1H15 Financial results Capitalising on the retirement income revolution. 17 February 2015

Transcription

1 1H15 Financial results Capitalising on the retirement income revolution 17 February 2015

2 Outline Operating performance Brian Benari Managing Director & CEO Financial results Capital management Strategy update Financial System Inquiry Outlook Andrew Tobin Chief Financial Officer Brian Benari Managing Director & CEO 2

3 Highlights Capitalising on the retirement income revolution Operating performance Strong operating results positioned for next growth phase Shareholders Capital strengthened and increased franked dividend Life Sales momentum and longer tenor driving book growth Funds Management Strong organic net flows and FUM growth Financial System Inquiry Propelling the retirement income revolution Outlook Leader in high growth markets 3

4 Group operating performance Strong operating results positioned for next growth phase AUM $57.2bn +17% Normalised EBIT 1 $206m +7% Normalised NPAT 1 $155m -5% Normalised EPS 28.8 cps -9% Statutory NPAT $130m Life 1H15 net book growth 7.2% Funds Management 1H15 organic net flows $2.1bn Net income up from AUM growth with stable Life margin Cost to income ratio stable at ~34% expense growth to support new initiatives EBIT growth offset by TOFA 2 tax benefit roll-off (1H14 $15m) Normalised NPAT excluding TOFA 2 up 4% Higher EBIT offset by higher share count (1H15 capital initiatives) and TOFA Normalised EPS unchanged excluding TOFA 1H15 investment experience -$25m (post tax) Positive asset investment experience offset by policy liability mark-to-market 4 1. Normalised profit framework and a reconciliation to statutory net profit after tax is disclosed in the Directors Report and Note 2 (segment information) in the Challenger Limited 31 December 2014 half year financial report. 2. Following a private tax ruling received from the Australian Taxation Office in February 2012 in relation to the application of Taxation of Financial Arrangements (TOFA), normalised tax was reduced by approximately $30m for each of the three financial years FY12 to FY14 (1H14 $15m).

5 Group operating performance Capital strengthened and increased franked dividend Shareholder dividends Dividend and payout ratio 1H15 dividend 14.5 cps 15 60% up 16% on 1H14 70% franked cps 10 45% gross yield ~6% 1 p.a. 5 30% 1H15 dividend payout ratio 50% 2 up from 39% in 1H14 1H13 2H13 1H14 2H14 1H15 15% Capital strengthened for growth 1H15 capital management initiatives equity issuance $290m 3 Challenger Capital Notes $345m 3 CLC PCA ratio 1.8 times Capital management initiatives support material future Life book growth, including annuities on platform 1,500 1, Franked dividend (cps) Unfranked dividend (cps) Normalised dividend payout ratio (%) (RHS) CLC excess capital and Group cash ($m) 1.8x 1.7x 30 June December 2014 CLC excess capital and Group cash LAGIC transition balance 5 1. Annualised gross dividend yield based on 14.5 cps (~70% franked) and closing Challenger share price of $6.48 on 13 February Dividend payout ratio based on normalised NPAT. 3. Equity issuance includes $250m institutional placement (August 2014) and $40m Share Purchase Plan (October 2014). Challenger Capital Notes are subordinated, unsecured convertible notes issued by Challenger Limited. Represents amount raised from capital management initiatives before transaction costs.

6 Life operating performance Strong book growth with stable margin Retail sales $1.6bn +8% Retail book growth +7.2% Average AUM $11.6bn +9% Life COE $258m +9% Life EBIT $216m +8% Record half yearly retail annuity sales (with Care Annuity suspended in November) Increased tenor up from 6.4 years to 6.6 years Reinvestment rates continue to remain strong Lifetime represents 23% of total retail annuity book Benefiting from strong retail net book growth 1H15 capital management initiatives invested in CLC 1 Driven by growth in investment assets Life COE margin stable at 4.4% COE benefiting from growth in investment assets Expenses up to support new growth initiatives inc. distribution and asset origination 1. Proceeds from Challenger Capital Notes ($345m) and $150m of 1H15 equity issuance injected into Challenger Life Company. 6

7 Life operating performance Brand strength in high growth market Adviser Leadership ranked 1 st Is the company a leader? Adviser service ranked 1 st How do you value adviser service levels? Challenger Challenger Industry average Industry average 0% 25% 50% 75% 100% Leader Netural 0% 25% 50% 75% 100% Excellent service Good service Consumer Brand awareness up 25 percentage points Have you heard of an investment company called Challenger? Product awareness up 11 percentage points Would you consider annuities in your retirement? 75% 50% 25% 17% 8% 21% 23% -13% -16% -18% -33% Very likely Quite likely Very unlikely Quite unlikely 0% Sep 13 Sep 14 Pre launch Sep 14 7 Adviser source Wealth Insights Annual Brand Tracking & Analysis. The study is an analysis of adviser perceptions of the Challenger Annuities brand and its position among 20 major competitors. Survey conducted in September Consumer source Hall & Partners Open Mind consumer Study. Survey conducted in September Product awareness chart does not add to 100% due to not sure responses being excluded.

8 Life operating performance Leveraging brand to broaden distribution footprint Retail and Industry funds Annuities on platforms Technology solution allowing annuities to easily integrate with account-based pensions providing pathway to CIPRs 1 growing acceptance annuities part of optimal retirement incomes strategy supports income layering strategies delivers greater adviser efficiencies enables retirement income model portfolios Colonial and VicSuper scheduled to launch 2H15 Retail platform Market leading First Choice & FirstWrap platforms Used by half of all Australian advice businesses CBA advisers will be able to write Challenger annuities Available to IFAs using CFS platforms Challenger product suite available Industry fund $14bn profit-to-member superannuation fund ~20% of FUM in retirement phase Large internal adviser team Challenger term and lifetime annuities offered as VicSuper guaranteed income products New guaranteed income products form a key part of VicSuper s retirement income solutions for members SMSF Accurium 2 Repositioned as SMSF retirement income specialist Service offering expanded SMSF retirement research assessment of SMSF retirement plans 1. Comprehensive Income Product for Retirement (CIPRs) refer to page 27 for more detail. 2. Bendzulla Actuarial rebranded Accurium in 1H15. SMSF Vision - Australia s SMSF retirement specialist Launched SMSF Retirement Insights Launched Retirement Healthcheck assessment 8

9 Funds Management operating performance Strong flows and FUM growth Net flows +6.8bn FUM $55.2bn +23% Normalised EBIT $21m unchanged RoE (pre-tax) 32.5% Investment performance & capacity +$2.1bn - organic net flows across both Fidante and CIP 1 +$4.7bn - formation of Whitehelm Capital and transfer of fixed income ABS team +$8.8bn Fidante Partners - Whitehelm & strong flows across boutiques +$1.4bn CIP 1 - fixed income and property FUM growth Higher net income albeit lower performance fee contribution Expenses up $2m including fixed income ABS team transfer from Life RoE up 120 basis points Capital light organically grown business (net assets $127m 2 ) 97% of funds outperforming benchmark 3 Significant new capacity available for growth 9 1. Challenger Investment Partners (CIP). 2. 1H15 average net assets. 3. Investment performance represents percentage of funds and mandates meeting or exceeding benchmark since inception.

10 Funds Management operating performance Largest fixed income manager and 7 th largest Aust. manager FUM doubled over 3 years Fixed income FUM +89% over 3 years Australia s largest fixed income manager Highly rated capability - KangaNews Credit Manager of the Year Equities FUM +120% over 3 years Strengthened investment talent New strategies developed and implemented Alternatives FUM +100% over 3 years Largest Australian property transactor in 1H15 1 Whitehelm (infrastructure) business formed and integrated Funds Management FUM ($bn) +100% $8bn $16bn $30bn 1H12 1H15 Fixed income Equities Alternatives (property & infrastructure) Fidante Partners investment performance Performance remains strong Fidante Partners since inception - 97% outperforming 2 Challenger Investment Partners 3 years 93% 5 years 96% property outperforming Since 97% inception 0% 20% 40% 60% 80% 100% 1. Jones Lang LaSalle. 2. Investment performance represents percentage of funds and mandates meeting or exceeding benchmark. Outperforming benchmark Underperforming benchmark 10

11 Highlights Capitalising on the retirement income revolution Operating performance Strong operating results positioned for next growth phase Shareholders Capital strengthened and increased franked dividend Life Sales momentum and longer tenor driving book growth Funds Management Strong organic net flows and FUM growth 11

12 1H15 Financial results Andrew Tobin Chief Financial Officer 17 February 2015

13 Group financial performance Strong operating results positioned for next growth phase Financial performance ($m) 1H15 1H14 Change Movement in normalised NPAT ($m) Life % Funds Management Corporate (30) (29) 3% Normalised EBIT % (1) (8) (15) 155 Interest expense (2) (2) - 50 Normalised tax (50) (42) 19% Normalised tax (TOFA) - 15 n/a Normalised NPAT (5%) 1H14 Normalised NPAT Higher Life EBIT Lower Corporate EBIT Higher Normalised tax TOFA tax benefit roll-off 1H15 Normalised NPAT Investment experience (post tax) (25) 2 n/a Statutory NPAT (22%) 120 Expenses $99m $106m $108m 40% Key metrics 1H15 1H14 Change 80 30% AUM ($bn) % $m Normalised cost to income (%) bps 40 20% Normalised RoE 1 (pre tax) (%) 17.4% 18.9% (150 bps) EPS normalised (cps) (9%) EPS normalised exc. TOFA (cps) EPS statutory (cps) (25%) 1H14 2H14 1H15 Corporate Funds Management Life Normalised cost to income ratio (RHS) 10% 1. Normalised RoE calculated as normalised NPBT divided by average net assets. 13

14 Life financial performance AUM growth with stable margin driving higher COE Financial performance ($m) 1H15 1H14 Change Movement in Life EBIT ($m) Normalised COE % (6) Expenses (42) (36) 17% 150 Life EBIT % Investment experience (post tax) (25) 3 n/a 50 1H14 Life EBIT Higher COE Higher expenses 1H15 Life EBIT Life EBIT and normalised return on equity Key metrics 1H15 1H14 Change % AUM (average) - $bn % % Retail annuity book growth (%) (40 bps) $m % Normalised cost to income (%) bps % Normalised RoE (pre tax) 1 (%) (200 bps) 180 1H13 1H14 1H15 Life EBIT Life RoE (pre tax) (RHS) 1. Normalised RoE calculated as normalised EBIT divided by average net assets. 14

15 Life margins COE margin stable 1H15 Life COE margin 4.4% - unchanged from 1H14 and down 10bps from 2H14 Change in Life COE margin from 2H14 due to 3.0% 2.0% Life product cash margin 3.0% 3.0% (0.3%) (0.1%) 0.2% 2.8% Product cash margin (-20 bps) lower return on assets partially offset by lower annuity funding costs 1.0% Normalised capital growth and return on shareholder capital (+10 bps) higher normalised capital growth from increased property allocation higher return on shareholder capital higher capital base following capital management initiatives partially offset by lower fixed income yields (shareholder capital not hedged for interest rates) 5.0% 4.0% 3.0% 2.0% 1.0% 1H14 product cash margin 4.4% 4.5% 0.1% 4.4% 0.9% 1.0% (0.2%) 1.0% 0.5% 0.5% 3.0% 3.0% 1H14 COE margin 2H14 product cash margin Life COE margin 2H14 COE margin Lower fixed income yields Product cash margin Lower property yields Lower annuity funding costs Normalised capital growth and return on shareholder capital 1H15 product cash margin 0.6% 2.8% 1H15 COE margin Product cash margin Normalised capital growth Return on shareholder capital 15

16 Life retail annuity sales Continued annuity sales growth with increasing tenor Record retail annuity sales Continuing to grow strongly 1H15 sales $1.6bn, up 8% record half yearly retail annuity sales pick up in both term and lifetime annuities reinvestment of maturities remains strong 3,000 2,000 1,000 Retail annuity sales ($m) Rolling 12 month sales Sales mix continuing to shift to longer tenor business 1H15 lifetime sales $319m, up 18% Liquid Lifetime $219m Care Annuity $100m new sales suspended November 2014 working on replacement product Lifetime sales represent 20% of total retail sales Tenor New business tenor 6.6 years, up from 6.4 years in 1H14 1,600 1, Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Retail annuity sales ($m) 10% 90% 19% 20% 81% 80% 1H13 1H14 1H15 Lifetime annuity sales Term annuity sales New business tenor (years) (RHS) Represents reinvestment of term annuities with a residual capital value of 50% of more on maturity. 16

17 Life net book growth Strong book growth driven by sales momentum and tenor Retail 1H15 retail net flows $561m 1 1H15 net book growth 7.2% 1 2,000 1,500 1, Life retail net flows ($m) Care Annuity contribution 0.9% - - (500) (150) (1,000) (300) Institutional 1H15 GIR 2 institutional sales $549m (1,500) 1H13 1H14 1H15 Retail capital outflows - maturities (LHS) Retail capital inflows - sales (LHS) Retail net flows (RHS) (450) GIR maturities reinvested for longer tenor Total Life retail annuity and institutional book 3 ($bn) 10 8 Portfolio mix 6 Retail annuities $8.6bn 4 total retail up 26% over 2 years 2 lifetime annuities up ~140% over 2 years Institutional $1.0bn 1H13 1H14 1H15 Institutional GIR Retail lifetime annuity book Retail term annuity book Retail net flows includes Care Annuity sales of $100m and Care Annuity capital payments of $33m. 2. Guaranteed Index Return product. 3. Represents balance date retail annuity liability and GIR liability.

18 Life investment portfolio Investment portfolio continues to meet 18% RoE target Fixed income Credit quality 75% investment grade Cash and AAA Fixed income credit quality 69% of portfolio Reweighting to capture relative value Investment grade to remain around these levels AA A BBB Credit performance BB 1H15 realised credit default rate 2 bps lower than normalised assumption (35bps) B & unrated 5% 10% 15% 20% 25% 30% Portfolio diversification Diversified across sectors and geographies Fixed income portfolio by sector No European sovereign debt Residential property Fixed income portfolio 15% cash and equivalents 48% asset backed securities 37% corporate credit Industrials and consumers Banks, financials & insurance Infrastructure & utilities Non-residential property Aust. Government Other 5% 10% 15% 20% 25% 30% 18

19 Life investment portfolio Investment portfolio continues to meet 18% RoE target Property 22% of portfolio Other 9% of portfolio $0.5bn of property acquired in 1H15 58% office; 42% retail Property portfolio remix underway Property allocation expected to remain around these levels ~85% invested in Australian assets Weighted average cap rate 7.6% Occupancy rate 97% and WALE 4.8 years Diversified tenants with 61% investment grade Government accounts for ~42% 1 Equities & other 5% of portfolio held for diversification purposes Infrastructure 4% of portfolio inflation linked cash flows 80% unlisted investments 50% 40% 30% 20% 10% Property portfolio sector diversification Australian office Australian retail Australian industrial Property portfolio 1H15 Australian listed REITs Japanese retail Property portfolio 2H14 Property portfolio tenant credit rating (by 2015 gross rental income) AAA AA A BBB BB B and below Not rated Other (including offshore) 1. Australian Government accounts for 42% of expected 2015 gross rental income. 19

20 Life investment experience Positive asset experience offset by actuarial adjustments Asset investment experience (+$11m) Property (+$52m) exceeded normalised growth assumption strong direct property and REIT valuation gains Fixed income (-$31m) impacted by credit spread expansion Infrastructure (+$6m) exceeded normalised growth assumption Equity and other (-$16m) did not achieve normalised growth assumption Actuarial assumption changes (-$46m) accounting loss mainly due to new business sales growth net of prior period unwind reverses over term of policy (40) (80) Investment experience (pre tax) - $m Fixed income Asset investment experience +$11m Property Infrastructure Equity and other Actuarial assumptions 1H15 actual capital growth Normalised capital growth Investment experience 20

21 Funds Management financial performance Higher net income with lower performance fee contribution Financial performance ($m) 1H15 1H14 Change Fidante Partners net income % CIP 1 net income % Movement in Funds Management EBIT ($m) 1 1 (2) Total net income % Expenses (35) (33) 6% 10 EBIT H14 FM EBIT Higher Fidante Partners net income Higher CIP net income Higher expenses 1H15 FM EBIT FM EBIT and return on equity Key metrics 1H15 1H14 Change 25 35% FUM (average) ($bn) % 20 30% Net flows ($bn) large Cost to income (%) bps $m % 20% 15% RoE (pre-tax) 2 (%) bps 1H13 1H14 1H15 FM EBIT FM RoE (pre-tax) (RHS) 10% 1. Challenger Investment Partners (CIP). 2. RoE (pre-tax) calculated as EBIT divided by average net assets. 21

22 Funds Management Strong flows and FUM growth lower performance fees FUM Fidante Partners FUM up 18% in 1H15 +$3.9bn formation of Whitehelm Capital +$1.6bn organic net flows Challenger Investment Partners FUM up 13% in 1H15 +$0.9bn fixed income ABS team less Whitehelm Capital +$0.5bn organic net flows Net income margin Fidante Partners Net fee income up 3% on 1H14 FUM growth offset by lower income margin Income margin 16 bps, down 4 bps on 1H14 lower performance fee contribution (-4 bps) Challenger Investment Partners Net fee income up 4% on 1H14 Income margin 39 bps down 1 bps on 1H14 change in AUM mix (-5 bps) higher transactions fees (+4 bps) Fidante Partners FUM movement ($bn) % 46% FY Whitehelm merger (0.3) Equities net flows Fixed income net flows 10% 39% Challenger Investment Partners FUM movement ($bn) 1.1 Market movements less distributions H15 Equities Fixed income Alternatives Market movements less distributions % 38% 54% FY14 (0.9) Whitehelm transfer 1.8 Life fixed income and property transfers Net flows Market movements less distributions 51% % 68% 1H15 Fixed income FUM Property FUM Infrastructure FUM 22

23 Capital management Capital strengthened to capture growth opportunities Strongly capitalised CLC excess capital and PCA ratio $1,301m 1 including LAGIC transition ($215m) half of LAGIC transition amortised on 1 January increased capital intensity from property assets CLC PCA multiples and target surplus 1.8x 1.6x CLC target ratio PCA ratio times on 31 December PCA ratio times on 1 January 2015 target PCA ratio 1.4 to 1.6 times 3 S&P reconfirmed CLC A rating in December 31 December 2014 (inc. LAGIC transition of $215m) 1 January 2015 (inc. LAGIC transition of $108m) APRA minimum requirements compared to CLC Capital strengthened for growth opportunities CET1 ratio 4 1.2x PCA x 1.0x APRA minimum CET1 ratio 0.6x PCA significant CET1 capacity to fund future growth via Additional Tier 1 Equity and Tier 2 instruments x CLC 31 December 2014 (inc. LAGIC transition) 0.6x APRA min. requirements CET1 to PCA Tier 2 Equity to PCA CLC target ratio Challenger Life Company (CLC) excess regulatory capital ($1,175m) plus Group cash ($126m). 2. Challenger Life Company (CLC) total regulatory capital base divided by Prescribed Capital Amount (PCA). 3. Based on target asset mix. 4. Common Equity Tier 1 (CET1) divided by Prescribed Capital Amount (PCA).

24 Capital management Strong dividend growth with increased franking Dividends 1H15 dividend up 16% to 14.5 cps 70% franked Dividend and normalised payout ratio payout ratio up from 39% to 50% 15 60% gross yield ~6% % 2H15 dividend expectations 100% franked cps 5 30% within dividend payout target range of 45% to 50% 2 1H14 2H14 1H15 Franked dividend (cps) Unfranked dividend (cps) Normalised dividend payout ratio (%) (RHS) 15% Annualised gross dividend yield based on 14.5 cps (~70% franked) and closing Challenger share price of $6.48 on 13 February Dividend payout ratio based on normalised NPAT. Dividend payout ratio and franking levels subject to market conditions and capital allocation priorities.

25 Strategy and outlook Brian Benari Chief Executive Officer 17 February 2015

26 Life growth The retirement income revolution Retirees - Superannuation Superannuation total number of Australian retirees (m) 1 average balance at retirement ($ 000) 2 moving to retirement phase p.a. ($bn) Number of retirees increasing Baby Boomer retirement phase ( ) gearing up Over 65s to increase by ~40% over next 10 years Australia has 3 rd highest life expectancy in OECD Savings increasing from time in system (compounding returns) and higher contribution rates Average annuity size up 2.5 times in 10 years Australia has 4 th largest global pension market Significant increase in flow to retirement phase each year Over next 10 years flow to retirement phase expected to triple to ~$190bn p.a. Retirement assets to increase to ~35% of super system over next 10 years Australian Bureau of Statistics population projections. 2. Estimated superannuation balance at age 65 of retiree earning average wages with only SG contributions and average fund performance (based on APRA data). 3. Rice Warner Actuaries projection.

27 Financial System Inquiry (FSI) Propelling the retirement income revolution David Murray Chairman of Financial System Inquiry super assets are not being efficiently converted into retirement incomes Recommendation 11 i. Trustees pre-select for members a CIPR (comprehensive income product for retirement) ii. Remove impediments to retirement income product development Comprehensive Income Product for Retirement (CIPR) Private provision of longevity risk protection benefits taxpayers CIPRs could deliver 15% to 30% increase in retirement incomes Reduce over dependency on account-based pensions Guaranteed annuities recognised as part of CIPR solution Super funds to partner with Life Companies to provide CIPRs CIPRs multi component solution to managing retirement risks (extract from Financial System Inquiry final report) 1 Remove impediments to product development Policy impediments hampering development of retirement products Retirement income stream review to remove DLA barriers 1. Financial System Inquiry final report released on 7 December Report available at 27

28 Life growth FSI to drive significant longevity market growth Australian longevity market (illustrative only) 2014 retirement assets ($bn) 1 CIPR allocation to longevity products 2 Australian longevity market ($bn) 3 Total retirement assets $581bn 30% CIPR take-up rate market ~$90bn (30 times bigger) market ~$220bn (70 times bigger) Lifetime annuities (<1%) Account-based pensions & other (>99%) 50% 2014 current longevity market 2014 potential longevity market 2024 potential longevity market Challenger positioned to leverage FSI recommendations Brand Distribution Product current position leading retirement brand dominant market position broad based adviser support targeting all super segments proven product innovator leading longevity provider next steps thought leadership adviser skilling programs annuities on retail platforms & models connecting to industry funds and SMSFs DLAs new longevity products Rice Warner Actuaries. 2. CIPR allocation to longevity products based on percentage of retiree portfolio currently invested in longevity products (for those retirees considering and protecting against longevity risk) and supported by Mercer and Zenith partial annuitisation work. 3. Australian longevity market projection based on current longevity market ($3.3bn) multiplied by assumed CIPR allocation to longevity products and CIPR take-up rate. This is for illustrative purposes only and is not a forecast or projection.

29 Funds Management growth Scalable and diversified platform with significant capacity Alternatives 3 managers & $8bn FUM Equity managers 9 managers & $17bn FUM Institutions seeking stable longer dated cash flows Fidante s first infrastructure boutique established Strong long term performance Alternatives FUM $8bn Equities capacity $24bn Establishing performance track records & securing ratings for new offerings Remaining capacity $24bn Alternatives capacity $14bn FUM $55bn current remaining capacity $58bn Equities FUM $17bn Fixed income FUM $30bn Remaining capacity $14bn Fixed income managers Fixed income capacity $20bn 4 managers & $30bn FUM Specialist capability in both Australian and global fixed income strategies Benefit from retirees seeking more conservative asset allocation (including CIPRs) Remaining capacity $20bn 29

30 Outlook Leader in high growth markets Life Colonial & VicSuper annuities on platform & form new partnerships Accurium and SMSF development opportunities Replacement Care Annuity product in development Guidance FY15 retail net book growth target of between 11% to 13% FY15 COE guidance range unchanged at $535m to $545m Funds Management Leverage existing manager capacity New offerings from existing boutiques New boutiques both onshore and offshore Challenger Group Committed to 18% RoE (pre tax) target as capital deployed 2H15 dividend expected to be 100% franked 1 FY15 cost to income ratio ~34% (medium term guidance ~32% to ~36%) 1. Dividend payout ratio and franking subject to prevailing market conditions and capital allocation priorities. 30

31 Highlights Capitalising on the retirement income revolution Operating performance Strong operating results positioned for next growth phase Shareholders Capital strengthened and increased franked dividend Life Sales momentum and longer tenor driving book growth Funds Management Strong organic net flows and FUM growth Financial System Inquiry Propelling the retirement income revolution Outlook Leader in high growth markets 31

32 Appendix additional background information

33 Our vision and strategy Providing financial security in retirement Vision Provide Australians with financial security in retirement Strategies Increase the Australian retirement savings pool allocation to secure and lifetime income products Be recognised as the leader in retirement income solutions in Australia Be an active investment manager providing superior returns from platforms with alignment Quality brands, products, service and platforms demonstrating value for money Drive a diverse culture where our people are highly engaged with a strong risk and compliance focus 33

34 Business overview Two core businesses supported by centralised functions Challenger Limited (ASX:CGF) Life Leading provider of annuities and guaranteed retirement income solutions in Australia Products offer certainty of guaranteed cash flows with protection against market, inflation and longevity risks Includes Accurium 1 - Australia s largest SMSF Actuarial certificate provider Funds Management Fidante Partners co-owned separately branded active fixed income, equity and alternative boutique investment managers Challenger Investment Partners originates and manages assets for Life and third party investors Distribution Product and Marketing (DPM) Central functions Operations, Finance, IT, Risk Management, HR, Treasury, Legal and Strategy 1. Accurium (previously Bendzulla Actuarial) acquired in February

35 Market opportunity Competitive advantage with favourable policy settings Market opportunity Life Supportive demographics Over 65 s to increase by 75% in next 20 years 1 Consumer risk preferences Retirees focused on regular, secure income Need for longevity protection Increasing demand as retirees live longer Funds Management Mandated superannuation system Growth underpinned by mandatory contributions Contributions increasing Increasing from 9.5% to 12% by 2022 Offshore investor appetite for assets Australian assets attractive to offshore investors Competitive advantage Independent provider Products on all major distribution hubs Retirement incomes core focus Product innovation and leading market share Retirement incomes market leader Strong support from advisers 2 Contemporary model Model has strong investor alignment & support Strong investment management capabilities 97% of FUM outperforming benchmark 3 Diversified strategies and products Different mangers across multiple asset classes Australian Bureau of Statistics population projections. 2. Ranked 1 st in leadership by advisers. Wealth Insights Annual Brand Tracking & Analysis. The study is an analysis of adviser perceptions of the Challenger Annuities brand and its position among 20 major competitors. Survey conducted in September Investment performance as at 31 December 2014 for all funds and mandates since inception.

36 Strong operating performance Track record of earnings growth with tight cost control Strong profit and EPS growth Normalised NPAT used to determine dividends Over 5 years normalised NPAT up 34% to $155m normalised EPS up 32% to 29 cps $m Normalised NPAT and EPS cps 1H10 1H11 1H12 1H13 1H14 1H15 Normalised NPAT Normalised EPS (RHS) Tight cost control One of Australia s most efficient financial services companies Medium term cost to income ratio target range of between 32% and 36% Since 1H10 cost to income ratio down 7 percentage points $m Expenses and cost to income ratio 1H10 1H11 1H12 1H13 1H14 1H15 Medium term Expenses Cost to income ratio (RHS) target Medium term cost to income ratio target (RHS) 50% 40% 30% 20% 10% 36

37 Favourable operating environment Attractive markets leveraged by distribution footprint Favourable macro trends Australia has the largest pension market in Asia-Pacific and world s 4th largest 1 superannuation forecast -180% of GDP by Pension assets of $1.9 trillion 2 and projected to grow to over $4 trillion in the next 10 years 3 over $7 trillion in the next 20 years 4 Demographic changes Number of Australians over 65 will increase by 40% over the next 10 years 5 will increase by 75% over the next 20 years 5 50% of retirees expected to live past 86 years 4 Post-retirement segment is the fastest growing driven by baby boomers (born ) as baby boomers draw down superannuation assets, they will be replaced by Generation X ( ) leading to growth in total postretirement assets 4 5,000 4,000 3,000 2,000 1, % 100% 80% 60% 40% 20% Projected superannuation assets 2015 to Pre-retirement assets Post-retirement assets Australian population growth rate 2013 to Life target demographic OECD Pension Markets in Focus APRA superannuation statistics September Rice Warner Actuaries projections. 4. Deloitte Dynamics of the Australian superannuation system: the next 20 years Australian Bureau of Statistics population projections.

38 Favourable operating environment Australian superannuation system Worlds 4 th largest pension market 1 Superannuation guarantee system implemented in 1992 initial contribution rate 3% of gross salary current contribution rate 9.5% and increasing to 12% by 2022 Two distinctive phases accumulation phase the super savings phase retirement phase the super spending phase $72bn moving from accumulation to retirement phase in FY15 3 Government aged pension means tested and acts as a safety net Superannuation policy settings Evolving for Australia s demographic changes Government focused on retirement income issues SMSF 39% Challenger access via Accurium 4 Australian superannuation system - $1.9 trillion 2 Corporate 4% Industry 25% Challenger access via partnerships Retail 32% Challenger access via financial advisers and partnerships OECD Pension Markets in Focus APRA superannuation statistics $1.9 trillion September Sectors reflect superannuation system of $1.6 trillion at 30 June 2013 and exclude public sector and pooled superannuation trusts - $0.3 trillion (APRA annual superannuation bulletin June 2013). 3. Rice Warner Actuaries projection. 4. Bendzulla Actuarial rebranded Accurium in 1H15.

39 Financial System Inquiry (FSI) Comprehensive Income Product for Retirement (CIPR) David Murray - Chairman of Financial System Inquiry super assets are not being efficiently converted into retirement incomes Recommendation 11 i. Trustees pre-select for members a CIPR (Comprehensive Income Product for Retirement) ii. Remove impediments to retirement income product development Comprehensive Income Product for Retirement (CIPR) Super funds to offer pre-selected CIPR to members enable seamless transition to retirement CIPRs required to deliver regular stable income streams provide longevity risk management have flexibility CIPRs to combine products to provide required features Super funds to partner with Life Companies to provide CIPRs Pre-selected option to have significant impact on decision making 1. Financial System Inquiry final report released on 7 December Report available at CIPRs multi component solution to managing retirement risks (extract from Financial System Inquiry final report) 1 39

40 Life favourable operating environment Leveraged by product innovation and distribution footprint Changes in risk preferences Australian allocation to bonds and fixed income lowest in OECD at 8% (OECD average 53%) Australia one of the most equitised retirement markets ~49% allocation (OECD average 22%) Australia United States UK Switzerland Canada Finland Japan Netherlands Germany OECD average Spain Denmark Australia has a low allocation to fixed income equivalants 1 0% 20% 40% 60% 80% 100% Increased focus on longevity Retirees face challenges including maintaining required annual income in retirement managing market and inflation impacts longevity risk Australian s have the 3rd highest life expectancy in OECD Bills and bonds Cash and Deposits Shares Other Life expectancy at birth 2 Medical and mortality improvements increasing longevity 40.0 Female Male OECD Pension Markets in Focus Australian Bureau of Statistics OECD Fact Book 2013: Economic, Environmental and Social Statistics.

41 Life - distribution and products Broad based distribution and innovative products Distribution Challenger products on approved product lists of all major hubs Largest 5 hubs (major Banks and AMP) account for ~50% of Australian financial adviser market and similar portion of Life s retail annuity sales New partnerships formed in 1H15 Colonial First State (large retail platforms) annuities on Colonial platforms VicSuper (large industry fund) annuities on VicSuper platform Product Total annuity book represented by ~70% fixed term annuities Product categories Fixed term annuities Lifetime annuity Guaranteed Annuity Guaranteed Income Plan Guaranteed Income Fund Guaranteed Pension Fund Liquid Lifetime On/off platform products with guaranteed rate and flexible terms including ability to draw principal Lifetime annuity with liquidity feature in first 15 years Institutional Guaranteed Index Return Institutional product with guaranteed returns Hub representation AMP ANZ BT/Westpac Commonwealth Bank of Australia (CBA) ~20% lifetime and aged care annuities 1 ~10% institutional guaranteed return product IOOF MLC/NAB 1. Annuity book includes ~$420m (~5%) of Care Annuity business. Sales of the Care Annuity were suspended in November 2014, Challenger is currently working on a replacement product and expects to re-enter the aged care market. 41

42 Life - annuity value proposition Provides regular and dependable income in retirement Benefits of annuities Provides guaranteed regular income and supports layering which improves retirement outcomes Retirement cash flow management solution Flexible features term (1 to 50 years) and policy amount interest only or interest and principal drawdown payment frequency, and nominal or indexed payments Income tax free if held in superannuation from age 55 (born before 1 July 1960) to age 60 (born after 1 July 1964) Eliminates market risk can provide longevity and inflation protection No management fees payable by customer Issued by Challenger Life regulated by APRA Desired income per year Essential income per year Annuities and portfolio construction income layering Account based pension to support peak spending years (including growth asset allocation) Annuity/private pension ASFA 1 comfortable living - $43k per annum Annuity increases income to achieve a comfortable living standard Age pension 2 - $20k per annum Minimum government support (social security) Age 1. The Association of Superannuation Funds of Australia (ASFA) is the peak industry body for the superannuation sector. 2. Age pension is income support provided by the Australian government and is subject to income and asset tests. 42

43 Life - retail annuity sales Leveraging favourable operating environment Sales growth Since 1H10 retail annuity sales have grown by 28% CAGR Annuity sales growth underpinned by favourable macro trends demographic changes changes in retiree risk preferences increased focus on longevity risk Net flows Retail net flows driven by record retail annuity sales lifetime sales and longer tenor term business AUM growth Significant AUM growth since 1H10 AUM has grown by 13% CAGR strong sales due to expanded distribution footprint and consumer & adviser education 2,000 1,600 1, Life retail annuity sales and retail net flows ($m) 1H10 1H11 1H12 1H13 1H14 1H15 Retail annuity sales Retail annuity net flows (RHS) Life AUM ($bn) 1H10 1H11 1H12 1H13 1H14 1H

44 Life - retail annuity sales Retirees focused on risks in retirement Senior Sentiment Index 1 Shows, outside of health, retirees focused on longevity risk peace of mind from regular and dependable income in retirement inflation protection Annuity value proposition addresses these high priorities % of survey respondents 80% 60% 40% 20% Seniors priorities 1 High Priority Medium Priority Low Priority Interest rate cycles Whilst interest rates have reduced, rates need to be considered in the context of risk appetite US experience shows fixed rate annuity volumes are not materially impacted by interest rate cycles US$bn Quarterly sales of US fixed term annuity sales through different interest rate cycles 2 6.0% 5.0% 4.0% 3.0% 2.0% % Quarterly US fixed rate annuity sales US 5 year bond rate 1. National Seniors Association Retiree risk aversion report March Source: Life Insurance and Market Research Association (LIMRA) based on calendar years. 44

45 Life - what retirees want Lifetime annuities address retiree needs Top retiree preferences Lifetime annuity product features 1 Entitlement to age pension/health card Compatible with social security regulations 2 Easy to understand Product is simple and does what it says Clear role in retirement income portfolio construction 3 Reputation of provider Challenger is the leader in retirement incomes On all major approved product lists 4 Ability to access funds Liquidity feature resolves capital access concerns Flexible options 5 Financial strength of provider Issued by regulated Life Company with capital reserves S&P A rated 6 Tax effective Superannuation product tax free in retirement 7 Income lasts as long as I do Longevity protection Source: Investment Trends Pty Ltd, 2014 Retirement Income Report, n=

46 Life - customer demographics Products aimed at investors seeking guaranteed cash flows FY14 annuitant key statistics Average policy amount $195,000 Average new customer age 68 years Average tenor of new business 6.6 years ~50% of customers draw capital 98% of sales via financial advisers 64,000 Life customers Policy reinvestment rates Peak in new business year old demographic Long term reinvestment rate around 80% for term maturities with a residual capital value of 50% or more Average number of times annuitant reinvests times Retail annuity sales by customer age demographic customer age 46

47 Liabilities Assets Life - portfolio management Assets and liabilities cash flow matched and risks managed Assets and liabilities are matched Assets deliver contracted cash flows to match liabilities Locking in COE over term as business is written Assets and liabilities continuously marked to market Assets and liabilities are cash flow matched Fixed income and cash flows Property income cash flows Infrastructure income cash flows Annuity liabilities cash flows Robust risk management framework Risks mitigated (hedged) - including interest rate, foreign exchange and inflation Rotating hedging strategy to Government bonds and repos from swaps Risks retained and managed within risk management framework including credit and property risk comprehensive limit structure - country, rating band, sector and counterparty limits Sensitivity to a 1bp movement in interest rates $m 0 (400) (800) >30 years Annuities Other Debt investments Interest rate hedges net sensitivity 47

48 Life - portfolio management Liabilities matched with high quality assets Investment portfolio - $12.4bn Highly diversified portfolio managed within comprehensive limit structure asset allocation evolves to reflect relative value and tenor of annuity sales Primary asset classes are fixed income and property Infrastructure and equities provide diversification and capital efficiencies 31 December 2014 investment portfolio Property 22% Equites and other 5% Infrastructure 4% Fixed income and cash 69% High quality fixed income portfolio 30% cash and AAA rated 75% investment grade 75% externally rated, remainder rated using S&P, Fitch, Moody s methodology Realised credit losses 2 bps (1H15) lower than normalised assumption (35bps) 80% 60% 40% 20% Fixed income portfolio credit quality 75% BBB A AA Cash & AAA Investment Grade 25% Unrated B BB Non-Investment Grade 48

49 Life - portfolio management High quality fixed income portfolio - $8.6bn Diversified fixed income portfolio Portfolio diversified across a broad range of sectors, geographies and rating limits Fixed income portfolio - by asset type Offshore asset backed securities, 18% Cash & equivalents, 15% No offshore sovereign debt Over 1,100 different investments Portfolio managed by experienced fixed income managers Foreign exchange risk hedged Offshore corporate credit, 9% Alternative finance, 2% Domestic asset backed securities, 30% Domestic corporate credit, 26% Fixed income portfolio - by currency exposure 80% 60% 40% 20% Australia US EU UK 49

50 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Jun-24 Jun-25 Jun-26 Jun-27 Jun-28 Jun-29 Jun-30 Jun-31 Jun-32 Life - portfolio management Asset Backed Securities portfolio - $4.1bn Asset Backed Securities (ABS) 48% of fixed income portfolio 70% investment grade 68% externally rated Domestic and offshore assets RMBS expertise developed when Challenger was Australia s largest non-bank securitiser of RMBS (via Mortgage Management business sold in 2009) Specialist team originating and investing in ABS Net Interest Margin (NIM) - $0.2bn NIM consists of $2.6bn of term funded prime residential mortgages generating ~200 bps in NIM Portfolio amortises down as mortgages run-off expected to amortise by 50% every 3 years Underlying mortgages are mortgage insured Senior secured loan securitisation, 17% Other ABS, 24% Asset Backed Securities CMBS, 5% NIM Notes, 4% RMBS, 50% NIM underlying mortgage run-off profile Actual Loan Balances Forecast Loan Balances 50

51 Life - portfolio management Corporate credit portfolio - $3.0bn Corporate credit 35% of fixed income portfolio 69% investment grade 73% externally rated Domestic and offshore assets Infrastructure debt long dated inflation linked bonds issued by PPP projects and loans to infrastructure companies Banks and financials bank, insurance companies and fund managers Senior secured bi-lateral loans senior debt secured by collateral and typically originated by Challenger Commercial real estate loans secured against commercial real estate assets and typically originated by Challenger Non-financial corporate lending traded industrials and retailers debt Senior Secured Bi-Lateral Loans, 20% Commercial Real Estate Lending, 14% Corporate credit Banks and Financials, 27% Infrastructure Debt, 32% Non-Financial Corporate Lending, 7% 51

52 Life - portfolio management Conservative property portfolio - $2.7bn Property portfolio ~85% of portfolio invested in Australian assets Conservative Australian property portfolio 61% of tenants investment grade 85% of leases have fixed or CPI increases WALE 4.8 years Cap rate on Australian portfolio 7.6% Occupancy rate 97% Japanese property portfolio consists of directly held suburban shopping centres primarily non-discretionary retail tenants net exposure ~$200m WALE 8.3 years All properties revalued by independent valuers at least annually Property portfolio 11% 8% 7% 6% 42% Australian office (direct) Australian retail (direct) Australian industrial (direct) AREITs Japanese Other (including offshore) 26% Lease tenant quality Australian direct property AAA AA A BBB BB B and Below NR 52

53 Life - portfolio management Diversified infrastructure portfolio - $0.5bn Attractive asset class Generates reliable and consistent cash flows Cash flows inflation linked Giving rise to sustainable income growth Diversified portfolio across sectors and geographic regions ~75% of infrastructure portfolio invested in unlisted assets Renewable 25% Power Generation 5% Airport 8% Infrastructure portfolio Patronage 15% Logistics 23% Utilities 24% South America North 5% America 5% Asia 2% Europe 7% Australia 46% UK 35% 53

54 Accurium SMSF retirement specialist Bendzulla Actuarial rebranded Accurium Vision - Australia s SMSF Retirement Specialist Service offering expanded to raise awareness of retirement risks SMSF Retirement Insights launched 1 SMSF analysis of preparation for retirement only one quarter of SMSFs have sufficient assets to sustain spending of $100,000 p.a. less than half of SMSF s have sufficient assets to sustain spending of $70,000 p.a. Retirement Healthcheck Assessment launched Service to SMSF customers Stress test SMSF retirement spending plans Build understanding of retirement issues 1. Based on 80% confidence level. 54

55 Funds Management (FM) Superior net flows and FUM growth continues Strong net flows History of providing strong net flows Net flows driven by alignment with investor interests institutional operating platform boutique investment management capability strong investment performance track record Challenger Investment Partners attracting new institutional clients Strong FUM growth Since 1H10 FUM has grown by 23% CAGR Australia s 7 th largest 1 fund manager and largest fixed income manager 8,000 6,000 4,000 2, Funds Management net flows ($m) 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 Organic net flows Metisq acquisition Formation of Whitehelm Capital Life fixed income and property transfers Funds Management FUM ($bn) 1H10 1H11 1H12 1H13 1H14 1H15 Fidante Partners Challenger Investment Partners 1. Consolidated FUM for Australian fund managers - Rainmaker Roundup September

56 FM - multiple brands and strategies Scalable and diversified - ~$55bn of FUM Equities A$16.6bn Multiple brands & strategies Challenger Investment Partners Alternatives A$8.8bn Fixed Income A$29.8bn 56

57 FM - Fidante Partners Contemporary model with strong alignment of interests Administration services Investment operations Client operations Compliance IT infrastructure Finance Human Resources Company secretarial Facilities Partnership Equity participation (non-controlling interest) Business planning, budgeting, strategic development, succession planning Administration (Fidante Partners provided) Investment Management Co investment with Life Partnership / equity (Fidante Partners and Boutique) Distribution (Fidante Partners provided) Distribution services Asset consultant & researcher relationships Strategic positioning Product development & management Brand development & marketing support Sales planning & execution Investor relationships Client service Responsible entity 57

58 FM - significant manager capacity $58bn of existing manager capacity underwrites future growth $bn 6 4 Remaining manager capacity FUM 2 Equity Managers Fixed income Managers 1 Alternative managers 1 Total Maximum capacity $41bn $50bn $22bn $113bn Remaining manager capacity $24bn $20bn $14bn $58bn 1. Challenger Investment Partners included in both fixed income managers and alternative managers. 58

59 FM - Fidante Partners boutiques Diversification of managers and strategies Boutique Investment date Asset class Boutique Investment date Asset class Aug 2010 Australian equities (value and growth) May 2010 Australian equities (income focus) Nov 2008 Australian inflation linked bonds May 2012 Global emerging equities June 2014 Australian mid cap equities Aug 2010 Australian small and micro cap equities Jun 2010 Global credit portfolios Feb 2014 Global smart beta equities Sep 2006 Mid and large cap Australian equities Nov 2008 Long/short Australian equities Feb 2007 Global fixed income Jul 2014 Global core Infrastructure Oct 2005 Australian small cap equities Jul 2013 US and European RMBS 59