alpha across all capabilities MANAGEMENT Equities, alternatives, real assets, fixed income Annuities – term, lifetime, aged care LIFE Institutional retirement solutions N
Slide 8: Diversification strategy delivering strong growth
Diversification strategy delivering strong growth Strong business momentum in markets with long-term structural tailwinds Funds Management Life Fastest growing Australian active manager #1 Australian annuity provider 1 Fund managers – net flows % of FUM Life sales 15% $3.4bn Domestic term annuities
Slide 9: Bank acquisition extending customer and product reach
Provide customers with financial security for retirement Bank acquisition extending customer and product reach FUNDS High alpha across all capabilities MANAGEMENT Equities, alternatives, real assets, fixed income Term deposits and future product innovation opportunities BANK Platform to access direc
Slide 10: Bank acquisition
Bank acquisition Extending customer and product reach to drive medium-term growth Highly strategic acquisition MyLife MyFinance overview • Australian-based consumer savings and loans bank • Increased role supporting customer retirement incomes 1 • $35m acquisition price (net assets ~$18m) • Attract
Slide 11: Financial results
Financial results Andrew Tobin Chief Financial Officer
Slide 12: Group result
Group result Performance in line with expectations Net income ($m) Expenses ($m) Normalised NPBT ($m) Normalised ROE2 (%) 1 EBIT margin (%) 20.0% 20.0% 142 143 80.0% 66.5% 300.0 19.0% 18.0% 18.0% 423 127 17.0% 70.0% 61.9% 61.0% 16.0% 16.0% 375 250.0 15.0% 60.0% 14.0% 14.0% 325 13.0% 15.2% 200.0 12.0
Slide 13: Group result
Group result On-track to meet full year normalised NPBT profit guidance Investment gains from partial reversal of pandemic related losses 1 Normalised Normalised Statutory Normalised NPBT $196m – down 14% NPBT NPAT NPAT • Life – normalised growth assumptions (-$33m) and more defensive portfolio sett
Slide 14: Life result
Life result Sales and book growth benefiting from diversification strategy Earnings reflect lower normalised growth and speed of capital deployment Total Life sales ($bn) Life book growth ($bn) Life COE1 and Life EBIT ($m) Life normalised ROE2 (%) 3.4 345 3.1 0.9 286 294 16.8% 16.1% 0.7 1.2 239 244
Slide 15: Life sales up 10%
Life sales up 10% Benefiting from diversification strategy Record long-term annuity sales 1 Life sales $3.4bn (+10%) Life sales ($m) and long term sales mix 3,500 50% Annuity sales $2.2bn (+12%) 41% 3,000 • Domestic sales $1.6bn (+11%) 40% 36% 35% • term $1.3bn (+2%) 2,500 31% 29% – adviser disrupti
Slide 16: Life net book growth +4.7%
Life net book growth +4.7% Benefiting from diversification strategy Life net book growth $709m Life book growth ($m) 1 948 • +4.7% growth in total Life book 1,000 924 843 Annuity net book growth $158m 800 709 2 • +1.3% growth in annuity book 584 ‒ Annuity sales up 12% 600 ‒ Maturity rate elevated 40
Slide 17: Life sales and book
Life sales and book Record long-term annuity sales Long-term sales reduce future maturity rates Focus on long-term liabilities Life annuity and other liabilities ($bn) $15.8bn $15.6bn • 41% of 1H21 annuity sales long-term1 16.0 $14.5bn $13.0bn 18% 19% 2 Annuity new business tenor 9 years $11.4bn 15%
Slide 18: Life investment portfolio
Life investment portfolio Portfolio in good shape and maintaining appropriate settings Fixed income – unchanged at 76% Life investment portfolio (%) • Investment grade stable at 86% At balance date Half year averages • Cash down 5 points to 11% following gradual deployment 2% 3% 5% 5% 4% 4% 2% 6% •
Slide 19: Life margins
Life margins Reflects lower normalised growth and changes in portfolio composition 2H21 to benefit from further deployment of cash and liquids 1H21 Life COE margin -55 bps on 2H20 • Normalised capital growth -35 bps • Change in portfolio composition and assumptions 3.10% Product cash margin -14 bps
Slide 20: Life Investment Experience
Life Investment Experience Investment gains from partial reversal of pandemic related losses Fixed • Valuation gain $200m; normalised growth +$25m; credit default experience +$13m (+9 bps) 2 income • Valuation gain from contraction in credit spreads – reversal of significant portion of FY20 losses 1
Slide 21: Challenger Life regulatory capital
Challenger Life regulatory capital Above top end of target with flexibility to enhance returns $1.5bn of excess regulatory Movement in Challenger Life Company (CLC) excess regulatory capital ($m) capital – down $68m in 1H21 Regulatory capital +$379m PCA ($448m) • Capital base up $0.4bn ‒ retained ea
Slide 22: Challenger Life regulatory capital
Challenger Life regulatory capital Above top end of target with flexibility to enhance returns 1 PCA ratio 1.63x down from 1.81x CLC excess regulatory capital ($m) and PCA ratio (times) 1700 1.81x 1.90 • Above top end of target range (1.3x to 1.6x) 1.63x 1.54x • PCA ratio reflects 1.60 3 CLC target
Slide 23: Funds Management result
Funds Management result Record half year results Strong net flows and FUM growth providing business momentum Net flows($bn) Average FUM ($bn) Net income ($m) EBIT ($m) 35 6.4 85.9 30 81.1 80.4 28 5 78 80 81 5 4 4 11 11 1.9 0.7 30 74 76 24 69 19 1H20 2H20 1H21 1H20 2H20 1H21 1H20 2H20 1H21 1H20 2H20
Slide 24: Fidante Partners
Fidante Partners Strong net flows and investment performance underpin future growth Fidante Partners net flows ($bn) Fidante Partners investment performance 6 5.8 Institutional net flows Quartile performance 2 Relative to benchmark 3 • 11% increase in 1 5 1.9 institutional client base 24% 13% 12% 4
Slide 25: Dividend
Dividend Reflects confidence in business and capital position Fully franked dividends (cps) Dividend payout ratio1 20 60% 55.6% 55.5% 52.9% No final FY20 50% dividend with 46.6% 10 preference to 17.5 18.0 17.5 remain strongly capitalised 40% during 9.5 COVID-19 pandemic 0 30% 1H19 2H19 1H20 2H20 1H2
Slide 26: Outlook
Outlook Richard Howes Managing Director and Chief Executive Officer
Slide 27: Providing financial security for retirement
Providing financial security for retirement Extending customer reach and diversifying product and distribution FUNDS MANAGEMENT LIFE BANK • Organic growth from existing • Complete program to deploy • Integrate MyLife MyFinance and new boutiques excess cash and liquids • Offer compelling value and •
Slide 28: FY21 financial outlook
FY21 financial outlook On-track for profit guidance and strongly capitalised Guidance Normalised Net FY21 guidance range $390m to $440m Profit Before Tax ‒ 1H21: $196m – 47% of mid-point of guidance range ‒ Earnings weighted to 2H with gradual deployment of Life cash & liquids over FY21 1 ‒ Expenses
Slide 29: Highlights
Highlights Providing our customers with financial security for retirement Performance in line with expectations and on-track for profit guidance Diversification delivering strong growth and business momentum Bank acquisition to drive medium-term growth Prudent deployment of Life’s cash and liquid in
Slide 30: Appendix
Appendix Additional background information
Slide 31: Appendix
Appendix Providing our customers with financial security for retirement Challenger business overview 32-33 Life sales and AUM 53 Superannuation system 34-38 Life asset allocation & portfolio overview 54-58 Retirement phase overview 39-42 Life normalised profit framework 59 Retirement income regulato
Slide 32: Vision and strategy
Challenger business overview Vision and strategy A clear plan for sustainable long-term growth 1H21 – 31 December 2020 32
Slide 33: Business overview
Challenger business overview Business overview Two core businesses benefiting from superannuation system growth Challenger Limited (ASX:CGF) Life Funds Management #1 market share in annuities1 One of Australia’s largest active fund managers2 Leading provider of annuities and guaranteed Fidante Partn
Slide 34: Australian superannuation system
Superannuation system Australian superannuation system Attractive market with long-term structural drivers Market growth supported by Australian superannuation growth2 ($bn) 8,000 • Mandatory and increasing contributions • Earnings and contributions compounding 6,000 • Population growth and ageing d
Slide 35: 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 36: 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 37: 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 51
Slide 38: 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 39: 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 40: 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 41: Industry leader benefiting from long-term tailwinds
Retirement phase overview Industry leader benefiting from long-term tailwinds With clear plan for sustainable growth Long-term tailwinds Industry leader Market growth • Natural market growth Investment capability • Significant retirement savings • Leading investment capability • Super funds partneri
Slide 42: 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 1 (increasing to 67 ) Single $944.30 $24,552 pension rates2 Couple $1,423.60 $37,014 • Age pension based on lower outcome under
Slide 43: 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 44: 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 45: 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 46: 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 $62k p.a. until age
Slide 47: Retirement income strategies – combined products
Retirement income strategies Retirement income strategies – combined products Enhances income and provides longevity and inflation protection Combined product (70% Account Based Pension; 30% Lifetime Annuity) Income from combined product enhanced through 1. mortality credits 2. interaction with age
Slide 48: MS&AD strategic relationship
MS&AD MS Primary MS&AD strategic relationship Diversifying and increasing access to Japanese market Strategic relationship with MS&AD Group • Increases access to Japanese market through MS&AD Japanese general insurer 1 #1 market share • Opportunities for both Challenger and MS&AD • Broadens Challeng
Slide 49: MS Primary annuity relationship
MS&AD MS Primary MS Primary annuity relationship Diversifying and increasing access to Japanese market MS Primary • MS&AD subsidiary Product overview • leading provider of foreign currency life products Term annuities – A$ and US$ • extensive distribution footprint via bancassurance channel • Austra
Slide 50: Life product overview
Life product overview Life product overview Providing customers with guaranteed income Fixed term Long term Other (including lifetime) 35% of total book 46% of total book 19% of total book Provides regular guaranteed Provides guaranteed regular Institutional product providing payments for a fixed ra
Slide 51: Clear leader in retirement incomes
Challenger brand and adviser ratings Clear leader in retirement incomes Challenger rated #1 in overall adviser satisfaction Brand strength: Leaders in Retirement Income1 Wealth Insights net promoter score3 100% 95% 95% 93% 93% 89% 90% Challenger +20% 80% 85% +ve net promotor score Peers include Aust
Slide 52: Customer brand journey
Challenger brand and adviser ratings Customer brand journey Evolution of brand and target audience TOTAL BRAND AWARENESS 66% 64% 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
Slide 53: Life sales and AUM
Life sales and AUM Life Diversified distribution driving sales and AUM growth Total Life sales ($m) Life AUM ($m) 6% CAGR 8% CAGR 19,669 19,634 18,624 17,040 3,438 3,324 3,139 14,607 2,758 2,740 1H17 1H18 1H19 1H20 1H21 1H17 1H18 1H19 1H20 1H21 Annuity sales Other Life sales 1H21 – 31 December 2020
Slide 54: 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 55: 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 General Insurance 100% Absolute Return Life Insurance Infrastructure 80% Low beta 60% Equity beta Offshore &
Slide 56: Fixed income portfolio
Life asset allocation and portfolio overview Fixed income portfolio 1 Represents 76% of portfolio with 86% investment grade Fixed income portfolio by asset class1 Fixed income portfolio by sector1 Fixed income portfolio by geography1 Non-IG Corporate Credit Other New Rest of 7% Infrastructure Liquid
Slide 57: Property portfolio
Life asset allocation and portfolio overview Property portfolio Represents 17% of portfolio All direct properties independently valued in December 2020 Property portfolio1 Australian office 59%; industrial 6% • 11 office assets; 3 industrial assets Japanese retail, 11% • Average cap rate 5.5% (offic
Slide 58: Life investment portfolio
Life asset allocation and portfolio overview Life investment portfolio Equity and infrastructure 3% of portfolio; Alternatives 4% of portfolio Equity and infrastructure portfolio1 Alternatives portfolio1 Other 15% Other 12% United Kingdom Europe 7% 9% 11% 21% 31% Australia 38% 15% United Kingdom Eur
Slide 59: Normalised profit framework
Life normalised profit framework Normalised profit framework Reflects underlying performance of Life business Investment Experience Cumulative Investment Experience (pre-tax) ($m) Asset and policyholder liability valuation 200 movements plus net new business strain - (200) (400) Asset and policy lia
Slide 60: Asset and liability matching
Life asset and liability matching Asset and liability matching Unwanted risks mitigated with assets and liabilities cash flow matched 1 Asset and liability cash flow matching ($m) • Assets deliver contracted cash flows to match liability flows 10,000 • Risk appetite seeks to minimise 8,000 duration
Slide 61: Funds Management
Funds Management sales and FUM Funds Management Strong FUM growth track record • Fidante Partners Funds Under Management (FUM) ($bn) 10% CAGR • growing multiple boutique platform 91.2 82.8 • located in Australia, UK and Japan 75.0 19.4 73.4 • asset class diversification 62.1 20.1 17.4 18.7 15.1 • CI
Slide 62: Fidante Partners capability
Funds Management sales and FUM Fidante Partners capability Adding new managers and expanding distribution footprint Fidante Partners FUM growth ($bn) 70 1 Boutiques formed pre-Dec 2010 boutique sale 60 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 63: Funds Management – multiple brands and strategies
Funds Management managers Funds Management – multiple brands and strategies Scalable and diversified ~$91bn of FUM Equities $30.2bn1 Multiple brands & strategies Alternatives $11.4bn1 Fixed Income $49.6bn1 1H21 – 31 December 2020 1. Funds Under Management (FUM) as at 31 December 2020. 63
Slide 64: Fidante Partners boutique managers
Funds Management managers Fidante Partners boutique managers Diversified managers and investment strategies Partnership Partnership Boutique Asset class Boutique Asset class commenced commenced Aug 2010 Boutique – Australian and global equities Oct 2005 Boutique – Australian small cap equities Nov 2
Slide 65: Fidante Partners model & performance
Fidante Partners model & performance Fidante Partners Contemporary model with strong alignment of interests Administration services Distribution services • Investment operations • Asset consultant & research • Client operations Investment • Strategic positioning • Risk and compliance Management • Pr
Slide 66: Fidante Partners investment performance
Fidante Partners model & performance Fidante Partners investment performance Strong performance underpinning FUM growth 1 2 Fidante Partners percentage of funds 1st or 2nd quartile Fidante Partners performance relative to benchmark 22% 5 Year 88% 33% 30% 13% 18% 25% 3 years 87% 56% 48% 40% 35% 35% 2
Slide 67: Funds Management
Fidante Partners manager capacity Funds Management Growth supported by available capacity Manager capacity ($bn) Quarterly net flows vs peers1 ($bn) 40 4.0 35 30 3.0 25 2.0 20 1.0 15 10 0.0 5 -1.0 0 Equity Fixed Income Alternatives -2.0 Managers Managers Managers -3.0 Available capacity FUM • ~$140b
Slide 68: 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 third party institutions • Clients benefit from experience and market insights through breadth and scale of mandates Trusted partner A
Slide 69: Important note
Important note The material in this presentation is general background information about Challenger Limited group’s activities and is This document may contain certain ‘forward-looking statements’. The words ‘forecast’, ‘expect’, ‘guidance’, ‘intend’, current at the date of this presentation. It is