Release Date: August 13, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Challenger Ltd (CFIGF, Financial) recorded a strong financial performance with a group normalized net profit before tax of $608 million, exceeding the top end of their guidance range.
- Assets under management reached $127 billion, reflecting a 21% increase, driven by strong institutional net flows.
- The Life business achieved high-quality sales of $9.1 billion, with 88% of new business annuity sales for terms of 2 years or more.
- The company has a strong capital position, holding 1.67 times the minimum regulatory capital requirement, ensuring balance sheet resilience.
- Challenger Ltd (CFIGF) declared a fully franked full-year dividend of $0.265 per share, a 10% increase, reflecting confidence in their business outlook.
Negative Points
- Statutory net profit after tax decreased by 24% to $130 million, impacted by non-cash revaluations of the property portfolio and accounting mismatches under AASB 17.
- Funds Management EBIT declined by 11% to $55 million due to ongoing changes in business mix and large retail outflows.
- The net income margin for Funds Management fell by 240 basis points to 16.4%, reflecting the impact of lower-margin institutional mandates.
- Group expenses increased due to investments in brand initiatives, higher staff costs, and investment administration inflation, despite a 1% decrease in overall expenses.
- The company experienced a pretax loss of $119 million in asset experience due to lower property valuations, particularly in the office portfolio.
Q & A Highlights
Q: If I could just turn to the guidance for the first question. You've got an improving COE margin trajectory, 5.5% net book growth, the maturity rate coming down by 200 basis points and improving CTI. How could you possibly get to the bottom end of the guidance target? I'm just wondering if you could tell me what's assumed within that.
A: Yes, okay. I'll start, then Alex can say a few words. So, as you can imagine, at this stage of the year, we set a range which is built out from our sort of best estimates across the business. So, if you think about Challenger in '25 without the bank, if you think about our Life company, there's lots of parts of that where the result is certain, but there are parts of that where it's less certain. And so, we make an estimate as to where we'll get to with that result. In the FM business, FY '24 has been a tough year. So we've got an expectation of better performance coming out of the Funds business in the year ahead. And as just noted there at the microphone, it's going to be an area of real focus for us going forward. And then on the expenses side, we've operated -- I think we've operated the business really well, being able to pull back spending in certain areas and reinvest it into areas where we really want to strengthen and expand our capability. But so we acknowledge we're in an inflationary environment that doesn't seem to be abating so much, but we will manage the cost base as rigorously as we can. So, we think about those variables which gets us to the 10% PCP. And this year, we sort of outperformed our expectations we had at the beginning of the year, the year before we did 10%. So, we think this is a good starting position for us in terms of setting guidance. But might see if Alex wanted to --
Alex Bell - Challenger Ltd - Chief Financial Officer: No. I think that is all good.
Q: On the ROE target, congratulations on a pathway to getting back there. Nick, if I could just ask, when is it time to get more ambitious? You've talked about the $1.8 billion of excess capital. What is the hurdle rate for new investments? When you're talking about some of these growth opportunities, including defined benefits, is that above your current ROE target?
A: Yes. Okay, maybe I'll split that up and try to have some comments on this as well. But if you think about the comments there about hitting ROE in '25, this year, we've closed the gap about 290 points, pleasing the majority of that's been through earnings improvement, and we expect that to continue. We expect net assets to improve in the year ahead. So, that goes into the equation as well. We think the target is appropriate. And hopefully in the comments, when we price any business, whether it be DB or our domestic annuity business or any of the business we're writing, that ROE target is the basis for how we price the business and it's also how we think about doing any -- not that we have to, you'd use that for the metrics for any internal investments or transactions. And so, that doesn't change. But I think what we'd like the market to hear today is that, in reducing the PCA requirement, increasing the target surplus to PCA and taking PCA to 1.67 times, and as Alex commented, preference to operate at a higher PCA and achieve the ROE, that is our focus for FY '25.
Q: Firstly, just on capital. The capital ratio improved significantly over the half. A lot of it seems to be -- because the combined stress charge dropped. And I think, Alex, you mentioned diversification as the key driver. Can you just explain that a bit more? Is that a change in your assumptions around diversification? Is there anything that you've changed in your asset allocation which has led to this, which you weren't able to get credit for?
A: Yes, no. I'm happy to take that. Yes. So, if we think about what you're seeing today, it is really a step change in that PCA ratio, and it absolutely does reflect how we expect to operate going forward. And what it does is provide us with really material headroom when we think about both opportunities for growth going forward, but also how different markets might perform and therefore, how that balance sheet can travel through the cycle in different markets. And what we've done over the last couple of years now is think about what are all the ways that we can economically diversify the balance sheet. So in the first half of the year, you would have heard us talking about our increased allocation to alternatives as an example. Now, actually, in that case, alternatives are pretty capital consumptive. And so, you saw the PCA ratio actually fall from the back end of FY '23 to the first half of FY '24 as a result of a higher asset charge. But it was the right economic thing to do in order to create resilience in the balance sheet. This half, we've continued with those diversification strategies, and we have applied a number of additional hedging strategies, which have actually given us a benefit from a PCA requirement perspective. And so, I think what's important is that, the overall decisions that we're taking around diversification are to improve economic diversification. Some of them have (technical difficulty) on the capital position and some are more consumptive. But importantly, it provides us that resilience and option for future growth. So, the comments we made about wanting to remain well capitalized, you should hear that we're not making a change to our range. But in a benign environment, you should expect us to operate in that half.
Q: In terms of the sort of new cost-to-income target, how much of the $90 million savings from Accenture are you allowing in sort of giving that new cost-to-income target?
A: I'll take that. So, yes, thanks for the question, Nigel. So, just as a reminder for everybody, when we went into the arrangement with Accenture, that had two parts. The first part was outsourcing our IT platform servicing to them. And that was the main driver for the $90 million of savings over a 7-year period that we expected to see. We did talk about that being not completely linear, but we have -- there is a step change in the cost of our IT services that is baked into FY '25. And so, that is a component part of being able to reduce that PCA -- that CTI range for FY '25. So, there is a component in there.
Q: Just a second one just on the TelstraSuper arrangement, can you give us some insight to how that is progressing? What the reception has been like from the advisers on their end, any sort of indication on volumes?
A: Yes. Thanks, Anthony. So, just as a
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
