Challenger Financial Services Group Limited and its controlled entities

Transcription

1 Challenger Financial Services Group Limited and its controlled entities 2010 INTERIM FINANCIAL REPORT AND APPENDIX 4D. dan Challenger Financial Services Group Limited ACN

2 Appendix 4D for the half year ended 31 December Results for announcement made to market $M 2008 $M Change 2 % Revenue from ordinary activities (1.8) Net profit /(loss) from ordinary activities after tax attributable to (107.9) - members Net profit /(loss) for the period attributable to members (107.9) - Normalised profit after tax and before investment experience and significant items for the half year ended 31 December 2009 increased by 9.4% to $115.9 million (31 December $105.9 million). Dividends 2009 Cents 2008 Cents Change % Interim dividend - unfranked (2009: unfranked) (cents per share) Record date for determining entitlements to be paid 24 March 2010 Payment date for dividend 16 April Per ASX Rule 4.2.C.3 Percentage change has not been provided when the previous corresponding period consisted of a net loss Refer Appendix 1 ASX Appendix 4D on page 43 for disclosures required under ASX Listing Rules. This interim financial report covers Challenger Financial Services Group Limited ( the Company ) and its controlled entities ( the Group ). This report should be read in conjunction with the 31 December 2009 of the Group and any public announcements made in the period by the Group in accordance with the continuous disclosure requirements of the Corporations Act 2001 and the ASX listing rules. Except where otherwise stated, all figures relate to the half year ended 31 December 2009 and comparatives to the half year ended 31 December

3 Interim financial report for the half year ended 31 December 2009 Contents Directors report... 3 Financial report... 8 Consolidated income statement...9 Consolidated statement of comprehensive income...10 Consolidated balance sheet...11 Consolidated statement of changes in equity...12 Consolidated statement of cash flows Directors'declaration Independent auditor s review report Investor information Appendix 1 ASX Appendix 4D (rule 4.2A) Page 2

4 Directors report The Directors of Challenger Financial Services Group Limited ( the Company ) submit their report together with the financial report of the Company and its controlled entities ( the Group ), for the half year ended 31 December Directors The names and details of the Company s Directors holding office during the six months to 31 December 2009 and until the date of this report are as listed below. Directors were in office for this entire period unless otherwise stated. Name Position Peter L Polson Independent Chairman Dominic J Stevens Chief Executive Officer and Managing Director Thomas Barrack Jr Non Executive Director, Independent Graham A Cubbin Non Executive Director, Independent Russell R Hooper Non Executive Director, Independent Leon Zwier Non Executive Director, Independent Ashok P Jacob Non Executive Director resigned 8 September 2009 James D Packer Non Executive Director resigned 8 September 2009 Tetsuya Wada Non Executive Director resigned 17 September 2009 The composition of the Board of Directors has changed in the period. Following the sale of shares in the Company by Consolidated Press Holdings and Bank of Tokyo Mitsubishi, Mr James Packer, Mr Ashok Jacob and Mr Tetsuya Wada resigned from the Board. This means that, with the exception of the Managing Director, Dominic Stevens, all the Directors on the Board are independent. The reduction in director numbers from nine to six prompted a review of Board sufficiency. In order to provide a high standard of corporate governance, the Board must be adequately and appropriately resourced. This review concluded that the six remaining Directors were sufficient to discharge the Board s various duties and obligations. Should the Board s future workload or business conditions demand it, the Board will not hesitate to revisit this decision. 2. Operating and financial review The six months to 31 December 2009 has seen the gradual recovery in global debt and equity markets following the events of the global financial crisis which adversely impacted many participants in the Australian and global financial services sector during last financial year. Challenger has emerged soundly and has participated in the global market recovery during the interim period, to now be in a strong financial position with a simpler and more focused business. The Group s statutory profit after tax was $176.7 million for the six months ended 31 December 2009 which represents an increase of $284.6 million (264%) on the prior corresponding period (pcp). The Group reported a normalised profit after tax (excluding investment experience and significant items) of $115.9 million, up 9.4% ($10.0 million) on the pcp. This result was supported by normalised earnings before interest and tax (EBIT) of $158.2m (down 0.3%). Interest and borrowing costs were $11.9 million (down 30.8%) due to a combination of lower levels of debt and a lower average cost of debt. Major drivers of the changes in normalised profit after tax were improvements in the cash spread earnings generated by the Life division as a result of investments in higher yielding assets, including the purchase of the mortgage residual income units on 1 August Asset growth was underpinned by increased annuity sales during the period. The mortgage distribution business, plus approximately $4.5 billion of mortgages, was sold to National Australia Bank Limited (NAB) during the period, with the sale completing on 30 October The results of this business up to this date have been disclosed as discontinued operations in the financial report. While average funds under management for the Funds Management business rose as markets recovered and net fund inflows increased, particularly into our Boutique Partnerships, the change in asset class composition and margin of funds lead to decreased earnings for the period. Corporate expenses decreased during the period to a more normalised level after non-recurring restructure expenses in the year ended 30 June Investment experience In any given reporting period, the actual investment gains (both realised and unrealised movements) will vary to the expected or normalised gains that may be expected to be realised over a longer term investment horizon. The resulting investment experience, net of the expected normalised gains, is reported separately when determining normalised profit for the Group. Investment experience gains of $61.3 million after tax were recognised for the six months ended 31 December 2009 (31 December 2008: loss of $213.8 million) arising from the recovery in global debt and equity markets during the period. 3

5 2. Operating and financial review (continued) Group financial summary Management analysis Income 1 1 Net income and Total operating expenses differ from Revenue and Expenses as disclosed in the financial report, as certain direct costs including commissions and management fees are netted off against gross revenues in deriving Net income above. These direct costs are classified as Expenses in the financial report. In addition, the Special Purpose Vehicle revenues, expenses and finance costs disclosed in the financial report are netted off in Net income above. These classifications have been made in the Directors Report disclosure, as it is considered that this presentation more closely reflects the key value drivers and core operations of the Challenger Group. 2 For the 4 months up to the sale of the business on 30 October Dec 2009 $M 31 Dec 2008 $M Change % Normalised cash operating earnings Net fee income (28.8) Other income Net income (4.1) Expenses 1 Total operating expenses (113.8) (125.0) (9.0) Normalised EBIT (0.3) Interest and borrowing costs (11.9) (17.2) (30.8) Normalised profit before tax Tax (30.4) (35.6) (14.6) Normalised profit after tax Investment experience after tax 61.3 (213.8) Large Significant items after tax (0.5) - - Statutory profit / (loss) after tax (107.9) Large Normalised EBIT represented by: Life Funds Management (36.4) Mortgage Management (37.9) Corporate (29.5) (26.7) 10.1 Normalised EBIT (0.3) Significant items An after tax loss of $0.5 million was recognised on the sale of the mortgage distribution business to NAB. Earnings per share As shown in the table below, on a normalised basis, basic earnings per share (eps) increased 17.2% to 21.8 cents and diluted eps increased 13.7% to 20.8 cents. Both the basic and diluted eps were positively impacted by the continuing on-market share buy-back, with 45.5 million shares having been repurchased over the six months to 31 December 2009 at an average price of $3.71 per share. Earnings per share for the 6 months ended 31 Dec 2009 cents 31 Dec 2008 cents Basic normalised Diluted normalised Basic statutory 33.3 (18.9) Diluted statutory 31.7 (18.7) Key events during the half year On 30 October 2009, the Group sold its mortgage distribution business to NAB for a consideration of $383 million. In addition to the mortgage distribution legal entities, NAB acquired $4.5 billion of residential mortgages held in warehouses and the Group s 41% stake in the listed mortgage origination company, Homeloans Limited. Of this 41%, the transfer of a 23% holding to NAB is still subject to a Homeloans Limited shareholder vote in March 2010 and, as a result the Group continues to own 23% of Homeloans Limited at 31 December The entitlement to the residual income units (RIUs) of the remaining residential mortgage loan special purpose vehicles (SPVs) not sold to NAB (backed by approximately $11 billion of mortgages) was sold from the Mortgage Management division to Challenger Life Company Limited (CLC) within the Life division. 4

6 2. Operating and financial review (continued) The transfer was completed on arm s length, commercial terms for $558 million. The consideration paid reflected a value excluding any obligation for future trail commissions and amortisation of acquisition costs pertaining to the loan portfolio. Although no change to the net asset position of the Group has arisen, the transfer was cash settled and so increased the Group s financial flexibility during this period. The proceeds from the sale of the mortgage distribution business and from the cash settlement of the RIUs transferred to CLC have been used to retire the Group s major debt facilities/borrowings, consisting of the Medium Term Note, Net Interest Margin Bond and Corporate bank facility as outlined in Note 12 to the financial statements. The Group s controlled entity, Challenger Diversified Property Group (CDI), announced a $130 million capital-raising on 6 August 2009 with a 4 for 7 pro-rata entitlement offer to eligible unitholders of CDI. The Group subscribed for its entitlement under the offer and its holding has increased from approximately 44.3% of the units prior to the issue to 46.3% as at 31 December The Funds Management division has seen positive funds flow, particularly into its Boutique Partnerships, and growth in assets under management during this period as global markets improved and the investment of cash held back during the time of financial uncertainty has begun to be reinvested. Capital position The Group s capital position is managed at both the Group level and at the prudentially regulated CLC level with the objective of maintaining the financial stability of the Group and CLC whilst ensuring the shareholders earn an appropriate risk adjusted return through the optimisation of capital structures. Capital reserves above the regulatory minimum in CLC grew from an excess of $530 million at 30 June 2009 to approximately $850 million at 31 December 2009, supported by CLC s increased underlying earnings during the period. The Company continued its on-market share buy back activity during the period and also received shareholder approval at the Annual General Meeting (AGM) on 12 November 2009 to buy back a further 56.9 million shares, effectively refreshing the ability of the Company to buy back up to 10% of its shares. From the commencement of the program in July 2008 to the date of this report, a total of 90 million shares have been repurchased at an average price of $2.95. By reducing the number of shares on issue, the Board expects that the share buy back will be earnings per share accretive for shareholders. 3. Likely developments and expected results Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years have not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. Other than as disclosed in section 6 below, as at the date of this report no other matter or circumstance has arisen that has affected or may significantly affect: the Group s operations in future financial years; the results of those operations in future financial years; or the Group s state of affairs in future financial years. 4. Significant changes in the state of affairs There were no significant changes to the state of affairs of the Group during the half year ended 31 December 2009, other than as outlined in section 1 and 2 above. 5. Dividends On 21 August 2009 the Directors of the Company declared a final dividend on ordinary shares in respect of the year ended 30 June The amount of the dividend was $43.8 million, which represented an unfranked dividend of 7.5 cents per share. This dividend was paid on 16 October On 19 February 2010, the Directors of the Company declared an interim dividend on ordinary shares in respect of the half year ended 31 December The amount of the interim dividend is $31.8 million, which represents a dividend of 6.0 cents per share from current period profits and will be unfranked (31 December 2008: 5.0 cents per share, unfranked). The dividend has not been provided for in the 31 December 2009 financial statements and is payable on 16 April

7 6. Significant events after the balance date On 28 January 2010 Challenger Kenedix Japan Trust (CKT) unitholders voted in favour of an offer from CLC to buy the remaining units in CKT that it did not already own for $1.05 per unit. This resulted in an additional 95% holding in CKT, taking CLC s holding to 100%. Trading in CKT shares has been suspended on the ASX and the entity delisted on 9 February CKT will be consolidated by the Group for the 30 June 2010 reporting period. As a result of the transaction occurring at a discount to the fair value of the net assets of the trust, the Group will recognise a provisional pre-tax profit on acquisition of $106 million, net of transaction related expenses. Whilst the Group recognises that there may be future declines in Japanese property values over subsequent periods, all CKT properties were valued at 30 November 2009 by independent valuers and, given the current nature of these valuations, they are deemed to be the best approximation for determining fair value at the 28 January 2010 acquisition date. Other than the above, no matter or circumstance has arisen since 31 December 2009 that has significantly affected, or may significantly affect: the Group s operations in future financial years; the results of those operations in future financial years; or the Group s state of affairs in future financial years. 7. Rounding The amounts contained in the interim financial report have been rounded off to the nearest $100,000 under the option available to the Company under Australian Securities and Investments Commission (ASIC) Class Order 98/0100. The Company is an entity to which the class order applies. 6

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9 Financial report Contents Page Consolidated income statement 9 Consolidated statement of comprehensive income 10 Consolidated balance sheet 11 Consolidated statement of changes in equity 12 Consolidated statement of cash flows Basis of preparation of the interim financial report Segment information Revenue Expenses Finance costs Income tax Dividends and distributions paid and proposed Earnings per share Financial assets Investment properties Goodwill Interest bearing liabilities Life contract liabilities Special Purpose Vehicles Contributed equity Reserves Reconciliation of operating cash flows Discontinued operations Significant transactions Subsequent events Contingent liabilities, contingent assets and credit commitments 38 Directors declaration 39 8

10 Consolidated income statement For the half year ended 31 December Dec Dec 2008 Notes $M $M Derived from operating activities Revenue Expenses 4 (347.0) (349.3) Finance costs 5 (346.6) (764.0) (184.6) Share of profits of associates Profit/(loss) from continuing operations before income tax (184.6) Income tax (expense)/benefit from continuing operations 6 (54.5) 58.8 Profit/(loss) from continuing operations after income tax (125.8) Profit/(loss) from discontinued operations after income tax Profit/(loss) after income tax (110.2) Loss attributable to non-controlling interests Profit/(loss) attributable to equity holders of the parent (107.9) Earnings per share from continuing operations: Basic earnings per share (21.6) Diluted earnings per share (21.3) Earnings per share from all operations: Basic earnings per share (18.9) Diluted earnings per share (18.7) The income statement should be read in conjunction with the accompanying notes. 9

11 Consolidated statement of comprehensive income For the half year ended 31 December Dec Dec 2008 Notes $M $M Profit/(loss) after income tax (110.2) Gain on translation of foreign operation Cash flow hedge movements 16 (3.9) (57.2) Unrealised gains on available for sale assets Adjustment to holding in controlled entity Other comprehensive income after income tax 7.6 (52.5) Total comprehensive income after income tax (162.7) Attributable to: Equity holders of the parent (160.4) Non-controlling interests (4.2) (2.3) Total (162.7) The statement of comprehensive income should be read in conjunction with the accompanying notes 10

12 Consolidated balance sheet As at 31 December 2009 Assets 31 Dec June Dec 2008 Notes $M $M $M Cash and cash equivalents , ,281.8 Cash and cash equivalents - SPV Receivables Receivables - SPV 9, , ,199.1 Current tax assets Derivative assets Financial assets fair valued through income statement 9 4, , ,321.3 Available-for-sale assets Investment property 10 1, , ,073.9 Plant and equipment Deferred tax assets Investments in associates Other assets Goodwill Other intangible assets Total assets 18, , ,788.7 Liabilities Payables Derivative liabilities Interest bearing liabilities , ,164.1 Interest bearing liabilities - SPV 12 9, , ,947.1 External unitholders liabilities Provisions Deferred tax liabilities Life contract liabilities 13 4, , ,166.8 Total liabilities 16, , ,123.2 Net assets 1, , ,665.5 Equity Contributed equity 15 1, , ,414.0 Reserves Accumulated losses (54.5) (187.4) (174.9) Total equity attributable to equity holders of the parent 1, , ,365.8 Non-controlling interests Total equity 1, , ,665.5 The balance sheet should be read in conjunction with the accompanying notes. 1 Special purpose vehicles (SPV) 11

13 Consolidated statement of changes in equity For the half year ended 31 December Dec Dec 2008 Issued capital Notes $M $M Opening balance at the beginning of the period 1, ,622.1 New shares issued - - Net shares cancelled under share based payment plans (17.6) (17.3) Shares purchased and cancelled under share buy back (168.4) (28.3) Closing balance at the end of the period 15 1, ,576.5 Treasury shares Opening balance at the beginning of the period (161.6) (159.7) Shares purchased and held in trust, net of forfeitures (32.8) (25.2) Vested shares released from the CPP Trust Vested shares released from the Long Term Incentive Plan Closing balance at the end of the period 15 (131.3) (162.5) Total contributed equity 15 1, ,414.0 Reserves Opening balance at the beginning of the period Currency translation differences Changes in cash flow hedges (3.9) (57.2) Changes in available-for-sale assets Cost of share based payments (4.6) 8.3 Adjustment to holding in controlled entity Closing balance at the end of the period Retained (losses)/earnings Opening balance at the beginning of the period (187.4) (19.7) Profit/(loss) for the period (107.9) Equity dividends (43.8) (47.3) Closing balance at the end of the period (54.5) (174.9) Total 1, ,365.8 Non-controlling interests Opening balance at the beginning of the period Other non-controlling movements/distributions (Loss)/profit for the period (4.2) (2.3) (Deconsolidation)/consolidation of controlled entities (21.2) Closing balance at the end of the period Total equity 1, ,

14 Consolidated statement of cash flows For the half year ended 31 December Dec Dec 2008 Notes $M $M Operating activities Receipts from customers ,159.3 Annuities received Annuities paid (626.3) (559.9) Payments to vendors and employees 1 (753.0) (1,115.9) Dividends received Interest received Interest paid (46.5) (64.6) Income tax paid - (3.3) Net cash inflow/(outflow) from operating activities (62.4) Investing activities Net (payments)/proceeds on sale/purchase of investments (217.3) Mortgages loans - advanced and purchased 14 (762.4) (4,907.4) Mortgages loans - repaid and sold 14 6, ,534.9 Net proceeds from sale of controlled entities/significant transactions Payments for purchase of plant and equipment (1.3) (5.2) Net cash inflow from investing activities 6, ,887.0 Financing activities Proceeds from interest bearing liabilities 1, ,526.2 Repayment of interest bearing liabilities (8,246.8) (5,826.7) Payments on buy-back of shares/treasury shares (185.6) (53.5) Proceeds from rights issue Dividend paid (43.8) (47.3) Distributions paid to non-controlling interests (7.7) - Net cash outflow from financing activities (7,151.6) (1,401.3) Net (decrease)/increase in cash and cash equivalents (489.5) Cash and cash equivalents at the start of period 1, ,758.4 Cash and cash equivalents at the end of period 1, ,181.7 Cash ,281.8 Cash - SPV Cash and cash equivalents at the end of period 1, , Inclusive of GST. The statement of cash flows should be read in conjunction with the accompanying notes. 13

15 1. Basis of preparation of the interim financial report This interim financial report of Challenger Financial Services Group Limited ( the Company ) as at, and for the half year ended, 31 December 2009 comprises the Company and its subsidiaries (together referred to as the Group or the consolidated entity ) and the Group s interest in associates. It was authorised for issue in accordance with a resolution of the Directors on 19 February (i) Basis of preparation This general purpose interim financial report for the half year ended 31 December 2009 has been prepared in accordance with Accounting Standard AASB 134 ing, and the Corporations Act The interim financial report does not include all the notes normally included in an annual financial report. Accordingly, it is recommended that this report be read in conjunction with the annual report for the financial year ended 30 June 2009 and any public announcements made by Challenger Financial Services Group Limited and its controlled entities during the half year in accordance with the continuous disclosure obligations arising under the Corporations Act 2001 and the ASX listing rules. (ii) Significant accounting policies The accounting policies applied by the Group in this consolidated interim financial report are consistent with those applied by the Group in its consolidated financial report as at and for the year ended 30 June 2009 with the exception of the clarifications and new reporting standards issued and/or applied during the year, as outlined below. Reinsurance The Group entered into a reinsurance arrangement during the period that meets the definition of a life insurance contract. The Margin on Services (MoS) methodology requires the present value of future cash flows arising from reinsurance contracts to be included in the calculation of life insurance contract liabilities. As a result, the life insurance contract liability included in the life contract liabilities on the 31 December 2009 balance sheet is stated net of the impacts of this reinsurance contract. External unitholders liabilities Unit trusts will record unitholders contributed funds as either debt or equity, depending on the nature of the trust. Previously, all non-controlling interests in such entities were recorded in equity. The Group gained control over two new entities (Harris Global Sovereign Linked Bond Trust and Balloon Inflation Linked Bond Trust) during the period whose unitholders funds are classed as liabilities. Upon consolidation the liability related to non- Group entities remain in the balance sheet as external unitholders liabilities. New reporting standards issued or applied during the year The revised AASB 101 Presentation of Financial Statements and AASB : Amendments to Australian Accounting Standards arising from AASB 101 were adopted for the first time during the period. These amendments require a statement of comprehensive income to be included as a primary statement in the financial report. Other than adjustments made for amendments to AASB 5 Non-current Assets Held for Sale and Discontinued Operations that resulted in minor disclosure impacts to Note 18, there are numerous amendments to Australian Accounting Standards that were available for early adoption, and applicable to the Group, but have not been applied in these financial statements. These amendments would have only resulted in minor disclosure impacts if they had been early adopted. (iii) Significant accounting judgements, estimates and assumptions The carrying amount of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Share based payments The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the ordinary shares at the date at which they are granted. The fair value is determined using the Black- Scholes formula, taking into account the terms and conditions upon which the equity instruments were granted. The fair value calculation is performed by an external valuer. Policy liabilities Life insurance policyholder liabilities are accounted for under AASB 1038 Life Insurance Contracts. Policy liabilities are measured at net present values of estimated future cash flows or, where the result would not be materially different, as the accumulated benefits available to policyholders. Changes in policy liabilities for non-deposit business are recognised in the income statement as revenues and expenses in the financial year in which the changes occur. 14

16 1. Basis of preparation of the interim financial report (continued) A significant area of judgement is in the determination of policyholder liabilities, which involve actuarial assumptions. The areas of judgement where key actuarial assumptions are made in the determination of policyholder liabilities are: business assumptions including: duration of claims/policy payments; and acquisition and maintenance expense levels; and economic assumptions for discount and inflation rates. The determination of assumptions relies on making judgements on variances from forecast assumptions. Where experience differs from forecast assumptions: recent results may be a statistical aberration; or there may be changes in the underlying experience requiring a change in the forecast assumptions. The Group s actuaries arrive at conclusions regarding the statistical analysis using their experience and judgement. Additional information on the policyholder liabilities is set out in Note 13 Life contract liabilities. Property valuations Investment properties in Note 10 are stated at fair value, which has been determined based on valuations performed by independent valuers during the period ended 31 December The Valuer or Valuation Practice are authorised to practise as a Valuer under the law of the relevant jurisdiction where the valuation takes place. The Valuer performing the valuation has at least five years of continuous experience in the valuation of property of a similar type to the property being valued. Neither the Valuer, nor Valuation Practice, has a pecuniary interest that could conflict with the valuation of the property. The Valuer and Valuation Practice comply with the Australian Property Institute (API) Code of Ethics and Rules of Conduct. Valuations are prepared on the basis of Market Value as defined by The International Assets Valuation Standards Committee (TIAVSC) and endorsed by the API. Market value is the estimated amount for which an asset could exchange on the date of valuation between a willing buyer and willing seller in an arm s length transaction wherein the parties had each acted knowledgeably, prudently and without compulsion. In determining Market value, Valuers have examined available market evidence and applied this analysis to both the traditional capitalisation approach and discounted cash flow approach. Interest bearing liabilities Subordinated debt is initially recognised at fair value and in subsequent periods is remeasured at fair value through the income statement. The determination of fair value includes the assessment of movements in interest rates, credit spreads and foreign exchange. These movements are reviewed at each reporting date to take into account market conditions. Deferred tax assets Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Factors considered include the ability to offset tax losses against taxable profits between members of the tax consolidated group within an appropriate future timeframe and whether the level of future taxable profits are expected to be sufficient to allow recovery of deferred tax assets. Unlisted investment valuations Investments for which there is no active market or an external valuation available were valued: with reference to the current market value of another instrument that is substantially the same; via discounted cash flow analysis; and/or by other methods consistent with market best practice. Impairment of goodwill The Group assesses whether goodwill is impaired at least annually. These calculations involve an estimation of the recoverable amount of the cashgenerating units to which the goodwill is allocated. (iv) Comparatives Where necessary, comparative figures have been reclassified to conform to the changes in presentation made in these financial statements. As a result of the sale of part of the Mortgage Management division to National Australia Bank Limited (NAB) on 30 October 2009, revenue and expenses in the comparatives relating to the legal entities sold have been removed from revenue and expense comparatives and included in Note 18: Discontinued operations. (v) Rounding of amounts The amounts contained in the interim financial report have been rounded off to the nearest hundred thousand dollars ($0.0M) under the option available to the Company under Australian Securities and Investments Commission (ASIC) Class Order 98/100. The Company is an entity to which the class order applies. 15

17 Challenger Financial Services Group Limited 2. Segment information Business segments The reporting segments of the Group have been identified as follows: Half year ended : 31 Dec 2009 Life 31 Dec 2008 Reporting segments Funds Mortgage Management Management 2 31 Dec 31 Dec 31 Dec Dec 2008 Total reporting segments Corporate and other 3 Total consolidated management view 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec $M Management view 1 Total segment revenue Operating expenses (13.8) (12.0) (40.3) (49.3) (26.5) (36.0) (80.6) (97.3) (33.2) (27.7) (113.8) (125.0) Normalised EBIT (29.4) (26.7) Interest and borrowing costs (11.9) (17.2) (11.9) (17.2) 31 Dec 2008 Normalised net profit/(loss) before tax, impairment, significant items and investment experience (41.3) (43.9) Investment experience 87.5 (305.4) (305.4) (305.4) Net profit/(loss) before tax (195.9) (120.0) (41.3) (43.9) (163.9) Income tax (expense)/benefit (56.7) 56.0 Net profit/(loss)after tax (107.9) Significant items after tax (0.5) - Net profit/(loss)after tax from all operations (107.9) Segment assets 7, , , , , , , , ,788.7 Segment liabilities (5,799.0) (5,982.2) (8.6) (19.9) - (522.6) (5,807.6) (6,524.7) (10,674.2) (19,598.5) (16,481.8) (26,123.2) Net assets from all operations 1, , , , , Management view is as described in the Directors report as this presentation more closely reflects the key value drivers and core operations of the Group. 2 The Mortgage Management division was disposed of on 30 October It remained as a reported segment during the period to 31 December Corporate and other includes Corporate, SPVs, CDI and group elimiations. 4 Intersegment transactions are at arm s length. 16

18 2. Segment information (continued) (i) Operating segments The presentation of these results is the same as that provided to the chief operating decision maker as required under AASB 8. The Group operates in Life, Mortgage Management, Funds Management and Corporate segments. Life includes annuity and life insurance business carried out by Challenger Life Company Limited (CLC). CLC invests in assets providing long-term income streams for policyholders. The Mortgage Management segment is a white label funding provider for the commercial and residential mortgage lending market. The segment also distributes mortgages through ownership of broker aggregation platforms. This division was sold on 30 October 2009 so the segment only includes the results up to that date. Funds Management earns fees from its operations in the funds management and specialised funds fields, providing an end to end funds management business as well as managing four listed funds and a number of unlisted fund mandates. Corporate and other in the segment note includes the income and expenses incurred by the corporate division. Corporate and other also includes eliminations and non-core activities of the Group. Corporate expenses consist of costs that fall outside the day-to-day operations of Life, Mortgage Management and Funds Management. These costs include the costs of the Group CEO and CFO, shared services across the Company, directors' fees, corporate borrowings and associated borrowing costs and shareholder registry services for the Group. (ii) Products and services The Group s divisional segment split represents the products that the Group supplies. Life Challenger offers a fixed rate superannuation product and fixed rate retirement product that are both designed for investors who are seeking a low-risk investment for a known period of time and want to protect their capital. Mortgage Management This division was sold on 30 October 2009 so the segment only includes the results up to that date. Challenger specialised in funding residential and commercial loans to borrowers in Australia and New Zealand. These loans were delivered through a vast network of accredited Preferred Lenders. The Preferred Lenders include mortgage originators, mortgage managers and other professionals who offer loans under their own branding to their clients. Funds Management Funds Management offers a range of managed investments across the major asset classes with funds in: Fixed interest and mortgage funds Australian shares Property funds International share funds (iii) Geographical areas The Group operates predominantly in Australia and so no geographical split is provided to the chief operating decision maker. (iv) Major customers The Group does not rely on any major customer and so there is no concentration risk. (v) Non-reportable segment reconciling items Reconciling items in Corporate and other revenue includes interest income received by corporate entities. Reconciling items in Corporate and other includes expenses incurred by the corporate divisions not recharged, such as corporate division wages and salaries and depreciation costs. The assets of the Corporate and other segment are made up of corporate assets and group eliminations of -$76.6 million (2008: $655.8 million), SPV assets of $10,007.5 million (2008: $18,162.0 million), and CDI assets of $790.2 million (2008: $874.2 million). The liabilities of the Corporate and other segment are made up corporate liabilities and group eliminations of $489.6 million (2008: $994.6 million), SPV liabilities of $9,974.6 million (2008: $18,208.2 million), and CDI liabilities of $210.0 million (2008: $395.7 million). 17

19 2. Segment information (continued) vi) Reconciliation of segment revenue to statutory revenue Half year ended 31 Dec Dec 2008 $M $M Reportable segment revenue Other revenue relating to CDI and Corporate function reported to management Management view of revenue SPV interest costs and fees offset against SPV income Commission expenses offset against commission income Amortisation of deferred portfolio and origination costs offset against mortgage fee income Property related expenses offset against property income Policyholder liabilities maintenance and expense offset against policyholder income Realised and unrealised gains and (losses) recognised as investment experience (236.5) Normalised capital growth management assumptions (28.3) (34.0) Interest expense on controlled property trusts offset against income for management reporting Other expenses, other interest and impact of non-controlling interests offset against income for management reporting (5.8) (2.8) Statutory revenue vii) Reconciliation of segment profit to statutory profit/(loss) Reportable segment profit before tax Other profit relating to CDI and loss relating to Corporate function reported to management (41.3) (43.9) Management view of profit before tax Investment experience (305.4) Amounts relating to discontinued operations pre tax (15.7) (20.7) Statutory profit/(loss) before tax (184.6) viii) Intersegment transactions All intersegment transactions are at arm s length. 1 Net income and Total operating expenses differ from Revenue and Expenses as disclosed in the financial report as certain direct costs including commissions and management fees are netted off against gross revenues in deriving Net income above. These direct costs are classified as Expenses in the Financial Report. In addition, the Mortgage Management Special Purpose Vehicle revenues, expenses and finance costs disclosed in the financial report are netted off in Net income. 2 Investment experience is the realised and unrealised mark to market gains and losses on assets and liabilities. Investment experience is net of normalised capital growth. 18

20 3. Revenue Half year ended Derived from operating activities: 31 Dec Dec Fees and other income $M $M Management fee income Fee income - SPV Other income Investment revenue Equity and infrastructure investments 1 Dividend income Net realised losses on equity investments (9.6) (3.3) Net unrealised gains/(losses) on equity investments 25.7 (78.5) Net realised gains on infrastructure investments Net unrealised gains/(losses) on infrastructure investments 42.0 (122.2) Debt assets and liabilities and cash Interest income Net realised gains/(losses) on debt assets 44.0 (87.2) Net unrealised gains/(losses) on debt assets and liabilities (94.9) Real estate investments Dividend income Property rental income Net realised losses on real estate investments (0.5) (0.9) Net unrealised losses on real estate investments (54.9) (98.4) Discount on acquisition of controlled entities Other investments Interest income - SPV Impairment loss on financial assets available for sale - (0.7) Net realised exchange gains/(losses) on foreign exchange translation and foreign currency hedges (313.0) Net unrealised (losses)/gains on foreign exchange translation and foreign currency hedges (86.6) Net realised (losses)/gains on interest rate derivative assets and liabilities (0.8) 9.4 Net unrealised (losses)/gains on interest rate derivative assets and liabilities (56.5) Other revenue Policyholder liability adjustment losses 3 (30.3) (277.1) Reinsurance contract liability adjustment losses (15.3) - Gain on annuity book transfer Total Infrastructure investments are designated as fair value through the income statement. 2 Includes fair value movement in subordinated debt (Note 12). 3 Policyholder liability movements from changes in interest rates, inflation rates, and valuation assumptions. Total change in policy liabilities is equal to the policyholder liability adjustment (above) plus the cost of policyholder liabilities (Note 4) comparatives have been restated to remove revenue related to discontinued operations. For details see Note

21 4. Expenses Half year ended Derived from operating activities: 31 Dec Dec $M $M Commission expenses Amortisation of deferred portfolio and origination costs Policyholder liabilities and maintenance expenses Property management expenses Management fees Fee expenses SPV Intangibles amortisation expense Employee expenses Employee share based payments Superannuation Depreciation expense Communications IT maintenance Occupancy expense - operating lease Professional fees Other expenses Total Cost of policy liabilities is made up of interest expense on policy liabilities plus fair value adjustments to policy liabilities at policy acquisition, less release of liability in respect of expenses incurred in the current year. Interest expense on policy liabilities is calculated at rates that applied during the current year. Movement in policy liabilities due to changes in absolute value of interest rates is captured in Note 3 Policy holder liability adjustment, (losses)/ gains comparatives have been restated to remove expenses related to discontinued operations. For details see Note Finance costs Derived from operating activities: Interest and loan amortisation expenses incurred by: Half year ended 31 Dec Dec $M $M Special purpose vehicles Other entities Property trusts Other finance costs Total comparatives have been restated to remove finance costs related to discontinued operations. For details see Note

22 6. Income tax Major components of income tax expense are: Half year ended 31 Dec Dec $M $M (a) Income tax (expense)/benefit analysis: Current income tax (expense)/benefit (26.6) 4.5 Deferred income tax (expense)/benefit (27.9) 54.3 Net income tax (expense)/benefit (54.5) 58.8 (b) Amounts recognised directly in equity: (4.5) (0.5) (c) Reconciliation of income tax (expense)/ benefit: Profit/(loss) from continuing operations before income tax (184.6) Prima facie income tax based on the Australian company tax rate of 30% (65.5) 55.4 Tax effect of amounts which are not deductible/assessable in calculating taxable income: Non-deductible/non-assessable items 14.8 (0.7) Rate differential on offshore income Prior year adjustments and other items (6.4) Income tax (expense)/ benefit from continuing operations (54.5) 58.8 Tax losses Gross unused losses for which no deferred tax asset has been recognised All available revenue losses have been recognised in the balance sheet at 31 December 2009 and 31 December comparatives have been restated to remove tax expense related to discontinued operations. For details see Note

23 7. Dividends and distributions paid and proposed a) Dividends declared and paid during the period Half year ended 31 Dec Dec 2008 $M $M Final unfranked dividend for the financial year 30 June 2009: 7.5 cents (2008: 7.5 cents 60% franked) b) Dividends proposed (not recognised as a liability as at 31 December) Interim dividend for the financial year 30 June 2010: 6.0 cents (2009: 5.0 cents unfranked) c) Dividend franking Dividends paid have been unfranked with a corresponding zero tax rate (30 June 2008: Paid dividends were franked at 60% with a tax rate of 18%). The interim dividend proposed will be unfranked (31 December 2008: unfranked). d) Distributions paid or provided Distributions paid or provided represents amounts paid or payable to non-controlling interests of entities controlled by the Group. Half year ended 31 Dec Dec 2008 $M $M Distributions paid during the period to non-controlling interests Distributions provided during the period to non-controlling interests

24 8. Earnings per share The following reflects the income and share data used in the basic and diluted earnings per share computations: Half year ended 31 Dec Dec 2008 From continuing operations: Cents Cents Basic earnings per share 31.6 (21.6) Diluted earnings per share 30.1 (21.3) Total from all operations: Basic earnings per share 33.3 (18.9) Diluted earnings per share 31.7 (18.7) Earnings used in calculating earnings per share $M $M For basic earnings per share: Profit/(loss) from continuing operations (123.5) Profit/(loss) from discontinued operations Net profit/(loss) attributable to ordinary shareholders for basic earnings per share (107.9) For diluted earnings per share: Profit/(loss) from continuing operations (107.9) Profit from discontinued operations Profit/(loss) attributable to ordinary shareholders for diluted earnings per share (107.9) Number of shares Number Number Weighted average number of ordinary shares for basic earnings per share 530,939, ,588,883 Effect of dilution: - dilutive impact of long term incentive (LTI) schemes 22,180,006 7,877,796 - dilutive impacts of external options 4,959,689 6,515 Adjusted weighted average number of ordinary shares for diluted earnings per share 558,079, ,473,194 The weighted average non-dilutive impacts of LTI scheme shares and external options over the period were 17.0 million and 57.5 million respectively. Since 31 December 2009, 14.0 million shares have been purchased and cancelled as part of the continuing on-market buy back. There have been no other transactions involving ordinary shares or potential ordinary shares since the reporting date and before the completion of these financial statements. 23

25 9. Financial assets (i) Financial assets fair valued through income statement As at 31 Dec June Dec 2008 $M $M $M Debt investments held for trading Bonds 1, , Fixed interest notes Floating rate notes 1, , ,025.9 Equity investments held for trading 3, , ,025.4 Shares in listed and unlisted corporations Unlisted unit trusts and managed funds Shares in listed corporations held in relation to endowment warrants Infrastructure investments Shares in listed and unlisted trusts Property investments Indirect property investments in listed and unlisted trusts Total financial assets fair valued through the income statement 4, , ,321.3 (ii) Available-for-sale assets Other financial assets Infrastructure investments are designated as fair value through the income statement. 2 Indirect property investments include units held in listed and unlisted trusts and interest in joint ventures. 3 Impairment losses on available-for-sale assets were $nil for Dec 2009 (June 2009: $1.2 million loss, Dec 2008: $0.7 million loss). 10. Investment property Investment property As at 31 Dec June Dec 2008 $M $M $M Investment property at fair value 1, , ,967.4 Investment property under development at fair value Development property at cost Total investment property 1, , ,